September 25th, 2014

Second Circuit – “There Is No Private Right Of Action Under The Antibribery Provisions Of The FCPA”

In a September 18th decision, the Second Circuit concluded in Republic of Iraq v. ABB et al that “there is no private right of action under the antibribery provisions of the FCPA.”

The FCPA issue was a minor component of the Second Circuit’s decision in the long-running civil RICO case in which Iraq sought recovery from a long list of defendants for their “alleged conspiracy with Iraq’s then-president Saddam Hussein and Iraq’s ministries to corrupt and plunder the Oil-for-Food Program, an international humanitarian program administered by the United Nations during the final years of Hussein’s rule.”  As to the primary RICO claim, the Second Circuit affirmed the trial court’s dismissal of the claim on the grounds that, among other things, the plaintiff was in pari delicto with defendants.

Notwithstanding the fact that previous FCPA enforcement actions concerning the Oil for Food Program were largely books and records and internal controls cases only because the alleged bribe payments went to the government, not a particular foreign official as required under the anti-bribery provisions, and notwithstanding the fact that Iraq was a unique plaintiff to say the least, it nevertheless brought FCPA claims against the defendants on the theory that the FCPA allowed for a private right of action.

As to this issue, the Second Circuit stated – in full – as follows.

“The Amended Complaint alleged that the surcharges and kickbacks paid by the Vendor and Oil Purchasing Defendants violated the antibribery provisions of the FCPA. The Republic contends that the district court should have recognized an implied private right of action for violations of those provisions despite a consistent line of cases holding to the contrary. The Republic is particularly critical of Lamb v. Phillip Morris, Inc., 915 F.2d 1024 (6th Cir. 1990) (“Lamb”), cert. denied, 498 U.S. 1086 (1991), the leading case declining to recognize such a cause of action. The Republic argues that Lamb erred in its analysis of the legislative history of the FCPA and that that history suggests that the reason Congress did not expressly provide for a private right of action was to avoid creating a “negative inference” that would dissuade judicial recognition of implied private rights of action under other provisions of the Securities Exchange Act of 1934, to which the FCPA was an amendment. We are unpersuaded.

“[P]rivate rights of action to enforce federal law must be created by Congress.” Alexander v. Sandoval, 532 U.S. 275, 286 (2001) (“Sandoval”). A federal statute may create a private right of action either expressly or, more rarely, by implication. In considering whether a statute confers an implied private right of action, “[t]he judicial task is to interpret the statute Congress has passed to determine whether it displays an intent to create not just a private right but also a private remedy.” Id. To discern Congress’s intent, “we look first to the text and structure of the statute.” Lindsay v. Association of Professional Flight Attendants, 581 F.3d 47, 52 (2d Cir. 2009), cert. denied, 11 130 S. Ct. 3513 (2010). To “illuminate” this analysis, id. at 52 n.3, we also consider factors enumerated in Cort v. Ash, 422 U.S. 66 (1975), which include the following:

First, is the plaintiff one of the class for whose especial benefit the statute was enacted, . . . –that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? . . . . Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? Id. at 78 (emphasis in Cort v. Ash) (internal quotation marks omitted). In our analysis, we are mindful that “the Supreme Court has come to view the implication of private remedies in regulatory statutes with increasing disfavor.” Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 286 F.3d 613, 618 (2d Cir. 2002).

The antibribery provisions of the FCPA prohibit certain entities and persons from, inter alia, corruptly making payments to foreign officials for the purpose of influencing official action in order to obtain business. See 15 U.S.C. §§ 78dd-1(a), 78dd-2(a), 78dd-3(a). The text of the statute contains no explicit provision for a private right of action, although it does provide for civil and criminal penalties, see id. §§ 78dd-2(g), 78dd-3(e), 78ff(c), and permits the Attorney General to seek injunctive relief, see id. §§ 78dd-2(d), 78dd-3(d). Because “[t]he express provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others,” Sandoval, 532 U.S. at 290, the structure of the statute, by focusing on public enforcement, tends to indicate the absence of a private remedy.

The Cort v. Ash factors also do not support recognition of a private right. The statute’s prohibitions focus on the regulated entities; the FCPA contains no language expressing solicitude for those who might be victimized by acts of bribery, or for any particular class of persons. “Statutes that focus on the person regulated rather than the individuals protected create no implication of an intent to confer rights on a particular class of persons.” Sandoval, 532 U.S. at 289 (internal quotation marks omitted).

Nor does the legislative history of the FCPA demonstrate an intention on the part of Congress to create a private right of action. As discussed in Lamb, 915 F.2d at 1029, a bill introduced by Senator Church in the 94th Congress included an express right of action for competitors of those who bribed foreign officials, see S. 3379, 94th Cong. § 10, 122 Cong. Rec. 12,605, 12,607 (1976); that provision, however, was deleted by a committee of the Senate, see S. Rep. No. 94-1031, at 13 (1976).

