Archive for the ‘Prosecutorial Common Law’ Category

Reading Assignments

Tuesday, December 2nd, 2014

Read ThisEnd of the semester reading assignments for those interested in topics related to FCPA enforcement.

Thus far in 2014, every SEC FCPA enforcement action (both corporate and individual) has been resolved via the SEC’s administrative process.  Against this backdrop, Judge Jed Rakoff’s (S.D.N.Y.) recent speech “Is the SEC Becoming a Law Unto Itself” is a suggested read.

Prosecutorial common law most certainly impacts FCPA enforcement.  My amicus brief filed in connection with the recent Supreme Court “foreign official” cert petition highlighted, among other things, how judicial percolation of the “foreign official” issue is unlikely given how the FCPA is enforced. Against this backdrop, a recent statement by Supreme Court Justices Scalia and Thomas is a suggested read.

Both suggested reads are excerpted below.

Judge Rakoff’s Speech

In this recent speech Judge Jed Rakoff (S.D.N.Y.) asks “is the SEC becoming a law unto itself” and discusses “some dangers that seem to lurk … in the SEC’s apparent new policy of bringing a greater percentage of its significant enforcement actions as administrative proceedings.”  In pertinent part, Judge Rakoff stated:

“[I]n recent months the S.E.C. has signaled its intention to bring as administrative actions certain kinds of enforcement actions that historically it has more often brought in the federal courts. As early as October of 2013, Andrew Ceresney, Director of the Division of Enforcement, stated that “Our expectation is that we will be bringing more administrative proceedings given the recent statutory changes.” He followed that up last June when, with specific reference to insider trading cases, which previously had only very rarely been brought administratively, rather than in federal court, Mr. Ceresney stated: “I do think we will bring more insider-trading cases as administrative proceedings in appropriate cases.” Not to be outdone, Kara Brockmeyer, the head of the SEC’s antiforeign- corruption enforcement unit, stated just two weeks ago that “It’s fair to say it’s the new normal. Just like the rest of the enforcement division, we’re moving towards using administrative proceedings more frequently.”

Judge Rakoff next provided an informative historical overview of the SEC’s evolving enforcement powers including recent Section 929 of Dodd-Frank which gave the SEC the power through internal administrative proceedings to impose monetary penalties.

In the words of Judge Rakoff:

“The net result of all this is that the S.E.C. can today obtain through internal administrative proceedings nearly everything it might obtain by going to court. This sea-change has come about almost entirely at the request of the S.E.C., usually by tacking the provisions authorizing such expansion onto one or another statute enacted in the wake of a financial scandal.

What has been the stated rationale for all these changes? Usually nothing more than a claim of greater efficiency. Thus, for example, when then-Director of Enforcement Robert Khuzami submitted a statement to the Senate Judiciary Committee in support of Dodd-Frank, he devoted all of one sentence to what became Section 929P(a), stating: “Additional legislative proposals that would serve to enhance the Division’s effectiveness and efficiency include the ability to seek civil penalties in [administrative] cease-and-desist proceedings.” Similarly, the sole legislative history of Section 929P(a) in the House Report on Dodd-Frank states that “This section streamlines the SEC’s existing enforcement authorities by permitting the SEC to seek civil money penalties in cease-and-desist proceedings under Federal securities laws.”

While a claim to greater efficiency by any federal bureaucracy suggests a certain chutzpah, it is hard to find a better example of what is sometimes disparagingly called “administrative creep” than this expansion of the S.E.C.’s internal enforcement power.

To be sure, an S.E.C. enforcement action brought internally is in some superficial respects more “effective and efficient” and more “streamlined” than a similar action brought in federal court, for the simple reason that S.E.C. administrative proceedings involve much more limited discovery than federal actions, with no provision whatsoever for either depositions or interrogatories. Similarly, at the hearing itself, the Federal Rules of Evidence do not apply and the S.E.C. is free to introduce hearsay. Further still, there is no jury, and the matter is decided by an administrative law judge appointed and paid by the S.E.C. It is hardly surprising in these circumstances that the S.E.C. won 100% of its internal administrative hearings in the fiscal year ending September 30, 2014, whereas it won only 61% of its trials in federal court during the same period.

But, although the informality and arguable unfairness of S.E.C. administrative proceedings might present serious problems for those defending such actions, you might suppose that federal judges would be delighted to have fewer complicated securities cases burdening their overcrowded dockets. The reason, though, that I suggest that the judiciary and the public should be concerned about any trend toward preferring the S.E.C.’s internal administrative forum to the federal courts is that it hinders the balanced development of the securities laws.”

[...]

[G]iven the expansion of its internal jurisdiction occasioned by Dodd-Frank, the S.E.C. might well be tempted in the future to bring such cases as administrative enforcement actions, and thereby likely avoid the sting of well-publicized defeats. But the result would be that the law in such cases would effectively be made, not by neutral federal courts, but by S.E.C. administrative judges.

This is because, at least in the case of administrative decisions that have been formally approved by the S.E.C., such decisions, though appealable to the federal courts of appeals, are presumed correct unless unreasonable. In other words, while the decisions of federal district courts on matters of law are subject to de novo review by the appellate courts, the law as determined by an administrative law judge in a formal administrative decision must be given deference by federal courts unless the decision is not within the range of reasonable interpretations.

To put it in terms that this audience is familiar with, an S.E.C. administrative judge’s formal ruling on an otherwise undecided issue of statutory interpretation of the securities law is, just like rules enacted by the Commission, entitled to “Chevron” deference.”

[...]

