Archive for the ‘Neither Admit or Deny’ Category

In The Words Of Mary Jo White

Monday, September 30th, 2013

SEC Chair Mary Jo White delivered a speech last week titled “Deploying the Full Enforcement Arsenal” before the Council of Institutional Investors.

The focus of White’s speech was on how the SEC is “deploying [its] full enforcement arsenal for the benefit of investors.”

While there was one reference to the Foreign Corrupt Practices Act in White’s speech, her speech was general in nature and touched upon the following issues (all of which are relevant to FCPA enforcement):  SEC enforcement principles, how the SEC should be aggressive and creative when employing its enforcement tools, the importance of deterrence, corporate penalty issues, the SEC’s neither admit nor deny settlement policy and recent revisions to this policy, and the importance of individual enforcement actions.

After highlighting excerpts from White’s speech, this post discusses two issues where White’s rhetoric and the reality of the SEC’s FCPA enforcement program most diverge.

“Enforcement Principles

Another key priority for me, as you would expect, is our enforcement program – building on past successes and making it as strong and effective as it can be.  A robust enforcement program is critical to fulfilling the SEC’s mission to instill confidence in those who invest in our markets and to make our markets fair and honest.

[...]

In many ways, the most visible face of the SEC is what we do to enforce the law.  After all, most Americans do not see how well our experts examine a financial firm, review a regulatory filing, or conduct economic analysis on a complex rule.

But they do pay attention when we bring a major enforcement action against a major financial institution, when we charge a hedge fund executive with insider trading, when we freeze a suspected Ponzi schemer’s assets, or when we charge a CEO with fraud.

As many here know, I spent a good part of my professional life in the enforcement arena.  I have focused much of my career not only on pursuing wrongdoers, but also on deterring wrongdoing.

When I arrived at the SEC, I came with a very high opinion of the enforcement division, having seen and admired their work up close – both as the U.S. Attorney when we worked side-by-side doing securities fraud cases,  and from the other side of the table as a private lawyer.

Any objective and informed observer agrees that the SEC has an exceptional enforcement record.  Its performance in the aftermath of the financial crisis was particularly impressive.  Since 2008, the enforcement division has brought crisis-related actions against more than 160 entities and individuals, including many CEOs and other senior executives, barred dozens of fraudsters and returned billions of dollars to harmed investors.  And they did it while also bringing literally thousands of other non-crisis-related cases at the same time – despite limits on resources and legal restrictions on the amount of penalties that the SEC can seek and recover.

As we continue to build on this impressive record, we will be guided by some overarching principles.

Be Aggressive and Creative

First, we must be aggressive and creative in the way we use the enforcement tools at our disposal.

That means we should neither shrink from bringing the tough cases, nor fail to bring smaller ones.  When we detect wrongdoing, we should consider all the legal avenues to pursue it.  If we do not have the evidence to bring a case charging intentional wrongdoing, then bring the negligence case that does not require intent.

And when we resolve cases, we need to be certain our settlements have teeth, and send a strong message of deterrence.  That is why in each case, I have encouraged our enforcement teams to think hard about whether the remedies they are seeking would sufficiently redress the wrongdoing and cause would-be future offenders to think twice.

We obviously cannot put offenders in jail like a U.S. Attorney can.  And in many cases, the law limits the penalties the SEC may obtain to amounts that both we and the public think are too low.  Under current law, we cannot assess a penalty based on investor losses, but are limited instead to the usually much lower figure based on the ill-gotten gains of a defendant.

That is why I support, as did my immediate predecessors, legislation introduced in Congress that would allow us to seek penalties based on either three times the ill-gotten gains or the amount of investor losses – whichever is greater.  Among other things, the proposed legislation also would authorize us to seek additional penalties if the wrongdoer is a recidivist – a repeat offender who has been undeterred by prior enforcement actions.  These would be very powerful, additional tools.

In the meantime, we must make aggressive use of our existing penalty authority, recognizing that meaningful monetary penalties – whether against companies or individuals – play a very important role in a strong enforcement program.  They make companies and the industry sit up and take notice of what our expectations are and how vigorously we will pursue wrongdoing.

Some years ago – in 2006 – the Commission issued a press release in the context of two settled cases setting forth the thinking of the five Commissioners at the time about the relevant factors to consider in deciding whether corporate penalties should be imposed and to what degree.  Today, we have an entirely new Commission.

I have been asked what I consider the import today of this release to our consideration of corporate penalties.  As an initial matter, it is important to remember that the release was not then, and is not now, binding policy for the Commission or the staff.

While it is not a binding policy, the 2006 press release in my view sets forth a useful, non-exclusive list of factors that may guide a Commissioner’s consideration of corporate penalties, such as the egregiousness of the misconduct, how widespread it was, and whether the company cooperated and had a strong compliance program.  The enforcement staff still references these factors as well as other inputs when analyzing and proposing their own recommendations to the Commission.

