Archive for the ‘SEC’ Category

Chamber Of Commerce Recommends Changes To SEC Enforcement Practices

Thursday, July 16th, 2015

ChamberYesterday, the U.S. Chamber of Commerce Center for Capital Markets Competitiveness released this report titled “Examining U.S. Securities and Exchange Commission Enforcement: Recommendations on Current Processes and Practices.”

Based on a yearlong effort that included surveys and interviews of a diverse group of in-house counsels, securities lawyers, and former SEC staff, the report “looks at the enforcement practices of the Securities and Exchange Commission (SEC) and provides recommendations on how to improve the process for all participants.” (See here for the Chamber press release).

Other than a few survey responses, there is nothing in the report specific to the Foreign Corrupt Practices Act.  However, there is much in the report that is relevant to FCPA enforcement.

For instance, as highlighted in this 2014 FCPA year in review article, of the seven SEC corporate FCPA enforcement actions in 2014, six (86%) were resolved through SEC administrative orders.

Regarding the problematic surge in SEC administrative actions, the Chamber report states that “the fundamental problem in the use of an administrative forum to break new ground is the inherent risk of an unchecked expansion of existing legal policy that is not adequately overseen by a truly impartial third-party judicial forum.”

Against this backdrop, the report makes a number of recommendations relevant to SEC administrative actions that, at their core, propose “that the Commission adopt a policy to refrain from using its administrative forum as an avenue to adopt new interpretations of the federal securities laws or to apply existing interpretations to new or unique factual circumstances.”

Another recommendation in the report that caught my eye was the following: “The Commission should take a leadership role among regulatory bodies at the federal, state, and international levels to reduce or eliminate duplicative and overlapping investigations and duplicative enforcement actions for the same conduct.”

As stated in the report:

“When companies respond to allegations of improper activities, management’s focus is necessarily diverted from the day-to-day running of its business. That is an ineluctable attribute of doing business in a regulated society. But, there should be some understanding on government’s part that, in the current era, firms are frequently subject to multiple domestic and foreign regulators. Responding to multiple regulators with respect to the same conduct or transaction is not, and should not be allowed to become, a regular attribute of doing business. It is counterproductive—and damaging to shareholders—to subject firms and individuals serially to multiple SEC inquiries or multiple regulators and self regulators for the same alleged misconduct.”

A good place to eliminate duplicative regulation is to have the SEC stop enforcing the FCPA’s anti-bribery provisions.

As I’ve previously stated, should this reform occur, it could be called “granting the wish” because as highlighted in the article “The Story of the Foreign Corrupt Practices Act,” the SEC never wanted any role in enforcing the FCPA’s anti-bribery provisions. However, congressional leaders at the time of the FCPA’s enactment had a high level of distrust with the Justice Department and insisted, against the SEC’s objections both when the FCPA was enacted in 1977 and when it was first amended in 1988, that it play a role in enforcing the FCPA’s anti-bribery provisions.

For additional reading on divesting the SEC of its authority to enforce the FCPA’s anti-bribery provisions, see here from former DOJ FCPA enforcement attorney Philip Urofsky and here from Professor Barbara Black.




Tuesday, June 9th, 2015

PotpourriA mixture of various things worthy of highlighting.


Recently, former high-ranking SEC officials William McLucas and Matthew Martens took to the pages of the Wall Street Journal with this piece titled “How to Rein in the SEC.”

The authors stated as follows concerning the SEC’s recent preference of resolving enforcement actions internally through its own administrative process.

“The timing of the agency’s decision in late 2013 to move toward more in-house proceedings couldn’t have been worse. In the months surrounding the SEC’s shift, it suffered several high-profile defeats in federal court. In October 2013, the SEC lost the trial on its insider-trading charges against Mark Cuban, the owner of the Dallas Mavericks NBA franchise. A few months later, the SEC lost an accounting-fraud trial against the chief financial officer of a publicly traded company in Kansas. A number of other SEC actions against supposed inside traders were dismissed by federal courts or rejected by juries. (Disclosure: The authors participated on various sides of some of these matters.)

