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Judge Rejects A “Minimalist Conception” Of The Courts

Thursday, May 2nd, 2013

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

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

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

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

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

Judge Marrero stated, in pertinent part, as follows.

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

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

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

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

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

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

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

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

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

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

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

Friday Roundup

Friday, March 22nd, 2013

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

An Endorsement

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

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

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

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

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

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

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

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

It’s An FCPA World

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

Microsoft

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

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

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

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

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

News Corp.

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

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

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

Optimer Pharmaceuticals

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

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

Sig Sauer

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

Spot-On

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

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

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

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

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

[...]

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

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

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

Reading Stack

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

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

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

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

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

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

Events of Interest

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

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

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

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

Puzzled By Straub And Steffen

Wednesday, March 13th, 2013

Prior posts here and here summarized the recent judicial decisions in SEC v. Straub and SEC v. Steffen.

Today’s post is from Russ Ryan (Partner, King & Spalding). Prior to joining King & Spalding, Ryan spent ten years in the SEC’s Division of Enforcement, including his last three years as Assistant Director of the Division. Ryan, along with his colleagues at King & Spalding (Gary Grindler – former DOJ Acting Deputy Attorney General - and Ehren Halse-Stumberg), recently published this client alert on the cases. Ryan contributes this guest post admitting to some confusion regarding the common thread between Straub and Steffen on the issue of personal jurisdiction.

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Am I the only one puzzled that the courts in both Straub and Steffen considered largely dispositive whether or not the respective defendants participated in the deception of U.S. shareholders by signing false accounting certifications or falsifying financial statements?

The irony of the courts’ focus on misleading financial statements is that in neither case – nor in most other Foreign Corrupt Practices Act cases, for that matter – did the SEC even allege that the relevant company’s financial statements were materially misstated. Likewise, nobody was charged with securities fraud under Securities Exchange Act Section 10(b) and Rule 10b-5, presumably because none of the bribes or falsified records were material to the companies involved, which is typical in an FCPA case. Indeed, neither Magyar nor Siemens was charged even with violating the periodic reporting requirements of Exchange Act section 13(a) and the rules thereunder for Form 10-K and 10-Q filings, which don’t require proof of scienter, but do require proof of materiality.

In short, in neither case did the SEC ever allege that financial statements were materially misstated, much less that U.S. shareholders were misled by them. Of course, mere acknowledgment of this point invites the question of to what extent the fight against foreign bribery has to do with the SEC’s core mission of protecting U.S. investors. Indeed, as Professor Koehler’s article “The Story of the Foreign Corrupt Practices Act” highlights, the SEC did not want any role in enforcing what would become the FCPA’s anti-bribery provisions.

Let’s face it: Most foreign bribery by employees of U.S. issuers and domestic concerns, although perhaps reprehensible, does not materially mislead or harm the shareholders of these companies, nor is it intended to do so. To the contrary, even if misguided and short-sighted, most foreign bribery is intended by the bribing employees to enrich their companies, and by extension their shareholders, by boosting real sales and increasing actual revenue. The primary victims are the company’s competitors and the foreign agency or department whose official was corrupted by the company’s bribe – not shareholders.

It’s true, of course, that if and when a company is caught engaging in bribery, the resulting publicity, investigations, and penalties can hurt the company and its shareholders. But this harm is no different from that which flows from the exposure of any kind of corporate criminal misconduct, little of which falls within the SEC’s jurisdiction.

It’s also true that most foreign bribery involves some evasion of a company’s internal accounting controls and/or some degree of falsification of a company’s books and records, conduct well within the SEC’s core area of interest whenever an issuer is involved. But these transgressions typically occur entirely or substantially at a remote subsidiary of the issuer and, even in the aggregate, rarely come close to being material to the issuer itself.

The SEC’s theory is usually that the remote subsidiary’s books and records “roll up” into the issuer’s, and thus are part of the issuer’s own books and records, so they are fair game. As this prior FCPA Professor post highlighted, the SEC has also argued that payments that violate the FCPA are qualitatively material even if quantitatively immaterial. For present purposes we can stipulate to the reasonableness of these positions.

But it brings us back to the issue of personal jurisdiction over foreign employees of issuers who lack any meaningful connection with the United States other than working for a company that happens to have SEC-registered securities and SEC filing obligations. Whether the foreign employee participates in a bribe or a falsification of books and records outside the United States, it is hard to see how that conduct could ever be viewed as a deliberate effort to mislead U.S. shareholders, much less suffice to subject the employee to personal jurisdiction in a law enforcement case being prosecuted in a U.S. court. And why courts would consider this the lynchpin of their personal jurisdiction analysis is likewise far from clear.