Ultimately, however, each Commissioner has the discretion, within the limits of the Commission’s statutory authority, to reach his or her own judgment on whether a corporate penalty is appropriate and how high it should be.

The bottom line for me is that corporate penalties will be considered in all appropriate cases.  Whether, in fact, to seek a corporate penalty and the appropriate amount are decisions that must be based on a consideration of all the facts and circumstances of each case and the objectives of a strong enforcement program.

Strong penalties are just a starting point.  When we sue a company for wrongdoing, we should consider whether to require the company to adopt measures that make the wrong less likely to occur again.

This is something we already do, in some cases.  For example, when we settle with a firm in a foreign corrupt practices case, we often require it to put in place better training and reporting programs.  Such forward-looking measures can also be useful in other kinds of cases.  When we enter into a settlement with a company involving systems control failures, for example, we should consider mandating new policies and procedures and other controls, and require that a compliance consultant test these controls.

Expect to see more such mandatory undertakings in future cases so that we are not just punishing past wrongs, but also acting to prevent future wrongs.

Demand Accountability

Another principle of an effective enforcement program is the recognition that there are some cases where monetary penalties and compliance enhancements are not enough.  An added measure of public accountability is necessary, and in those cases we should demand it.

Until recently, the SEC – like most other federal agencies and regulators with civil enforcement powers – settled virtually all of its cases on a no-admit-no deny basis.  Generally, a party would pay a hefty penalty and agree to an injunction against future misconduct, but neither admit nor deny the wrongdoing asserted by the SEC in a court complaint or set forth as findings in an order instituting administrative proceedings.

In most cases, that protocol makes very good sense.  It makes sense because the SEC can get relief within the range of what we could reasonably expect to achieve after winning at trial.  By settling, the agency is able to eliminate all litigation risk, resolve the case, return money to victims more quickly, and preserve our enforcement resources to redeploy to do other investigations – ordinarily, a significant win-win.   But sometimes more may be required for a resolution to be, and to be viewed as, a sufficient punishment and strong deterrent message.

In 2012, the SEC changed the no-admit-no-deny language as it applied to settlements with parties that have pled guilty in a related criminal action.  In these cases, we now explicitly reference these admissions in the SEC settlement.  It was a first step towards greater accountability, and a good one.

But when I started at the SEC, I re-examined our approach and concluded that there are certain other cases not involving any parallel criminal case where there is a special need for public accountability and acceptance of responsibility.

As you might expect, much of my thinking on this issue was shaped by the time I spent in the criminal arena, where courts cannot accept a guilty plea without the defendant first admitting to the unlawful conduct.  Anyone who has witnessed a guilty plea understands the power of such admissions – it creates an unambiguous record of the conduct and demonstrates unequivocally the defendant’s responsibility for his or her acts.

But what about resolutions that do not require a guilty plea?

In 1994, when I was a U.S. Attorney, I entered into the first-ever deferred prosecution agreement (DPA) with a company – a tool the Department of Justice frequently uses today.  Essentially, a DPA is an agreement that the government will file a criminal charge, but defer its prosecution for a period of time during which the party must demonstrate good behavior and satisfy the other terms of the agreement.  These terms can include very significant payments of money, enhanced compliance requirements, and sometimes an outside monitor.

Back in 1994, there was no template for those agreements.  Nothing required an admission or confession of wrongdoing.  But I decided in that particular case that a public admission of wrongdoing was required for the resolution to have sufficient teeth and public accountability. So considering this history, it should not be surprising that I would follow that same approach in my new role as Chair of the SEC.

Since laying out this new approach, the most frequent question we get is about the types of cases where admissions might be appropriate.

Candidates potentially requiring admissions include:

  • Cases where a large number of investors have been harmed or the conduct was otherwise egregious.
  • Cases where the conduct posed a significant risk to the market or investors.
  • Cases where admissions would aid investors deciding whether to deal with a particular party in the future.
  • Cases where reciting unambiguous facts would send an important message to the market about a particular case.

To reiterate, no-admit-no-deny settlements are a very important tool in our enforcement arsenal that we will continue to use when we believe it is in public interest to do so.  In other cases, we will be requiring admissions.  These decisions are for us to make within our discretion, not decisions for a court to make.

Pursue Individuals

Another core principle of any strong enforcement program is to pursue responsible individuals wherever possible.  That is something our enforcement division has always done and will continue to do.  Companies, after all, act through their people.  And when we can identify those people, settling only with the company may not be sufficient.  Redress for wrongdoing must never be seen as “a cost of doing business” made good by cutting a corporate check.

Individuals tempted to commit wrongdoing must understand that they risk it all if they do not play by the rules.  When people fear for their own reputations, careers or pocketbooks, they tend to stay in line.