In short, what you have here are broad anti-fraud provisions, critical to the transparency of the securities markets, that have historically been construed and elaborated by the federal courts but that, under Dodd-Frank, could increasingly be construed and interpreted by the S.E.C.’s administrative law judges if the S.E.C. chose to bring its more significant cases in that forum. Whatever one might say about the S.E.C.’s quasijudicial functions, this is unlikely, I submit, to lead to as balanced, careful, and impartial interpretations as would result from having those cases brought in federal court.

In the short-run, this would be unfair to the litigants. In the longer-run, it might not be good for the S.E.C. itself, which has its own reputation for fairness to consider. But, most of all, in the both the short-run and the long-run, it would not be good for the impartial development of the law in an area of immense practical importance.

Almost from the very outset of the administrative state, the defense of the huge power we accord to administrative agencies – as classically stated by the second Chairman of the S.E.C., James Landis, in his book The Administrative Process – is that no practical alternative exists in our complex society. But when it comes to interpreting the securities laws, a practical alternative – and the very one provided by the Constitution – has functioned very effectively for decades, namely, adjudication in the federal courts. I see no good reason to displace that constitutional alternative with administrative fiat, and I would urge the S.E.C. to consider that it is neither in its own longterm interest, nor in the interest of the securities markets, nor in the interest of the public as a whole, for the S.E.C. to become, in effect, a law onto itself.”

Justice Scalia / Thomas Statement

Recently, the U.S. Supreme Court denied cert in an insider trading case, Whitman v. United States.  Much of the news surrounding the denial though focused on this statement by Justice Scalia and joined by Justice Thomas.  The statement reads in full (internal citations omitted) as follows.

“A court owes no deference to the prosecution’s interpretation of a criminal law. Criminal statutes “are for the
courts, not for the Government, to construe.” This case, a criminal prosecution under §10(b) of the Securities
Exchange Act of 1934 raises a related question: Does a court owe deference to an executive agency’s interpretation of a law that contemplates both criminal and administrative enforcement?

The Second Circuit thought it does. It deferred to the Securities and Exchange Commission’s interpretation of §10(b), and on that basis affirmed petitioner Douglas Whitman’s criminal conviction. Its decision tilled no new ground. Other Courts of Appeals have deferred to executive interpretations of a variety of laws that have both criminal and administrative applications.

I doubt the Government’s pretensions to deference. They collide with the norm that legislatures, not executive officers, define crimes. When King James I tried to create new crimes by royal command, the judges responded that “the King cannot create any offence by his prohibition or proclamation, which was not an offence before.” James I, however, did not have the benefit of Chevron deference. With deference to agency interpretations of statutory provisions to which criminal prohibitions are attached, federal administrators can in effect create (and uncreate) new crimes at will, so long as they do not roam beyond ambiguities that the laws contain. Undoubtedly Congress may make it a crime to violate a regulation, but it is quite a different matter for Congress to give agencies—let alone for us to presume that Congress gave agencies—power to resolve ambiguities in criminal legislation.

The Government’s theory that was accepted here would, in addition, upend ordinary principles of interpretation. The rule of lenity requires interpreters to resolve ambiguity in criminal laws in favor of defendants. Deferring to the prosecuting branch’s expansive views of these statutes “would turn [their] normal construction . . . upside-down, replacing the doctrine of lenity with a doctrine of severity.”

The best that one can say for the Government’s position is that in Babbitt v. Sweet Home Chapter, Communities for Great Ore., 515 U. S. 687 (1995), we deferred, with scarcely any explanation, to an agency’s interpretation of a law lenity aside in a footnote, stating that “[w]e have never suggested that the rule of lenity should provide the standard for reviewing facial challenges to administrative regulations.” That statement contradicts the many cases before and since holding that, if a law has both criminal and civil applications, the rule of lenity governs its interpretation in both settings. The footnote in Babbitt added that the regulation at issue was clear enough to fulfill the rule of lenity’s purpose of providing “fair warning” to would-be violators. But that is not the only function performed by the rule of lenity; equally important, it vindicates the principle that only the legislature may define crimes and fix punishments. Congress cannot, through ambiguity, effectively leave that function to the courts—much less to the administrative bureaucracy. Babbitt’s drive-by ruling, in short, deserves little weight.

Whitman does not seek review on the issue of deference, and the procedural history of the case in any event makes it a poor setting in which to reach the question. So I agree with the Court that we should deny the petition. But when a petition properly presenting the question comes before us, I will be receptive to granting it.”

FCPA Readings

Wednesday, March 12th, 2014

If your idea of a good time is cuddling up with an entire law journal volume devoted to the Foreign Corrupt Practices Act, then this post is for you.

Even if that is not your idea of a good time, if you are the least bit interested in the FCPA and its evolution, then you owe it to yourself to get your hands on the Fall 1982 edition of the Syracuse Journal of International Law and Commerce, a symposium volume titled “The Foreign Corrupt Practices Act:  Domestic and International Implications.”

This post previously highlighted the speech by Richard Shine (Chief, Multinational Fraud Branch, Criminal Division, U.S. Department of Justice – the name given to the DOJ’s then de facto FCPA Unit) in the volume.

This recent post highlighted the speech by Frederick Wade (Chief Counsel, SEC Enforcement Division) in the volume.

The remainder of this post highlights notable aspects of other articles found in the Fall 1982 edition of the Syracuse Journal of International Law and Commerce.

In “An Overview of the FCPA,” Wallace Timmeny (the former Deputy Director, SEC Division of Enforcement and at the time a lawyer in private practice) rightly identified the foreign policy concerns which motivated Congress to pass the FCPA:

“Concerns were expressed that our government was faced with foreign policy determinations and decisions made by American corporations.  In other words, some of our corporations were affecting foreign policy and there was also the overriding concern that the whole idea of foreign payments or corruption in business was really putting an arrow in the bow of the countries that oppose our system.”

