Archive for the ‘FCPA Trials’ Category

Ipse Dixit

Tuesday, April 8th, 2014

This post last week highlighted the recent activity in SEC v. Mark Jackson & James Ruehlen (a Foreign Corrupt Practices Act enforcement action scheduled for trial this summer).  As noted in the post, among other things, the SEC is seeking to exclude various defense expert witnesses on a variety of issues including internal controls issues.

If you read the SEC’s motions (see here – condensed into one document) you will see that a primary basis for exclusion is the SEC’s argument that the experts are merely offering their own naked ipse dixit.

I must confess – arcane latin phrases not being in my strike zone – I had to look up the meaning of ipse dixit.

Ipse Dixit – Latin for He himself said it – an unsupported statement that rests solely on the authority of the individual who makes it.

The term ipse dixit appears approximately 30 times in the SEC’s motions – and related to it – is the SEC’s argument that the experts’ internal controls opinions should be excluded because the experts fail to define certain terms and/or there is no discernible methodology underlying their opinions.

For instance, in seeking to exclude Alan Bell (CPA – regarding, among other things, internal controls) the SEC states:

“Bell could not define what constitutes a “circumvention” of an internal control.”

“Bell concedes that there are no written standards to evaluate what constitutes, in his view, a “circumvention” of an internal control.”

“Bell’s opinions are not the product of a reliable methodology applied to the facts of this case. In fact, Bell employed no methodology at all; instead, his opinions are “based on [his] 40 years of experience.”

In seeking to exclude Gary Goolsby (CPA – regarding, among other things, internal controls issues) the SEC states:

“There is also no discernible methodology underlying his opinion on Jackson’s purported reliance [on Noble's internal controls], other than Goolsby’s own naked ipse dixit. Goolsby’s methodology reduces to the proposition that “I know what I’m looking at.” Yet, in deposition, he could not explain what his opinion means, as a practical matter, with reference to the conduct at issue in this case. Goolsby’s testimony thus confirms what is apparent from his report – his factual findings are based on nothing more than his subjective say-so.”

In seeking to exclude Lowell Brown (regarding various FCPA compliance issues) the SEC states:

“There is no discernible analysis or methodology underlying Brown’s opinion as to Jackson’s purported reliance, other than Brown’s own naked ipse dixit – a manifestly improper basis for expert testimony.”

In seeking to exclude Professor Ronald Gilson (regarding, among other things, internal controls issues) the SEC states:

“There is no genuine methodology here, other than Gilson’s own ipse dixit based on his subjective interpretation of the evidence

In the final analysis, Gilson is an advocate for the defense who proffers nothing but his ipse dixit in the place of rigorous analytical connection between his deficient methodology (reading deposition transcripts and exhibits) and his expert conclusion (the inference that if Ruehlen told others at Noble what he was doing, he lacked the corrupt intent to violate the FCPA, as opposed to simply colluding to bribe foreign officials).”

The irony of course is that while attacking the defendants’ experts for their own ipse dixit, many of the SEC’s FCPA internal controls enforcement theories are nothing more than ipse dixit.

For instance, as noted in this prior post, the SEC alleged that Oracle violated the FCPA’s internal control provisions. The only allegations against Oracle itself is that it failed to audit distributor margins against end user prices and that it failed to audit third party payments made by distributors.  The SEC did not allege any red flags to suggest why Oracle should have done this.  Thus, how did Oracle violate the FCPA’s internal controls provisions?  What was the methodology the SEC used?

Ipse dixit.

Indeed, in a pointed critique of the SEC’s Oracle enforcement theory, the former Assistant Chief of the DOJ’s FCPA unit stated:

“Oracle is the latest example of the SEC’s expansive enforcement of the FCPA’s internal controls provision, and it potentially paints a bleak picture—one in which the provision is essentially enforced as a strict liability statute that means whatever the SEC says it means (after the fact).”  (See here for the prior post).

In many SEC FCPA enforcement actions, the SEC merely makes conclusory statements for why the company allegedly violated the FCPA’s internal controls provisions.  For instance, in the Philips enforcement action (see here for the prior post) the SEC states:

“Philips failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were properly recorded by Philips in its books and records. Philips also failed to implement an FCPA compliance and training program commensurate with the extent of its international operations. Accordingly, Philips violated [the internal control provisions].”

Source?  Methodology?

Ipse dixit.

As noted in my recent article “Why You Should Be Alarmed by the ADM FCPA Enforcement Action” one reason, among others, why you should be alarmed by the action is because of the “failure to prevent” standard invoked by the SEC for why ADM violated the FCPA’s internal controls provisions.  As noted in the article, this standard  does not even exist in the FCPA and is inconsistent with actual legal authority.  (See here for the previous post regarding SEC v. World-Wide Coin – the only judicial decision to directly address the FCPA’s internal controls provisions).

Moreover, as noted in the article, the “failure to prevent standard” is inconsistent with SEC guidance relevant to the internal-controls provisions.  (See also this prior post).  The SEC’s most extensive guidance on the internal controls provisions states, in pertinent part, as follows:

“The Act does not mandate any particular kind of internal controls system. The test is whether a system, taken as a whole, reasonably meets the statute’s specified objectives. ‘‘Reasonableness,’’ a familiar legal concept, depends on an evaluation of all the facts and circumstances.