Of course, there will be cases in which it is not possible to charge an individual.  But I have made it clear that the staff should look hard to see whether a case against individuals can be brought.  I want to be sure we are looking first at the individual conduct and working out to the entity, rather than starting with the entity as a whole and working in.  It is a subtle shift, but one that could bring more individuals into enforcement cases.

When we do bring charges against individuals, we also need to consider all the possible remedies to prevent future wrongs.  One of the most potent tools the SEC has is a court order imposing a bar on an individual – a bar from, for example, working in the securities industry or serving on the board of a public company.  Such an order not only punishes past actions, but also can reduce the likelihood that the defendant can defraud and victimize the public again.

[...]

Win at Trial

Finally, a strong enforcement regime is only effective if we have the ability to back it up in court.

So, we need to maintain and enhance our ability to win at trial.  For us to be a truly potent regulatory force, we need to remain constantly focused on trial readiness.

Indeed, because of our increased demands for admissions, we recognize that we may see more financial firms that say: “We’ll see you in court.”  But that will not deter us.  The SEC has a well-established record of winning when we go to trial – our recent win in the Tourre case is just the latest example.  We must continue to sustain this successful record and ensure that we have sufficient resources available to litigate cases.

Significant and consistent trial wins also gives us the credibility we need to achieve strong and meaningful settlements, in every area that we will be pursuing in the coming years.  

Conclusion

Going forward, I know you will be watching to see what we produce, as you should.  A strong enforcement program provides greater protection for all investors participating in our markets.  We should be judged by the quality of the cases we bring, by the aggressive and innovative techniques we use to pursue wrongdoers, by the tough sanctions and meaningful remedies we impose, and where appropriate by the acknowledgements of wrongdoing that we require.

Throughout my tenure as SEC Chair, I will continuously look for ways to make our enforcement program stronger.

The more successful we are at being – and being perceived as – the tough cop that everyone rightfully expects, the more confidence in the markets investors will have, the more level the playing field will be and the more wrongdoing that will be deterred.”

*****

There are two issues where White’s rhetoric and the reality of the SEC’s FCPA enforcement program most diverge.

First, White stated “any objective and informed observer agrees that the SEC has an exceptional enforcement record” and that “the SEC has a well-established record of winning when we go to trial.”

Not true in the FCPA context where the SEC has an overall losing record in FCPA enforcement actions when put to its ultimate burden of proof.  As noted in this prior post, the SEC lost the Eric Mattson and James Harris individual enforcement actions at the motion to dismiss stage and as noted in this prior post, the SEC lost the Herbert Steffen individual enforcement action at the motion to dismiss stage.  As noted in this prior post, in the Mark Jackson and James Ruehlen individual enforcement actions the court granted, without prejudice, the SEC’s claims that sought monetary damages and upon repleading the SEC’s ongoing case is a shell of its former self.  In the ongoing enforcement action against Elek Straub and other former executives of Magyar Telekom, the court denied the defendants’ motion to dismiss (see here for the prior post).

Second, White stated “another core principle of any strong enforcement program is to pursue responsible individuals wherever possible.  That is something our enforcement division has always done and will continue to do.”

As noted in this prior post, between 2008-2012, 79% of SEC corporate FCPA enforcement actions have not (at least yet) resulted in any SEC charges against company employees.  This figure is likely to climb when re-calculated to include 2013 SEC FCPA enforcement actions.  Thus far this year there have been 4 SEC corporate FCPA enforcement actions and none of the actions have (at least yet) resulted in any SEC charges against company employees.

Friday Roundup

Friday, July 26th, 2013

A sign-off, no surprise, scrutiny alert, for the reading stack, spot-on, and the $10 million man.

Judge Leon Signs-Off On IBM Action

As highlighted in this prior post, in March 2011 the SEC announced an FCPA enforcement action against IBM concerning alleged conduct in South Korea and China.  The settlement terms contained a permanent injunction as to future FCPA violations and thus required judicial approval.  Similar to the Tyco FCPA enforcement action, the case sat on Judge Leon’s docket.  Last month, Judge Leon approved the Tyco settlement (see here) and yesterday Judge Leon approved the IBM settlement.

The common thread between the two enforcement actions would seem to be that both companies were repeat FCPA offenders.

Like Judge Leon’s final order in Tyco, the final order in IBM action states:

“[For a two year period IBM is required to submit annual reports] to the Commission and this Court describing its efforts to comply with the Foreign Corrupt Practices Act (“FCPA”), and to report to the Commission and this Court immediately upon learning it is reasonably likely that IBM has violated the FCPA in connection with either improper payments to foreign officials to obtain or retain business or any fraudulent books and records entries …””

For additional coverage of yesterday’s hearing, see here from Bloomberg.  The article quotes Judge Leon as follows.  IBM “has learned its lesson and is moving in the right direction to ensure this never happens again.” If there’s another violation over the next two years, “it won’t be a happy day.”

However, as noted in this previous post, IBM recently disclosed additional FCPA scrutiny.