For more on this primary motivation of Congress in enacting the FCPA, and how the FCPA was thus not a purely altruistic act, see my article “The Story of the Foreign Corrupt Practices Act.”

In “An Examination of the Accounting Provisions of the FCPA,” Lloyd Feller (the former Associate Director of the SEC’s Division of Market Regulation and at the time a lawyer in private practice) nicely touched upon the FCPA’s books and records and internal controls provisions and how they created much controversy at the time.

“Let me try to put into context the controversy surrounding the accounting provisions.  First, it is important to understand that the accounting provisions are part of the Securities Exchange Act of 1934, and apply to all issuers which register securities with the SEC.  The provisions apply to all such issuers, whether or not they do business overseas.  The Act, as it is applied through the accounting provisions, has absolutely nothing to do with foreign corrupt practices; it has to do with accounting, including the maintenance of books and records, and the establishment and maintenance of a system of internal accounting controls.”

“I think it is important to start with the understanding of how the Act was presented to the corporate community at the time it was passed, because the context in which the words were used and the purpose for which the accounting provisions were intended create the great controversy.  It is important to understand that people who never heard of the bribery of foreign officials woke up one day and found that an Act had just been passed which applied to them in very significant ways.  This was an Act which they had never heard of, had never thought involved them, had never paid any attention to, and had never understood.  They listened to the lawyers and accountants explain it to them and still did not understand.”

In “The SEC Interpretative and Enforcement Program Under the FCPA,” John Sweeny (former Assistant General Counsel of the SEC and at the time a lawyer in private practice) rightly noted:

“The SEC did not actively support the bribery provisions of the Foreign Corrupt Practices Act.  Indeed, it’s not entirely clear that they have any interest in prohibiting bribery per se.”

Sweeny also nicely touched upon a prosecutorial common law issue that remains today.

“The corporate community cannot sit back and wait to see how the law develops.  Because it makes sound business sense to comply with federal regulatory authorities without a public clamor, corporations must confirm their activity in ways which the agency requires.  To do otherwise would mean that the corporations would be risking substantial litigation expenses and adverse publicity.”

In ”International Aspects of the Control of Illicit Payments,” Professor Seymour Rubin assessed the then current state of the FCPA.

“The course of events in this particular area has been long, but it has not yielded much in the way of result.  Whether the FCPA has yielded a great deal in the way of results, I leave to all of you who have considered the matter.  Certainly it has yielded much in the way of instruction to people in various corporations.  I am somewhat impressed by the amount of paper which has been produced on this subject.  It reminds me again of the old saying to the effect that when the weight of the paper equals the weight of the airplane, the airplane will fly.”

Professor Rubin also rightly identified bribery and corruption as a trade issue and particularly how Senate Resolution 265 sponsored by Senator Ribicoff during the FCPA’s legislative debate was the most promising way to deal with the bribery and corruption problem.  For more on Senate Resolution 265, see the Story of the Foreign Corrupt Practices Act (pgs. 982-984).

“[Senator Ribicoff's proposal - Senate Resolution 265] was more realistic than some of the other proposals.  In particular, Senator Ribicoff argued that bribes, as well as similar practices, represent distortions of proper trade practices.  Under this premise, the members of the General Agreement on Tariffs and Trade would be the appropriate group to consider the question of illicit payments and bribes that distort the fair competition desirable in the field of international trade.  In other words, just as dumping and subsidization distort normal competition, so too does the practice of making illicit payments.  This premise served as the basis upon which the issue was to be presented at the GATT conference.  But when a special trade representative presented Senator Ribicoff’s proposal before the GATT conference, he was greeted with polite silence.  The GATT, in 1979, concluded a multilateral trade negotiation.  Among other things, this multilateral trade negotiation dealt with trade-distorting practices such as nontariff barriers, the question of government procurement, dumping codes, and the anti-subsidy or subsidies and countervailing duties.  It would seem that the multilateral trade negotiation would have been a legitimate arena in which to discuss the subject, as being one more example of a trade distortion which ought to be regulated.”

“I think if one were to rexamine the idea presented in Senate Resolution 265 and adopt this in the area of trade, one would be addressing the problem of illicit payments in more meaningful and significant terms.  When a large contract is lost by an American corporation because somebody else paid a bribe, a trade distortion results.  Clearly, if one were really serious about achieving a meaningful agreement in the area of international control of illicit payments, the peg on which to hang it would be trade policy and not morality.”

In “The Foreign Corrupt Practices Act:  Implications for the Private Practitioner,” Robert Primoff (a lawyer in private practice) called the FCPA a “prosecutor’s paradise” and observed:

“The target is always guilty of the violation.  The government has the option of deciding whether or not to prosecute.  For practitioners, however, the situation is intolerable.  We must be able to advise our clients as to whether their conduct violates the law, not whether this year’s crop of administrators is likely to enforce a particular alleged violation.  That would produce, in effect, a government of men and women rather than a government of law.”

If the Fall 1982 edition of the Syracuse Journal of International Law and Commerce does not completely fill your FCPA belly, you might also want to check out Volume 18, Number 2 of the Northwestern Journal of International Business (Winter 1998).

It is a symposium edition titled “A Review of the Foreign Corrupt Practices Act on Its Twentieth Anniversary:  Its Application, Defense and International Aftermath.“  The articles are rather pedestrian, but Stanley Sporkin’s (the former Director of the SEC’s Enforcement Division during Congress’s consideration and deliberation of the FCPA) article “The Worldwide Banning of Schmiergeld:  A Look at the Foreign Corrupt Practices Act On Its Twenieth Birthday” is worth a read as he provides a first-person account of the origins of the FCPA. [In case you are wondering Schmiergeld is the German word for bribe].