Private sector decisions implementing these statutory objectives are business decisions. And, reasonable business decisions should be afforded deference. This means that the issuer need not always select the best or the most effective control measure. However, the one selected must be reasonable under all the circumstances.

Inherent in this concept [of reasonableness] is a toleration of deviations from the absolute. One measure of the reasonableness of a system relates to whether the expected benefits from improving it would be significantly greater than the anticipated costs of doing so. Thousands of dollars ordinarily should not be spent conserving hundreds. Further, not every procedure which may be individually cost-justifiable need be implemented; the Act allows a range of reasonable judgments.

The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company. But, an adequate system of internal controls means that, when such breaches do arise, they will be isolated rather than systemic, and they will be subject to a reasonable likelihood of being uncovered in a timely manner and then remedied promptly.”

What is the source for the “failure to prevent” standard in ADM?  What is the methodology?

Ipse dixit.

In short, while attacking the defendants’ experts for their lack of defined methodology regarding internal controls issues, the SEC itself has long recognized that the FCPA’s internal controls lack a defined methodology.

As noted in this post, in a 2013 speech SEC Chair Mary Jo White reminded us why trials are important.  Among other things, White stated that “trials allow for more thoughtful and nuanced interpretations of the law in a way that settlements and summary judgments cannot.”

The SEC’s enforcement action against Jackson and Ruehlen represents an extremely rare instance in which the SEC is being forced to articulate its FCPA positions in the context of an adversary proceeding.

The SEC’s motions seeking to exclude defendants’ experts – while primarily based on ipse dixit – reminds us that a large portion of the SEC’s (and DOJ’s) FCPA enforcement program is nothing more than ipse dixit – and subjective say so.

The SEC Has Never Prevailed In An FCPA Enforcement Action When Put To Its Ultimate Burden Of Proof

Wednesday, March 5th, 2014

This recent Wall Street Journal article highlighted how the SEC’s win rate at trials has slipped.  According to the article:

“[The SEC has] won 55% of its trials since October [2013], a sharp drop after three consecutive years when it prevailed more than 75% of the time.”

There has never been an SEC Foreign Corrupt Practices Act trial, but the above percentages are downright stellar when one considers that the SEC has never prevailed in an FCPA enforcement action when put to its ultimate burden of proof.

As highlighted in this previous post, in 2002 the S.D. of Texas dismissed an SEC complaint against Eric Mattson and James Harris.  The enforcement action involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment.  The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the Court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment.  When Mattson and Harris was decided, the S.D. of Texas in U.S. v. Kay case had already dismissed that case finding that the plain language of the FCPA does not prohibit goodwill payments to foreign government officials to reduce a tax obligation.  The SEC attempted to distinguish the trial court’s Kay ruling by arguing that in the civil enforcement context, the Court should interpret the FCPA’s language more liberally than in criminal cases.  The Court rejected the SEC’s arguments and followed the trial court’s analysis in Kay that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.”  See here for the court’s Memorandum and Order.

As highlighted in this previous post, in 2013 the S.D. of New York dismissed an SEC complaint against Herbert Steffen.  In dismissing the case against the German national, the judge concluded, as an initial threshold matter, that personal jurisdiction over Steffen exceeded the limits of due process.  The judge stated, in pertinent part, as follows.

“If this Court were to hold that Steffen’s support for the bribery scheme satisfied the minimum contacts analysis, even though he neither authorized the bribe, nor directed the cover up, much less played any role in the falsified filings, minimum contacts would be boundless.  [...] [U]nder the SEC’s theory, every participant in illegal action taken by a foreign company subject to U.S. securities laws would be subject to the jurisdiction of U.S. courts no matter how attenuated their connection with the falsified financial statements.  This would be akin to a tort-like foreseeability requirement, which has long been held to be insufficient.”

The other two instances in FCPA history in which the SEC is being put its burden of proof are in the pending Straub and Jackson cases.  To state the obvious, when an SEC complaint is allowed to proceed past the motion to dismiss stage, the SEC has not prevailed when put to its ultimate burden of proof.  Rather the standard at the motion to dismiss stage is whether the complaint pleads enough facts to state a claim that is plausible on its face.

As highlighted in this previous post, in February 2013 the S.D. of New York denied the motion to dismiss of Elek Straub and other foreign national defendants (formerly associated with Magyar Telekom) in an SEC FCPA case concerning an alleged bribery scheme in Macedonia.  A trial date has not been set in the case, the current discovery deadline is May 2015.