It was against this backdrop that the SEC publicly vowed to bring more cases as administrative proceedings. The agency contends that it was simply making use of new tools provided by the Dodd-Frank law, which authorized the SEC to charge virtually any offense in an administrative forum and to impose extraordinarily harsh financial penalties without the benefit of a jury. But the Dodd-Frank power to move more cases in-house was conferred in 2010 and lay largely unused until the agency’s 2013 announcement of its new plans to make greater use of that authority.

One need not be a conspiracy theorist to wonder whether at least part of the SEC’s rationale was to avoid the federal courts. In government as in comedy, timing is everything. And here the SEC’s timing raises serious questions about the agency’s move toward the in-house forum.”

Three cheers for this observation.

In my 2014 article “A Foreign Corrupt Practices Act Narrative,” I likewise observed as follows.

 ”The SEC’s response to [recent] judicial scrutiny [of SEC enforcement theories] has been, as strange as it may sound, to bypass the judicial system altogether when resolving many of its enforcement actions including in the FCPA context.”

As reported today by the Wall Street Journal:

“A federal judge ruled Monday that the Securities and Exchange Commission’s use of an in-house judge to preside over an insider-trading case was “likely unconstitutional,” a potential blow to the agency’s controversial use of its internal tribunal. The decision possibly creates a serious headache for the SEC, which is increasingly using its five administrative-law judges to hear its cases, rather than sending them to federal court, legal experts said. Although the ruling was preliminary, and won’t necessarily be duplicated in other federal courts, it could have ramifications for other SEC cases and potentially other federal agencies.”


AlixPartners recently released this “Combating Corporate Corruption” survey. Among the results that caught my eye.

“As much as 64% of our respondents said they believe there are places in the world where it’s impossible to do business without encountering corruption. When asked to identify such places, 62% cited Russia; 53%, Africa; and 46%, China. Still, a number of companies opted to do business in high-risk regions; specifically, 66% said they have not avoided doing business in a region because of the risk of corruption. Although battling corruption remains a priority, our findings suggest that many companies see an uneven playing field.

Among survey participants who are with organizations that have dedicated compliance programs, such programs are tailored to a variety of legal requirements (figure 3). For example, 73% said the program specifically addresses the US Foreign Corrupt Practices Act; 55%, the UK Bribery Act; and 44%, the US Office of Foreign Assets Control.”


“We asked respondents to take stock of their most-successful anticorruption programs and to cite what they see as the top factors in reducing corruption risk in their organizations. The most-important practices they identified were proper anticorruption training for employees (44%), compliance policies that specifically address corruption (42%), and internal audits (usually done on an annual basis) (39%) (figure 4). Only 21% cited expanding the scope of their audits for foreign subsidiaries, and just 11% mentioned the increased use of incentives.”

I am all for creative marketing teasers, but the below statement from the survey report is not true. (See here).

“Anticorruption enforcement remained active in 2014, with a sharp rise in enforcement actions taken by both the US Department of Justice and the US Securities and Exchange Commission against corporate defendants.”


Comparing enforcement of the FCPA with enforcement of FCPA-like laws around the world is not a valid comparison for the reasons highlighted in this article “Ten Seldom Discussed FCPA Facts That You Need to Know.”

There are other limitations as well.  As noted in the most recent version of Trace International’s Global Enforcement Report:

“The TRACE Compendium and the GER 2014 cannot provide a precise and objective measurement of global anti-corruption enforcement. Instead, they are meant to provide general information on trends in international anti-corruption efforts on a broad scale.”

Despite the many limitations, the GER does as good of job as any tracking global enforcement of FCPA-like laws.

Moreover, given my own focus on FCPA enforcement statistics and concern of the various creative counting methods used by others (see here for example), I particularly like the Introduction of the GER in which Trace articulates a similar “core” approach that I use in keeping my enforcement statistics.  The GER states:

“When a company and its employees or representatives face multiple enforcement actions involving substantially the same conduct, only one enforcement action is counted in the GER 2014. If a company does not face an enforcement action but its employees or representatives do, the enforcement action is counted as one enforcement action.”

Another Week And More SEC Speeches

Wednesday, May 20th, 2015

Speaking8SEC enforcement officials sure do make a lot of speeches.

Last week, it was Andrew Ceresney (Director of the Division of Enforcement) who delivered speeches in Texas and New York.