See here for a prior post detailing articles in a 2012 symposium edition of the Ohio State Law Journal “The FCPA At Thirty-Five and Its Impact on Global Business.”

Requiring The DOJ or SEC To Prove Its Case Is Not “Criminal”

Wednesday, February 12th, 2014

It is truly a sorry state of affairs that have come to define government enforcement of criminal (or even civil) laws against business organizations.

Exhibit A is this recent CNBC video clip of Andrew Ross Sorkin’s interview of JPMorgan CEO Jamie Dimon.

As you likely know, JPMorgan recently resolved a variety of criminal and civil matters brought by various government enforcement agencies for approximately $20 billion.

“SORKIN: So, you look at these big numbers. And they are big numbers. And so the public looks at them and they are trying to grasp and understand what to make it. Do you think ultimately, that it was fair?

DIMON: No. I think a lot of it was unfair, but I’m not going to go into the details.”

No surprise there as the various JPMorgan resolution documents contained a so-called “muzzle clause.”  (See paragraph 17 of the JPMorgan DPA).

Dimon continued:

“And I’m grateful to have it behind us. Because the most important thing for a company is you do your job. Serving clients and communities around the world. And this is a huge negative for the company – a huge distraction of management time, board time, when we should really be helping our clients, which includes cities and schools. So we just wanted to get back, do what we’re good at and what we are supposed to be doing.”

The interview then continued as follows.

“SORKIN: On the stuff you think was wrong, do you think you fully remedied it?

DIMON: I guess at one point it doesn’t matter who you think is wrong or right, so we can debate all day long whether we should have paid. [...] You know, again, you’re really caught between two bad choices. We made the one that was better for the company.

SORKIN: Right.

DIMON: Whether it should have been high or low, I don’t care anymore. I’ve moved on. That was last year. I’m looking forward to 2014.

SORKIN: One more question on that, which though is, was there a moment – what was the moment for you when you said to yourself, “ok. Pay it. I want to put this behind me.” And was there something that happened? Was it a conversation with the board? Was it a conversation with Eric Holder? What was that moment for you?

DIMON: First of all, the board was involved every step of the way in this. It was this kind of unprecedented, kind of – you know we have multiple regulators and multiple U.S. attorneys and district – Department of Justice. And it was just, thinking it through, looking at our options and realizing there are two really bad options. And that the wrong thing to do is to complain, fight and then you could have said, well why not go to court all those years? So if you are my board, you would have said, why would you do that and subject your company to three or four more years and the outcomes could be worse. Then wouldn’t even necessarily be better. So a lot of people said fight – if you think you are right, fight – banks have a very tough time doing that. It would really hurt this company and that would have been criminal for me to subject our company to that kind of – those kinds of issues.”

Obviously, one can assume that Dimon did not literally mean it was criminal to put the DOJ and/or SEC to its burden of proof.

However, the notion that an individual with fiduciary duties to a corporation and its shareholders would speak in those terms about something so basic and fundamental to the rule of law and our legal system is truly troubling.

But then again, can you blame Dimon?  He was perhaps simply acting consistent with those fiduciary duties and in the best interest of shareholders.   After all, should JPMorgan have put the DOJ (or SEC) to its burden of proof and thus been criminally indicted (or merely charged in a civil case) the hit to JPMorgan’s market capitalization (approximately $215 billion) likely would have been greater than $20 billion.  Viewed this way, the decision of JPMorgan’s board and it executives seems like a rationale corporate decision in the best interest of shareholders.

But here is the problem as I recently highlighted in my article “Why You Should Be Alarmed By the ADM FCPA Enforcement Action.”  While the specific risk-averse business decisions of a specific company may seem minor in isolation, the aggregate effect of these numerous decisions contributes to a facade of enforcement of any law – whether it is the Foreign Corrupt Practices Act (see here) or otherwise.

As former U.S. Attorney General Alberto Gonzales rightly noted in the FCPA context:

“In an ironic twist, the more that American companies elect to settle and not force the DOJ to defend its aggressive interpretation of the [FCPA], the more aggressive DOJ has become in its interpretation of the law and its prosecution decisions.”

For more on this dynamic see “Prosecutorial Common Law” by Michael Levy –  one of best guest posts in the history of FCPA Professor.

It truly is a sorry state of affairs.

And there is more.

As highlighted at the end of this video (around the five minute mark), Senator Elizabeth Warren chides government regulators for not exploiting this imbalance even more to extract even more shareholder money from risk averse corporations.

*****

The New York Times returns, once again, to JPMorgan’s FCPA scrutiny concerning alleged hiring practices in China.  This article states:

“[A] confidential email has emerged that shows a top Chinese regulator directly asked Jamie Dimon, the bank’s chief executive, for a “favor” to hire a young job applicant. The applicant, a family friend of the regulator, now works at JPMorgan.  [...]  JPMorgan said Mr. Dimon had nothing to do with the decision to hire the young woman, described within the bank as well qualified. And like the C.E.O. of any large company, Mr. Dimon can be expected to meet with many people in a given day. According to a person briefed on the investigation, he is not suspected of any wrongdoing. Still, the episode underscores the dual forces driving JPMorgan and other Wall Street banks to hire the family and friends of China’s ruling elite. The banks sought to build good will with Chinese officials, who, in turn, expected favors from the banks.”