In the 95th Congress, which finally enacted the FCPA, a committee of the House of Representatives, in reporting out a bill that did not provide expressly for a private right of action, made a statement that the House “Committee intends that the courts shall recognize a private cause of action based on this legislation . . . on behalf of persons who suffer injury as a result of prohibited corporate bribery,” H.R. Rep. No. 95-640, at 10 (1977). We have three main problems with the Republic’s reliance on this statement, and other aspects of the FCPA’s legislative history, as justification for judicial implication of a private right of action in its favor

First, the House committee’s statement was not repeated (and no endorsement of its substance was in any way suggested) in the reports of either the Senate committee considering the FCPA or the conference committee that reconciled the views of the House and Senate to produce the language of the FCPA as it was ultimately enacted. See S. Rep. No. 95-114 (1977); H.R. Rep. 95-831 (1977). Indeed, in the debate on the conference committee report, one conferee stated that the question of whether “courts will recognize [an] implied private right of action . . . . was not considered in the Senate or during the conference, and thus [it] cannot be said that any intent is expressed at all on this issue.” 123 Cong. Rec. 38,601, 38,602 (1977) (statement of Sen. Tower) (emphasis added).

Second, although the legislative history contains additional references to the desirability of a private right of action, they do not provide any clear indication of congressional intent to create one. See generally Siegel, The Implication Doctrine and the Foreign Corrupt Practices Act, 79 Colum. L. Rev. 1085, 1105-12 (1979) (canvassing the legislative history in detail and finding “no conclusive evidence of congressional intent to grant private actions”).

Third, we note that this case illustrates the wisdom of Lamb, which avoids the question of what class of parties the FCPA was designed to protect. Although we agree that the statute was ”primarily designed to protect the integrity of American foreign policy and domestic markets,” Lamb, 915 F.3d at 1029, one might argue that it is principally the foreign governments whose processes might be corrupted. The Republic’s claim highlights the obvious problem with the latter concern here: The foreign government supposedly to be “protect[ed]” by the FCPA was the entity that demanded the bribes in the first place.

Finally, we note that although it has been nearly a quarter of a century since Lamb was decided, and although Congress has more recently amended the FCPA, see International Anti-Bribery and Fair Competition Act of 1998, Pub. L. No. 105-366, 112 Stat. 3302 (1998), Congress has not chosen to override Lamb. We conclude that there is no private right of action under the antibribery provisions of the FCPA and that the district court did not err in dismissing the Republic’s FCPA claims.”

As indicated in the Second Circuit’s decision, there have been previous appellate court decisions addressing whether the FCPA has a private right of action.  As highlighted in this prior post, the Sixth Circuit addressed the issue in Lamb v. Phillip Morris Inc., 915 F.2d 1024 (6th Cir. 1990).  The primary reason articulated by the court for declining a private right of action was something that never happened – at least until 2012 when the DOJ/SEC issued FCPA Guidance.  The Sixth Circuit stated:

“Recognition of the plaintiffs’ proposed private right of action, in our view, would directly contravene the carefully tailored FCPA scheme presently in place. Congress recently expanded the Attorney General’s responsibilities to include facilitating compliance with the FCPA. See 15 U.S.C. §§ 78dd-1(e), 78dd-2(f). Specifically, the Attorney General must ‘establish a procedure to provide responses to specific inquiries’ by issuers of securities and other domestic concerns regarding ‘conformance of their conduct with the Department of Justice’s [FCPA] enforcement policy….’ 15 U.S.C. §§ 78dd-1(e)(1), 78dd-2(f)(1). Moreover, the Attorney General must furnish ‘timely guidance concerning the Department of Justice’s [FCPA] enforcement policy … to potential exporters and small businesses that are unable to obtain specialized counsel on issues pertaining to [FCPA] provisions.’ 15 U.S.C. §§ 78dd-1(e)(4), 78dd-2(f)(4). Because this legislative action clearly evinces a preference for compliance in lieu of prosecution, the introduction of private plaintiffs interested solely in post-violation enforcement, rather than pre-violation compliance, most assuredly would hinder congressional efforts to protect companies and their employees concerned about FCPA liability.”

Prior to Lamb, the Fifth Circuit addressed a private right of action, albeit in dicta, in McLean v. Int’l Harvester Co., 817 F.2d 1214 (5th Cir. 1987).  The court stated:  ”we find it inappropriate to imply a private cause of action from the statute. The statute on its face shows no congressional intent to create a private action. Moreover, no legislative history exists referring to such an intent.” This last sentence is obviously false given the legislative history discussed in the recent Second Circuit opinion.

In short, the three appellate court decisions that address an FCPA private right of action are either: (1) based on a false premise (McLean); (2) based on a false premise at the time (Lamb); or (3) involved a unique and odd plaintiff.

An FCPA private right of action does warrant further consideration.

At the very least, this much should be undisputed:  if there was an FCPA private right of action, there would be substantially more case law of precedent concerning the FCPA’s provisions than currently exists and that, I submit, would be a good thing.

Contrary to the Second Circuit’s statement, courts have inferred private rights of action in several provisions of the ’34 Act (see e.g., J.I. Case v. Borak, 377 U.S. 426 (1964)) and the FCPA is after all part of the ’34 Act. Moreover, several of the Cort v. Ash factors for implying a private of right would seem to be met in the FCPA context.  Among the reasons Congress passed the FCPA was to level the playing field given how the discovered foreign corporate payments distorted free and fair competition.  Moreover,  the SEC itself has said on numerous occasions that FCPA enforcement is central to its mission of investor protection.  An FCPA private right of action would further seem to be consistent with the underlying premise of the FCPA which is to reduce foreign bribery.  Finally, “regulation of bribery directed at foreign officials cannot be characterized as a matter traditionally relegated to state control,” as even the Lamb court recognized.

As highlighted in prior posts here, here and here, for several years U.S. Representative Ed Perlmutter (D-CO) consistently introduced the “Foreign Business Bribery Prohibition Act” which would have provided for a limited private right of action under the FCPA.  The bills never made it out of committee.