No Surprise

This recent post highlighted the 9th Circuit’s restitution ruling in the Green FCPA enforcement action and was titled “Green Restitution Order Stands … For Now.”  As noted in the prior post, the decision practically invited the Greens to petition for an en banc hearing.

No surprise, the Greens did just that earlier this week - see here for the petition.

Scrutiny Alert

This February 2012 post detailed how Wynn Resorts $135 million donation to the University of Macau became the subject of an SEC inquiry.

Earlier this month, Wynn disclosed in an SEC filing as follows:

“On February 13, 2012, Wynn Resorts, Limited (the “Company”) filed a Report on Form 8-K disclosing that it had received a letter from the Salt Lake Regional Office (the “Office”) of the Securities and Exchange Commission (the “SEC”) advising the Company that the Office had commenced an informal inquiry with respect to certain matters, including a donation by Wynn Macau, Limited, an affiliate of the Company, to the University of Macau Development Foundation. On July 2, 2013, the Company received a letter from the Office stating that the investigation had been completed with the Office not intending to recommend any enforcement action against the Company by the SEC.”

According to this report:

“Speaking to The Associated Press from his boat on the Spanish island of Ibiza … CEO Steve Wynn said he never had any doubt federal investigators would clear the company.  ‘We were so sanguine that we never paid any attention to it; we had no exposure. It was a nonevent except for the damn newspapers.’”

For the Reading Stack

The always informative Gibson Dunn Mid-Year FCPA Update and Mid-Year DPA and NPA Update (through July 8th, approximately 30% of all DPAs/NPAs have been used to resolve FCPA enforcement actions).

Sound insight from Robertson Park and Timothy Peterson in this Inside Counsel column:

“Without putting too fine a spin on the matter, the discussion of the potential consequences faced by a company with potential anti-bribery exposure was fundamentally U.S.-centric. The dispositive question was often whether or not the potential misconduct was likely to fall under the umbrella of FCPA enforcement. Would U.S. authorities be interested in pursuing this matter? Would they find out about this matter? There were not many other concerns that mattered. Whether the site of the potential misconduct was in the European, Asian, South American or African sector, the substantial likelihood was that home authorities would have little interest in the matter, and even if they did it was likely an interest that would often frustrate and impede efforts by the Department of Justice or the Securities and Exchange Commission to investigate the matter. Cooperative enforcement was unlikely. This has changed. [...]  For companies that learn of a potential international corruption issue, the impact of this emerging global enforcement market means that the headache associated with scoping an internal investigation is now a migraine with diverse and complex symptoms. Companies investigating potential bribery have always faced the question of how, if at all, they plan to disclose any subsequent findings to government authorities. Now, initial assessments of investigative plans in anti-bribery matters must consider a broader array of potentially interested enforcement authorities. Companies must design their anti-bribery investigations at the outset to consider not only the FCPA enforcement regime in the U.S., but also a newly energized U.K. anti-bribery law, along with a growing list of ant-bribery measures in almost all of the important jurisdictions with business growth opportunities.”

Six ways to improve in-house compliance training from Ryan McConnell and Gérard Sonnier.

The reality of facilitation payments from Matt Kelly.

“… Facilitation payments are a fact of life in global business. Nobody likes them, and no compliance officer wants to pay a bribe disguised as a facilitation payment. But when the transaction truly fits the definition of a facilitation payment—money paid to a government official, to speed up some job duty he would normally perform anyway—there shouldn’t be any ethical or legal crisis in paying it. After all, we have facilitation payments domestically in the United States. If you want a passport from the State Department, you pay $165 in fees. If you want an expedited passport, you pay an extra $60 fee and get your passport in half the usual time. That’s a facilitation payment, pure and simple. Other countries have all sorts of facilitation payments as well, say, to get a visa processed quickly or to clear goods through customs rather than let them rot on the docks. Urgent needs happen in business, and facilitation payments get you through them. That’s life.”

The language of corruption from the BBC.

Spot-On

Regardless of what you think of former New York Attorney General Eliot Spitzer, he is spot-on with his observation that the so-called Arthur Anderson effect (i.e. if a business organization is criminally charged it will go out of business) is “overrated.”  As noted in this Corporate Crime Reporter piece, in a new book titled “Protecting Capitalism Case by Case” Spitzer writes:

“Almost all entities have the capacity to regenerate — even if under a new name, with new ownership and new leadership — and forcing them to do so will have the deterrent effect we desire.”

“Most companies would have no trouble continuing in operation once charged. They might suffer reputational harm, perhaps lose contracts, have certain loans be declared to be in default, and lose some personnel and public support. But that would probably be the proper price to be paid in the context of the violations of the law they committed.”

As noted in previous posts, the Arthur Anderson effect was effectively debunked (see here) and even Denis McInerney (DOJ, Deputy Assistant Attorney General) recently acknowledged (see here) that there is a very small chance that a company would be put out of business as a result of actual DOJ criminal charges.