In this speech, Ceresney focused on the SEC’s “cooperation program” (announced in 2010 see here for the prior post) and how the SEC uses “cooperation agreements and other cooperation tools.”

According to Ceresney:

“My bottom line is twofold:  first, the cooperation program has succeeded in making the Commission’s enforcement program more effective by obtaining significant results which protect investors and deter misconduct; and second, those who are willing and able to help us can thereby help themselves in significant ways.”

Ceresney continued as follows.

“In laying out the range of options for considering and rewarding self-reporting and cooperation, the Commission noted that such credit could range from the “extraordinary” step of declining an enforcement action, to narrowing charges, limiting sanctions, or including mitigating or similar language in charging documents.  The Commission has used each of these approaches in its cases over the years.

To take one example of how this plays out in practice, look at our recent announcement of settled Foreign Corrupt Practices Act (FCPA) charges against FLIR Systems Inc.  As the order in that case noted, the company self-reported, cooperated, and undertook significant remedial efforts.  The settlement required the company to pay around $7.5 million in disgorgement, plus prejudgment interest, but a penalty of only $1 million, whereas penalties in FCPA settlements often are set at an amount equal to the disgorgement amount.

Similarly, the Commission filed an FCPA action against Goodyear Tire & Rubber Company earlier this year. The order in that case notes the company’s prompt self-reporting, remedial acts, cooperation, and disciplinary actions against employees.  The settlement ordered disgorgement and prejudgment interest of over $16 million, but no penalty at all.  As you can see from those two examples, Seaboard continues to provide a framework under which entities can receive cooperation credit in settlements.”

Let’s pause for a moment to reflect on Ceresney’s suggestion that Goodyear uniquely benefited from receiving no civil penalty and FLIR Systems uniquely benefited because its civil penalty was “only $1 million” and his assertion that “penalties in FCPA settlements often are set at an amount equal to the disgorgement amount.”

For starters, between 2011 and 2014 the SEC resolved 36 corporate FCPA enforcement actions.  22 of the actions 61% did not involve any civil penalty in the settlement amount.  Of the 12 enforcement actions that involved disgorgement and a civil penalty amount (note Oracle and Ball Corp. involved only a civil penalty), in only the Allianz enforcement action did the civil penalty amount equal the disgorgement amount.  In every other situation (92%), the civil penalty amount did not equal (by a large margin) the disgorgement amount.

In short, Ceresney’s statement that “penalties in FCPA settlements often are set at an amount equal to the disgorgement amount” is simply false as evidenced in SEC FCPA enforcement actions between 2011-2014.

Ceresney next talked about self-reporting and cooperation and stated as follows.

“The discussion of whether and when to self-report is, I think, a bit more developed in the context of FCPA cases than in other types of cases.  As I have previously said, companies are gambling if they fail to self-report FCPA misconduct to us.  After all, given the success of the SEC’s whistleblower program, we may well hear about that conduct from another source.  But self-reporting is advisable not just in the FCPA context.  Firms need to be giving additional consideration to it in other contexts as well.  This includes self-reporting by registered firms of misconduct by associated persons, for example, and misconduct by issuer employees.  Where Enforcement staff uncovers such misconduct ourselves, a natural question for us to ask is why the firm didn’t tell us about it.  Was it because the firm didn’t know of the misconduct?  If so, what does that say about the firm’s supervisory systems, compliance program, and other controls?  On the other hand, if the firm did know about it, and the misconduct was significant, why didn’t the firm report it to us?  There will be significant consequences in that scenario from the failure to self-report.

As for the nature of cooperation, I think that the bar has been raised for what counts as good corporate citizenship in the last 15 years or so.  For example, internal investigations have now become common, a clear best practice for any company that discovers significant potential misconduct.  And sharing the results of those internal investigations with the government has become commonplace, as companies recognize the immense benefits that can accrue to them from doing so.  Some government officials have reemphasized recently the need for companies to share information on individual wrongdoers in order to receive credit for their cooperation.  I wholeheartedly agree, and this has long been a central tenet of cooperation with the SEC. When a company commits to cooperation and expects credit for that assistance, the Enforcement staff expects them to provide us with all relevant facts, including facts implicating senior officials and other individuals.  In short, when something goes wrong, we want to know who is responsible so that we can hold them accountable.  If a company helps us do that, they will benefit.”

