October 24th, 2014

Friday Roundup

SEC administrative proceedings, a sorry state of affairs, voluntary disclosure calculus, nice payday but what was really accomplished, and for the reading stack.  It’s all here in the Friday roundup.

SEC Administrative Proceedings

A focus on SEC administrative proceedings here at the Wall Street Journal.

“The Securities and Exchange Commission is increasingly steering cases to hearings in front of the agency’s appointed administrative judges …”

For discussion of this dynamic in the FCPA context, see my article “A Foreign Corrupt Practices Act Narrative” (pgs. 991-995).

“SEC administrative settlements, as well as SEC  DPAs and NPAs, place the SEC in the role of regulator,  prosecutor, judge and jury all at the same time and a notable  feature from 2013 SEC FCPA corporate enforcement is that 4 (1  NPA and 3 administrative orders) of the 8 corporate enforcement  actions (50%) were not subjected to one ounce of judicial  scrutiny.”

In 2014, there have been three SEC corporate FCPA enforcement actions (Smith & Wesson, Alcoa, and HP).  All have been resolved via the SEC’s administrative process.

Sorry State of Affairs

It really is a sorry state of affairs when former government enforcement attorneys go into private practice and then criticize the current enforcement climate that they helped create.  For more on this dynamic in the FCPA context, see this prior post “A Former Enforcement Official Is Likely To Say (Or Has Already Said) The Same Thing.”

Albeit outside the FCPA Context, this ProPublica article, “In Turnabout, Former Regulators Assail Wall St. Watchdogs,” touches on the same general issue.

“Last week, I visited an alternate universe. The real world sees a pandemic of bank misconduct, but to the white-collar defense lawyers of Washington, the banks are the victims as they bow beneath the weight of regulators’ remarkably harsh punishments.

I was attending the Securities Enforcement Forum, a gathering of top regulators and white-collar defense worthies. The marquee section was a panel that included Andrew Ceresney, the current enforcement director of the SEC, and five of his predecessors. Four of those former S.E.C. officials represent corporations at prominent white-collar law firms. [...] The conference turned into a free-for-all of high-powered and influential white-collar defense lawyers hammering regulators on how unfair they have been to their clients, some of America’s largest financial companies.

[...]

This is how power and influence work in Washington. Former top officials, whose portraits mount the walls, weigh in on matters of enforcement. Now working for the private sector, they assail the regulatory “overreach.” Sincerely held or self-serving, these views carry weight in Washington’s clubby legal milieu.

[...]

Former regulators are the mouthpieces. And given what they say in public, one can only imagine what is happening behind closed doors.”

Voluntary Disclosure Calculus

At the Corporate Crime Reporter, Laurence Urgenson (Mayer Brown) talks about, among other topics, voluntary disclosure.

“Voluntary disclosure is still an important option in dealing with FCPA risk,” Urgenson said. “It used to be the default position — people had a predisposition toward it. It’s moved from the default position to one taken only after a clear-eyed case by case analysis of the benefits and the costs.” “That’s because the benefits and costs of voluntary disclosure have shifted. Part of that is the result of globalization. Part of it has to do with the increased penalties.” “It used to be that the Department of Justice and the SEC could provide companies with one stop shopping. If you volunteered to the Department and SEC, and you settled the matter, you had finality.” “That was a big benefit of the voluntary disclosure process. Now, because in part of the high penalties and globalization, the Department and SEC resolution can be the first stop in a long journey, which includes dealing with law enforcement authorities around the world, dealing with NGOs such as the World Bank which has an enforcement process, and navigating the risks of civil litigation.” “Once the Department of Justice resorted to the alternative fine provisions, which greatly increases the potential fines and once the SEC began to use the disgorgement remedy, FCPA settlements became much more costly, so much so that they could affect the stock price and provoke civil actions.” “You really have to sit down with the client and look at the list of pluses and minuses to voluntary disclosure. You have to go through with the client the long list of things that follow from voluntary disclosure.”

Nice Payday But What Was Really Accomplished?