As highlighted in this previous post, in December 2012 the S.D. of Texas granted – in an SEC FCPA enforcement action involving alleged conduct in Nigeria –  Mark Jackson and James Ruehlen’s motion to dismiss the SEC’s claims that sought monetary damages while denying the motion  to dismiss as to claims seeking injunctive relief.  Even though court granted the motion as to SEC monetary damage claims, the dismissal was without prejudice meaning that the SEC was allowed to file an amended complaint.  As noted in this prior post, that is indeed what happened next, and as noted here a second round of briefing began anew.  As noted in this previous post, in the Defendant’s renewed motion to dismiss they argued that the SEC could not rely on the fraudulent concealment or continuing violations doctrine to extend the limitations period to cover certain claims.  A week later the Supreme Court issued its unanimous decision in SEC v. Gabelli (see here for the prior post) and soon thereafter the Defendants filed a notice of supplemental authority with the court arguing that Gabelli “bolstered” their position.  On the same day the SEC’s opposition brief was due, the parties jointly notified the court “that in lieu of opposing the [motion to dismiss] the SEC intends to file a Second Amended Complaint.”  The filing noted that the then proposed Second Amended Complaint “moots the relief sought in the [the motion to dismiss] because it clarifies that, among the violations alleged, the SEC seeks civil penalties … only to the extent such violations accrued on or before [a certain date].  In short, after being put to its initial burden of proof, the SEC’s case against Jackson and Ruehlen remains a shell of its former self.  The SEC’s case against Jackson and Ruehlen is currently scheduled for trial to begin on July 9, 2014.

Did Richard Liedo Win Or Lose?

Monday, December 23rd, 2013

[This post is part of a periodic series regarding "old" FCPA enforcement actions]

This previous post highlighted the 1989 Foreign Corrupt Practices Act enforcement action against NAPCO International in connection with military sales to the Republic of Niger.  The previous post noted that the DOJ also criminally charged the Vice President of the Aerospace Division of NAPCO and that this individual exercised his constitutional right to a jury trial and put the DOJ to its burden of proof.

That person was Richard Liedo and his enforcement action is worthy of its own post.

Among other things, the Liebo enforcement action resulted in a rare appellate FCPA decision, and an often overlooked one at that given that the court concluded that a jury could find that a subordinate who acted at his supervisor’s direction in providing a thing of value to a foreign official lacked “corrupt” intent.

In this lengthy 62 page criminal indictment, the DOJ charged Liebo in connection with the same bribery scheme alleged in the NAPCO action.  In pertinent part, the DOJ alleged that in connection with aircraft sales to Niger, Liebo conspired with others to violate the FCPA by making payments or authorizing payments of money to “officials of the Government of Niger, that is, Tahirou Barke Doka [the First Counselor of the Embassy of Niger in Washington, D.C.] and Captain Ali Tiemogo [Chief of Maintenance for the air force component of the Niger Ministry of Defense] and “Fatouma Mailelel Boube and Amadou Mailele, both relatives of Tiemogo, while knowing that all or a portion of such money would be offered, given or promised, directly or indirectly, to foreign officials, namely Barke and Tiemogo” for the purpose of “influencing the acts and decisions of Barke and Tiemogo in their official capacities, and inducing them to use their influence with the Ministry of Defense.”

In addition to the conspiracy charge (count 1), the DOJ also charged Liebo with 10 counts of violating the FCPA’s anti-bribery provisions (counts 2 – 11), one count of violating the FCPA’s books and records provisions (count 12), three counts of aiding and abetting in the preparation of false corporate income tax returns (counts 13 – 15), and five counts of making false statements to the Defense Security Assistance Agency (DSAA) of the U.S. Department of Defense in connection with the sales (counts 16 – 20).

Liebo exercised his constitutional right to a jury trial and put the DOJ to its burden of proof.

The jury considered 19 charges against Liebo (on the first day of trial, the court granted the DOJ’s motion to dismiss one of the false statement charges) and he was acquitted of 17 charges.  The only charges Liebo was convicted of was one count of violating the FCPA’s anti-bribery provisions and one count of making a false statement to DSAA.  The FCPA charge related to the payment of $2,028 “for the airline tickets purchased for Barke’s wedding and honeymoon travel.”

As noted in this judgment, Liebo was sentenced to 18 months in federal prison.  However, as noted in a Trace Compendium entry, “Liebo only served two of the 18 months, having petitioned for, and eventually received, a retrial.”

As noted in this Eighth Circuit opinion, Liebo appealed and argued on appeal that “his convictions should be reversed because of insufficient evidence and because the district court erred in instructing the jury” and that the “district court abused its discretion by denying his motion for a new trial based on newly discovered evidence.”

As to the FCPA anti-bribery charge Liebo was found guilty on, he argued on appeal that: (1) there was insufficient evidence to show that the airline tickets were given to obtain or retain business; and (2) that there was no evidence to show that his gift of honeymoon tickets was done corruptly.

After setting forth the standard of review (i.e. considering the evidence in the light most favorable to the government with all reasonable inferences and credibility determinations made in support of the jury’s verdict), the court stated as follows as to obtain or retain business.

“There is sufficient evidence that the airplane tickets were given to obtain or retain business. Tiemogo testified that the President of Niger would not approve the contracts without his recommendation. He also testified that Liebo promised to “make gestures” to him before the first contract was approved, and that Liebo promised to continue to “make gestures” if the second and third contracts were approved. There was testimony that Barke helped Liebo establish a bank account with a fictitious name, that Barke used money from that account, and that Barke sent some of the money from that account to Tiemogo. Barke testified that he understood Liebo deposited money in the account as “gestures” to Tiemogo for some “of the business that they do have together.”