Ceresney next spoke about the SEC’s use of NPAs and DPAs, part of the SEC’s cooperation program announced in 2010.

“Since the start of the cooperation program, the Commission has announced just five DPAs and five NPAs.  [Note: the SEC has used such agreements three times in the FCPA context:  Tenaris (DPA), Ralph Lauren (NPA) and PBSJ (DPA)]. While these types of agreements are a good option in some extraordinary cases, they have been a relatively limited part of our practice.  I think this is appropriate and should continue to be the case.

In contrast to the limited number of DPAs and NPAs, the Division of Enforcement has signed over 80 cooperation agreements over the last five years.  These cooperation agreements, and the benefits they have provided, are really at the heart of our cooperation program.

As I mentioned, cooperation agreements have long been a staple of criminal prosecutions.  The reason for this is simple:  to break open a case, you often need assistance from someone who participated in or knew of the misconduct.  These people can answer your questions, and they can lead you to ask the questions you hadn’t yet thought of.  They can also be strong witnesses in outlining the misconduct for a jury.  This is no less true in our civil cases than in criminal cases.  Given the complexity of so many cases in our docket, we have much to gain by enlisting those who can guide us during our investigation and who can then tell a fact finder what happened from an insider’s perspective or otherwise explain the contours of the misconduct with specificity.

Over the last five years, we have signed up cooperators in all manner of cases.”

Ceresney next turned to a question that he suspected was on the minds of many in the audience:

“[I]s cooperation worth it?  Does it provide significant enough benefits to make it worthwhile?  Particularly given some of the downsides, including the need to potentially testify against others, can it pay sufficient dividends to justify the sacrifice?  Of course, in the criminal realm, a reduction in sentence is a very significant benefit of cooperation and serves to incentivize cooperation.  Have we been able to offer benefits sufficient to incentivize cooperation on the civil side?

My answer to that is a simple yes.  Let me start by talking about the cooperation calculus for individuals.  Say that you represent someone who fits this profile:  they are caught up in an investigation where charges are likely, but there are others who are more culpable or are in a more senior role.  True, they can hunker down during the investigation and hope for the best.  But if they come forward and assist the investigative staff, they can be affirmatively helping themselves as well.  Our history over the last five years demonstrates that the benefits are real in terms of charging decisions, monetary relief, and bars.  Let me go through each of those categories of benefits.

First, charging decisions.  Usually if a defendant is at a certain level of seniority, has engaged in serious misconduct, and we have significant evidence, the staff is not going to be in a position to recommend against charges entirely.  But there are situations where an individual is on the bubble.  The person might be a somewhat peripheral or lower-level player, where charges are possible but where exercising prosecutorial discretion against bringing charges is also a valid option.  Or there may be situations where the evidence is less clear, and without cooperation we would have a hard time making a case against that individual or against others.  The staff may also consider whether the conduct is sufficient to justify an injunction or a cease-and-desist order – after all, if an individual’s conduct suggests they are not likely to break the law again, and if the individual accepts responsibility through cooperation, it weighs against that sort of relief.

The bottom line is that it is possible to convince the staff that forward-looking relief is not necessary based on your client’s conduct and risk profile, and this can happen when your client quickly and fully owns up to their conduct and tries to make it right by helping us in our investigation.  Or, if we believe a charge is necessary, in the right case we may reflect your client’s cooperation in making a recommendation about which violations to charge – for example, a cooperator might avoid scienter-based charges.

For obvious reasons, the Commission does not normally announce instances where, in the exercise of discretion, it determines that no charges are appropriate.  And unless that individual testifies, that exercise of discretion likely will not become public.  But I can tell you, based on an analysis of our cooperation agreements, that a significant percentage involved instances where the Division declined to recommend charges.