*****

Related to the above issue, this article states:

“UBS has suspended two staff members, including its top capital markets banker in Asia, as the Swiss bank investigates its hiring of the daughter [Joyce Wei] of the chairman of a Chinese chemicals company that is considering a $1 billion share sale the bank has sought a role in.  [...]  Ms. Wei is the daughter of Wei Qi, the chairman of Tianhe Chemicals, a privately owned Chinese company that is considering a potential $1 billion initial public offering in Hong Kong this year. UBS is one of the banks positioned to secure a role in the deal.  [...]  “It’s not a ‘princeling’ issue, because Joyce Wei is not a princeling,” [a person familar with the matter] said, referring to the children of senior Chinese government officials. “Tianhe is not a state-owned company,” the person added. Instead, the investigation is focused on “whether internal processes were adhered to or not.”

Even so, UBS remains part of the SEC’s industry sweep of the financial sector regarding hiring practices in China.

Friday Roundup

Friday, April 5th, 2013

Other items of note, add another to the list, a 6 day sentence, a notable name from the past and spot-on.  It’s all here in the Friday roundup.

Other Items of Note

Yesterday’s post highlighted comments made by former Attorney General Alberto Gonzalez at the Dow Jones / Wall Street Journal Global Compliance Symposium.  Other items of note from the event concern the Africa Sting case and the SEC’s neither admit nor deny settlement policy.

Africa Sting

The jury foreman in the second Africa Sting trial (see here for the prior post) stated that there were “enough small comments through the course of [jury] deliberations [that lead the person] to believe that [the jury's] underlying view was that the defendants had acted in good faith and the FBI/DOJ in bad faith.”

The Africa Sting cases ended (see here for the prior post) by Judge Richard Leon stating, in pertinent part, as follows.

“This appears to be the end of a long and sad chapter in the annals of white collar criminal enforcement.”

“I expressed on a number of occasions my concerns regarding the way this case had been investigated and was conducted especially vis-a-vis the handling of Mr. Bistrong.”

“I for one hope this very long, and I’m sure very expensive, ordeal will be a true learning experience for both the Department and the FBI as they regroup to investigate and prosecute FCPA cases against individuals in the future.”

Yet listening to the interview of Ronald Hosko (assistant director of the criminal investigative division of the FBI) at the Dow Jones event, one was left with the conclusion that nothing appeared to be learned.  Indeed, Hosko seemed to blame the government’s loss on Judge Leon’s evidentiary rulings and the defendants’ good lawyers.  Hosko was interviewed by Dow Jones reporter Christopher Matthews (who closely followed the Africa Sting cases) and Matthews specifically asked Hosko whether anything will change as a result of the case.  Hosko said “we will do it again – see you out there.”

Neither Admit Nor Deny

Former SEC Enforcement Director Robert Khuzami had the opportunity at the Dow Jones event to articulate a sound rationale and purpose for the SEC’s long-standing neither admit nor deny settlement policy.  (See numerous prior posts here, here, here, and here – focusing mostly on Judge Jed Rakoff’s (S.D.N.Y.) disdain of the policy. ).

Instead, Khuzami’s remarks were unconvincing.

Khuzami acknowledged that direct accountability occurs when someone is forced to admit something “on the record,” but he stated that this incremental benefit (compared to a defendant in an SEC enforcement action resolving the case by way of penalties and other relief via a neither admit nor deny settlement) presents challenges that are not worth the additional costs that come from a system that demanded such accountability.

Khuzami noted that without the settlement policy, the “SEC would get few settlements, [settlements] would happen much later in the process, [and that enforcement actions] would tie up a great deal of resources, resources that could be used for the next fraud or victim.”  Against “all those benefits,” and the defendant writing a check and reforming itself, Khuzami did not believe that “it is worth the marginal increase in accountability” to require an explicit admission.

The problem with Khuzami’s defense is the failure to recognize that such a policy insulates SEC enforcement positions from judicial scrutiny.  Indeed, the SEC explicitly acknowledged in the Bank of America enforcement action (where Judge Rakoff first expressed concerns regarding the settlement policy) that SEC settlements “do not necessarily reflect the triumph of one party’s position over the other.”

The SEC is a law enforcement agency and enforcing a law and accusing people (legal or natural) of wrongdoing should not be easy and efficiency should not be the goal.  Justice, transparency, and accountability ought to be the goals and the SEC’s neither admit nor deny settlement policy frustrates these goals.

Add Another

Add another to the list of companies subject to FCPA scrutiny.  SBM Offshore (a Netherlands-based company with ADRs traded in the U.S. and a company that provides floating production solutions to the offshore energy industry) recently issued this press release titled “Update on Internal Investigation.”  It stated, in pertinent part, as follows.

“This investigation commenced in 2012 at the request of SBM Offshore into alleged payments involving sales intermediaries in certain African countries in the period 2007 through 2011, in order to determine whether these alleged payments violated anti-corruption laws. These alleged payments came to the attention of the management board after a review of SBM Offshore’s compliance procedures in late 2011. In the course of the investigation allegations were made of improper payments in countries outside Africa but to date no conclusive proof of such allegations has been established. The investigation is being carried out by outside legal counsel and forensic accountants, with the support of the chief Governance and Compliance officer and under the oversight of the audit committee. The investigation is expected to be completed in 2013.

As the investigation is not yet concluded, SBM Offshore cannot make any definitive statements regarding the findings of the investigation. The initial feedback received to date is that there are indications that substantial payments were made, mostly through intermediaries, which appear to have been intended for government officials. Also, SBM Offshore’s new Management Board, which was appointed in the course of 2012, has found it necessary and appropriate to increase awareness of proper compliance throughout the Group up to the highest management levels.

The Company voluntarily disclosed the investigation to the Dutch Public Prosecution Service (Openbaar Ministerie) and the United States Department of Justice in 2012. The Company will update the authorities on this initial feedback from the investigation shortly. At this stage it is not possible to state anything on the outcome of the investigations, including financial or otherwise.

6-Day Sentence

Bloomberg’s David Glovin has extensively followed the Kozeny, Bourke, etc. enforcement actions.