As highlighted in this Law360 article:

“Alcoa Inc. shareholders on Monday asked a Pennsylvania federal judge to approve a settlement between shareholders and the board over allegations that the company paid hundreds of millions of dollars in illegal bribes to government officials in Bahrain. The proposed agreement states that aluminum producer Alcoa “has adopted or will adopt” compliance reforms that include the creation of a chief ethics and compliance officer, an officer-level position that oversees the ethics and compliance program, enhancements to the program that include the development of an anti-corruption policy, and implementation of Alcoa’s due diligence and contracting procedure for intermediaries.

[...]

The proposed settlement also provides that there be a reorganization of Alcoa’s regional and local counsel reporting structure, enhanced mandatory annual Foreign Corrupt Practices Act and employee anti-corruption training, improvements to its business expense policies, and enhancements to its compliance policies for evaluating the effectiveness of preventing corruption.

In addition, the company has agreed to pay $3.75 million to the plaintiffs’ counsel.

Alcoa admits no wrongdoing or liability under the terms of the proposed agreement.”

The issue is the same as highlighted in this prior post – nice payday, plaintiffs’ lawyer,s but what was really accomplished?

In connection with the January 2014 FCPA enforcement action against Alcoa World Alumina, Alcoa basically agreed to the same thing it agreed to do in the above settlement.  (See here at Exhibit 4).

Reading Stack

A review of my book, “The Foreign Corrupt Practices Act in a New Era” published at International Policy Digest by John Giraudo (of the Aspen Institute and formerly a chief compliance officer).  It begins:

“If you care about the rule of law, The Foreign Corrupt Practices Act in the New Era by Mike Koehler, is one of the most important books you can read—to learn how it is being eroded. Professor Koehler’s book … is a must read for people who care about law reform. It is a story of how a good law, the US Foreign Corrupt Practices Act, a criminal law that prevents companies from bribing foreign government officials has been misapplied in recent enforcement actions by the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC).”

Miller & Chevalier’s FCPA Autumn Review 2014 is here.

*****

A good weekend to all.

Posted by Mike Koehler at 12:03 am. Post Categories: AlcoaEnforcement Agency PolicyRelated Civil LitigationSECVoluntary Disclosure




October 23rd, 2014

The Selling Of FCPA Enforcement Attorneys Needs To Stop!

StopSignFor profit companies that host FCPA conferences are entitled to run their business as they see fit.

However, when for profit companies use Foreign Corrupt Practices Act enforcement attorneys at the DOJ and SEC like commodities that are then marketed and sold to the public, this is where the line needs to be drawn.

A common marketing device the conference companies use in hopes of driving attendance to their events is by touting the public officials who will speak at the event. The marketing materials highlight the DOJ and SEC officials as keynote speakers.  Participants are told they are going to have a “Conversation with DOJ and SEC Prosecutors.”

One e-mail I recently received attempted to entice me as follows.

Come for the DOJ and SEC, Stay for the Rest…

“With 12 senior level DOJ and SEC officials providing invaluable insights into the latest enforcement initiatives, there is so much more to [the conference next month]“

Another recent e-mail from the same conference company had the following subject matter line:  ”Join the DOJ, SEC, Over 500 Anticorruption Professionals Next Month in DC.”

Another recent e-mail from the same company concerning a separate event stated “gain first-hand insights from US DOJ, SEC and the IRS on the priorities and approaches to building a successful case.”  The more formal marketing material from the conference company profiled DOJ, SEC and IRS officials as “featured speakers” and described the enforcement officials’ panel as an “exclusive” session.

Exclusive is right because the general public is not invited.

Rather, to hear your public officials speak about an important law you will have to pony up (approximately $2,500 – $4,000 dollars depending on the package you choice and when you register).

The selling of FCPA enforcement attorneys by private companies needs to stop.

FCPA enforcement attorneys are public officials, not a commodity that a for-profit company should be allowed to sell.