Posted by Mike Koehler at 12:05 am. Post Categories: FCPA Related ChargesOil for Food Enforcement ActionPrivate Right of ActionRelated Civil Litigation




September 24th, 2014

How The DOJ Can Better Achieve Its FCPA Policy Objectives

Last week the DOJ’s Principal Deputy Assistant Attorney General for the Criminal Division, Marshall Miller, delivered this speech focused on how the DOJ is “addressing criminal conduct when it takes place at corporations and other institutions.”  While not specific to the Foreign Corrupt Practices Act, Miller did reference the FCPA several times during the speech.

The post is not about the DOJ’s empty rhetoric when it comes to individual FCPA prosecutions – that post was published last week the same day that Miller carried forward DOJ talking points on individual prosecutions.

Nor is this post about Miller carrying forward the DOJ’s talking points on Morgan Stanley’s so-called declination.  That post was published here in 2012.

Nor is this post about Miller’s suggestion that PetroTiger did not face any charges “of any kind [...] and no non-prosecution agreement was entered” because the company voluntarily disclosed and cooperated.  As highlighted in this post regarding the charges against the former PetroTiger executives, the core DOJ allegations concerned self-dealing by the executives and not disclosing conflicts of interest to their employer and other investors involved in a business deal.  To be sure, there have been several companies – ADM, Diebold, Ralph Lauren, Maxwell Technologies, and Tyson Foods to name just a few –  that have voluntarily disclosed and cooperated yet received NPAs or DPAs in the FCPA context.

Nor is this post about the “wow” factor of Miller’s speech – as termed by the FCPA Blog – because contrary to the suggestion by the FCPA Blog, the FCPA information in Miller’s speech was not new – all was previously mentioned in original source documents and/or previously highlighted in prior FCPA Professor posts or by others (see herehere, and here).

Rather, this post highlights for the DOJ (and others) how an FCPA reform proposal can help the DOJ better achieve its policy objectives, as sensibly articulated in Miller’s speech,. in the FCPA context.

For starters, I realize – based on reliable information – that I am a persona non grata within the DOJ’s FCPA Unit.  Nevertheless, I share an interest in advancing policies to make FCPA enforcement more effective so that the laudable objectives of the FCPA can best be achieved.

I’ve written about the below issue several times (see here for “Revisiting a Foreign Corrupt Practices Act Compliance Defense” and see here for the prior post “Seeing the Light From the Dark Ages”).

In his speech, Miller stated the following sensible policy objectives.

“[W]e would like corporations to cooperate.  We will ensure that there are appropriate incentives for corporations to do so.

[...]

I want to focus today on an aspect of [The Principles of Federal Prosecution of Business Organization and/or the DOJ's internal "Filip" factors]  that I believe, at times, receives insufficient attention – but that lies at the heart of our approach at the Criminal Division.   And that is what the factors have to say about the importance of individual prosecutions to the decision on how to approach a corporation.

[...]

[In analyzing cooperate cooperation], companies are always quick to tout voluntary disclosure of corporate misconduct and the breadth of an internal investigation.   What is sometimes given short shrift, however, is in many ways the heart of effective corporate cooperation: whether that cooperation exposed, and provided evidence against, the culpable individuals who engaged in criminal activity [...].

The importance of cooperating regarding individuals is set forth, in black and white, in the text of the [Principles of Prosecution] itself.   Factor Four expressly states that prosecutors should evaluate a corporation’s “willingness to cooperate in the investigation of [its] agents.”   This key point is fleshed out later in the guidance section, where prosecutors are directed to consider the corporation’s “willingness to provide relevant information and evidence and identify relevant actors within and outside the corporation, including senior executives.”

Voluntary disclosure of corporate misconduct does not constitute true cooperation, if the company avoids identifying the individuals who are criminally responsible.  Even the identification of culpable individuals is not true cooperation, if the company fails to locate and provide facts and evidence at their disposal that implicate those individuals.

This principle of cooperation is not new or unique to companies.   We have applied it to criminal cases of all kinds for decades.   Take, for example, organized crime cases.   Mob cooperators do not receive cooperation credit merely for halting or disclosing their own criminal conduct.   Attempted cooperators should not get reduced sentences if they refuse to provide testimony or fail to turn over evidence against other culpable parties.   A true cooperator – whether a mobster or a company – must forthrightly provide all the available facts and evidence so that the most culpable individuals can be prosecuted.

The importance of this principle is enhanced by a second Filip factor – Factor Eight – which states that, in deciding whether to charge a corporation, prosecutors must consider “the adequacy of the prosecution of individuals responsible for the corporation’s malfeasance.”   So, effective and complete corporate cooperation in the investigation and prosecution of culpable individuals is not only called for by Factor Four, but reinforced by Factor Eight.

[...]

Corporations do not act criminally, but for the actions of individuals.   The Criminal Division intends to prosecute those individuals, whether they’re sitting on a sales desk or in a corporate suite.

The prosecution of individuals – including corporate executives – for white-collar crimes is at the very top of the Criminal Division’s priority list under Assistant Attorney General Caldwell.”