Gabelli’s Broader Implications

Tuesday, March 5th, 2013

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Professor Koehler has already ably analyzed (see here) the Supreme Court’s recent statute of limitations decision against the SEC in Gabelli. The Court’s opinion obviously was limited to the precise statute of limitations question before it, but I view it – perhaps with a generous helping of wishful thinking – as an encouraging sign that the justices may be ready, willing, and able to take on other troubling issues that arise as federal law enforcement agencies continue to blur the lines between traditional criminal prosecution and increasingly punitive “civil” prosecution.

SEC enforcement is a classic example of such civil prosecution. And, in a nod to the primary focus of this website, SEC enforcement of FCPA violations comes perhaps closest to the bull’s eye, because in nearly all cases the SEC works side-by-side with criminal prosecutors in investigating and announcing its own civil cases.

So why is Gabelli so encouraging in this regard? For starters, the Court’s unanimous opinion explicitly rejected the notion that the SEC should be treated like a private plaintiff when it sues people in its law enforcement capacity. To the contrary, the opinion correctly notes that when the SEC accuses private businesses and citizens of breaking the law, and seeks government-imposed punishment for those violations, the SEC is “a different kind of plaintiff” seeking “a different kind of relief.”

Specifically, the SEC’s role is much closer to that of a traditional criminal prosecutor than that of an injured shareholder seeking compensation for investment losses. At one point, in fact, the Court explicitly characterized the SEC’s role in Gabelli as “a prosecutor seeking penalties.”

This recognition – which was long overdue – logically invites much broader questions than simply the starting gun for the SEC’s statute of limitations. If the SEC’s enforcement role is more like that of a criminal prosecutor than a private plaintiff, why shouldn’t the SEC be held to some of the same procedural and evidentiary burdens of a prosecutor rather than benefitting from the more relaxed standards accorded to private plaintiffs?

For example, why should the SEC be able to prosecute and punish private citizens under the relatively forgiving “preponderance of evidence” burden of proof rather than “guilt beyond reasonable doubt” – or at least “clear and convincing evidence”? As Justice Scalia pointed out in his questioning of the government’s lawyer during oral argument in Gabelli, “You just call it a civil penalty and you don’t have to prove it beyond a reasonable doubt.”

Why too should the SEC be entitled to infer guilt from a defendant’s exercise of his or her constitutional right to remain silent, or to hammer that adverse inference home before the judge and jury deciding the case? And why should the SEC be entitled to seek additional law enforcement penalties even after the defendant has already been punished in a parallel federal criminal case involving the same offense? Finally, why shouldn’t an accused securities law violator facing a government law enforcement prosecution – even if nominally civil – have an absolute right to the assistance of competent counsel, paid for by the government if the defendant can’t afford it?

The Supreme Court didn’t have to address these questions in Gabelli, and for the most part lower courts have generally sided with the SEC whenever such questions have arisen. But I’m not sure the SEC will have compelling answers to these questions if they should ever reach the Supreme Court. And given the Supreme Court’s decisive rejection of the SEC’s position in Gabelli – unanimously, less than two months after oral argument, and requiring only a 11-page opinion – those answers may not come easy for the SEC.

Friday Roundup

Friday, February 1st, 2013

The SEC files an amended complaint, Judge Leon strikes again, a provocative press release, a focus on lobbying and for the reading stack. It’s all here in the Friday roundup.

SEC Files Amended Complaint in Jackson / Ruehlen Matter

As highlighted in this prior post, this past December Judge Keith Ellison (S.D. Tex.) issued a lengthy 61 page decision (here) in SEC v. Mark Jackson and James Ruehlen. In short, Judge Ellison granted Defendants’ motion to dismiss the SEC’s claims that seek monetary damages while denying the motion to dismiss as to claims seeking injunctive relief. Even though Judge Ellison granted the motion as to SEC monetary damage claims, the dismissal was without prejudice meaning that the SEC was allowed to file an amended complaint. As explained in the prior post, Judge Ellison’s decision was based on statute of limitations grounds (specifically that the SEC failed to plead any facts to support an inference that it acted diligently in bringing the complaint) as well as the SEC’s failure to adequately plead discretionary functions relevant to the FCPA’s facilitation payments exception.

Last week, the SEC filed its amended complaint (here). The most noticeable difference in the amended complaint, based on my brief review of the 58 page document, appears to be several allegations regarding Nigerian law, including the Customs & Excise Management Act.

Judge Leon Strikes Again

This prior post generally discussed Judge Richard Leon’s rejection of the SEC v. IBM FCPA settlement, a case that still lingers on the docket.