It is is bit ironic that these conferences focus on FCPA topics, yet are not the speaking slots a thing of value that the conference companies provide to public officials in an effort to obtain more business?  Not a clear parallel to be sure, but an issue to nevertheless ponder.  Why do the FCPA enforcement attorneys at the DOJ and SEC allow themselves to be used as pawns by for profit companies?  After the FCPA Guidance is there really a need for the enforcement officials to hit the FCPA conference circuit as frequently as they do?

These are serious questions that deserve more attention.

On final point – conference participants are lead to believe by the conference firm marketing literature that they are going to hear unique insight into DOJ or SEC enforcement policy and procedures.  The reality is the first words out of the mouth of the DOJ or SEC officials will usually be something to the effect that they are speaking in their individual capacity and that nothing they say represents official DOJ or SEC policy or binds the DOJ or SEC.

For previous posts on the above (and to see how this practice has NOT stopped) see here and here.

Posted by Mike Koehler at 12:01 am. Post Categories: FCPA Inc.




October 22nd, 2014

As Foreign Scrutiny Grows, Dollars Continue To Flow In The U.S.

This 2012 post highlighted the origins and prominence of an enforcement theory in this new era of Foreign Corrupt Practices Act enforcement.

The enforcement theory is that employees (such as physicians, nurses, mid-wives, lab personnel, etc.) of various foreign health care systems are “foreign officials” under the FCPA.  The prior post detailed eleven corporate enforcement actions in which the enforcement theory was used, in whole or in part, and since then four additional corporate enforcement actions (Stryker, Philips Electronics, Tyco and Eli Lilly) have been based, in whole or in part, on the same enforcement theory.  Perhaps telling, the DOJ has never charged an individual based on this FCPA enforcement theory.

In most of the corporate enforcement actions based on the enforcement theory, the “things of value” provided to the alleged “foreign officials” have included consulting opportunities and services contracts and payment of travel and entertainment expenses such as  wine, speciality foods, visits to bath houses, card games, karaoke bars, door prizes, spa treatments and cigarettes.

The enforcement theory continues to be the reason certain companies are under FCPA scrutiny as evidenced by the on-going FCPA scrutiny of GlaxoSmithKline and Sanofi to name just a few (see here).

Yet as this foreign scrutiny of pharmaceutical and other healthcare related companies continues, the dollars continue to flow in the United States.

Recently, the Wall Street Journal ran articles here (“Doctors Net Billions From Drug Firms”) and here (“Payments Reveal Range of Doctors’ Ties With Industry”) based on information from “a new federal government transparency initiative mandated in the 2010 Affordable Care Act which required manufacturers of drugs and medical devices to disclose the payments they make to physicians and teaching hospitals every year.

In the words of the Wall Street Journal:

“The payments and so-called transfers of value to an estimated 546,000 doctors and 1,360 teaching hospitals include such items as free meals that company sales representatives bring to physicians’ offices, fees paid to doctors to speak about a company’s drug to other doctors at restaurants, and compensation for clinical trial research and consulting fees. Some doctors earned tens of thousands of dollars annual from drug companies by flying to various cities to give paid speeches, while some surgeons received even larger amounts from medical device makers, partly from royalties on products they helped develop.”

In short, many of the “things of value” are similar to those alleged in FCPA enforcement actions involving foreign physicians and other healthcare personnel.

Against this backdrop, it is interesting to note that in the United States approximately 20% of hospitals are owned by state or local governments (see here). In addition, approximately 150 more medical centers are run by the Veterans Health Administration (see here).

Presumably then, a healthy percentage of the “things of value” are going to U.S. officials – at least so long as one applies the FCPA enforcement theory to the U.S. context.

Yet, one should not hold their breath waiting for enforcement actions under 18 U.S.C 201, the U.S. domestic bribery statute with very similar elements to the FCPA’s anti-bribery provisions.  Nor should one hold their breath as to any books and records or internal controls enforcement actions regarding such payments by issuer companies.

But the question is why?