He reports here that Clayton Lewis (a former executive at hedge fund Omega Advisors, Inc.) was sentenced to time served by U.S. District Court Judge Naomi Buchwald.  As noted in Glovin’s article, Lewis pleaded guilty in 2004 to charges that he conspired with Viktor Kozeny to pay bribes as part of a 1998 scheme to buy the state oil company in Azerbaijan. Soon after his 2003 arrest, Lewis agreed to cooperate with the DOJ and he previously served six days in jail.

A Notable Name From The Past

Roderick Hills (Chairman of the SEC in the mid-1970′s) was a notable voice in the story of the FCPA.  (See here for my article of the same name).  It is ironic (given the SEC’s current FCPA unit) that the Commission never wanted any role whatsoever in enforcing the FCPA’s anti-bribery provisions.  Indeed, Chairman Hill stated as follows during various Congressional hearings.

“The Commission does not oppose direct prohibitions against these payments, but we have previously stated that, as a matter of principle, we would prefer not to be involved even in the civil enforcement of such prohibitions. As a matter of long experience, it is our collective judgment that disclosure is a sufficient deterrent to the improper activities with which we are concerned.”

“[A]s a matter of longstanding tradition and practice, the [SEC] has been a disclosure agency. Causing questionable conduct to be revealed to the public has a deterrent effect. Consistent with our past tradition, we would rather not get into the business, however, we think get involved in prohibiting particular payments. It is a different thing entirely to try to prohibit something, to try to make a decision as to whether it is legal or illegal, or proper or improper. Under present law, if it is material, we cause its disclosure, and we need not get into the finer points of whether it is or is not legal.”

“[The SEC] would prefer not to be involved in civil enforcement of such prohibitions since they embody separate and distinct policies from those underlying the federal securities laws. The securities laws are designed primarily to insure disclosure to investors of all of the relevant facts concerning corporations which seek to raise their capital from the public at large. The [criminal payment provisions of proposed legislation], on the other hand, would impose substantive regulation on a particular aspect of corporate behavior.The Commission recognizes the congressional interest in enacting these prohibitions, but the enforcement of such provisions does not easily fit within the Commission’s mandate.”

Against this backdrop, I enjoyed reading recent comments by Hills on the FCPAmericas Blog (see here).  Hills recently stated as follows.

“My view at the time was that the problem of bribery that we had uncovered had been dealt with and I did not support the passage of the Foreign Corrupt Practice Act. I was concerned then that broad criminalization of “questionable payments” to foreign officials would adversely affect the incentives for transparency that we had created. Nonetheless, the FCPA was passed and it has been properly amended to reduce the possibility that undue criminal actions will be brought.  It is important to remember that it was the ability of the SEC to cause disclosure that brought the scope of worldwide corporate bribery to light. What began in the 1970’s with the SEC enforcement efforts is now a worldwide crusade against the use of bribes to secure business. Today I accept that the FCPA has had, on balance, a positive effect on the reduction of bribery and that similar laws in other countries can have a similar effect. However, criminalization alone is not a useful policy. By itself it is an incentive to conceal. Without effective independent auditing, fair enforcement of FCPA type legislation is unlikely. Also, I believe that in the United States and elsewhere, prosecutorial discretion is essential if we are serious about reducing the corruption. Payments that are made in response to extortion demands or payments that are made by lower level corporate officials contrary to the policies of their employer should surely be treated differently than money crassly offered to buy corrupt official action. In short, as other countries are following the United States’ lead they need to understand that the criminalization of corporate bribery is not enough. If a country does not have effective means of causing broad transparency with effective auditing and independent oversight, FCPA type laws make it too easy to use improper payments as a political weapon.”

Spot-On

In a recent Q&A on Law360, Haywood Gilliam Jr. (Covington & Burling), stated as follows.

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

A: Foreign Corrupt Practices Act enforcement stands out as an area in need of further reform. Over the past several years, FCPA enforcement has been characterized by the U.S. Department of Justice and U.S. Securities and Exchange Commission advancing aggressive enforcement theories, but there have been limited opportunities for courts to scrutinize those theories. Most FCPA enforcement cases end in negotiated resolutions such as deferred prosecution or nonprosecution agreements. In that context, regulators often insist that the settling company or individual accept the government’s expansive theories as a condition of resolving the case.  For example, the DOJ has extracted penalties from non-U.S. based, non-U.S. traded companies not covered under the four corners of the statute by asserting broad theories such as aiding and abetting or conspiracy — even when the foreign entity has not taken any action in the U.S. As a practical matter, that could be a hard case to prove at trial — but the government almost never has to.  The result of this trend has been to enshrine the government’s aggressive enforcement positions as quasi-precedent: The law means what the DOJ and SEC say it means, and defendants (especially publicly traded companies) seldom have a realistic opportunity to push back in court, given the financial and practical costs of fighting a contested enforcement action. Relatively recently, district courts have begun to weigh in on these theories, which is a positive development, but there still is a dearth of FCPA case law as compared to other areas of criminal law.  This absence of settled law makes it challenging for companies to decide how to handle thorny FCPA compliance issues. For example, companies routinely face a difficult choice in deciding whether to self-report potential violations to the government, as opposed to thoroughly investigating and remediating the issues internally. While regulators insist that they will give “meaningful credit” to companies that self-report, the tangible benefits of doing so are far from clear. The recent FCPA resource guide issued by the DOJ and SEC says that the agencies place a “high premium” on self-reporting, but does not give concrete guidance as to how the government weighs self-reporting in deciding whether to charge a case, as opposed to offering a deferred prosecution or nonprosecution agreement, or declining the case outright. While the resource guide is a start, companies and their counsel would benefit from more specific guidance when they are weighing the potential, but uncertain, benefits of disclosure against the cost and distraction that can result from voluntarily handing the government a case that otherwise might not have come to its attention.”