In his new book Spitzer also writes as follows concerning the SEC’s neither admit nor deny settlement policy.

“I hope that the new leadership at the Securities and Exchange Commission will mandate that an admission of guilt is a necessary part of future settlements in cases of this stature or magnitude. The law and justice require such an acknowledgement — or else nothing has been accomplished.”

Speaking of neither admit nor deny, part of the SEC’s talking points defense of this policy is that the SEC is not the only federal agency that makes use of such a settlement policy.

On this score, it is notable – as detailed in this Law360 article – that Bart Chilton, a top official at the U.S. Commodity Futures Trading Commission, “said the commission should rethink its policy of allowing defendants to settle claims without admitting or denying the allegations.”  According to the article, Chilton stated:

“I understand there are certain circumstances where we might not want to require [admissions], but I think we at the CFTC should change our modus operandi.  The default position should be that people who violate the law should admit wrongdoing.”

$10 Million Man

Continuing with neither admit nor deny, one of the defenders of this settlement policy was Robert Khuzami while he was at the SEC as the Director of Enforcement.   As noted in this Kirkland & Ellis release, Khuzami joined the firm as a partner in the global Government, Regulatory and Internal Investigations Practice Group.  According to this New York Times article, Khuzami’s new position “pays more than $5 million per year” and is guaranteed for two years.  In joining Kirkland, the New York Times stated that Khuzami “is following quintessential Washington script: an influential government insider becoming a paid advocate for industries he once policed.”

Khuzami and former Assistant Attorney General Lanny Breuer were the voice and face of the SEC and DOJ last November upon release of the FCPA Guidance.  As detailed in this prior post, Breuer is currently at Covington & Burling making approximately $4 million per year.

*****

A good weekend to all.

Friday Roundup

Friday, June 21st, 2013

SEC tweaks its neither admit nor deny settlement policy, Tyco settlement approved, scrutiny alert, and for the reading stack.  It’s all here in the Friday roundup.

SEC Tweaks Neither Admit Nor Deny Settlement Policy

Numerous prior posts have focused on the SEC’s controversial neither admit nor deny settlement policy.  (See here for the subject matter tag).

Earlier this week, SEC Chairman Mary Jo White announced that the SEC would no longer maintain a blanket policy permitting defendants to settle SEC cases without admitting to wrongdoing.  (See here for Alison Frankel’s excellent write-up at Thomson Reuters News & Insight).  Frankel cites to an internal SEC email from Enforcement Division co-directors Andrew Ceresney and George Canellos as follows.

“While the no admit/deny language is a powerful tool, there may be situations where we determine that a different approach is appropriate. In particular, there may be certain cases where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate, even if it does not allow us to achieve a prompt resolution. We have been in discussions with Chair White and each of the other commissioners about the types of cases where requiring admissions could be in the public interest. These may include misconduct that harmed large numbers of investors or placed investors or the market at risk of potentially serious harm; where admissions might safeguard against risks posed by the defendant to the investing public, particularly when the defendant engaged in egregious intentional misconduct; or when the defendant engaged in unlawful obstruction of the commission’s investigative processes. In such cases, should we determine that admissions or other acknowledgement of misconduct are critical, we would require such admissions or acknowledgement, or, if the defendants refuse, litigate the case.”

Last month at a Corporate Crime Reporter sponsored conference Ceresney defended the neither admit nor deny settlement policy – see here.

Judge Leon Signs Off On Tyco Settlement

This previous post highlighted how Judge Richard Leon had been refusing to sign off on SEC FCPA settlements involving IBM and Tyco International.  The common thread between the two enforcement actions would seem to be that both companies are repeat FCPA offenders.  In  2000 IBM agreed to a permanent injunction prohibiting future FCPA violations and in 2006 Tyco agreed to a permanent injunction prohibiting future FCPA violations.

Earlier this week, Judge Leon approved a final judgment in the Tyco enforcement action that was filed in September 2012 (see here for the prior post).  The final judgement contains the following paragraph.

“[For a two year period Tyco is required to submit annual reports] to the Commission and this Court describing its efforts to comply with the Foreign Corrupt Practices Act (“FCPA”), and to report to the Commission and this Court immediately upon learning it is reasonably likely that Defendant has violated the FCP A in connection with either improper payments to foreign officials to obtain or retain business or fraudulent books and records entries …”"

Final judgment in the IBM enforcement action from March 2011 (see here for the prior post) remains pending.

Scrutiny Alert

The Economic Times of India reports (here) that “five top executives at the Indian unit” of Bunge (a U.S. agribusiness and food company) ”have resigned amid an internal audit into possible financial irregularities.”  According to the report, Bunge (the parent company) “had objected to the manner in which its Indian subsidiary paid for the factory land in Kandla. Bunge was of the view that the transaction may not be compliant” with the FCPA.

