December 4th, 2014

Friday Roundup

Roundup2Transparency International’s latest Corruption Perception Index, monitor issues, scrutiny alert, Chinese SOEs, SEC press releases, hot, and for the reading stack.  It’s all here in the Friday roundup.

Transparency International’s Latest Corruption Perceptions Index

Transparency International, a global civil society organization dedicated to the fight against corruption, released recently the 20th edition of its Corruption Perceptions Index (“CPI”).  (See here for TI’s release).  As stated by TI, the CPI “measures the perceived levels of public sector corruption worldwide” and 175 countries are ranked with Denmark, New Zealand, Finland, Sweden, Norway, and Switzerland (topping the list – i.e. low levels of perceived corruption) and South Sudan, Afghanistan, Sudan, North Korea and Somalia (on the bottom of the list – i.e. high levels of perceived corruption).

TI’s CPI is a popular tool on which many business organizations rank perceived risk, but query whether the CPI is a reliable or meaningful measure of the specific risks specific business organizations face when competing in the global marketplace?

For starters, perceptions are just that, perceptions.  To be sure, there are countless honest and ethical people living in Somalia just as there are countless dishonest and unethical people living in Denmark.  Moreover, at its core, FCPA risk is the function of specific business actors (employees and agents) coming into contact with specific foreign officials, in the context of specific foreign business conditions.  These risk points are often industry specific and within a country are often region specific.  None of these factors, or very few, are captured by the CPI.

Thus, while I enjoy each time this year looking at the CPI map, I don’t think it is a very useful tool for business organizations when adopting policies and procedures designed to minimize FCPA risk.

Monitor Issues

An interesting blurb here from Courthouse News Service.

“Siemens and a monitor charged with keeping watch over the German conglomerate’s compliance with a settlement agreement over federal corruption and bribery charges can fight to keep records of that agreement out of the hands of reporters, a federal judge ruled. (See 2014 WL 6817009). 100Reporters – a press outlet with a self-proclaimed mission to “cover corruption of all sorts” – sued the Justice Department under the Freedom of Information Act this past summer, seeking records of Siemens’ compliance with a 2008 settlement of violations of the Foreign Corrupt Practices Act. Siemens pleaded guilty and agreed to pay a precedent-setting $1.6 billion penalty to U.S. and EU authorities to settle charges that it routinely used bribes and slush funds to secure massive public works contracts around the world. Part of the settlement included four-year compliance monitoring by Dr. Theo Waigel, who was given broad access to Siemens’ confidential and commercially sensitive information and records to make annual reports to the Justice Department. The DOJ closed the compliance monitoring in 2012, determining that Siemens had “satisfied its obligations under the plea agreement.” After the Justice Department denied 100Reporters’ request for compliance monitoring documents – including the four annual reports from Waigel – and the group sued, Siemens and Waigel demanded to get involved, citing the right of intervention. For Siemens’ part, the company argued that the reports contained confidential and proprietary information not fit for public consumption. Waigel complained that his personal reputation – and the unfettered access of future compliance monitors – was on the line because he promised Siemens confidentiality while examining the company’s records and delivering his reports to the Justice Department.  Both Siemens and Waigel have a legal interest in fighting 100Reporters’ FOIA request, U.S. District Judge Rudolph Contreras held in a 31-page ruling issued Wednesday. Specifically, Contreras dismissed 100Reporters’ claims that Siemens, Waigel and the DOJ are all fighting from the same legal position. ”Requiring Siemens to monitor the DOJ’s litigation posture from the sidelines until Siemens disagrees with a decision by the agency is inefficient and impractical; indeed, Siemens likely would have limited, if any, insight into the DOJ’s strategy during the litigation, and once Siemens did learn of a hypothetical shift in the DOJ’s position, such as a decision to release a specific category of materials, it might be too late for Siemens to undue any damage done,” Contreras wrote. Furthermore, not allowing Siemens and Waigel to intervene now – and forcing them to wait months or years until the Justice Department has done its withholding analysis – would put them both in danger of missing federal filing deadlines, the judge said. The potential injury to Siemens if the documents are released is both “particularized and sufficiently imminent,” Contreras wrote. ”It is not surprising, then, that 100Reporters cannot cite a single FOIA case in which a court denied on standing grounds the application of a prospective intervenor whose own confidential materials were the clear subject of the FOIA request,” he added. Contreras also rejected calls by 100Reporters to limit Siemens’ involvement solely to FOIA exemption 4, which bars release of confidential and commercially sensitive information. ”A more functional and practical approach is required, and fatally, 100Reporters fails to offer any concrete or realistic consequences to this litigation from Siemens’s (or Waigel’s) intervention that might require the court to impose a limitation on the scope of the defenses that an intervenor may raise as this case, which still is in its infancy, proceeds to the merits,” Contreras wrote. The judge refused 100Reporters’ claims that allowing Siemens and Waigel to get involved would unnecessarily delay the proceedings, advising the group in a footnote “raise such concerns then,” if and when any delays occur.”