Although much of this evidence is directly relevant to those counts on which Liebo was acquitted, we believe it appropriate that we consider it in determining the sufficiency of evidence as to the counts on which Liebo was convicted.

[…]

Moreover, sufficient independent evidence exists that the tickets were given to obtain or retain business. Evidence established that Tiemogo and Barke were cousins and best friends. The relationship between Barke and Tiemogo could have allowed a reasonable jury to infer that Liebo made the gift to Barke intending to buy Tiemogo’s help in getting the contracts approved. Indeed, Tiemogo recommended approval of the third contract and the President of Niger approved that contract just a few weeks after Liebo gave the tickets to Barke. Accordingly, a reasonable jury could conclude that the gift was given “to obtain or retain business.”

As to corrupt intent, the court stated as follows.

“Liebo also contends that the evidence at trial failed to show that Liebo acted “corruptly” by buying Barke the airline tickets. In support of this argument, Liebo points to Barke’s testimony that he considered the tickets a “gift” from Liebo personally. Liebo asserts that “corruptly” means that the offer, payment or gift “must be intended to induce the recipient to misuse his official position….”  […] Because Barke considered the tickets to be a personal gift from Liebo, Liebo reasons that no evidence showed that the tickets wrongfully influenced Barke’s actions.

We are satisfied that sufficient evidence existed from which a reasonable jury could find that the airline tickets were given “corruptly.” For example, Liebo gave the airline tickets to Barke shortly before the third contract was approved. In addition, there was undisputed evidence concerning the close relationship between Tiemogo and Barke and Tiemogo’s important role in the contract approval process. There was also testimony that Liebo classified the airline ticket for accounting purposes as a “commission payment.” This evidence could allow a reasonable jury to infer that Liebo gave the tickets to Barke intending to influence the Niger government’s contract approval process. We conclude, therefore, that a reasonable jury could find that Liebo’s gift to Barke was given “corruptly.” Accordingly, sufficient evidence existed to support Liebo’s conviction.”

As to Liebo’s argument on appeal that the “district court abused its discretion by denying his motion for a new trial based on newly discovered evidence,” Liebo noted that “two months after his conviction, a NAPCO employee provided Liebo with a memorandum showing [a superior's] approval to the charge of the airline tickets.”  Liebo argued that the discovery of this evidence warranted a new trial.  In support, Liebo argued that “he was acquitted on all other bribery counts for which there was evidence that the payment in question was approved [by a superior].  Liebo argued that evidence of a superior’s approval of the wedding trip was a determinative factor in the jury’s verdict by “pointing to a question sent out by the jury during their deliberations asking whether there was ‘any information regarding authorization for payment of wedding trip.’”

After noting that motions for a new trial based on newly discovered evidence are looked upon with disfavor, the court also noted that “courts have granted a new trial based on newly discovered evidence especially when the evidence supporting the defendant’s conviction is weak.”

The court closed its opinion as follows.

“[T]he evidence against Liebo, while sufficient to sustain the conviction, was not overwhelming. Indeed, we believe that the company president’s approval of the purchase of the tickets is strong evidence from which the jury could have found that Liebo acted at his supervisor’s direction and therefore, did not act “corruptly” by giving the tickets to Barke. Furthermore, we are highly persuaded that the jury considered such approval pivotal, especially in light of the question it submitted to the court during its deliberations and its acquittal of Liebo on the other bribery counts in which evidence of approval existed. Accordingly, we hold that the district court clearly abused its discretion in denying Liebo’s motion for a new trial.”

In the re-trial, Liebo was convicted of aiding and abetting FCPA anti-bribery violations and making a false statement to the DSAA.  He was then sentenced to three years probation, two months home detention, and 400 hours of community service.

Based on all of the above, the question is raised – did Richard Liedo win or lose when he put the DOJ to its burden of proof?

In this the exam grading season, I know where I come out when the one with the burden is 90% unsuccessful.

Indeed, Trials Are Important … And Telling As Well

Tuesday, November 19th, 2013

Three cheers for SEC Chair Mary Jo White’s recent speech titled “The Importance of Trials to the Law and Public Accountability.”

Under the heading, “why trials are important,” White stated that “simply put, [trials] put our system of justice [...] on display for all to see.”  She stated as follows.

“The public airing of facts, literally in open court, creates accountability for both defendants and the government. How we resolve disputes and how we decide the guilt or innocence of an accused are the true measure of our democracy. Thomas Jefferson once said that he considered ‘trial by jury as the only anchor ever yet imagined by man, by which a government can be held to the principles of its constitution.’”

In the speech, White agreed that trials are the “‘crown jewel’ of our system of justice” and she focused on two “of the more important roles that trials play in our administration of justice:  how they foster development of the law, and perhaps even more importantly how they create public accountability for both defendants and the government through the public airing of charges and evidence.”

As to the former, White stated that “trials allow for more thoughtful and nuanced interpretations of the law in a way that settlements and summary judgments cannot.”

As to the later, White agreed with the following statement.  “The death of trials would … remove a source of disciplined information about matters of public significance. … It would mean the end of an irreplaceable public forum and would mean that more of the legal order would proceed behind closed doors.  And it would deprive us, as American citizens, of an important source of knowledge about ourselves and key issues of public concern.”