Second, a significant reduction in monetary relief is another potential benefit of cooperation.  In most cooperation cases, the Commission enters into bifurcated settlements.  This postpones the determination of any civil penalty until after the cooperation is complete, much like a deferred sentencing in the criminal realm.  What this means is that, if there is a trial or a hearing in which the cooperator takes the stand and testifies, that cooperation can be taken into account when setting any monetary penalty.  Again, the numbers bear out that cooperators receive significant benefits.  In cases where a cooperator has been charged and we have resolved the penalty question, two-thirds of the time the cooperator has paid no penalty at all.  For example, our bifurcated proceeding with our first testifying cooperator resulted in a termination with no civil penalty.



To be clear, this flexibility ordinarily does not extend to disgorgement, for reasons that I think should be obvious.  Where someone is in possession of what clearly are the proceeds of wrongdoing, the Commission typically seeks to disgorge it.  That said, in some cases there is flexibility as to how to calculate disgorgement, and the Enforcement staff might take a narrower view of what should be disgorged in recognition of cooperation.


Let me point out that the cooperation program also may have important implications not only for potential cooperators, but also for their attorneys.  The defense bar would benefit from heightened attention to the fact that our use of our cooperation tools has changed the calculus for individuals whose conduct is under investigation.  Among other things, counsel need to take seriously the challenges posed by representing multiple clients when one client is in a position to obtain significant benefits by cooperating.  This is especially true when one client’s cooperation might threaten another of a lawyer’s clients.  Additionally, counsel should keep in mind that, just as corporate cooperation credit is greatly enhanced by early self-reporting, the same is true with individuals.  The earlier that someone comes in to start a conversation about cooperation, the better it will be for the client, because early action allows us to achieve the efficiency, speed, and effectiveness that result in the highest amount of cooperation credit being given.  So, just as we have seen the bar raised in terms of corporate cooperation, I think we are seeing a similar evolution when it comes to individuals.”


In this speech, also last week, Ceresney talked about the SEC’s litigation program.  Among other things, he stated:

“Litigation and trials are among the most important work of the Commission’s Enforcement staff and we have dedicated the necessary resources to ensure that we have and will continue to have a strong record of success.


The cases that litigate are typically those where the evidence is less clear cut, the law is unsettled, the defendants have determined to spare no expense in attempting to clear their names, or, in many cases, all of the above.”

In the speech, Ceresney also elaborated on the factors the SEC recently released in determining whether to bring an enforcement action internally through its administrative process or in federal court.  (See here for the prior post).

SEC Potpourri

Monday, May 11th, 2015

SECLast week, the SEC released this document titled “Division of Enforcement Approach to Forum Selection in Contested Actions.”

In Foreign Corrupt Practices Act history, one can count the number of “contested” SEC FCPA enforcement actions on one hand, but the recent document is nevertheless an interesting read as it sets forth the SEC’s approach in determining whether an action proceeds as a civil action in federal court or an SEC administrative proceeding.

According to the document:

“There is no rigid formula dictating the choice of forum.  The Division considers a number of factors when evaluating the choice of forum and its recommendation depends on the specific facts and circumstances of the case.  Not all factors will apply in every case and, in any particular case, some factors may deserve more weight than others, or more weight than they might in another case.  Indeed, in some circumstances, a single factor may be sufficiently important to lead to a decision to recommend a particular forum. While the list of potentially relevant considerations set out below is not (and could not be) exhaustive, the Division may in its discretion consider any or all of the factors in assessing whether to recommend that a contested case be brought in the administrative forum or in federal district court.”

  • The document then sets forth the following factors;
  • The availability of the desired claims, legal theories, and forms of relief in each forum;
  • Whether any charged party is a registered entity or an individual associated with a registered entity;
  • The cost‐, resource‐, and time‐effectiveness of litigation in each forum;
  • Fair, consistent, and effective resolution of securities law issues and matters.

Under the last factors, the document states:

“If a contested matter is likely to raise unsettled and complex legal issues under the federal securities laws, or interpretation of the Commission’s rules, consideration should be given to whether, in light of the Commission’s expertise concerning those matters, obtaining a Commission decision on such issues, subject to appellate review in the federal courts, may facilitate development of the law.”

This statement is beyond concerning.

Unsettled and complex legal issues are deserving of an independent judiciary, not the SEC’s own administrative law judges. Contrary to the SEC’s assertion, the above preference does not facilitate the development of law, it hinders the development of law.


