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A Focus On SEC FCPA Individual Actions

Wednesday, January 30th, 2013

Posts earlier this week (here and here) highlighted various facts and figures concerning DOJ FCPA individual prosecutions. This post focuses on SEC FCPA individual actions.

Like the DOJ, the SEC frequently speaks in lofty rhetoric concerning its focus on holding individuals accountable under the FCPA. For instance, in connection with the recent Garth Peterson enforcement action, Robert Khuzami (then Director of the SEC’s Division of Enforcement) stated (here) that the case “illustrates the SEC’s commitment to holding individuals accountable for FCPA violations.” Likewise, in connection with the 2011 SEC action against Paul Jennings, Cheryl Scarboro (then Chief of the SEC’s Foreign Corrupt Practices Act Unit) stated (here) that the SEC ”will vigorously hold accountable” individuals for FCPA violations.

Since 2005, the SEC has charged 49 individuals with FCPA civil offenses. The breakdown is as follows.

2005 – 1 individual
2006 – 8 individuals
2007 – 7 individuals
2008 – 5 individuals
2009 – 5 individuals
2010 – 7 individuals
2011 – 12 individuals
2012 - 4 individuals

Similar to the prior DOJ figures, most of the individuals charged – 33 (or 67%) were charged since 2008. Thus, on one level the SEC is correct when it states that individual prosecutions are a focus at least as measured against the historical average given that between 1978 and 2004 the SEC charged 32 individuals with FCPA civil offenses.

Yet on another level, a more meaningful level given that there was much less overall enforcement of the FCPA between 1978 and 2004, the SEC’s statements (like the prior DOJ statements about its focus on individuals) represent hollow rhetoric as demonstrated by the below figures.

Of the 33 individuals charged with civil FCPA offenses by the SEC since 2008:

7 individuals were in the Siemens case;
4 individuals were in the Willbros Group case;
4 individuals were in the Alliance One case;
3 individuals were in the Maygar Telekom case; and
3 individuals were in the Noble Corp. case.

In other words, 64% of the individuals charged by the SEC with FCPA civil offenses since 2008 have been in just five cases.

Considering that there has been 57 corporate SEC FCPA enforcement actions since 2008, this is a rather remarkable statistic. Of the 57 corporate SEC FCPA enforcement actions, 45 (or 79%) have not (at least yet) resulted in any SEC charges against company employees. This figure is thus higher than the 74% figure (here) highlighted earlier this week regarding the DOJ. This is notable given that the SEC, as a civil law enforcement agency, has a lower burden of proof in an enforcement action.

Once again, like with the DOJ figures, one can ask the “but nobody was charged” question.

Yet, like with the DOJ figures and as highlighted in yesterday’s post (here), there is an equally plausible reason why so few individuals have been charged in connection with many corporate SEC FCPA enforcement actions. The reason has to do with the quality and legitimacy of the corporate enforcement action in the first place.

With the SEC, the issue is not so much NPAs or DPAs (the SEC has used such a vehicle just once to resolve an FCPA enforcement action – Tenaris 2011), but rather the SEC’s neither admit nor deny settlement policy. For more on this policy and its impact of SEC enforcement actions, see pgs. 946-955 of my article “The Facade of FCPA Enforcement.” In the article, I discuss the affidavit of Professor Joseph Grundfest (Standford Law School and former SEC Commissioner) in SEC v. Bank of America and how SEC enforcement actions “typically omit mention of valid defenses and of countervailing facts or mitigating circumstances that, if proven at trial, could cause the Commission to lose it case.” In the article, I also discuss the SEC’s frank admission in the Bank of America case that a settled SEC enforcement action “does not necessarily reflect the triumph of one party’s position over the other.” Individuals in an SEC FCPA enforcement, even if only a civil action, and even if allowed to settle on similar neither admit nor deny terms, have their personal reputation at stake and are thus more likely than corporate entities to challenge the SEC and force it satisfy its burden of proof at trial as to all FCPA elements.

In other words, and like in the DOJ context, perhaps the more appropriate question is not “but nobody was charged,” but rather – do SEC neither admit nor deny FCPA settlements represent provable FCPA violations.