Gilliam’s spot-on comments would make for good conversation with his firm’s new Vice-Chair, former Assistant Attorney General Lanny Breuer.

In a recent Q&A on Law360, Mary Spearing (Baker Botts) stated as follows.

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

A: It would be good for the practice if there was more litigation surrounding the scope and breadth of the statutes as applied and the government were put to the test. Currently, so much is being defined in settlements reached with the government. More frequent trials would render more judicial oversight of the government’s readings of the scope of the statutes’ reach.”

*****

A good weekend to all.

Friday Roundup

Friday, March 1st, 2013

Hits and misses, does it really need to cost this much, the Wal-Mart effect, survey says, Senate hearing quotable, while they’re at it, checking in on Hollywood and Goldman too, spot on, and some refreshing words.  It’s all here in the Friday roundup.

Hits and Misses

I read pretty much everything churned out by FCPA Inc., including the flood of recent client alerts concerning the Straub and Steffen decisions.  (See here and here for previous posts summarizing the decisions).  Many of these alerts are good and informative (for instance, see here from Debevoise & Plimpton).  However, some of these alerts are just plain wrong.

The headline of one alert was “District Court Decision Limits the Extraterritorial Reach of the FCPA.”  The headline of another alert was “Court Sets Limits on Extraterritorial FCPA Reach; Dismisses Case Against Foreign Siemens Executive.”

Neither the Straub nor Steffen decisions concerned extraterritorial application of the FCPA.  In fact, there is no extraterritorial reach of the FCPA as to foreign actors.  Yes, the FCPA was amended in 1998 to provide for alternative “nationality” jurisdiction (i.e. extraterritorial jurisdiction) over U.S. persons (both legal and natural), however, 78dd-1(g) and 78dd-2(i) are strictly limited to U.S. persons.

Rather, the Straub decision concerned the scope of territorial jurisdiction under 78dd-1(a), specifically the meaning of “use of the mails or any means or instrumentality of interstate commerce …”.

The Steffen decision did not even reach this issue as the judge found the initial threshold issue of personal jurisdiction lacking.

Wal-Mart’s FCPA Scrutiny Expenses Mount

During the media feeding frenzy after the New York Times April 2012 Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV.  At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.

Spitzer of course was right.

Wal-Mart recently stated (here) that it has incurred “$157 million of professional fees and expenses related to the ongoing” FCPA matter during its last fiscal year and that it expect to incur an additional ”$40 to $45 million for the first quarter of fiscal 2014.”  During Wal-Mart’s recent earnings conference call, a company executive stated as follows.  “On FCPA, we continue  to work closely with anticorruption compliance experts to review and to assess  our programs and help us implement concrete steps for each particular market. In  the various markets, these experts have spent tens of thousands of hours on  anti-corruption support and training. We remain committed to follow all laws and  regulations in the markets where we operate.”

The $157 million Wal-Mart spent in the last FY equates to approximately $604,000 in professional fees and expenses per working day.

I observed in this March 2011 articles 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.”

While minor compared to Wal-Mart’s FCPA professional fees and expenses, Beam Inc. recently disclosed here that in 2012 the company spent approximately $4.2 million for “legal, forensic accounting, and other fees related to our internal investigation into Foreign Corrupt Practices Act compliance in our India operations.”

Wal-Mart Effect

Switching gears, but sticking with Wal-Mart related issues, this May 2012 post highlighted a potential “Wal-Mart effect.”  In short, the point was that Wal-Mart is clearly not the only company subject to the FCPA that needs licenses, permits and the like when doing business in Mexico.  I predicted that Wal-Mart’s potential FCPA exposure would cause sleepless nights for many company executives doing business in Mexico and the general region.  The post then discussed statements made during a Kimco Realty Corporation earnings call in May 2012 concerning its properties in Mexico.

Earlier this week, Kimco Realty stated in an SEC filing as follows.

“On January 28, 2013, the Company received a subpoena from the Enforcement Division of the SEC in connection with an investigation, In the Matter of Wal-Mart Stores, Inc. (FW-3678), that the SEC Staff is currently conducting with respect to possible violations of the Foreign Corrupt Practices Act. The Company is responding to the subpoena and intends to cooperate fully with the SEC in this matter. The Company has also been notified that the U.S. Department of Justice (“DOJ”) is conducting a parallel investigation, and the Company expects that it will cooperate with the DOJ investigation. At this point, we are unable to predict the duration, scope or result of the SEC or DOJ investigation.”

Survey Says

The annual Litigation Trends and Survey report by Fulbright & Jaworski is always a good read.  This year’s report (see here to download) surveyed 392 “senior corporate counsel” (275 in the U.S., 100 in the U.K. and 17 in other jurisdictions) on a wide-range of litigation and related matters.  The following were FCPA or related survey results.

“Companies that have retained outside counsel to assist with a corruption or bribery investigation in the past 12 months (including, but not limited to, FCPA in U.S. and equivalent in U.K.”

  • 9% of U.S. respondents answered “yes”; 18% of U.K. respondents answered “yes.”  As noted, “U.S. figures [2010-2012] have remained relatively stable.”

“Companies that have engaged in due diligence for bribery or corruption (including FCPA matters) relating to a merger, acquisition or other business transactions with a foreign country in the past 12 months.”

  • 18% of U.S. respondents answered “yes”; 26% of U.K. respondents answered “yes.”  As noted, “more companies this year have engaged outside counsel in due diligence for corruption or bribery investigations due to business transactions with entities based in a foreign country.”