The above are all sensible policy statements from the DOJ and are consistent with Attorney General Eric Holder’s similar sensible policy statements articulated on the same day in a different speech.  As Holder stated:

“[T]he department recognizes the inherent value of bringing enforcement actions against individuals, as opposed to simply the companies that employ them.  We believe that doing so is both important – and appropriate – for several reasons:

First, it enhances accountability.  Despite the growing jurisprudence that seeks to equate corporations with people, corporate misconduct must necessarily be committed by flesh-and-blood human beings.  So wherever misconduct occurs within a company, it is essential that we seek to identify the decision-makers at the company who ought to be held responsible.

Second, it promotes fairness – because, when misconduct is the work of a known bad actor, or a handful of known bad actors, it’s not right for punishment to be borne exclusively by the company, its employees, and its innocent shareholders.

And finally, it has a powerful deterrent effect.  All other things being equal, few things discourage criminal activity at a firm – or incentivize changes in corporate behavior – like the prospect of individual decision-makers being held accountable.  A corporation may enter a guilty plea and still see its stock price rise the next day.  But an individual who is found guilty of a serious fraud crime is most likely going to prison.”

Again, sensible policy statements.

The problem is – at least in the FCPA context – the DOJ is not achieving its policy objectives.  This is the unmistakable conclusion from the following statistics.

  • As highlighted in this previous post (with statistics calculated through the end of 2013) since 2008 approximately 75% of corporate FCPA enforcement have not (at least yet) resulted in any DOJ charges against company employees.
  • As highlighted in this previous post, in the 20 most recent DOJ corporate FCPA enforcement actions, only one has resulted (at least yet) in any DOJ charges against company employees.

An FCPA compliance defense can help the DOJ better achieve its above-stated policy objectives.

As stated in my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense.”

“An FCPA compliance defense will better facilitate the DOJ’s prosecution of culpable individuals and advance the objectives of its FCPA enforcement program. At present, business organizations that learn through internal reporting mechanisms of rogue employee conduct implicating the FCPA are often hesitant to report such conduct to the enforcement authorities. In such situations, business organizations are rightfully diffident to submit to the DOJ’s opaque, inconsistent, and unpredictable decision-making process and are rightfully concerned that its pre-existing FCPA compliance policies and procedures and its good faith compliance efforts will not be properly recognized. The end result is that the DOJ often does not become aware of individuals who make improper payments in violation of the FCPA and the individuals are thus not held legally accountable for their actions. An FCPA compliance defense surely will not cause every business organization that learns of rogue employee conduct to disclose such conduct to the enforcement agencies. However, it is reasonable to conclude that an FCPA compliance defense will cause more organizations with robust FCPA compliance policies and procedures to disclose rogue employee conduct to the enforcement agencies. Thus, an FCPA compliance defense can better facilitate DOJ prosecution of culpable individuals and increase the deterrent effect of FCPA enforcement actions.”

Is the DOJ capable of viewing an FCPA compliance defense, not as a race to the bottom, but a race to the top?  Is the DOJ capable of viewing an FCPA compliance defense as helping it better achieve its FCPA policy objectives?

Let’s hope so.

*****

In his speech, Marshall also provided specifics as to what type of cooperation the DOJ looks for.  He stated:

“[I]f a corporation wants credit for cooperation, it must engage in comprehensive and timely cooperation; lip service simply will not do.

Corporations are often too quick to claim that they cannot retrieve overseas documents, emails or other evidence regarding individuals due to foreign data privacy laws.   Just as we carefully test – and at times reject – corporate claims about collateral consequences of a corporate prosecution, the department will scrutinize a claimed inability to provide foreign documents or evidence.   We have forged deepening relationships with foreign governments and developed growing sophistication and experience in analyzing foreign laws.   A company that tries to hide culpable individuals or otherwise available evidence behind inaccurately expansive interpretations of foreign data protection laws places its cooperation credit at great risk.   We strongly encourage careful analysis of those laws with an eye toward cooperating with our investigations, not stalling them.

Understand too, that we will use our own parallel investigation to pressure test a company’s internal investigation: to determine whether the company actually sought to root out the wrongdoing and identify those responsible, as far up the corporate ladder as the misconduct goes, or instead merely checked a box on a cooperation punch list.

Companies that have not conducted comprehensive investigations will not secure significant cooperation benefits.   Worse, companies that hamper the government’s investigation while conducting an internal investigation – for example, by conducting interviews that serve to spread corporate talking points rather than secure facts relating to individual culpability – will pay a price when they ask for cooperation credit.

A few final words: when you come in to discuss the results of an internal investigation to the Criminal Division and make a Filip factor presentation – expect that a primary focus will be on what evidence you uncovered as to culpable individuals, what steps you took to see if individual culpability crept up the corporate ladder, how tireless your efforts were to find the people responsible.

At the risk of being a little too Brooklyn, I’m going to be blunt.

If you want full cooperation credit, make your extensive efforts to secure evidence of individual culpability the first thing you talk about when you walk in the door to make your presentation.

Make those efforts the last thing you talk about before you walk out.

And most importantly, make securing evidence of individual culpability the focus of your investigative efforts so that you have a strong record on which to rely.”





September 23rd, 2014

Attorney General Holder – “The Buck Needs to Stop Somewhere” – But Does It Stop With Him?

Buck Stops HereLast week U.S. Attorney General Eric Holder delivered this speech at New York University School of Law.  While focusing on financial fraud issues, the speech also touched upon several issues of general interest such as Holder’s statement that “the buck needs to stop somewhere where corporate misconduct is concerned.”  (emphasis in original).  Holder spoke of corporate structures that “blur lines of authority and prevent responsibility for individual business decisions from residing with a single person.”  Holder also highlighted that:

“[A]t some institutions that engaged in inappropriate conduct before, and may yet again, the buck still stops nowhere.  Responsibility remains so diffuse, and top executives so insulated, that any misconduct could again be considered more a symptom of the institution’s culture than a result of the willful actions of single individual.”