It is also interesting to analyze the 12 instances since 2008 where an SEC corporate FCPA enforcement action resulted in related charges against company employees. With the exception of Siemens, KBR/Halliburton and Magyar Telekom, the corporate SEC FCPA enforcement actions resulting in related charges against company employees occurred in what can only be described as relatively minor (at least from a settlement amount perspective) corporate enforcement actions. These actions are: Faro Technologies, Willbros Group, Nature’s Sunshine Products, United Industrial Corp., Pride Int’l., Noble Corp., Alliance One, Innospec, and Watts Water.

[Note - the above data was assembled using the "core" approach as well as the definition of an FCPA enforcement action described in this prior post]

Of Note From The Eli Lilly Enforcement Action

Monday, January 14th, 2013

This previous post went long and deep as to the Eli Lilly enforcement action from last month. This post continues the analysis by highlighting additional notable issues.

If This Is The Standard, Then Every Issuer Is An FCPA Violater.

This previous post discussed how the SEC’s August 2012 FCPA enforcement action against Oracle diluted FCPA enforcement to a new level.

The SEC’s China allegations against Lilly further dilutes FCPA enforcement. The focus of the allegations is that sales representatives at Lilly-China, between 3-6 years ago, submitted false expense reports for items such as wine, speciality foods, a jade bracelet, meals, visits to bath houses, card games, karaoke bars, door prizes, spa treatments and cigarettes. Because the SEC charged only FCPA books and records and internal controls violations based on these allegations, the identity of the ultimate recipients was not relevant, although the SEC did allege that the ultimate recipients were ”government-employed physicians.”

If the SEC’s position is that an issuer violates the FCPA’s books and records and internal controls provisions because some employees, anywhere within its world-wide organization, submit false expense reports for such nominal and inconsequential items, then every issuer has violated and will continue to violate the FCPA.

Once again, the SEC’s charging decisions prove hallow its recent Guidance related rhetoric. (See here for the prior post).

What Is Really Being Accomplished?

Let me state for the record, lest there be any misunderstanding, that I support strong FCPA enforcement as to conduct Congress intended to capture in passing the FCPA, that adheres to fundamental legal principles, and that actually makes a difference in accomplishing the FCPA’s objective. My criticisms and concerns of the DOJ and SEC’s FCPA enforcement has been across a wide spectrum, including that in egregious instances of corporate bribery, the DOJ has been too lenient. See here for my article “The Facade of FCPA Enforcement” and here for my November 2010 Senate testimony.

To be sure, certain things were accomplished by the Lilly enforcement action. $29.4 million was added to the U.S. treasury and FCPA Inc.’s pre-enforcement action professional fees and expenses likely exceeded that amount.

Beyond this, it is an open question whether the Lilly enforcement action really accomplished anything.

For starters, let’s start with the SEC’s mission. As stated on its website, the SEC’s mission is ”to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

How is this mission accomplished by the Poland and Russia allegations in the SEC’s complaint?

The Poland allegations concern approximately $39,000 in payments made by Lilly-Poland approximately 12 years ago to a legitimate and bona fide Polish charitable foundation, albeit one allegedly headed by the Director of a Government Health Fund.

The Russia allegations, the only allegations in the complaint that give rise to FCPA anti-bribery charges, concern the conduct of Lilly-Vostok and its use of various third parties in connection with government pharmaceutical business. There is only one paragraph in the SEC’s complaint concerning specific knowledge of the alleged improper conduct and that paragraph (para. 28 of the complaint) cites a Lilly-Vostok e-mail from 18 years ago and another Lilly-Vostok e-mail from 13 years ago.

The same what is really being accomplished question could also be asked concerning a post-enforcement action requirement imposed on Lilly by the SEC.

The SEC devoted a paragraph of its complaint to “Lilly’s Remedial Measures” and stated as follows.

“Since the time of the conduct noted in this Complaint, Lilly has made improvements to its global anti-corruption compliance program, including: enhancing anticorruption due diligence requirements for relationships with third parties; implementing compliance monitoring and corporate auditing specifically tailored to anti-corruption; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.”

In other words, per the SEC, over the last approximate decade, Lilly has made extensive enhancements to its FCPA compliance program. Against this backdrop, what is really being accomplished by the requirement that Lilly engage a compliance consultant for a 60 day period?

“Check The Box” Due Diligence?

One of the greater frustrations I experienced during my FCPA practice career was attending meetings with SEC FCPA enforcement attorneys and learning of the alternate world they lived in. In their alternate world, companies – 7 to 10 years ago – were supposed to have current FCPA best practices throughout their organization and the absence of such current best practices was evidence of FCPA books and records and internal control violations.