White talked about the “near-sacred nature of the courtroom,” how “litigants are required to meet their burden of proof, and where there is up-close-and-personal accountability for whatever the trial is about,”  how trials are where “victims and witnesses have the chance to tell their stories and where the public can hear the facts set forth in open court,” and how trials provide a place for “public closure on hotly disputed facts and legal issues.”

As White stated, “by the end of the trial, the full scope of the misconduct is laid before the fact-finder to decide guilt or innocence, liability or no liability.”

As to criminal trials, White, a former DOJ prosecutor, stated that the “scarcity of criminal trials means that the public does not often enough have this kind of public airing and adjudication that trials uniquely provide.”

Although White’s speech was general in nature, the topics addressed are relevant to Foreign Corrupt Practices Act enforcement and I completely agree with White, trials are indeed important.

In “The Facade of FCPA Enforcement,” under the heading “why the facade of FCPA enforcement matters,” I observed.

“As a matter of general jurisprudence, it is troubling when any area of law largely develops outside of the judicial process. The judicial process facilitates the thoughtful presentation of opposing views, mitigating facts and circumstances, and potential defenses in an adversarial proceeding culminating in an impartial decision-maker weighing the facts and applying the law in rendering a decision in a transparent manner. These fundamental hallmarks are largely missing in FCPA enforcement. Rather, the enforcement agencies, occupying positions of advocate, judge, and rule-maker, induce settlement through the “carrots” and “sticks” they possess even though many of the enforcement theories leading to these resolutions are untested and dubious, and in some case in direct conflict with the FCPA’s statutory provisions. The end result is resolution vehicles that do not facilitate the thoughtful presentation of opposing views, mitigating facts and circumstances, potential defenses, or testing of legal theories. Yet, these resolution vehicles largely define the FCPA. When the parameters of any law develop through such an opaque process, public confidence in that law, as well as the rule of law, suffers.”

The irony of course is that – notwithstanding White’s sensible statements – the SEC has never been put to its burden of proof in a corporate FCPA enforcement.  The reasons are largely due to SEC enforcement policies that pre-date White’s tenure at the SEC, but policies that she continues to champion – namely the SEC’s neither admit nor deny settlement policy (notwithstanding its recent tweak) and the SEC’s more recent use of non-prosecution and deferred prosecution agreements.

As to the later, when the SEC announced its intention to use NPAs and DPAs, I called the development (see here for the prior post) a blow to those who prefer government law enforcement agencies to enforce a law in an open, transparent matter and in the context of an adversary proceeding … in other words the very same things White championed in her recent speech.

The further irony of course from White’s recent speech is that when the SEC has been put to its burden of proof in individual FCPA enforcement actions, the SEC has an overall losing record.  (See this prior post detailing the instances).

The importance of trials and the issues addressed in White’s speech are of course also relevant to the DOJ’s overall losing record when put to its burden of proof in FCPA enforcement actions.  (See here for “What Percentage of DOJ FCPA Losses Is Acceptable?”).  And of course White’s comments about “behind closed doors” and how trials “allow for more thoughtful and nuanced interpretations of the law in a way that settlements” cannot is even more important to the DOJ’s enforcement of the FCPA given its prevalent use of NPAs and DPAs.

As I’ve offered a number of times in the FCPA context, success in enforcing a law, whether in the corporate context or individual context, is best measured by instances in which an enforcement agency is actually put to its burden of proof in an adversarial proceeding.

Thanks to White’s recent speech, we have been reminded of that.

*****

Much like this prior post in which a high-ranking SEC official acknowledged the underlying logic supporting a compliance defense, White did the same thing in this October speech before a broker-dealer compliance audience.  In pertinent part, White stated:

“Your work is extremely important to us as well as to investors because you are positioned to prevent infractions from happening in the first place, rather than coming to our attention only after harm has been done.”  [...] “[W]e rely on you.  We rely on you because as much as we strive to be everywhere we can be, our resources are limited and always stretched.”

Elsewhere, White stated that a question the SEC often asks is whether compliance professionals are ”empowered by your firms to do what you need to do?”  [...]  “We want to encourage companies to give you the recognition that you deserve, the resources that you need and the authority that your role demands, so you can succeed and, as a result, our markets are safe and can succeed.”  [...]  “[W]e seek to promote the role of compliance and ensure that the firms recognize and acknowledge the importance we place on your role.”

For why these statements acknowledge the underlying logic supporting a compliance defense, see “Revisiting a Foreign Corrupt Practices Act Compliance Defense.”

Friday Roundup

Friday, March 22nd, 2013

An endorsement, it’s an FCPA world,  spot-on, for the reading stack and events of interest.  It’s all here in the Friday roundup.

An Endorsement

Several recent posts (see here for instance) have called for a common FCPA lingua franca including as to what is an FCPA enforcement action.  In this prior post, in an effort to improve the quality and reliability of FCPA statistics and related information, I set forth various metrics for what is an FCPA enforcement action, including the core approach I use in my FCPA data.