Reading Stack

A profile (here) of “Calgary’s Top Corporate Corruption Lawyer” as well as background information on Canada’s Corruption of Foreign Public Officials Act.

As noted in this Bulletin from Blake, Cassels & Graydon, earlier this week “the amendments to the Corruption of Foreign Public  Officials Act received royal assent following passage by the  Parliament of Canada on Tuesday, June 18, 2013.”  (See this prior post highlighting various issues raised during debate of the amendments).

*****

A good weekend to all.

Friday Roundup

Friday, May 17th, 2013

$1.16 million in FCPA professional fees and expenses per working day, show me the numbers, quotable, and for the reading stack.  It’s all here in the Friday roundup.

Wal-Mart’s FCPA Expenses

In this previous Friday roundup, I calculated Wal-Mart’s 2012 FCPA-related professional fees and expenses as being approximately $604,000 per working day.

Yesterday in a first-quarter earnings conference call (see here), Wal-Mart disclosed as follows.

“Our core corporate expenses [included] $73 million in expenses related to FCPA matters, which was above our forecasted range of $40 to $45 million. Approximately $44 million of the expenses represent costs incurred for the ongoing inquiries and investigations, while $29 million covers costs regarding the global compliance review, program enhancements and organizational changes.”

Doing the math, Wal-Mart’s first quarter FCPA-related professional fees and expenses equal approximately $1.16 million per working day.

I observed in this March 2011 article as follows.

“This new era of enforcement has resulted in wasteful overcompliance, companies viewing every foreign business partner with irrational suspicion, and companies deploying teams of lawyers and specialists around the world spending millions to uncover every potential questionable or unethical $100 corporate payment.  This new era of enforcement has proven lucrative to many segments of the legal, accounting, and compliance industries and the status quo would, from their perspective, seem desirable.”

The question again ought to be asked – does it really need to cost this much or has FCPA scrutiny turned into a boondoggle for many involved?  For more on this issue, see my article “Big, Bold, and Bizarre: The Foreign Corrupt Practices Act Enters a New Era.”

Sticking with Wal-Mart, this Bloomberg article provides an update on certain of the civil cases pending against Wal-Mart based on the company’s FCPA scrutiny.

Show Me The Numbers

This previous Friday roundup highlighted comments by Senator Elizabeth Warren concerning the SEC’s neither admit nor deny settlement policy and how it creates conditions in which there is “not much incentive to follow the law.”  Senator Warren now wants to see research and analysis of the pro and cons of this policy and other related regulatory settlement devices.

In this letter to, among others, Attorney General Eric Holder and SEC Chairman Mary Jo White, Senator Warren writes, in pertinent part, as follows.

“There is no question that settlements, fines, consent orders, and cease and desist orders are important enforcement tools, and that trials are expensive, demand numerous resources, and are often less preferable than settlements.  But I believe strongly that if a regulator reveals itself to be unwilling to take large financial institutions all the way to trial — either because it is too timid or because its lacks resources — the regulator has a lot less leverage in settlement negotiations and will be forced to settle on terms that are much more favorable to the wrongdoer.  [...]  Have you conducted any internal research or analysis on trade-offs to the public between settling an enforcement action without admission of guilty and going forward with litigation as necessary to obtain such admission, and if so, can you provide that analysis to my office.  I am interested in learning more about how your institution has evaluated the cost to the public of settling cases without requiring an admission of guilt rather than pursuing more aggressive actions.”

Senator Warren is obviously concerned that settlement policies and procedures facilitate the under-prosecution of alleged corporate wrongdoer.  This is a valid concern.  Yet so is the concern that such settlement policies and procedures also facilitate the over-prosecution of corporate conduct.  For more, see my article “The Facade of FCPA Enforcement“, including reference to the SEC’s acknowledgment that settlement of an SEC enforcement action does “not necessarily reflect the triumph of one party’s position over the other.”

Quotable

Michael Crites (Dinsmore & Shohl and the former U.S. Attorney for the S.D. of Ohio) stated as follows in a recent Law360 interview.

“The federal government passed the Foreign Corrupt Practices Act in 1977 after discovering that American companies were making millions of dollars in bribes to various foreign government officials. The law was heralded as solving the problem by prohibiting companies and individuals from offering or making payments to any foreign official with the purpose of inducing the recipient to use their official position by directing business to or continuing business with the briber. Over 35 years later, the basics of this law are still necessary to prevent and punish unethical bribes but businesses have discovered that the Department of Justice’s interpretation of the law is broader than anyone intended.”

“DOJ has increased dramatically the number of investigations and enforcement actions under the FCPA, creating what DOJ calls a new era of FCPA enforcement.  Unlike the activity in 1977, this heightened enforcement does not come from illegal bribes but the DOJ’s broad interpretation of the law which is now being applied to otherwise legitimate and ethical actions. The law is undeniably vague and few judicial decisions exist to provide additional guidance. Without these restraints, DOJ has embraced their power to apply the FCPA to unintended situations, resulting in a climate of fear for American businesses that conduct any business abroad.”