I was reminded of this alternate world when reading the SEC’s release (here) in connection with the Lilly enforcement action. In it, Kara Novaco Brockmeyer (Chief of the SEC Enforcement Division’s Foreign Corrupt Practices Unit) stated as follows. “Eli Lilly and its subsidiaries possessed a ‘check the box’ mentality when it came to third-party due diligence.”

“Check the Box” due diligence?

The SEC’s allegations concerning due diligence (or lack thereof) focus on the conduct of Lilly-Vostok, a Russian subsidiary, between 1994 through 2005. In other words, 7 to 18 years ago. Even the SEC acknowledged that, as to the relevant third-parties, ”Lilly’s due diligence” consisted of “ordering a Dun and Bradstreet report and conducting a search using an internet service to scan publicly available information.” Elsewhere, the SEC acknowledges that Lilly-Vostok “in conjunction with outside counsel” conducted due diligence on various third parties.

Effective due diligence? Probably not – the SEC alleges that certain beneficial owners were not identified and that there was no documentation that certain third parties were capable of performing the engaged services. Due diligence consistent with today’s best practices? Probably not.

Yet to call such due diligence efforts – which took place 7 to 18 years ago – “check the box” is emblematic of the SEC’s alternate reality.

The Double Standard On Display

I have frequently written about the FCPA’s double standard. (See here for all prior posts). The double standard regards the seemingly obvious fact that there is little intellectual or moral consistency between enforcement of the FCPA and enforcement of the U.S. domestic bribery statute (18 USC 201). The double standard is present when a U.S company’s interaction with a “foreign official” is subject to more scrutiny and different standards than its interaction with a U.S. official.

Prior double standard posts (here and here) have explored the frequency in which U.S. business gives to charitable donations favored by influential politicans. No consequences or legal action is taken.

Yet when a U.S. company gives to charitable donation favored by foreign politicians - well that is stuff of bribery and corruption. In addition to the Chudow (Poland) Castle Foundation allegations in the SEC’s Lilly complaint, is the following allegation concerning Russia.

“From 2005 through 2008, Lilly-Vostok made various proposals to government officials in Russia regarding how Lilly-Vostok could donate to or otherwise support various initiatives that were affiliated with public or private institutions headed by the government officials or otherwise important to the government officials. Examples included their personal participation or the participation of people from their institutions in clinical trials and international and regional conferences and the support of charities and educational events associated with the institutes. At times, these proposals to government officials were made in a communication that also included a request for assistance in getting a product reimbursed or purchased by the government. Generally, Lilly-Vostok personnel believed these proposals were proper because of their relevance to public health issues and many of the proposals were reviewed by counsel. Nonetheless, Lilly-Vostok did not have in place internal controls through which such proposals were vetted to ascertain whether Lilly-Vostok was offering something of value to a government official for a purpose of influencing or inducing him or her to assist Lilly-Vostok in obtaining or retaining business.”

No DOJ Involvement

As indicated in the prior Lilly post, the Lilly enforcement action was the latest in a series of FCPA enforcement actions begun in 2011 against pharmaceutical / health care-related companies. All actions (Johnson & Johnson, Smith & Nephew, Biomet, and Pfizer) have been based on the same general set of allegations (things of value to various foreign health care providers for an alleged business purpose). However, the Lilly enforcement action is the only enforcement action with no DOJ involvement. In “The Facade of FCPA Enforcement,” I discuss how the lack of enforcement transparency contributes to the facade of enforcement when the same core set of facts are resolved with materially different results.

A Message For Internal Audit

I have long discussed (see here and here for prior posts and here for a recent interview) the importance of FCPA goggles for internal audit and finance professionals – meaning that internal audit and finance personnel should be specifically trained to approach their specific job functions not only in the traditional way, but also with “FCPA goggles” on. I have noted that it is clear from recent FCPA enforcement actions that the SEC expects much more from non-legal personnel when it comes to FCPA compliance, including the ability to spot FCPA issues and display a high degree of (I’ll call it) intellectual curiosity as to certain issues.

The SEC’s complaint against Lilly contains an emphatic message to the internal audit community. Paragraph 46 of the complaint states, in full, as follows.