As to the due diligence figures, in the abstract these figures do not mean much, unless one knows how many responding companies actually engaged in foreign acquisitions or other business combinations.

The last survey result in the report perhaps speaks best to the over-hyped nature of the U.K. Bribery Act.

“Has your company changed the way it operates due to the emergence of anti-bribery legislation outside the U.S., such as U.K. Bribery Act 2010?”

  • 78% of U.S. respondents answered “no” and 63% of U.K. respondents answered “no.”

Senate Hearing Quotable

Senator Elizabeth Warren (D-MA) had some quotable moments (here) during a recent Senate Banking hearing.  The hearing concerned financial regulation, not the FCPA.  Nevertheless, some of the issues have some overlap to FCPA enforcement - including how settlement policies in regulatory enforcement actions create conditions in which there is “not much incentive to follow the law” and how “too big to fail” perhaps means “too big for trial.”

Disclosure Issues

This recent Wall Street Journal CFO Journal post notes as follows.

“Securities and Exchange Commissioner Troy Paredes called for a complete review of the information companies disclose to investors, amid concerns that investors suffer from “disclosure overload” that could hamper their ability to gauge the importance of the data.  “What we need is a top-to-bottom review of our disclosure regime,” Mr. Paredes said at the Practising Law Institute’s annual “SEC Speaks” conference in Washington, D.C. on Friday.”

While they’re at it, the SEC should take a look at its absurd position that all payments in violation of the FCPA, no matter how small the payment and no matter how large the company, are “qualitatively material.”  For instance, as noted in this previous post concerning comments made by enforcement officials at a conference I chaired, an SEC official suggested that the concept of materiality itself has two “sub-concepts”: (i) quantitative materiality (something that impacts a company’s financial statements) and (ii) qualitative materiality.  While conceding that very few improper payments are “quantitatively material” and while recognizing that “qualitative materiality” is a “complicated gray area,” the SEC officials nevertheless said that all bribes can be considered qualitatively material because they may “automatically trigger a books and records violation.”  For formal SEC guidance on this issue, see here.

Checking In

Hollywood Industry Sweep

From the New York Times regarding the on-going scrutiny of Hollywood movie studios in China.

“Last March, word reached several studios of a confidential inquiry by the Securities and Exchange Commissionand the Justice Department into possible violations of the Foreign Corrupt Practices Act by people or companies involved in the China film trade. Since then, executives and their advisers have been waiting for some public sign of the scope or focus of the government’s interest.  So far, there has been none. But official silence has not kept the investigation from casting a chill over dealings between Hollywood and China.”

Goldman

From the Wall Street Journal regarding the on-going scrutiny of Goldman’s dealings with Libya’s sovereign wealth fund.

“Libya’s sovereign-wealth fund said it is cooperating with the U.S. Securities and Exchange Commission in its ongoing investigation into Goldman Sachs Group Inc. over the securities firm’s dealings with the fund when Col. Moammar Gadhafi was in power.  [...]  People close to the Libyan investment fund said officials have authorized some former fund executives to give testimony to the SEC. The officials also agreed to provide documents and other data to U.S. regulators about the fund’s ties to Goldman, these people said.”

Spot On

Two recent Q&A’s on Law360 caught my eye.  The question was “what is an important issue or case relevant to your practice area and why.”

Neil Eggleston (Kirkland & Ellis) stated as follows.

“We are beginning to see the development of case law in the FCPA area, which I believe is good for the process. Most of these cases have been settled. When that occurs, defendants have little incentive to refuse to agree to novel Department of Justice theories of prosecution or jurisdiction, so long as the penalty is acceptable. The department then cites its prior settlement as precedent when settling later ones. But no court approved the earlier settlement, and the prior settlement should have no precedential value in favor of the DOJ in later settlements. As the DOJ increases its prosecution of individuals, we will see many more trials, which will give rise to courts, not the DOJ, interpreting the statute.”

For more on these issues, see my article “The Facade of FCPA Enforcement” and this previous guest post on ”prosecutorial common law.”

Richard Marmaro (Skadden) answered the same question as follows.

“An issue of importance in the white collar area is the issue of prosecutorial misconduct, and appropriate remedies for prosecutors who intentionally conceal evidence, intimidate witnesses, or otherwise compromise or impact a defendant’s right to a fair trial. I have seen firsthand in several of my cases shocking misconduct, which has gone undisciplined by the U.S. Department of Justice. I have been fortunate enough to expose this misconduct, and have had cases dismissed as a result. Indeed, over the last decade, there have been several dismissals nationwide at trial or reversals on appeal based on willful misconduct by government lawyers. Despite these judicial findings, however, the Justice Department’s record of disciplining misbehaving prosecutors is shockingly inadequate. I don’t know of any prosecutor that has been terminated based on a judicial finding of intentional misconduct. In addition, I believe that only two prosecutors have received any discipline at all (both in the Stevens case). In my view, the failure to sanction prosecutors who have been found by judges to have committed misconduct sends the wrong signal to defendants, the public and the vast majority of prosecutors who do their jobs honestly every day.”

For more, see this previous post titled ”Should There Be A Difference?”

Refreshing Words

Every now and then it is refreshing to read some common sense words about FCPA compliance and risk assessment.  Such as this recent post from the Trace blog.

“Remember, perfection is neither possible nor necessary.  When devising a compliance plan, it’s important to remind oneself of the big picture.  A company need not break the bank to have a compliance program that follows accepted best practices.  As discussed below, there are various ways that good compliance can be affordable.  And companies are not responsible for developing full-proof compliance programs; they only need to develop programs proportionate to the risk they face, with the understanding that no program will completely eliminate all risk from the equation.  Unlike in other areas of business, when it comes to compliance, being in the middle of the pack is okay.”

*****

A good weekend to all.