Reading Stack

More from the recent Corporate Crime Reporter sponsored conference.  This article concerns a panel on corporate monitors.  Participating in the panel were Dan Newcomb of Shearman & Sterling, George Stamboulidis of Baker Hostetler, Gil Soffer of Katten Muchin, Joseph Warin of Gibson Dunn, and John Buretta, chief of staff of the Criminal Division at the Department.

Judge Rejects A “Minimalist Conception” Of The Courts

Thursday, May 2nd, 2013

Tomorrow at the National Press Club in Washington, D.C., Corporate Crime Reporter is sponsoring a conference (see here) focused on resolution policies and procedures in DOJ and SEC enforcement actions.  Top officials from the DOJ and SEC are participating and I am pleased to be on a panel focused on non-prosecution and deferred prosecution agreements.  Another topic to be discussed at the event is the SEC’s neither admit nor deny settlement policy.

This long-standing, yet controversial, policy is currently before the Second Circuit in SEC v. Citigroup (see prior posts here and here) and this policy also applies to many FCPA enforcement actions.

Thus, Judge Victor Marrero (S.D.N.Y.) was in a difficult position recently when deciding whether to approve the approximate $600 million neither admit nor deny settlement (in an non-FCPA action) between the SEC and a unit of SAC Capital Advisor.  (See here for the SEC action).  In an April 16th order, Judge Marrero granted approval of the final judgment “conditioned upon the disposition of the pending appeal” of the SEC v. Citigroup case.

Judge Marrero’s order is a must read for those interested in following the growing judicial chorus questioning a central feature of most SEC settlements.  For how this settlement features contributes to the “facade” of enforcement in the FCPA context, see my 2010 article “The Facade of FCPA Enforcement.”

Like Judge Rakoff before him, Judge Marrero stated that although courts are bound to give deference to an executive agency’s assessment of the public interest, “this does not mean that a court must necessarily rubber stamp all arguments made by such an agency.”

Judge Marrero stated, in pertinent part, as follows.

“In assessing the appropriateness of the ‘neither admit nor deny’ provisions in [the settlement], the Court must perform a very delicate balancing act, walking a tightrope between various competing interests. It must recognize complexities that characterize government law enforcement proceedings, the difficult policy calls, and the expertise possessed by the administrative agencies entrusted with the responsibility to protect the public interest. To this end, the Court must avoid undue meddling and second-guessing, and must accord government agency law enforcement and financial determinations such as those now before it the proper level of deference they are due. At the same time, the Court cannot conceive that Congress intended the judiciary’s function in passing upon these settlements as illusory, as a predetermined rubber stamp to any settlement put before it by an administrative agency, or even a prosecutor. Such a minimalist conception of the Courts would make a mockery out of Congressional intent in delegating approval authority to the courts in these matters and cramp judicial independence in this context.”

“The parties have stressed that the inclusion of ‘neither admit nor deny’ provisions in regulatory settlements of civil proceedings is a longstanding and commonplace practice routinely pursued not only by the SEC, but many other federal agencies.  They have pointed out that, historically, courts in this district and others across the country, recognizing the sound practical and policy reasons warranting such a provision, have regularly approved such agreements without questioning the inclusion of ‘neither admit nor deny’ provisions.  Additionally, they emphasize, as this Court has acknowledged above, that a decision by a body of the executive branch of the federal government, particularly agencies possessing special expertise, to end an administrative enforcement action represents a prerogative that lies outside the ambit of the function of the judiciary, embodied in controlling doctrine requiring that courts accord due deference to such policy judgments.  The court agrees with these salient arguments.”

“However, implicit in the parties’ arguments is the premise that because the Court must accord deference to an administrative agency’s special competence to commence and resolve administrative proceedings, and because traditionally courts have not questioned settlements of civil enforcement actions that contain ‘neither admit nor deny’ provisions, therefore no circumstances exist in which enhanced judicial scrutiny, or perhaps even rejection, of a proposed consent judgment containing such a provision would be appropriate.  In essence, the parties are telling the Court that assessing the appropriateness of the inclusion of these ‘neither admit nor deny’ provisions in this particular action is none of the Court’s business.  Whether veiled or explicit, such a hard-line overstates the judicial deference due to administrative policy determinations, suggesting a form of absolutism that is unwarranted by law or reasonable public policy.”

“If courts traditionally have not challenged the inclusion of ’neither admit nor deny’ provisions in civil enforcement actions, perhaps this outcome was obtained because fitting circumstances have not previously arisen that would compellingly justify that level of judicial intervention. It should come as no surprise that judges called upon routinely to resolve cases of the domestic “cats and dogs” variety would take special note when the elephant is first dragged into the courtroom. Nor should it startle anyone if among the questions the court raises on such an occasion is whether the rules of law meant to adjudicate the issues presented by one type of case should be extended to atypical others, or be adjusted to properly reflect the true nature of the beast.”