“[D]espite an understanding that certain emerging markets were most vulnerable to FCPA violations, Lilly’s audit department, based out of Indianapolis, had no procedures specifically designed to assess the FCPA or bribery risks of sales and purchases. Accordingly, transactions with off-shore entities or with government-affilated entities did not receive specialized or closer review for possible FCPA violations. In assessing these transactions, the auditors relied upon the standard accounting controls which primarily assured the soundness of the paperwork. There was little done to assess whether, despite the existence of facially acceptable paperwork, the surrounding circumstances or terms of a transaction suggested the possibility of an FCPA violation or bribery.”

SEC Enforcement Of The FCPA – Year In Review

Tuesday, January 8th, 2013

Foreign Corrupt Practices Act enforcement, it is not just about the DOJ. Granted, as a civil enforcement agency its sticks are less sharp than the DOJ’s, but the SEC also claims a significant piece of the FCPA enforcement pie (query whether it should – but that is a subject for another day – for instance as discussed in “The Story of the Foreign Corrupt Practices Act” the SEC wanted no part in enforcing the FCPA’s anti-bribery provisions).

Today’s post is a year in review of SEC FCPA Enforcement. (See here for a similar post for 2011 and here for a similar post for 2010). Stay tuned for a similar post on DOJ FCPA enforcement in 2012.

Settlement Amounts

In 2012, the SEC collected approximately $118 million in 8 corporate FCPA enforcement actions. By comparison, in 2011 the SEC collected approximately $148 million in 13 corporate FCPA enforcement actions. In 2010, the SEC collected approximately $530 million in 19 corporate FCPA enforcement actions.

The range of SEC FCPA enforcement actions in 2012 was, on the high end, $45.1 million in the Pfizer enforcement action, and on the low end, $2 million in the Oracle enforcement action.

Three corporate FCPA enforcement actions from 2012 were SEC only (Oracle, Allianz, and Eli Lilly).

Of the 8 corporate enforcement actions from 2012, only 4 (Smith & Nephew, Biomet, Tyco, and Eli Lilly) included FCPA anti-bribery charges. In other words, 4 SEC FCPA enforcement actions charged FCPA books and records and internal controls violations only, yet in those enforcement actions, the SEC collected approximately $57.4 million in disgorgement and prejudgment interest. This is noteworthy because many question, and rightfully so, whether disgorgement is an appropriate remedy in cases that do not charge FCPA anti-bribery violations. See here for a prior post on so-called “non-bribery disgorgement” cases. In 2011, 8 of the 13 SEC FCPA corporate enforcement actions charged FCPA books and records and internal controls violations only and the SEC collected approximately $51 million in disgorgement and prejudgment interest in those non-bribery disgorgement cases.

Of the $118 million the SEC collected in 2012 corporate FCPA enforcement actions, approximately $75 million (64%) were in two enforcement actions (Pfizer and Eli Lilly). Of the $118 million, approximately $104 million (88%) were in enforcement actions against pharmaceutical or other health care related companies. All of these enforcement actions were based, in whole or in part, on the enforcement theory that employees of various foreign health care systems (such as physicians, nurses, mid-wives, lab personnel, etc.) are “foreign officials” under the FCPA. See this prior post which traced the origins and prominence of this enforcement theory.

The $118 million the SEC collected in 2012 FCPA enforcement actions breaks down as follows: $16 million in civil penalties and $102 million in disgorgement and prejudgment interest. Thus, 86% of SEC FCPA settlement amounts in 2012 consisted of disgorgement and prejudgment interest. In 2011, disgorgement and prejudgment interest comprised 94% of SEC FCPA enforcement settlement amounts and in 2010, disgorgement and prejudgment interest comprised 96% of SEC FCPA enforcement settlement amounts If one tries to analyze why some SEC FCPA enforcement actions in 2012 included a civil penalty, disgorgement and prejudgment interest (Allianz and Eli Lilly), whereas other enforcement actions included only disgorgement and prejudgment interest (Smith & Nephew, Biomet, Orthofix, Pfizer, and Tyco), whereas other enforcement actions included only a civil penalty (Oracle), good luck and please enlighten us all with your insight.

Corporate vs. Individual Actions

Of the 8 SEC corporate FCPA enforcement actions from 2012, 0 (0%) have involved, at present, related SEC charges against company employees. In 2011, just 2 of the 13 (15%) corporate SEC FCPA enforcement actions involved related SEC charges against company employees and in 2010, just 3 of the 19 (15%) corporate SEC FCPA enforcement actions involved related SEC charges against company employees.