Recently Chuck Duross (DOJ FCPA Unit Chief) endorsed the core approach when he stated as follows:

“So the bottom line is, we don’t count statistics the way I guess some of the people, whether it’s the commentators or the media, or law firms and the like.  [...]  And so, you know, we count slightly differently by the way, than a lot of people in the public. If you have a parent and two subs plead guilty, and the parent gets a DPA, we don’t count that as three actions. That’s one matter from our prospective, and I think internally it just makes sense for us.”

[The website Main Justice recently posted here the full comments of Duross at the ABA's National Institute on White Collar Crime] 

As one informed observer recently shared with me, the lack of an FCPA lingua franca “muddies the conversational waters.”

Case in point, earlier this week the Wall Street Journal, citing statistics from a law firm, reported that “since 2009, the Justice Department has brought 108 [FCPA] cases while the SEC has brought 77.”

Using the core approach, the numbers since 2009 are as follows.  DOJ – 46 “core” FCPA enforcement actions; SEC – 50 “core” FCPA enforcement actions.  Obviously, there is a huge difference between these numbers, and even my “core” numbers paint an inadequate picture because many FCPA enforcement actions involve both a DOJ and SEC component based on the same alleged core set of facts.  In short, since 2009, there have been approximately 55 ”core” FCPA enforcement actions (and a point could be made that even this number overstates things a bit since it separately counts the seven Panalpina related actions).

For additional reading on a proper perspective on FCPA enforcement statistics, see this prior post.

It’s An FCPA World

Scrutiny alerts / updates regarding Microsoft, News Corp, Optimer Pharmaceuticals and Sig Sauer.

Microsoft

Earlier this week, the Wall Street Journal reported here that the DOJ and SEC “are examining kickback allegations made by a former Microsoft representative in China, as well as the company’s relationship with certain resellers and consultants in Romania and Italy.”  According to the article, “the China allegations come from an anonymous tipster who passed them on to U.S. investigators in 2012.”  The article further states that “the allegations in China were also the subject of a 10-month internal investigation [conducted by an outside law firm] that Microsoft concluded in 2010 [and that the investigation] found no evidence of wrongdoing” and that tipster “whose contract [with Microsoft] ended in 2008, was also involved in a labor dispute with Microsoft in China.”

As to Romania, the articles states that “U.S. government investigators are also reviewing whether Microsoft had a role in allegations that resellers offered bribes to secure software deals with Romania’s Ministry of Communications” and that in Italy “the agencies are looking at Microsoft’s dealings with consultants in Italy that specialize in customer-loyalty programs.”  According to the article, the allegations focus on Microsoft’s Italian unit’s use of “consultants as vehicles for lavishing gifts and trips on Italian procurement officials in exchange for government business.”

For additional coverage, see here from the New York Times.

John Frank (Microsoft Vice President & Deputy General Counsel) responded in a company blog post as follows.

“[T]he Wall Street Journal reported that the U.S. government is reviewing allegations that Microsoft business partners in three countries may have engaged in illegal activity, and if they did, whether Microsoft played any role in these alleged incidents. We take all allegations brought to our attention seriously, and we cooperate fully in any government inquiries. Like other large companies with operations around the world, we sometimes receive allegations about potential misconduct by employees or business partners, and we investigate them fully, regardless of the source. We also invest heavily in proactive training, compliance systems, monitoring and audits to ensure our business operations around the world meet the highest legal and ethical standards. The matters raised in the Wall Street Journal are important, and it is appropriate that both Microsoft and the government review them. It is also important to remember that it is not unusual for such reviews to find that an allegation was without merit. (The WSJ reported earlier this week that an allegation has been made against the WSJ itself, and that, after a thorough investigation, its lawyers have been unable to determine that there was any wrongdoing). We cannot comment about on-going inquiries, but we would like to share some perspective on our approach to compliance. We are a global company with operations in 112 countries, nearly 98,000 employees and 640,000 business partners. We’re proud of the role we play in bringing technology to businesses, governments, non-profits and consumers around the world and the economic impact we have in local communities. As our company has grown and expanded around the world, one of the things that has been constant has been our commitment to the highest legal and ethical standards wherever we do business. Compliance is the job of every employee at the company, but we also have a group of professionals focused directly on ensuring compliance. We have more than 50 people whose primary role is investigating potential breaches of company policy, and an additional 120 people whose primary role is compliance. In addition, we sometimes retain outside law firms to conduct or assist with investigations. This is a reflection of the size and complexity of our business and the seriousness with which we take meeting our obligations. We also invest in proactive measures including annual training programs for every employee, regular internal audits and multiple levels of approval for contracting and expenditure. In a company of our size, allegations of this nature will be made from time to time. It is also possible there will sometimes be individual employees or business partners who violate our policies and break the law. In a community of 98,000 people and 640,000 partners, it isn’t possible to say there will never be wrongdoing. Our responsibility is to take steps to train our employees, and to build systems to prevent and detect violations, and when we receive allegations, to investigate them fully and take appropriate action. We take that responsibility seriously.”

News Corp.