The California Lawyer goes in-depth in an article titled “The Secret Life of a Corporate Monitor.”

“Without naming the subjects of his monitoring, Dan Ray talked generally about the highly secretive world of government-appointed corporate monitors, where progress reports are confidential, judges rarely get involved, and the DOJ alone determines whether corporations have complied with terms of the agreements. Monitors are not government employees or agents, and they do not contract with or receive payment from the government. Fees generally are negotiated between the corporation and the monitor.”

Through some basic internet research, it is not that difficult to figure out which companies Ray monitored.  (See here, here and here).

Scrutiny Alert

The Financial Times reports:

“In a Florida court on Tuesday, a judge granted a request by US prosecutors to seize an ice cream cooler, a walk-in freezer, dozens of other pieces of catering equipment and three properties belonging to a woman called Mamadie Touré. It was just one of a ceaseless stream of such requests, through which the authorities seek forfeiture of what they say are ill-gotten assets. But this was no ordinary woman and no ordinary case. Ms Touré is the widow of Lansana Conté, a dictator who ruled the resource-rich but dirt poor west African state of Guinea for 24 years before his death in 2008. And US prosecutors’ interest in Ms Touré runs to much more than a few refrigerators and some Jacksonville real estate. Their court filing in the forfeiture request spells out the details of a two-year US investigation into one of the most wide-ranging cases of alleged corruption in recent years.  Prosecutors alleged in that filing, lodged last week and seen by the Financial Times, that Ms Touré received bribes totalling $5.3m to help a mining company win iron-ore rights in Guinea. The rights in question were to exploit the northern half of a hillside called Simandou, considered the planet’s richest virgin deposit of iron ore. The company involved is not named in the filing. But references to documents published in a Guinean inquiry, to the timing of the award of the mining rights and to a separate criminal case make it obvious that the company is BSG Resources, the mining arm of Israeli billionaire Beny Steinmetz’s family conglomerate.”

Chinese SOEs

An interesting article recently in the Wall Street Journal.  According to the article:

“At the end of 2013, China had about 155,000 firms owned by central, provincial and local governments, according to the Ministry of Finance.  Beijing itself directly controls less than 120 of the biggest and most strategically significant industrial companies, which are responsible for building the world’s largest nuclear reactors and most extensive high speed rail network, buying up mining and agricultural resources overseas, and spreading Chinese goodwill with infrastructure projects across the developing world. [...] Many smaller state-owned firms make goods with no obvious strategic significance, like spirits and toothpaste …”.

The article contains an interesting chart comparing six China SOEs with U.S. counterparts.  According to the chart, the six SOEs have approximately 2.6 million employees.