In 2012, the SEC did charge 3 individuals (Thomas O’Rourke, Mark Jackson, and David Ruehlen) in connection with the 2010 Noble Corporation enforcement action. Without admitting or denying the SEC’s allegations, O’Rourke agreed to resolve the matter by paying a $35,000 civil penalty. The SEC’s case against Jackson and Ruehlen remains pending. (See here for the most recent post). In addition, as noted in this prior post, the SEC also charged Subramanian Krishnan (former CFO of Digi International) with aiding and abetting violations of the FCPA’s books and records provisions and substantive FCPA internal controls violations. However, as noted in the prior post, it was unclear as to the nature of the SEC’s allegations. This action appears to have been a ”non-FCPA, FCPA enforcement action” as the action is not listed on the SEC’s FCPA website.

Voluntary Disclosures

Of the 8 corporate SEC FCPA enforcement actions in 2011, 4 enforcement actions (50%) (Orthofix, Pfizer, Tyco, and Oracle) were the result of corporate voluntary disclosures. 3 enforcement actions (38%) (Smith & Nephew, Biomet and Eli Lilly) appear to have been based on corporate disclosures following an industry sweep (a sweep that may have been prompted by Johnson & Johnson’s voluntary disclosure – see here for the prior post). 1 enforcement action (Allianz) was based on the SEC opening an investigation after receiving an anonymous complaint of possible FCPA violations

This remainder of this post provides an overview of corporate SEC FCPA enforcement in 2012.

Eli Lilly (December 20th)

See here for the prior post.

Charges: Settled civil complaint charging violations of the FCPA’s anti-bribery provisions, and books and records and internal controls provisions.

Settlement: Approximately $29.4 million (approximately $14 million in disgorgement, approximately $6.7 million in prejudgment interest, and an $8.7 million civil penalty)

Disclosure: According to the company’s disclosures, it was first notified of an investigation in August 2003.

Individuals Charged: No.

Related DOJ Enforcement Action: No.

Allianz (December 17th)

See here for the prior post.

Charges: None. Administrative cease and desist order finding violations of the FCPA’s books and records and internal control provisions.

Settlement: Approximately $12.4 million (approximately $5.3 million in disgorgement, approximately $1.8 million in prejudgment interest, and a civil penalty of approximately $5.3 million).

Disclosure: According to the SEC – “In response to the March 2009 Whistleblower complaint, Allianz convened a Whistleblower Committee to do an internal investigation and retained counsel to conduct an internal investigation of Utama’s payment practices in Indonesia. Allianz did not report the conduct to the Commission staff. In April 2010, the staff opened an investigation after receiving an anonymous complaint of possible FCPA violations.”

Individuals Charged: No.

Related DOJ Enforcement Action: No.

Tyco International (September 24th)

See here for the prior post.

Charges: Settled civil complaint charging violations of the FCPA’s anti-bribery provisions, and books and records and internal controls provisions.

Settlement: Approximately $13.1 million ($10.5 million in disgorgement and approximately $2.6 million in prejudgment interest).

Disclosure: Voluntary disclosure.

Individuals Charged: No.

Related DOJ Enforcement Action: Yes.

Oracle (August 16th)

See here for the prior post.

Charges: Settled civil complaint charging violations of the FCPA’s books and records and internal controls provisions.

Settlement: $2 million civil penalty.

Disclosure: Voluntary disclosure.

Individuals Charged: No.

Related DOJ Enforcement Action: No.

Pfizer (August 7th)

See here for the prior post.

Charges: Settled civil complaint against Pfizer charging violations of the FCPA’s books and records and internal controls provisions. Settled civil complaint against Wyeth charging violations of the FCPA’s books and records and internal controls provisions.

Settlement: As to Pfizer, approximately $26.3 million ($16 million in disgorgement and $10.3 in prejudgment interest). As to Wyeth, approximately $18.8 million ($17.2 million in disgorgement and $1.6 million in prejudgment interest).

Disclosure: Voluntary disclosure.

Individuals Charged: No.

Related DOJ Enforcement Action: Yes as to Pfizer, no as to Wyeth.

Orthofix International (July 10th)

See here for the prior post.

Charges: Settled civil complaint charging violations of the FCPA’s books and records and internal controls provisions.

Settlement: $5.2 million (approximately $5 million in disgorgement and approximately $240,000 in prejudgment interest).

Disclosure: Voluntary disclosure.

Individuals Charged: No.

Related DOJ Enforcement Action: Yes.

Biomet (March 26th)

See here for the prior post.