As noted in this Main Justice story and this Wall Street Journal story, Judge Leon has struck again. According to the reports, yesterday Judge Leon conducted a scheduled hearing in SEC – Tyco FCPA case in chambers, much to the dismay of media assembled in open court.

As noted in this prior post, in September 2012, the DOJ and SEC announced an FCPA enforcement against Tyco International Ltd. and a subsidiary company. Total fines and penalties in the enforcement action were approximately $26.8 million (approximately $13.7 million in the DOJ enforcement action and approximately $13.1 million in the SEC enforcement action). As noted in this SEC release, Tyco consented to a final judgment that orders the company to pay approximately $10.5 million in disgorgement and approximately $2.6 million in prejudgment interest. Tyco also agreed to be permanently enjoined from violating the FCPA.

Although both the IBM and Tyco enforcement actions involve the SEC’s neither admit nor deny settlement language, this would not seem to be the key thread between these two enforcement actions that is drawing the ire of Judge Leon. Rather as explained in this post summarizing the IBM enforcement action and this post highlighting various notable features of the Tyco action, both companies are repeat FCPA violators. In resolving the “original” FCPA enforcement actions – IBM in 2000 and Tyco in 2006 – both companies agreed to permanent injunctions prohibiting future FCPA violations.

This prior post titled “Meaningless Settlement Language” detailed Judge Jed Rakoff’s discussion of so-called ”obey the law” injunctions in SEC v. Citigroup and this prior guest post discussed an Eleventh Circuit decision last year vacating a SEC “obey the law” injunction.

A Provocative Press Release

The law firm Bienert, Miller & Katzman (“BMK”) represented Paul Cosgrove (a former executive of Control Components Inc.) in the so-called Carson enforcement actions. The Carson action involved a notable “foreign official” challenge and as highlighted in previous posts here, here, and here, after Judge Selna issued a pro-defendant jury instruction, the DOJ soon thereafter offered the remaining defendants (Stuart Carson, Hong Carson, David Edmonds, and Cosgrove) plea agreements which the defendants accepted. As to those plea agreements, I ended each post by saying – the conclusions are yours to reach. In Fall 2012, the defendants were sentenced as follows: S. Carson (four months in prison), H. Carson (three years probation), Edmonds (four months in prison) and Cosgrove (15 months of home detention). See this prior post regarding Carson sentencing issues.

In a January 17th press release (here), BMK stated as follows.

“BMK and counsel for three other defendants … conducted a worldwide investigation and developed evidence suggesting the government’s evidence was incomplete, the court documents indicate. Ultimately, most companies bought CCI valves because they were the best in the world (not because of bribes); most of the supposed “public officials” denied receiving any bribes; and, in most cases, the alleged improper payments were never actually made, according to court records.

Further, through an aggressive litigation and motion strategy, counsel were able to obtain jury instructions that highlighted the government’s heavy burden of proof at trial. For example, the trial court agreed with defense counsel that the government was obligated to prove defendants’ knew they were dealing with “foreign officials,” something that would have been extremely difficult for the government to prove. The supposed bribery recipients worked for companies that appeared to operate like private companies in the United States, making it very unlikely that the defendants realized they were dealing with “government officials.”

BMK and other defense counsel raised several other issues that brought the government’s ability to obtain a conviction, or defend an appeal, into serious doubt. These motions called into question whether the alleged bribe recipients were even “public officials” as intended by the FCPA; whether the Travel Act even applied to the case; and, whether defendants were entitled to millions of pages of documents that had been withheld from them by CCI, their former employer. Each of these issues likely would have been decided for the first time on an appeal in this case.”

[Full disclosure - I was an engaged expert in the Carson cases, filed a "foreign official" declaration in connection with the motion to dismiss, and was disclosed as a testifying expert for the trial]

Lobbying

In my double-standard series (here), I have highlighted various aspects of lobbying here in the U.S. The beginning of the recent opinion in U.S. v. Ring (D.C. Circuit) is an interesting read. In pertinent part, it states as follows (internal citations omitted).