Earlier in the week, in what was a strange article in that the Wall Street Journal was reporting on itself, the WSJ reported here that “the Justice Department last year opened an investigation into allegations that employees at The Wall Street Journal’s China news bureau bribed Chinese officials for information for news articles.  A search by the Journal’s parent company found no evidence to support the claim, according to government and corporate officials familiar with the case.”  The article states as follows.  “According to U.S. and corporate officials, News Corp. has told the Justice Department that some company officials suspect the informant was an agent of the Chinese government, seeking to disrupt and possibly retaliate against the Journal for its reporting on China’s leadership. The company officials came to that view after finding no evidence of the alleged bribery and because of the timing and nature of the accusations, company officials say.”

The article also states as follows concerning News Corp.’s overall FCPA scrutiny which splashed onto the scene in July 2011 (see here for the prior post).

“Since 2011, the Justice Department has been overseeing a criminal investigation of News Corp. relating to revelations that its British papers hacked phones and bribed public officials to get information for articles. Almost two years later, that probe is nearing completion, government and company officials said, setting the stage for settlement negotiations between the U.S. and News Corp.  News Corp., which has hired law firm Williams & Connolly to oversee the FCPA case, is expected to make its final presentation detailing the company’s global bribery investigation to the Justice Department next month, according to people familiar with the matter. It will be then up to the Justice Department to spell out what punishment or sanctions, if any, the agency wants, and at that point negotiations will likely begin. The Justice Department doesn’t publicly discuss cases that close without charges filed. Both sides expect an agreement would include a monetary settlement of some kind, based on the alleged violations in the U.K. The government has also investigated potential misconduct in the company’s former Russian outdoor billboard subsidiary, according to people familiar with the case, specifically whether it paid bribes to local officials to approve sign placements in that country.”

Optimer Pharmaceuticals

Optimer (see here for the prior post) disclosed as follows in a recent SEC filing.

In March 2012, we became aware of an attempted grant in September 2011 to Dr. Michael Chang of 1.5 million technical shares of OBI.  We engaged external counsel to assist us in an internal review and determined that the attempted grant may have violated certain applicable laws, including the FCPA.  In April 2012, we self-reported the results of our preliminary findings to the SEC and the DOJ, which included information about the attempted grant and certain related matters, including a potentially improper $300,000 payment in July 2011 to a research laboratory involving an individual associated with the OBI [Optimer Biotechnology, Inc.] share grant. At that time, we terminated the employment of our then-Chief Financial Officer and our then-Vice President, Clinical Development. We also removed Dr. Michael Chang as the Chairman of our Board of Directors and requested that Dr. Michael Chang resign from the Board of Directors, which he has not. We continued our investigation and our cooperation with the SEC and the DOJ.  As a result of our continuing internal investigation, in February 2013, the independent members of our Board of Directors determined that additional remedial action should be taken in light of prior compliance, record keeping and conflict-of-interest issues surrounding the potentially improper payment to the research laboratory and certain related matters. On February 26, 2013, our then-President and Chief Executive Officer and our then-General Counsel and Chief Compliance Officer resigned at the request of the independent members of our Board of Directors.  In addition, over the past year, we have revised our compliance policies, strengthened our approval procedures and implemented training and internal audit procedures to make our compliance and monitoring more comprehensive.  We continue to cooperate with the SEC and DOJ, including by responding to informal document and interview requests, conducting in-person meetings and updating these authorities on our findings with respect to the attempted OBI technical share grant, the potentially improper payment to the research laboratory and certain matters that may be related.”

Sig Sauer

The Indian Express reports here reports allegations that Sig Sauer (a U.S. arms manufacturer) conspired with an Indian agent and his associates ”to sell arms to India in violation of the FCPA and Indian laws. A JV called Sig Sauer Asia LLC was created with the sole purpose of paying 10 per cent commission on all arms deals made with the Defence and Home ministries in India.”

Spot-On

In a recent Q&A on Law360, William Goodman (Kasowitz) stated as follows.

“Q: What aspects of your practice area are in need of reform and why?

A: In the area of federal criminal practice, there must be reform in and reduction of the power of prosecutors to force individuals and corporations to cooperate in marginal cases by threatening draconian outcomes if cooperation is not forthcoming. This practice is particularly reprehensible because it does not achieve anything approaching a fair result in many cases. When lawyers and clients have to cave in to pressure based on a threatened punishment and not based on the merits of the case, the truth and genuine justice take a back seat to expediency.”

In this recent Op-Ed in the Wall Street Journal titled “Corporate Crime and Punishment” David Rivkin and John Carney stated as follows.

“Two weeks ago, a unanimous Supreme Court rebuffed the Securities and Exchange Commission Gabelli v. SEC. The SEC maintained that its enforcement actions for fines under the Investment Advisers Act weren’t subject to the five-year statute of limitations. This wasn’t the first time the courts have pushed back a federal agency for overreaching. It won’t be the last.  But the SEC’s audacity prompts a broader policy question: What good is accomplished by imposing monetary penalties on corporations, as the agency attempted to do in Gabelli? The answer is that when such penalties are sought by the government, they probably do more harm than good.  Monetary damages, including penalties, that are awarded in private lawsuits are an attempt to compensate victims of corporate fraud and other unlawful behavior, usually shareholders or customers, making them as “whole” as the law can approximate. The SEC doesn’t seek monetary fines in most cases—it has an array of other enforcement options including injunctive or remedial relief. When it does pursue a fine, however, the purpose is solely punitive. In Gabelli, for example, the SEC brought two sets of claims against principals of an investment firm who countenanced a client’s “market timing” scheme. The first claim sought disgorgement of profits to the government—a remedy that Gabelli didn’t appeal. But the SEC also sought large monetary fines designed solely to punish the defendants and brand them as wrongdoers. Who is the wrongdoer in such a situation? The company officials who made the bad decisions? The board of directors? The shareholders? Pinning a wrongdoer label on the corporation as a whole or fining a corporation in this way—years after any alleged wrongdoing—punishes current shareholders for conduct that benefited a largely different group of shareholders, if any benefit was conferred at all. From a current shareholder’s point of view, government-imposed corporate fines are virtually indistinguishable from a tax on investing, and are thus a disincentive for doing so.”