Recognizing that there are obvious differences between a government department and a business organization, the fact remains there are many similarities between the two when it comes to internal behavior, diffusion of responsibility and insulation of top leadership.

For instance and to borrow corporate analogies, Attorney General Holder is the CEO of DOJ Inc. and even the DOJ describes itself as the “world’s largest law office, employing more than 10,000 attorneys nationwide.”  That employee headcount (obviously the DOJ also employs non-attorneys as well) is rather small compared to a typical corporation doing business in the global marketplace through employees and hundreds, if not thousands, of third parties.

Returning to an issue previously highlighted here and here, if the DOJ was a business organization and subject to the same legal principles its uses to prosecute business organizations, the DOJ would constantly be under scrutiny and the subject of numerous enforcement actions.

Why?

Because as highlighted in this recent report by the Project on Government Oversight (“POGO”) titled “Hundreds of Justice Department Attorneys Violated Professional Rules, Laws, or Ethical Standards:”

“An internal affairs office at the Justice Department has found that, over the last decade, hundreds of federal prosecutors and other Justice employees violated rules, laws, or ethical standards governing their work.”

[...]

“From fiscal year 2002 through fiscal year 2013, the Justice Department’s Office of Professional Responsibility (OPR) documented more than 650 infractions … In the majority of the matters – more than 400 – OPR categorized the violations as being at the more severe end of the scale:  recklessness or intentional misconduct, as distinct from error or poor judgment.”

Although not specifically discussed in the POGO report, Foreign Corrupt Practices Act enforcement actions have seen instances of prosecutorial misconduct.  For instance, as highlighted in this post, in the DOJ’s enforcement action against Lindsey Manufacturing and two of its executives, the judge in dismissing the case, stated that the instances of misconduct were “so varied, and occurr[ed] over so lengthy a period … that they add up to an unusual and extreme picture of a prosecution gone badly awry.” In the failed Africa Sting case, the judge in dismissing the cases, stated that certain of the DOJ’s conduct had “no place in a federal courtroom.”  (See here).

The DOJ’s Principles of Prosecution of Business Organizations state, among the factors prosecutors should consider in deciding whether – and how – to charge a business organization as follows.

“Among the factors prosecutors should consider and weigh are whether the corporation appropriately disciplined wrongdoers, once those employees are identified by the corporation as culpable for the misconduct.”

Against this backdrop, the POGO report stated that several “examples of misconduct” within the DOJ often result in lenient sanctions such as a 10, 14 or 30 day suspensions.  Moreover, if I am not mistaken, certain of the DOJ prosecutors in the above FCPA enforcement actions – far from being disciplined – were promoted after their conduct was called into question by the federal judiciary.

The policy question needs to be asked: as a matter of principle should not the prosecutor / regulator and the prosecuted / regulated be held to the same general standards?

As a matter of principle and borrowing Holder’s policy pronouncements, should not the buck somewhere in the DOJ when improper conduct occurs within its ranks?  Is responsibility so diffuse in the DOJ that top leaders are insulated from accountability?

As noted in the POGO report, “high-level DOJ officials have said in the past that given the context – tens of thousands of its attorneys working on tens of thousands of cases each year – the amount of misconduct is small.”  (See here).

Could not the same be said of a typical business organization doing business in the global marketplace?  After all, dig into the details of many corporate FCPA enforcement actions and you will quickly learn that the conduct at issue was engaged in by a “small fraction” of the company’s global workforce to borrow the phrase the DOJ used in the HP enforcement action.

To be clear, the point of this post is not to call (as some actually have) for Holder’s resignation or to insist that Holder ought to be personally responsible, legally or ethically, for the improper conduct that has taken place in the DOJ under his leadership.

Rather, the point of this post is to highlight from a policy perspective the similarities between the DOJ and a business organization when it comes to compliance, internal behavior, diffusion of responsibility and insulation of top leadership.

These similarities ought to make top government enforcement officials less confident and less sweeping in their policy statements and simplistic views of legal and ethical culpability.  And if not, the similarities should at least cause top government enforcement officials to recognize that the same statements and views can be appropriately used to shine a light on the organizations they are tasked with running.

*****

For additional views of Holder’s recent speech, see here from Debevoise & Plimpton and here from Professor Peter Henning at his White Collar Crime Watch column in the New York Times.

Posted by Mike Koehler at 12:08 am. Post Categories: Double StandardEnforcement Agency PolicyEnforcement Agency SpeechesExecutive Enforcement Action




September 22nd, 2014

And The Apple Goes To …

applepicFitting of the season, the FCPA Professor apple award goes to Matthew Fishbein (Debevoise & Plimpton).

In this recent article titled “Why Aren’t Individuals Prosecuted for Conduct Companies Admit,” Fishbein (who previously served in the U.S. Attorney’s Office for the Southern District of New York as Chief Assistant U.S. Attorney and Chief of the Criminal Division, among other DOJ positions), picks an orchard. He writes:

“The public has every right to wonder how it can be that the government brings no charges against individuals in the wake of [corporate criminal settlements]. Companies act only through the conduct of individuals—if the conduct is as egregious as portrayed in these settlements, and if the massive penalties are appropriate, how is it that so often the government charges no individuals?