“The Court recognizes there are circumstances, possibly even in the vast majority of cases, in which it is perfectly reasonable for parties to a regulatory proceeding to agree to such a provision. A government regulatory agency and a defendant may deem it mutually advisable and beneficial for public and private reasons, and on financial, practical, and public policy grounds to settle civil enforcement proceedings without an admission of wrongdoing. Among the obvious considerations are: the resources necessary to prosecute and defend the action fully; the level of vindication, penalty, and deterrence achieved; the risks of loss weighed against the best the party might stand to gain from proceeding further with the action; exposure to liability from other lawsuits, business disruptions and effects on good will.  For example, where the likely cost of litigation and the amount at stake are relatively comparable, parties may agree to such a provision to  avoid the undue expenses and risk associated with proving culpability at trial.  In addition, the Court must recognize that, for the SEC, requiring an admission of culpability would in most cases undermine any chance of compromise with corporate defendants who face additional exposure from private lawsuits.  In the run-of-the-mill case, these concerns are likely to produce a reasonably balanced outcome, reflecting a fair measure of proportionality, defensible for the parties and other pertinent interests.”

“However, instances can and do arise in which courts should properly raise the level scrutiny they accord to particular settlement agreements in particular situations. Earlier precedents may not have entailed the extreme disparity evident in recent cases between the size and speed of a settlement on the one hand, and the plausibility of an absence of wrongdoing on the other.”

“Perhaps we live in a different era. In this age when the notion labeled “too big to fail” (or jail, as the case may be) has gained currency throughout commercial markets, some cynics read the concept as code words meant as encouragement by an accommodating public –  a free pass to evade or ignore the rules, a wink and a nod as cover for grand fraud, a license to deceive unsuspecting customers. Perhaps, too, in these modern times, new financial, industrial, and legal patterns have merged that call for enhanced regulatory and, as appropriate, judicial oversight to counter these sinister attitudes. This prospect raises concerns about whether the regulatory and judicial practices which have governed to date fail to reflect what new realties demand to adequately protect the public interest. Anyone who even superficially follows accounts of current events entailing well-known scandals – instance  involving extensive fraud or excess in the financial markets, environmental disasters, and hazardous consumer products -is likely to be impressed by a quality many of these events share: massive scale whose effects go well beyond mere matters of degree.”

“A few other qualities about these events bear comment. In the world, and in the eyes of the public whose perceptions pass judgment on official actions, harmful conduct on the scale of the contemporary models ordinarily does not occur absent some form of wrongdoing; the damage the victims suffer cannot always be blamed on acts of God or the mischief of leprechauns. For the people directly injured and for others who share an interest in these matters implicating broad public concerns, the purposes of the justice system embodied in compensation, deterrence, and punishment cannot be adequately satisfied, and there cannot be proper closure when incidents causing extensive loss occur, if the individuals or entities responsible for the large-scale wrongful consequences are not properly held accountable. These impressions hold doubly true in situations, such as may apply in the case at hand, where strong evidence of wrongdoing exists, or where at least circumstantially, as embodied in the doctrine of res ipsa loquitur, the events are unlikely to have happened without substantial misconduct.”

“In appropriate cases, the vast scope of the harmful actions referred to here, and the reach of their consequences, ought to be assessed in two ways. Quantitatively, they should be gauged by the staggering amounts of money, both profits and losses, that typically are involved in underlying wrongdoing that is alleged, with huge numbers of victims seriously injured worldwide, correspondingly matched by the perceived outsized rewards the offenders seek to derive from the illicit and damaging behavior. Qualitatively, the measure of these events should be taken by the sheer magnitude of the culpability the offending conduct presumptively would entail – the higher levels of daring, of risk-taking, of outright abuse that manifest tougher grades of arrogance and greed, as well as cavalier disdain for victims and the public good alike.”

“If true – a question that legislators, regulators, and other policy-makers, as well as judges when warranted, should closely examine within the respective domains – these new circumstances highlight the challenge of framing a fair, adequate, and reasonable response by all bodies of government entrusted by law with protecting the public interest against such outsized malfeasance. In this Court’s view, and perhaps as also perceived by other judges who recently have declined to grant uncritical approval to ‘neither admit nor deny’ provisions in proposed consent judgments for administrative enforcement actions, some of the uniquely harmful fact patterns emerging from modern financial and industrial market scandals should not be thrown into the mix with the run-of-the-mill cases. To do so would overlook the distinctive features of this new breed of cases that might require enhanced scrutiny, more careful review, and better tailored resolution.”

For additional coverage of Judge Marreo’s April 16th order, see here from Reuters.