[...]

“The principal rationale for levying fines is to deter corporate wrongdoing. The mismatch between the shareholders that benefit from misconduct and those that are ultimately punished undermines this rationale.  Corporate fines are equally problematic when considered as punishment for a manager’s bad conduct. Fine an individual for his conduct, and you are likely to deter him from doing it again. Fine a corporation, and the managers responsible for the misconduct have almost always left or been fired long beforehand. New managers are in place, and for them the tab is just a price of doing business.  Moreover, even the threat of government fines or penalties puts immediate, intense pressure on a corporation to settle, regardless of the merits. A protracted legal fight means a public-relations nightmare. It could also impinge on corporate earnings, the reputations of current executives, and relationships with regulators and other business concerns.  Whether the corporation is actually culpable of wrongdoing is a consideration, but it may not be a major one. That question can be beside the point of getting back to business and avoiding a prolonged battle with the SEC. In the large number of settlement scenarios where actual guilt isn’t the most pressing or relevant consideration, the fines don’t by definition deter any future misconduct.  In any event, when the government obtains fines from corporate wrongdoers, the monies rarely go to any ascertainable “victims”—they merely transfer funds from businesses to an already bloated public sector. With the aggregate penalties often running into the billions of dollars, the economic distortions involved are substantial.”

“More recently, the SEC fined Eli Lilly $29 million in December 2012 for alleged misconduct that purportedly began more than a decade ago.”

As I highlighted in this post, it is an open question whether the Lilly enforcement action really accomplished anything.

Reading Stack

This recent Debevoise & Plimpton FCPA Update focuses on Latin America and contains useful charts of corporate enforcement actions, individual enforcement actions, and instances of FCPA scrutiny (2005 to 2012) that have involved alleged business conduct in Latin America.  Over at his FCPAmericas blog, Matt Ellis also recently posted here and here FCPA enforcement actions involving conduct in Latin America.

A useful update here from WilmerHale titled “Recent Court Decisions Reveal Litigation Challenges for SEC.”  It begins as follows.

“Although the US Securities and Exchange Commission may have significant leverage to get what it wants during the course of an investigation and even in settlements, several recent court decisions strongly suggest that the playing field levels once the agency ends up in litigation. From the US Supreme Court to the federal district courts, litigants are pushing back effectively against the SEC on everything from when the clock starts for the SEC to bring an action for civil monetary penalties to key discovery questions.”

From Sidley & Austin attorneys Kimberly Dunne and Alexis Buese an article (here) titled “Holding the Government to its Burden of Proof in FCPA Cases:  Litigating Jury Instructions.”  The article notes as follows.

“Unlike corporate defendants that resolved FCPA investigations pre‐indictment, individual defendants were not as willing to accept the government’s aggressive pre‐indictment demands or its broad interpretation of the statute, which the defense bar considered vague and untested. What ensued from the indictments that followed were a number of defense upsets.”

In my 2010 article “The Facade of FCPA Enforcement,” I noted that government enforcement agencies, when challenged, are vulnerable in contested actions and encouraged more FCPA defendants to challenge the enforcement agencies and further expose the facade of FCPA enforcement.

Events of Interest

Dow Jones Global Compliance Symposium, April 2-3 in Washington, D.C..  I will be participating in a panel titled “The FCPA:  Does It Need Further Clarifying” along with Paul McNulty (Baker & McKenzie and former Deputy Attorney General) and David Yawman (Senior Vice President & Chief Compliance and Ethics Officer, PepsiCo, Inc.).  The panel is being moderated by Joe Palazzolo of the Wall Street Journal.

TRACE International, in partnership with Barrick Gold Corporation and Arnold & Porter LLP, presents a 1-day seminar on Anti-Corruption for the Extractive Industries being held on April 23, 2013 in Toronto, Canada.  (See here).

Neither Admit Nor Deny: Corporate Crime in the Age of Deferred Prosecutions, Consent Decrees, Whistleblowers and Monitors sponsored by Corporate Crime Reporter at the National Press Club in Washington, D.C. on May 3.  I will be participating in a panel titled “Deferred and Non-Prosecution Agreements” along with Anthony Barkow (Jenner & Block), Steven Fagell (Covington), Kathleen Harris (Arnold & Porter), Denis McInerney (Deputy Assistant Attorney General, DOJ Criminal Division), and David Uhlmann (Univ. of Michigan Law School).

*****

A good weekend to all and good luck with your brackets.