[...]

Prosecutors’ increasing appreciation of the leverage they enjoy over corporate entities, coupled with companies’ determinations that a “bad” settlement is likely better than a “good” litigation, has resulted in a greater number of corporate settlements in cases where the government would be unlikely to prevail if forced to prove its case in court. The result, increasingly common over the last 20 years, is that prosecutors can obtain what appears to be a monumental victory without needing to develop a theory, supported by evidence, that could survive a legal challenge or prevail before a jury.

Prosecutors have far less leverage over individuals. People, unlike corporations, often face the prospect of incarceration and financial ruin in the event of a criminal conviction. As a result, individuals are more likely to test the government’s legal theories and version of the facts. Of course, the government often does pursue complex cases against individuals where the legal theory is clear and the facts compelling (for example, the recent wave of insider trading cases). But in many of the recent settlements, prosecutors know from their interactions with lawyers for individuals that, unlike with the corporation, they are likely to have a fight on their hands if they bring charges. Prosecutors are under enormous pressure from Congress and the public to pursue cases against senior executives who are thought to have caused the financial crisis. If they thought they would prevail, is there any doubt that they would bring these cases?

[...]

As NPAs and DPAs have become increasingly common, the government’s leverage over corporations in negotiating these settlements has become more apparent. In addition to the tremendous risks associated with an indictment, prosecutors have several other powerful sources of negotiating leverage. These include: government suspension and debarment; the loss of key licenses, such as banking licenses; the drain on the time and energy of corporate executives and other witnesses; legal costs; and costs associated with the uncertainty of a criminal investigation and potential indictment.

Corporations are also reluctant to go to trial because they are risk averse. Regardless of the strength of the government’s case, the facts in corporate criminal cases are often complex or esoteric, and there is always a chance that a jury may not understand why a few problematic documents do not add up to criminal liability.

In light of these factors, companies often may view an admission of criminal conduct as preferable to a legal victory that clears the company’s name but requires years of uncertainty. By entering into a settlement, a company often confines its exposure to a press conference followed by writing a large check, after which the incident may be relegated to a paragraph in a 10-Q filing. By contrast, a company that goes to trial may receive negative—and unpredictable—news coverage for years.

From a business perspective, the preference to settle appears to be prudent: Even though DPAs often involve damaging admissions and massive fines, such negotiated resolutions tend to lead to an immediate increase in a company’s stock price. [...] The increase of a company’s stock price after it admits to often egregious criminal conduct and pays a multimillion dollar fine reflects the strong desire of shareholders and the market—and the consequent pressure on corporate executives—to resolve investigations by entering into settlements. The market appears to value the certainty of a resolution more than it is concerned by admissions of criminal conduct.

The above factors all contribute to an environment in which the government can test the limits of its leverage in negotiating corporate settlements. In recent years, prosecutors have pushed those limits further, knowing that they often need not develop a theory of criminal liability that would likely survive a court challenge. A December 2013 NPA that Archer Daniels Midland (ADM) entered into to settle FCPA charges provides a telling example. Under the NPA, ADM agreed to pay $54 million in penalties for bribing foreign government officials. Although it was undisputed that officials of ADM indirect subsidiary ACTI Ukraine paid off foreign officials, they did so in order to receive tax refunds owed by the Ukrainian government.

According to FCPA expert and Southern Illinois University School of Law Professor Michael Koehler, “it is difficult to square [the elements of the FCPA] with the facts alleged in the [ACTI] Ukraine information, and anyone who values the rule of law should be alarmed by it.” The FCPA was designed to prevent companies from “corruptly” acquiring “business”—not receiving owed tax refunds. Moreover, the statute specifically exempts from its anti-bribery provisions “payments to a foreign official…the purpose of which is to expedite or to secure the performance of a routine government action by a foreign official.”

The ADM NPA appears to reflect what Mark Mendelsohn, former head of the Justice Department’s FCPA Unit, has described as the “danger” of NPAs and DPAs: “it is tempting for the [Justice Department] or the SEC…to seek to resolve cases through DPAs or NPAs that don’t actually constitute violations of the law.” But if a case turns out to be marginal, why would a prosecutor pursue it? My experience as a former prosecutor and current defense lawyer suggests that there are at least three reasons for this phenomenon.

First, competition between prosecutors’ offices and public demands for immediate investigations in the wake of high-profile stories place substantial pressure on prosecutors to investigate companies quickly and to pursue cases without having necessarily vetted their appropriateness for criminal charges.

Second, many of the subjects of corporate investigations are complicated, esoteric, and place a substantial burden on the limited resources of prosecutors’ offices. After a lengthy investigation, a prosecutors’ office may not be inclined to simply close a case, especially if it can induce the company to enter into a settlement.

Third, as a result of the leverage discussed above, prosecutors can obtain settlements and massive payments in even marginal cases. Corporate prosecutions represent a low-risk, high-reward opportunity: The risk inherent in pursuing a marginal case is blunted by the high likelihood that a corporation will settle because of the prosecutor’s superior leverage and the corporate defendant’s rational risk aversion. And as settlements increase and monetary penalties skyrocket, the government accumulates and issues press releases reporting record amounts in fines and forfeitures.

[...]