Assuming that foreign physicians and healthcare personnel are indeed “foreign officials” under the FCPA, why should corporate interaction with a “foreign official” be subject to greater scrutiny and different standards of enforcement than corporate interaction with a U.S. official?  Why do we reflexively label a “foreign official” who receives “things of value” from private business interests as corrupt, yet generally turn a blind eye when it happens here at home?

For numerous other prior posts on the “double standard,” see this tag.

Posted by Mike Koehler at 12:04 am. Post Categories: Double StandardMedical Device IndustryPharmaceutical Industry




October 21st, 2014

Self-Serving Statements Do Not Establish The Truth Of The Matter Asserted

FCPA Professor is the best website devoted to the Foreign Corrupt Practices Act.

Does this self-serving statement establish the truth of the matter asserted?

Of course not.

Yet, in the FCPA context it seems that many self-serving statements by political actors, advocates, and counsel are reported as establishing the truth of the matter asserted.

For instance, recently there was much reporting in the FCPA space regarding the DOJ’s so-called declination of Layne Christensen Company.

As highlighted in this prior post, the company has been under FCPA scrutiny since 2010 concerning conduct in Africa and as noted in this November 2013 post, the company disclosed that it was “engaged in discussions with the DOJ and the SEC regarding a potential negotiated resolution” of the matter.

However, in August Layne Christensen issued this release which stated in pertinent part:

“The DOJ has decided to not file any charges against the Company in connection with the previously disclosed investigation into potential violations of the FCPA.  The DOJ has notified Layne that it considers the matter closed. [...] Based on conversations with the DOJ, we understand that our voluntary disclosure, cooperation and remediation efforts have been recognized and appreciated by the staff of the DOJ and that the resolution of the investigation reflects these matters.”

The implicit suggestion from the company’s disclosure would seem to be that the reasons for the so-called declination was the company’s voluntary disclosure, cooperation and remediation.  Yet, the disclosure of course is little more than a self-serving statement that does not establish the truth of the matter asserted (indeed there have been many FCPA enforcement actions originating from voluntary disclosures during which the company cooperated and engaged in extensive remedial measures).

Moreover, there could be other reasons why the DOJ declined to prosecute Layne Christensen including the nature and quality of the evidence that the company actually violated the FCPA.  There is no way to test or measure the accuracy of Layne Christensen’s disclosure, yet the public is  invited to accept the self-serving statements as establishing the truth of the matter asserted.

Perhaps sensing a marketable moment, Layne Christensen’s counsel took the unusual step of issuing this press release. The release noted the “recently closed DOJ investigation” of its client and then cited to the substance of its own client’s press release.  In other words, the firm used its client’s self-serving statements to support its own self-serving statements with the implicit suggestion being that the nature and quality of the firm’s lawyering was a reason for the so-called declination of its client by the DOJ.

No big deal, everyone is entitled to engage in a bit of puffery aren’t they?

Yet, the problem arises when self-serving statements are then reported by others to establish the truth of the matter asserted.

And that is precisely what this recent article appeared to do.  The article began as follows.

“Often the best guidance on how to avoid Foreign Corrupt Practices Act charges comes from the details of cases that government authorities chose not to pursue. Companies looking to improve their FCPA compliance programs got two such cases recently. Together, the cases speak volumes about how to get a declination from the Department of Justice. In an unusual move, the Department of Justice opted not to bring enforcement actions against Image Sensing Systems and Layne Christensen in two separate cases pertaining to alleged violations of the FCPA. Statements issued by the companies themselves cite numerous reasons why the Justice Department declined to prosecute.” (emphasis added).

The article then quoted a number of self-serving statements from Layne Christensen’s counsel that appear to convince the reader of the truth of the matter asserted by the statements.

The above linked article even closed with the biggest self-serving statement of them all in the context of so-called DOJ declinations. The article stated:

“Learning from Morgan Stanley

In 2012, the Justice Department similarly exonerated Morgan Stanley of FCPA charges for its extensive cooperation, robust internal compliance program, and voluntary disclosure of the misconduct. “Often overlooked is one of the critical factors that led to that declination: Morgan Stanley assisted the government in identifying the individual executive responsible for the criminal conduct, Garth Peterson, and in securing evidence to hold Peterson criminally responsible,” [stated an industry participant]. For other companies facing an FCPA investigation, engaging the help of outside experts who have been through the process many times before and can help the company “not have to reinvent the wheel,” [stated an industry participant], really helps in the end to see the successful conclusion of an FCPA investigation and remediation.”