Charges: Settled civil complaint charging violations of the FCPA’s anti-bribery provisions, and books and records and internal controls provisions.

Settlement: $5.5 million ($4.4 million in disgorgement and $1.1 million in prejudgment interest).

Disclosure: Industry sweep inquiry followed by disclosure of misconduct at issue, including a portion of which that was voluntarily disclosed.

Individuals Charged: No.

Related DOJ Enforcement Action: Yes.

Smith & Nephew (Feb. 6th)

See here for the prior post.

Charges: Settled civil complaint charging violations of the FCPA’s anti-bribery provisions, and books and records and internal controls provisions.

Settlement: $5.4 million ($4,028,000 in disgorgement and $1,398,799 in prejudgment interest).

Disclosure: Industry sweep inquiry followed by disclosure of misconduct at issue.

Individuals Charged: No.

Related DOJ Enforcement Action: Yes.

“Shifting Gears On Bribes Abroad”

Thursday, October 11th, 2012

The year was 1981, the FCPA was a mere infant, and the beginnings of a vibrant FCPA reform debate were taking hold as to the new law. Bill Brock was the U.S. Special Trade Representative and he took to the pages of the New York Times with the following Op-Ed published on August 16, 1981.

Before turning to Brock’s piece, a bit of historical context.

The FCPA was passed in 1977. As noted in this prior post (which highlights historical articles in Time Magazine) almost as soon as the FCPA was passed, concerns were raised that the law was imprecise and ambiguous and thus harmful to U.S. business. There was much activity on this issue in the early 1980′s. Among other things: (i) the Carter administration (Carter signed the FCPA into law in December 1977) sent a hefty 250-page report to Congress on the various ways the U.S. discourages exporters – one example – “the provisions of the 1977 Foreign Corrupt Practices Act, which have never been clearly spelled out by the Justice Department.” (ii) the GAO released a report in 1981 (see here for a prior post) detailing how the FCPA “is riddled with complicating ambiguities and shortcomings” including the key “foreign official” element; and (iii) the Reagan administration recommended decriminalization of bribery.

The FCPA reform debate on the 1980′s was met with many of the same anti-reform rhetoric heard in the past year. See this prior post for a sampling of statements from that era.

As to the SEC issue Brock raised in his article, it is sort of ironic to note (in this era when the SEC has a specific FCPA Unit) that the SEC initially wanted no part in enforcing the FCPA’s anti-bribery provisions. Despite being a reluctant actor, the SEC’s role in helping uncover the foreign corporate payments problem and the expertise it gained in doing so was highly valued by congressional leaders, particularly Senator Proxmire who stated that the SEC was “the only agency in the Government that hasn’t gone to sleep on this issue, and [that it did] a good job under the circumstances.” That the SEC was also an independent agency, unlike the DOJ, was also highly valued by Senator Proxmire as indicated by the following statement Senator Proxmire made during a hearing. “If we learned anything in the Watergate affair, we learned that the Department of Justice is not a department we can always rely on, especially when you have top influential corporate officials that are involved. They have a good record in some areas. They prosecute the hoodlums. They haven’t got such a good record on white-collar crime.” The following statement by Senator Proxmire to SEC Chairman Hills during a hearing best captures the SEC’s reluctant role in the foreign payments problem. “[The SEC was] responsible for about the only action we have taken with respect to foreign bribery and your agreements, your work, with various corporations to persuade them to cleanse their operation have been a fine example of how an agency can work to get this job done even without legislation. Because of that, you see, we would like to have you involved at least on the investigative disclosure basis. And perhaps we can work something out that would protect you from not pushing you into something you think you wouldn’t want to do.” Thus, the dual jurisdiction of the SEC and DOJ on FCPA matters is mostly a historical accident and one of the reform issues in the 1980′s was to strip the SEC of its FCPA anti-bribery enforcement powers, something the SEC itself did not object to.

Back to Brock’s Op-Ed piece which is set forth in full below.

Shifting Gears on Bribes Abroad – Bill Brock – New York Times (Aug. 16, 1981)

“Just because the Foreign Corrupt Practices Act spotlights a sensitive subject - corporate bribery abroad - some people turn a blind eye to its shortcomings rather than risk being accused of being soft on bribery.

That is too easy a way out. Retreating from controversy will not cure the law’s deficiencies. Congress is addressing a complex, tough issue in a reasoned manner and deserves our attention and admiration.