[F]ew prosecutions of individuals actually occur. The reason is simple: Prosecutors do not possess the same kind of leverage over individuals that they do over companies. Because an admission of wrongdoing by an individual has far greater consequences, individuals are more likely to test the prosecution’s case. In cases where the evidence of criminal conduct is weak, prosecutors may well succeed in inducing the corporation to settle, but fail to convince individuals to do the same. Consequently, we see DPAs, often accompanied by inflammatory statements of fact (drafted by prosecutors) documenting outrageous criminal conduct by the company through its employees, without any follow-up prosecution of individuals.

Prosecutors have long been able to charge companies for the criminal conduct of their employees. And in the appropriate case, it makes sense that the corporation, which is created by the laws of the state, should be held accountable to ensure that its employees follow the law. But it follows that if criminal conduct has occurred, the individuals responsible should also be pursued.

The leverage the government can exercise over companies has tipped the scales to a troubling degree. By using their considerable leverage to induce companies to enter into settlements in increasingly marginal cases and forcing them to admit to egregious conduct to settle charges that likely would not survive a legal challenge or be proved to a jury, prosecutors have created a situation where the public is deceived into thinking that the individuals involved in corporate criminal conduct are receiving a free pass.

If these cases were exposed to the light of day by the adversarial system, the public would learn that they are often far murkier than they appear in the DPA’s statement of facts. Instead, however, the public sees a fundamental disconnect between the prosecution of corporations and the prosecution of individuals—and is justifiably left to wonder why prosecutors do not pursue the individuals through whom all corporations must act.”

For additional reading on the above topics see:

The Facade of FCPA Enforcement“ (2010)

My 2010 Senate FCPA testimony (“The lack of individual prosecutions in the most high-profile egregious instances of corporate bribery causes one to legitimately wonder whether the conduct was engaged in by ghosts. [...]  However, a reason no individuals have been charged in [most FCPA] enforcement actions may have more to do with the quality of the corporate enforcement action than any other factor. As previously described, given the prevalence of NPAs and DPAs in the FCPA context and the ease in which DOJ offers these alternative resolution vehicles to companies subject to an FCPA inquiry, companies agree to enter into such resolution vehicles regardless of the DOJ’s legal theories or the existence of valid and legitimate defenses. It is simply easier, more cost efficient, and more certain for a company … to agree to a NPA or DPA than it is to be criminally indicted and mount a valid legal defense – even if the DOJ’s theory of prosecution is questionable …”.

But Nobody Was Charged” (2011)

“DOJ Prosecution of Individuals – Are Other Factors At Play?” (2011) (2013) (2014)

Why You Should Be Alarmed by the ADM Enforcement Action” (2014).

*****

[The FCPA Apple Award recognizes informed, candid, and fresh thought-leadership on the Foreign Corrupt Practices Act or related topics. There is no prize, medal or plaque awarded to the FCPA Professor Apple Award recipient. Just recognition by a leading FCPA website visited by a diverse group of readers around the world. There is no nomination procedure for the Apple Award. If you are writing something informed, candid and fresh about the FCPA or related topics, chances are high that I will find your work during my daily searches for FCPA content.]

Posted by Mike Koehler at 12:04 am. Post Categories: Apple AwardDeferred Prosecution AgreementsFCPA ScholarshipNon-Prosecution Agreement




September 19th, 2014

Friday Roundup

GSK announces verdict in China, the silly season, interesting read, Alibaba, and get it right!  It’s all here in the Friday roundup.

GSK Verdict in China

Earlier today, GlaxoSmithKline announced:

“[T]he Changsha Intermediate People’s Court in Hunan Province, China ruled that GSK China Investment Co. Ltd (GSKCI) has, according to Chinese law, offered money or property to non-government personnel in order to obtain improper commercial gains, and been found guilty of bribing non-government personnel. The verdict follows investigations initiated by China’s Ministry of Public Security in June 2013.  As a result of the Court’s verdict, GSKCI will pay a fine of £297 million [approximately $490 million USD] to the Chinese government. [...] The illegal activities of GSKCI are a clear breach of GSK’s governance and compliance procedures; and are wholly contrary to the values and standards expected from GSK employees. GSK has published a statement of apology to the Chinese government and its people on its website (www.gsk-china.com).  GSK has co-operated fully with the authorities and has taken steps to comprehensively rectify the issues identified at the operations of GSKCI. This includes fundamentally changing the incentive program for its salesforces (decoupling sales targets from compensation); significantly reducing and changing engagement activities with healthcare professionals; and expanding processes for review and monitoring of invoicing and payments. GSK Chief Executive Officer, Sir Andrew Witty said: “Reaching a conclusion in the investigation of our Chinese business is important, but this has been a deeply disappointing matter for GSK. We have and will continue to learn from this. GSK has been in China for close to a hundred years and we remain fully committed to the country and its people. We will continue to expand access to innovative medicines and vaccines to improve their health and well-being. We will also continue to invest directly in the country to support the government’s health care reform agenda and long-term plans for economic growth.”

For more, see here from the BBC.

“The court gave GSK’s former head of Chinese operations, Mark Reilly, a suspended three-year prison sentence and he is set to be deported. Other GSK executives have also been given suspended jail sentences. The guilty verdict was delivered after a one-day trial at a court in Changsha, according to the Xinhua news agency.”

The GSK penalty was described as the biggest fine in Chinese history.  The $490 million fine is also believed to be one of the largest bribery/corruption fines ever.  For instance, a $490 million settlement would rank third on the top ten list of FCPA settlements.

Perhaps the most interesting aspect of the GSK development is reference in the company’s release to the charges involving “non-government personnel.”  In the U.S., it is a prominent enforcement theory that employees of various state-run health care systems – including in China – are “foreign officials” under the FCPA.  (See here).