“Lobbying has been integral to the American political system since its very inception. […] As some have put it more cynically, lobbyists have besieged the U.S. government for as long as it has had lobbies.” […] By 2008, the year Ring was indicted, corporations, unions, and other organizations employed more than 14,000 registered Washington lobbyists and spent more than $3 billion lobbying Congress and federal agencies. […]

The interaction between lobbyists and public officials produces important benefits for our representative form of government. Lobbyists serve as a line of communication between citizens and their representatives, safeguard minority interests, and help ensure that elected officials have the information necessary to evaluate proposed legislation. Indeed, Senator Robert Byrd once suggested that Congress “could not adequately consider [its] workload without them.” […]

In order to more effectively communicate their clients’ policy goals, lobbyists often seek to cultivate personal relationships with public officials. This involves not only making campaign contributions, but sometimes also hosting events or providing gifts of value such as drinks, meals, and tickets to sporting events and concerts. Such practices have a long and storied history of use—and misuse. During the very First Congress, Pennsylvania Senator William Maclay complained that “New York merchants employed ‘treats, dinners, attentions’ to delay passage of a tariff bill.” […] Sixty years later, lobbyists working to pass a bill that would benefit munitions magnate Samuel Colt “stage[d] lavish entertainments for wavering senators.” […] Then, in the 1870s, congressmen came to rely on railroad lobbyists for free travel. [...]. Indeed, one railroad tycoon complained that he was “averag[ing] six letters per day from Senators and Members of Congress asking for passes over the road.”

Reading Stack

Some dandy articles/essays to pass along regarding the FCPA books and records provisions, victim issues and criminal procedure.

FCPA Books and Records Provisions

Michael Schachter (Willkie Farr & Gallagher and a former Assistant United States Attorney in the Southern District of New York, where he focused on criminal prosecution of securities fraud and was a member of the Securities and Commodities Fraud Task Force) recently authored an article concerning the FCPA’s books and records provisions. Titled “Defending an FCPA Books and Records Violation” and published in the New York Law Journal, the article begins as follows.

“In recent years, the books and records provisions of the [FCPA] have taken on new life, as both the [DOJ and SEC] have announced their intention to bring more charges, especially against individuals, for violation of this section of the FCPA. A review of recent enforcement actions reveals that the Justice Department and the SEC consider the books and records requirement violated whenever corrupt payments are made to a foreign official and recorded in a corporation’s books as anything other than a ‘bribe,’ including, but not limited to, such things as commissions, social payments, or after sales service fees. This article proposes that the books and records provision is, in fact, narrower than the Justice Department and the SEC interpretations suggest, and argues that both agencies may be using the provision to punish behavior falling outside the FCPA’s reach.”

Spot on. See prior posts here and here. See here for a word cloud of the FCPA’s books and records and internal control provisions.

Corporate Employer’s As Victims

The title of Professor Peter Henning’s recent White Collar Crime Watch post in the New York Times DealBook was “How Can Companies Sue Defendants in Insider Trading Cases?” The post concerned the Mandatory Victims Restitution Act and Professor Henning writes that it ”has been interpreted to allow companies that incur costs in cooperating with the government to seek repayment of their expenses from defendants” and the “statute requires a court to order the reimbursement to victims of ‘other expenses incurred during participation in the investigation or prosecution of the offense.’”

The parallels to a company incurring expenses in connection with FCPA investigations based on employee conduct is obvious.

Yet, Professor Henning writes as follows.

“[T]he crucial word in the Mandatory Victims Restitution Act is “incurred,” and there isn’t a consensus among federal courts over what expenses are covered. Companies want it to include all costs related to any part of the case, including dealing with the S.E.C. even though it can only pursue a civil enforcement case. Defendants take a much narrower view, arguing that mandatory restitution covers only expenses arising as direct result of the criminal prosecution by the Justice Department.

Ham Sandwich Nation

Glenn Reynolds (University of Tennessee College of Law) recently published an essay titled “Ham Sandwich Nation: Due Process When Everything is a Crime” (see here to download). The essay does not mention the FCPA, yet it is very much applicable to the FCPA. In just the past year, approximately 25 individuals criminally indicted by the DOJ have put the DOJ to its burden of proof and ultimately prevailed. Ham Sandwich Nation would also seem applicable given the extensive use of NPAs and DPAs in the FCPA context. The thesis of the essay is spot on. Reynolds write as follows.

“Though people suspected of a crime have extensive due process rights in dealing with the police, and people charged with a crime have even more extensive due process rights in courts, the actual decision whether or not to charge a person with a crime is almost completely unconstrained. Yet, because of overcharging and plea bargains, that decision is probably the single most important event in the chain of criminal procedure.”

Year In Review

The Year in Review version of Debevoise & Plimpton’s always informative and comprehensive FCPA Update is here. Among the many topics discussed in the FCPA Update is the notion that many FCPA enforcement actions are based on very old conduct and the following observation. “Targets of enforcement actions also run the risk that regulators – whether consciously or not – apply current expectations of appropriate compliance measures and effective internal controls mechanisms when evaluating the adequacy of procedures that existed at times when less rigorous standards may have commonly been considered acceptable.” For my similar previous observation, see this prior post.

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A good weekend to all.