The above article cited, as so many articles have before, the self-serving statements in this April 2012 DOJ press release concerning its so-called Morgan Stanley declination.  However, the DOJ’s statements in that press release were not simply that of an umpire calling the balls and strikes.  Rather, the press release statements concerning Morgan Stanley are more properly viewed as statements by a political actor and advocate seeking to quell the then-existing growing tide of FCPA reform, including as to a compliance defense.  (See prior posts here and here for the context, timing, and background of the DOJ’s so-called Morgan Stanley declination).

In short, the DOJ was looking for an opportunity to make a policy statement – and a political move – yet to most this self-serving statement seemed to establish the truth of the matter asserted.  That this was the primary motivation of the DOJ’s so-called Morgan Stanley declination seems to become more apparent with time as it is a prominent talking point in nearly every DOJ FCPA policy speech since.  (See here – Sept. 2012); (here – October 2012); (here – Nov. 2012); (here – Nov. 2013); (here – Nov. 2013); (here – May 2014); (here – Sept. 2014); (here – Oct. 2014).

To anyone who has attended an FCPA conference in recent years, you know that self-serving statements dominate the conference circuit.

For instance, a DOJ or SEC enforcement official will state x, y, or z.  It is of course impossible to test the accuracy or veracity of x, y, or z, but the audience is of course invited to accept the self-serving statement as establishing the truth of the matter asserted.

Likewise, it is common on the conference circuit for FCPA Inc. participants to tell “war stories” about how they successfully negotiated with the DOJ or SEC as to issue x, y or z.  Again, it is of course impossible to test the accuracy or veracity of x, y or z, but once again the audience is invited to accept the self-serving statement as establishing the truth of the matter asserted.

To conclude, the point is this.

Self-serving statements are fine and political actors, advocates, and counsel are entitled to make them.  Yet, greater restraint should be exhibited in reporting self-serving statements as establishing the truth of the matter asserted.

Posted by Mike Koehler at 12:03 am. Post Categories: Declination DecisionsLayne ChristensenMorgan Stanley




October 20th, 2014

Is There Successor Liability For FCPA Violations?

A guest post today from Taylor Phillips (an attorney with Bass Berry & Sims in Washington, D.C.).

*****

Imagine you deliver pizza for a living.  You are good at your job, but there is another deliveryman who is the best in the business – Hiro Protagonist.  Thanks to a remarkably fast car, Hiro always makes his deliveries on time.

One day, however, Hiro asks if you are interested in buying the car.  He tells you that he had a “near miss” with a pedestrian and, shaken, he has decided to hang up his insulated pizza bag for good.  Because he offers you a good price on the car, you accept.

A few months later, the police show up at your door.  They inform you that Hiro did not have a “near miss” – he hit a pedestrian while making a delivery.  Worse, they say that because you bought substantially all of Hiro’s business assets, you are criminally culpable for the hit-and-run.  Moreover, because pizza delivery is a highly regulated industry, the Sicilian Edibles Commission brings an administrative action against your business based on Hiro’s failure to properly account for expenses related to the hit-and-run.

*****

Obviously, this hypothetical is grossly oversimplified, but its patent injustice highlights the problems with expansive successor liability.  As FCPA practitioners know, successor liability is a key part of the government’s enforcement of the FCPA.  Consequently, as the FCPA Professor put it recently, “the FCPA is a fundamental skill set for all business lawyers and advisers, including in the mergers and acquisitions context.”