Another interesting aspect of the GSK development – and one foreshadowed in this 2013 post – is how the Chinese verdict will impact GSK’s scrutiny in its home country (United Kingdom).  As highlighted in the post, the U.K. has a unique double jeopardy principle and, as explained by former SFO Director Richard Alderman, the U.K. “double jeopardy law looks at the facts in issue in the other jurisdiction and not the precise offense.  Our law does not allow someone to be prosecuted here in relation to a set of facts if that person has been in jeopardy of a conviction in relation to those facts in another jurisdiction.”

GSK remains under investigation for conduct outside of China as well.

The U.S. does not have a similar double jeopardy principle, relevant to the extent GSK has shares listed on a U.S. exchange and its conduct in China and elsewhere has been under FCPA scrutiny.

As indicated in the prior post, GSK’s scrutiny – and now liability – in China makes for an interesting case study in enforcement competition.

The Silly Season

Offensive use of the FCPA to accomplish a business objective or advance a litigating position is an observable trend highlighted in my article “Foreign Corrupt Practices Act Ripples.”  As noted here, the FCPA has also been used offensively to score (or at least attempt to score) political points.

The election season is upon us and during this “silly season” perhaps the silliest use of the FCPA ever is happening – not once – but twice.

As noted in this article:

“Michigan Democrat Gary Peters profited from a French oil company [Total S.A.] that admitted to bribing Iranian officials for access to their oil fields.  [...] The Peters campaign did not return requests for comment about whether he was aware of the bribery scandal. [...] Republican Senate nominee Terri Lynn Land called on him to divest from the company, but the three-term congressman refused. [...] “Gary Peters will do anything to make a dollar and say anything to win an election,” Land spokesman Heather Swift said in a statement. “The more Michigan voters learn about Gary Peters the more they know they can’t trust him to put Michigan first.”

Silly.  And there is more.

As noted in this separate article from the same source:

“Sen. Jeanne Shaheen has invested tens of thousands of dollars in a French oil company that admitted to bribing Iranian officials.  [...]  Shaheen’s family owns between $50,000 and $100,000 of stock in Total S.A., the fourth-largest oil company in the world, through a mutual fund.”

Two scoops of silly.

And now for some facts.

Per the DOJ/SEC’s own allegations in the 2013 Total FCPA enforcement action, the vast majority of the alleged improper conduct took place between 1995 and 1997 (that is 17 to 19 years ago).  So old was the conduct giving rise to the Total enforcement action, that the DOJ made the unusual statement in the resolution document that “evidentiary challenges” were present for both parties given that “most of the underlying conduct occurred in the 1990s and early 2000s.”

Interesting Read

Speaking of those FCPA ripples, Hyperdynamics Corporation has been under FCPA scrutiny since 2013 and its recent annual report makes for an interesting read as to the wide-ranging business effects of FCPA scrutiny.  Among other things, the company disclosed approximately $7.5 million in the prior FY for legal and other professional fees associated with its FCPA scrutiny.  Not all issuers disclose pre-enforcement action professional fees and expenses, so when a company does, it provides an interesting data-point.

Chinese Issuers

I began writing about Chinese companies and the FCPA in this 2008 article at the beginning of the trend of Chinese companies listing shares on U.S. exchanges.  This 2009 post returned to the issue and noted that with the IPO market showing signs of life again, and with foreign companies increasingly turning to U.S. capital markets, and with many of these companies doing business in FCPA high-risk countries, the number of FCPA enforcement actions against foreign issuers is likely to increase.  That, of course, has turned out to be true.

Today, of course, is the IPO of Chinese company Alibaba, expected to be largest U.S. IPO ever.  The company’s business model does not exactly rank high in terms of FCPA risk, but recall that the FCPA has always been a law much broader than its name suggests because of the books and records and internal control provisions.

Even as to the anti-bribery provisions, it is at least worth noting, as highlighted in this recent New York Times article:

“Alibaba’s [recent acquisition of a company] provides an example of how the rapid growth of the private sector is also benefiting the country’s political elite, the so-called princelings, or relatives of high-ranking officials.  [...]  Although Alibaba declined to comment for this article, citing regulatory restrictions on public statements ahead of a public offering, the company has said it relies on the market — not political connections — to drive its business. “To those outsiders who stress companies’ various ‘backgrounds,’ we didn’t have them before, we don’t have them now, and in the future we won’t need them!” the company said in a statement in July after a report that several investment companies tied to the sons and grandsons of senior Communist Party leaders owned stakes in Alibaba, including New Horizon Capital, whose founders include the son of former Prime Minister Wen Jiabao.”

As noted in the article, over the past year JPMorgan and several other financial services companies have come under FCPA scrutiny for alleged relationships with princelings.

Get It Right!

It’s a basic issue.

If you are writing about the Foreign Corrupt Practices as a paid journalist you have an obligation to get it right and engage in due diligence before hitting the publish button.

This Corporate Counsel article states:

“It’s already been a big year for enforcement activity under the U.S. Foreign Corrupt Practices Act. In the first half of 2014 alone, the U.S. Department of Justice and the U.S. Securities and Exchange Commission initiated 15 actions against companies alleged to have violated the international corruption law.”

For the record, in the first half of 2014, there have been three corporate FCPA enforcement actions: HP, Alcoa and Marubeni.

*****

A good weekend to all.