Speaking of SEC administrative actions, no surprise here – the SEC wins a very high percentage of its cases when brought before its own administrative law judges. According to this recent Wall Street Journal article:

“An analysis by The Wall Street Journal of hundreds of decisions shows how much of a home-court advantage the SEC enjoys when it sends cases to its own judges rather than federal courts. That is a practice the agency increasingly follows, the Journal has found.

The SEC won against 90% of defendants before its own judges in contested cases from October 2010 through March of this year, according to the Journal analysis. That was markedly higher than the 69% success the agency obtained against defendants in federal court over the same period, based on SEC data.”

As highlighted in prior posts (see here for instance), the predominate method by which the SEC has brought FCPA enforcement actions over the past few years have been through its own administrative process.  This is against the backdrop of the SEC never prevailing in an FCPA enforcement action when put to its ultimate burden of proof. (See here).


In this recent speech, SEC Chair Mary Jo White talks about the SEC’s whistleblower program:

“There have always been mixed feelings about whistleblowers and many companies tolerate, at best, their existence because the law requires it.  I would urge that, especially in the post-financial crisis era when regulators and right-minded companies are searching for new, more aggressive ways to improve corporate culture and compliance, it is past time to stop wringing our hands about whistleblowers.  They provide an invaluable public service, and they should be supported.  And, we at the SEC increasingly see ourselves as the whistleblower’s advocate.

It has been nearly four years since the SEC implemented its whistleblower program.  While still evolving and improving, we have enough experience now to take a hard look at how the program is working and what we have learned.  Overall, I am here to say that the program is a success – and we will work hard at the SEC to build on that success.

The volume of tips has been greater and of higher quality than expected when the program was first adopted.  We have seen enough to know that whistleblowers increase our efficiency and conserve our scarce resources.  Importantly, internal compliance programs at companies also remain vibrant and effective ways to detect and report wrongdoing.  But despite the success of our program, the decision to come forward, especially in the face of internal pressure, is not an easy one.

The ambivalence about whistleblowers can indeed sometimes manifest itself in an unlawful response by a corporate employer and we are very focused at the SEC on cracking down on such misconduct.  We want whistleblowers – and their employers – to know that employees are free to come forward without fear of reprisals.  In 2014, we brought our first retaliation case and, this month, our first case involving the use of a confidentiality agreement that can impede whistleblowers from communicating with us.  This latter case has generated some controversy, which I will address shortly.  But, first, let’s look a bit closer at the four-year track record of the program.”

A portion of White’s speech also focused on “supporting internal compliance” and she stated:

“Let me say a bit more about company compliance programs.  When the Commission was considering its whistleblower rules, concerns were raised about undermining companies’ internal compliance programs.  Some commenters urged that internal reporting be made a pre-condition to a whistleblower award.  That was not done, but the final whistleblower rules established a framework to incentivize employees to report internally first.  A whistleblower’s participation in internal compliance systems is thus a factor that will generally increase an award, whereas interference with those systems will surely decrease an award. And, a whistleblower who internally reports, and at the same time or within 120 days reports to the Commission, will receive credit for any information the company subsequently self-reports to the SEC.

All indications are that internal compliance functions are as strong as ever – if not stronger – and that insiders continue to report possible violations internally first.  Although there is no requirement under our rules that the whistleblower be a current or former employee, several of the individuals who have received awards were, in fact, company insiders.  Notably, of these, over 80% first raised their concerns internally to their supervisors or compliance personnel before reporting to the Commission.

Many in-house lawyers, compliance professionals, and law firms representing companies have told us that since the implementation of our program, companies have taken fresh looks at their internal compliance functions and made enhancements to further encourage their employees to view internal reporting as an effective means to address potential wrongdoing without fear of reprisal or retaliation.  That is a very good thing, and, so far, we believe that the whistleblower program has achieved the right balance between the need of companies to be given an opportunity to address possible violations of law and the SEC’s law enforcement interests.”