Of course, many attorneys who are not well-versed in the FCPA will look first to the DOJ and SEC’s Resource Guide to the U.S. Foreign Corrupt Practices Act.  It emphasizes that “[a]s a general legal matter, when a company merges with or acquires another company, the successor company assumes the predecessor company’s liabilities. . . . Successor liability applies to all kinds of civil and criminal liabilities, and FCPA violations are no exception.”  But is that right?

To assess the statement in the Resource Guide, it’s worth stepping back and considering how companies are purchased by other companies.  The most common acquisition structures are mergers, stock purchases, and asset purchases.  In a statutory merger, the resulting company assumes all the civil and criminal liability of its predecessor companies.  Thus, no transactional lawyer should be surprised that FCPA liabilities will transfer in a merger.  Conversely, in a stock purchase, there is no “successor”—the purchased company still exists, with all its existing liabilities.

Thus, asset purchases typically are the only cases in which “successor liability” is meaningfully analyzed by courts.  Interestingly, the rule is different from that stated in the Resource Guide: as a general legal matter, when a company acquires substantially all of another company’s assets, it does not assume the seller’s liabilities – even when it continues the seller’s business, brand, and contracts.

Of course, most rules have their exceptions, and there are four commonly recognized exceptions to the general rule of nonliability for asset purchasers.  The first exception—express or implied assumption of liabilities—simply states that where an acquirer intends to assume the liabilities of the seller, the law will enforce that intent.  The second exception—fraud—applies when the sale of assets would work a fraud on the seller’s creditors.  Finally, the third and fourth traditional exceptions—“mere continuation” and de facto merger—commonly are considered to be a single exception which can involve a number factors, depending on the idiosyncrasies of state law.  Critically, however, continuity of ownership between the buyer and seller typically is considered to be an indispensable factor for these two exceptions.  Thus, in accordance with traditional common law, an arms-length buyer that does not intentionally assume the seller’s liabilities nor engage in fraud will not be liable for the seller’s legal violations.  In other words, if only these exceptions applied to the hypothetical, the police would be wrong, and you would not have any successor liability, civil or criminal, for Hiro’s hit-and-run (even if you were well aware of it prior to the transaction).

Given this fairly clear answer, what explains the government’s silence regarding asset purchasers in the Resource Guide?  One potential answer is the “substantial continuity” exception.  In addition to the four traditional exceptions to successor nonliability referenced above, some federal courts have applied federal common law to find arms-length asset purchasers liable for violations of the seller where the asset purchaser (1) knew of the liability prior to the acquisition and (2) continued the enterprise of the seller.  Thus, unlike the traditional exceptions of “mere continuation” and “de facto merger,” the “substantial continuity” exception does not require continuity of ownership – merely continuity of enterprise.  Thus, if the substantial continuity exception applied to FCPA violations, there would be a plausible argument that China Valves had successor liability for Watts Waters’ FCPA violations (and that you would be at least civilly liable for Hiro’s hit-and-run).

Supreme Court precedent, however, strongly suggests that federal courts should incorporate state law rather than expand federal common law.  In particular, the Supreme Court’s decisions in United States v. Kimbell Foods, 440 U.S. 715 (1979), and United States v. Bestfoods, 524 U.S. 51 (1998), indicate that federal courts should adopt state law, rather than create a federal law of corporate liability.  Accordingly—as many circuit courts have found in other contexts—state successor liability law is applicable to many federal causes of action.  Because most states do not recognize the federal substantial continuity exception, several circuits do not apply the exception except in environmental, labor, and employment cases.

In short, there is a compelling argument that arms-length asset purchasers—even asset purchasers who continue the business of the seller and know about the seller’s FCPA violations—do not, as a matter of law, have successor liability for the FCPA violations of the seller.  For additional development of this argument see The Federal Common Law of Successor Liability and the Foreign Corrupt Practices Act, ___ William & Mary Business Law Review ___ (forthcoming).

Despite the general rule of successor nonliability, the Resource Guide does not squarely address FCPA liability for asset purchasers.  If only there was some way to ask the government for guidance on its present enforcement position with respect to successor liability…

Posted by Mike Koehler at 12:03 am. Post Categories: Guest PostsSuccessor Liability