As the Senate moves toward final consideration of changes in the act, this is a good time to discuss the modifications, which have been proposed in a legitimate effort to clarify the act’s ambiguous language.

Here are several common misunderstandings and questions about the changes and some straight answers:

1. In modifying the act, Congress condones corporate bribery of foreign officials.

Wrong. Any corporation found guilty of ‘paying, giving, offering or promising anything of value to a foreign official for the purpose of obtaining business,’ under the revised act, would be subject to a million-dollar fine. Individuals would face a $10,000 fine or five years in jail or both.

2. American businesses are crying wolf. The act has not discouraged exports. In fact, American international trade has increased since its enactment.

Not exactly. True, our trade has increased since 1977. But much of that increase disappears when adjusted for inflation. No one contends that the act is solely responsible for the last five consecutive years of trade deficits totaling $100 billion. However, a General Accounting Office study, the President’s Export Council and extensive testimony by businesses have cited the act as a significant export deterrent because of its vague and unpredictable application.

3. Without the act’s provisions requiring businesses to establish new accounting systems, bribery of foreign officials will go undetected because the Government will not have a ‘paper trail’ to monitor.

False. There are two misconceptions in this statement. First, under this law the Government can not ‘monitor the paper trail’ to track down bribers. Instead, the act sets accounting and recordkeeping standards that all companies - whether or not they conduct international business - must follow. Second, the proposed changes would make a felony of falsifying books and records for the purpose of concealing illegal payments to foreign officials. It makes more sense to penalize the few who falsify their books to conceal a bribe than to impose a broad and expensive standard of recordkeeping on every publicly owned corporation.

4. If questionable payments are a way of life with some of our trading partners, what is so bad about conforming to accepted business practices in other countries so long as we do not do it at home?

Plenty. Bribes are morally, ethically and economically wrong. They create national security problems, distort normal market forces and, by corrupting officials, jeopardize the political stability of friendly nations. They suffer, and the United States suffers from that ‘way of life.’

5. Transferring jurisdiction over the act from the Securities and Exchange Commission will insure that bribery of foreign officials will go undiscovered. After all, the S.E.C. was solely responsible for the disclosure of illegal payments that brought the whole issue to a head in 1975-76.

False. The S.E.C., under its charter, would continue to police the financial disclosures of American concerns and protect the rights of public investors. The proposals seek to differentiate between the duties of different Government agencies. The Justice Department is now responsible for enforcing all criminal penalties but only some civil penalties under the act, leaving the law subject to interpretation by two enforcement authorities. The changes consolidate under the Justice Department the enforcement authority for all domestic and foreign anti-bribery laws.

6. The real way to curb bribery around the world is through international negotiations.

True, but don’t hold your breath. Until now, the United States has had to go it alone. For six years the United Nations Economic and Social Council and the General Assembly have failed to obtain a commitment by other nations to an international agreement outlawing bribery. Still, the Administration’s proposals would require the President to pursue international agreements to prohibit illicit payments to foreign officials. We can strengthen our leadership in attaining international agreements by demonstrating to our trading partners that we have created a stringent yet fair prohibition against bribery without sacrificing exports.

Changing the act is a complex issue, and emotions will run high in the debate. But the mandate of the American people is clear; a law should be understandable, enforceable and reserve sure and certain punishment for the few who violate it. As it is now, the act penalizes the innocent more predictably than the guilty, and along with both, our competitiveness in world trade.”

Checking In On Neither Admit Nor Deny

Wednesday, September 5th, 2012

This previous post discussed the Second Circuit’s March 2012 procedural decision regarding the SEC’s neither admit nor deny settlement policy in the context of SEC v. Citigroup and Judge Jed Rakoff’s (S.D.N.Y.) rejection of the proposed consent order. Although not an FCPA case, as noted in various previous posts, the SEC’s neither admit nor deny settlement policy is very much at issue in most FCPA enforcement actions and contributes to what I have called the “facade” of FCPA enforcement (see here).

As noted in the prior post, the Second Circuit’s decision did not squarely address the merits of the SEC’s settlement policy, rather the issue before the Court was whether to stay the district court proceedings pending a merits based review of the issues. The Second Circuit’s merits based review is forthcoming and the court is scheduled to hear arguments later this month. This post highlights the brief filed on behalf of Judge Rakoff and the brief of amici curie securities law scholars filed by Professor Barbara Black (here – Univ. of Cincinnati College of Law).