In conclusion, White stated:

“The bottom line is that is that responsible companies with strong compliance cultures and programs should not fear bona fide whistleblowers, but embrace them as a constructive part of the process to expose the wrongdoing that can harm a company and its reputation.  Gone are the days when corporate wrongdoing can be pushed into the dark corners of an organization.  Fraudsters rarely act alone, unobserved and, these days, the employee who sees or is asked to make the questionable accounting entry or to distribute the false offering materials may refuse to do it or just decide that they are better off telling the SEC.  Better yet, either there are no questionable accounting entries or false offering materials to be reported in the first place or companies themselves self-report the unlawful conduct to the SEC.”


If SEC enforcement is an area of interest, you will want to check out this recent article in Securities Regulation Journal about Stanley Sporkin.

Among Sporkin’s other notable accomplishments, he was the Director of Enforcement at the SEC in the mid-1970′s when the so-called foreign corporate payments problem arose and he championed what would become the FCPA’s books and records and internal controls provisions.

Many have called Sporkin the “father of the FCPA” – a label I have always found curious given that Sporkin and his enforcement division were opposed to the FCPA’s anti-bribery provisions and wanted no part in enforcing those provisions.

To learn more about this, see “The Story of the Foreign Corrupt Practices Act.”

Fittingly Foolish

Monday, April 6th, 2015

FoolishLast week – on April Fools’ Day – the SEC announced this administrative action against KBR Inc.

It was fitting because the action was foolish.

In the words of the SEC:

“The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, amended the Exchange Act by adding Section 21F, “Whistleblower Incentives and Protection.” The congressional purpose underlying these provisions was “to encourage whistleblowers to report possible violations of the securities laws by providing financial incentives, prohibiting employment-related retaliation, and providing various confidentiality guarantees.” [...]

To fulfill this congressional purpose, the Commission adopted Rule 21F-17, which provides in relevant part: (a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”

As to KBR, the SEC stated:

“As part of its compliance program, KBR regularly receives complaints and allegations from its employees of potential illegal or unethical conduct by KBR or its employees, including allegations of potential violations of the federal securities laws. KBR’s practice is to conduct internal investigations of these allegations. KBR investigators typically interview KBR employees (including the employees who originally lodged the complaint or allegation) as part of the internal investigations.

Prior to the promulgation of Rule 21F-17 and continuing into the time that Rule 21F-17 has been in effect, KBR has used a form confidentiality statement as part of these internal investigations. Although use of the form confidentiality statement is not required by KBR policy, the statement is included as an enclosure to the KBR Code of Business Conduct Investigation Procedures manual, and KBR investigators have had witnesses sign the statement at the start of an interview.

The form confidentiality statement that KBR has used before and since the SEC adopted Rule 21F-17 requires witnesses to agree to the following provisions: I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.”

And now for the foolish part.  The SEC specifically stated:

“Though the Commission is unaware of any instances in which (i) a KBR employee was in fact prevented from communicating directly with Commission Staff about potential securities law violations, or (ii) KBR took action to enforce the form confidentiality agreement or otherwise prevent such communications, the language found in the form confidentiality statement impedes such communications by prohibiting employees from discussing the substance of their interview without clearance from KBR’s law department under penalty of disciplinary action including termination of employment. This language undermines the purpose of Section 21F and Rule 21F-17(a), which is to “encourage[e] individuals to report to the Commission.”

Based on the above, the SEC found that KBR violated Rule 21F-17.

Without admitting or denying the SEC’s findings, KBR agreed to pay a civil monetary penalty of $130,000.

A far more prudent approach would have been for the SEC to issue a Section 21(a) Report of Investigation (see here).

The supreme irony of the SEC’s enforcement action?

While faulting KBR for its non-existent, theoretical muzzling of individuals, the SEC routinely muzzles corporate defendants in SEC enforcement actions.

For instance, the recent PBSJ deferred prosecution agreement with the SEC stated:

“Respondent agrees not to take any action or to make or permit any public statement through present or future attorneys, employees, agents, or other persons authorized to speak for it, except in legal proceedings in which the Commission is not a party in litigation or otherwise, denying, directly or indirectly, any aspect of this Agreement or creating the impression that the statements in [the Statement of Facts” are without factual basis. [...] Prior to issuing a press release concerning this Agreement, the Respondent agrees to have the text of the release approved by the staff of the Division.”

The Ralph Lauren non-prosecution agreement and the Tenaris deferred prosecution agreement contained the same muzzle clauses.