Rakoff Brief

Among other things, the brief states as follows.

“[The SEC and Citigroup] essentially contend that this Court should force the district court to rubber-stamp their agreement simply because ‘it reflects an agreement reached in arm’s-length negotiations between experienced, capable counsel after meaningful [though undisclosed] discovery’ and has been determined by the SEC to serve ‘the public interest.’ Their argument ignores the well-settled law that federal judges have a responsibility to make an independent determination as to whether a federal agency’s proposed consent judgment is fair, adequate, and reasonable, and – in the view of a number of courts – in the public interest.”

Elsewhere, the brief states as follows.

“The law is clear that a federal judge has a responsibility to independently determine whether a proposed consent judgment satisfies well established standards of being fair, adequate, reasonable, and in the public interest. The deference due the SEC in considering a proposed consent judgment cannot and does not eliminate that responsibility, nor does the fact that the parties have agreed to the terms of a proposed court order require the judge to sign off on that order without inquiry into whether it meets those standards. In making that inquiry, depending on the particulars of the case before it, a federal judge has every right to seek an evidentiary basis where necessary to determine whether the proposed settlement conforms to the established standards.”

As to whether SEC complaints settled under the neither admit nor deny practice represent or show anything, the brief states as follows.

“The SEC contends that the allegations in its complaint that are not admitted or denied would suffice to constitute the requisite ‘showing’ but as the district court noted at the hearing, ‘people bring law suits all the time making all sorts of allegations, some of which are proved, some of which are unproved and the unproved ones are no better than rumor and gossip.’ This obvious reality is illustrated by the fact that in 2011 the SEC lost 25% of the cases that it tried in district courts.”

The brief also argues that the SEC’s and Citgroup’s position threatens the constitutional independence of the federal judiciary. The brief states as follows.

“Finally, it would be remiss not to note that the position taken by the parties here threatens the constitutional independence of the federal judiciary. As the district court stated, it needed to ‘exercise a modicum of independent judgment’ in evaluating the proposed consent judgment because ‘[a]nything less would not only violate the constitutional doctrine of separation of powers but would undermine the independence that is the indispensable attribute of the federal judiciary.’ [...] Although the district court cannot interfere with the SEC’s responsibility to execute the securities laws, appellants give short shrift to the careful balance of authority inherent in the principles of separation of powers. Depriving the district court of its capacity to reach a sound and reasoned judgment regarding the propriety of a proposed consent judgment and the imposition of injunctive relief would undermine the judiciary’s independence and thereby threaten the constitutional balance of power. [...] The SEC’s and Citigroup’s concept of deference – in which courts would be effectively reduced to potted plants – would surely undermine the independence of the federal judiciary.”

Amicus Brief

The brief begins, in pertinent part, as follows.

“As scholars who study the SEC, we have concerns about the agency’s practice of settling enforcement actions alleging serious fraud without any acknowledgement of facts, on the basis of a pro forma “obey the law” injunction, a commitment to undertake modest remedial measures and insubstantial financial penalties. The prevalence of this practice is precisely why federal district courts must have discretion, when reviewing consent judgments between a government agency and a private party that include an injunction, to take into account the public interest.” The brief states that “the requirement of judicial review serves as an independent check on settlements that may meet the needs of the settling parties, but do not serve the public interest because they neither inform the public of the truth of the allegations nor deter future violations.”

The brief states as follows concerning the SEC’s neither admit nor deny settlement practice. “The prevalence of this practice invites cynicism. Both parties get what they want. The SEC has an opportunity to promote it success, and Citigroup can put the matter behind it and treat the settlement as a ‘cost of doing business.’ The matter is swept under the carpet, and the public is left to wonder what really happened. [...] The SEC’s position effectively leaves no place for judicial review. ‘Trust us!’ says the SEC.”

The brief further states as follows.

“It also concerns us that the SEC measures success to a large extent by the number of actions brought. The SEC Chairman and the SEC Director of Enforcement frequently point with pride to the number of enforcement actions filed. For example, Director Khuzami recently testified before a Congressional committee: “… the SEC‟s enforcement program is achieving significant results. During FY 2011, the Commission filed 735 enforcement actions – more than the SEC has ever filed in a single year.” Statements like these bear an unfortunate resemblance to a sheriff’s carving notches on his gun to prove his toughness. The agency’s emphasis on numbers reinforces the concern that the agency has incentives to settle on terms that may not be consistent with the public interest.”