SEC Press Releases

Russell Ryan (King & Spalding and former assistant director of enforcement at the SEC ) returns to the Wall Street Journal’s opinion page with this dandy piece titled “Get the SEC Out of the PR Business.”  He begins:

“Press releases are par for the course when the Securities and Exchange Commission files a case in federal court that it must later prove to a judge or jury. But the agency is increasingly shunting cases into its own administrative proceedings, where it initiates the prosecution and ultimately decides guilt or innocence—along with the severity of any sanctions—subject to only limited review in court. Given the SEC’s peculiar quasi-judicial role in these cases, you might think the agency would refrain from gratuitously stoking prehearing publicity against the accused. Think again. The SEC now routinely issues press releases when it files charges in administrative cases it will eventually decide. This practice calls into question the agency’s ability to decide those cases fairly and impartially.”

[...]

“SEC releases also stray beyond a fair and accurate summary of agency action. Many confuse what happened by asserting—often in the headline or lead sentence—that the SEC “charged” the accused with wrongdoing. But at this initial stage only SEC staff employees, typically from the enforcement division, have “charged” any wrongdoing. Commissioners, at least in theory, have merely scheduled a hearing to determine whether the employees can prove their charges—a determination the commissioners are supposed to make after an administrative judge conducts the hearing and makes a preliminary decision. Not surprisingly, media reports often reinforce the misperception that SEC commissioners are prosecuting these cases rather than deciding them. One of the most troubling features of SEC prehearing press releases is the partiality they betray in favor of agency prosecutors over the accused. In virtually all cases, the SEC allows its prosecuting employees not only to ghostwrite the official press release but also to insert gratuitous quotations that embellish the formal accusations with more colorful words and phrases like “tricks,” “calculated fraud,” “reaping substantial profits,” and “choosing profits over compliance.” The accused is never extended similar courtesies. When the SEC initiates enforcement action administratively rather than in court, it should embrace its primary role as impartial decision maker. That means resisting the urge to stoke prehearing publicity and maintaining strict neutrality in both fact and appearance. By failing to do so, the SEC risks having administrative fines and other sanctions swept aside if a court someday concludes, quite reasonably, that agency press releases plausibly suggest prejudgment of cases or lack of impartiality. The agency may consider that scenario unlikely. But given its determination to prosecute more cases administratively, that may not be a risk worth taking.”

Hot

You probably already knew that FCPA and related practices are hot.  But just in case you need another reminder, see here.  The latest edition of “What’s Hot and What’s Not in the Legal Profession” contains the following under the “hot” category.

“Anti-corruption. Larger U.S. firms continue to increase enforcement of the Foreign Corrupt Practices Act, leading to more prosecutions. The U.K., China, Brazil and Canada have all enacted anti-bribery laws in the past few years and are now increasing investigations.”

You can elevate your FCPA knowledge and practical experience by attending the FCPA Institute in Miami (Jan. 12-13, 2015). Join other firm lawyers, in-house counsel, auditing professionals and others already registered for the FCPA Institute – Miami by clicking here to register.  CLE credit is available.

Reading Stack

The lastest edition of Debevoise & Plimpton’s always informative FCPA Report is here.

From Foley & Lardner attorney Aaron Murphy and Daniel Seltzer (Senior Director, Anticorruption for Accenture) “The End of Whac-A-Mole Compliance:  A Global Approach to Anti-Corruption Actions.”

*****

A good weekend to all.

Posted by Mike Koehler at 12:03 am. Post Categories: Asset RecoveryBeny SteinmetzBSG ResourcesChinaComplianceFCPA Inc.FCPA StatisticsMamadie TouréMonitorSECSiemensTransparency International




December 4th, 2014

Issues To Consider From The Recent OECD Report

Earlier this week the OECD released a report titled “OECD Foreign Bribery Report – An Analysis of the Crime of Bribery of Foreign Public Officials.”

The Report “endeavours to measure, and to describe, transnational corruption based on data from the 427 foreign bribery cases that have been concluded since the entry into force of the OECD Anti-Bribery Convention in 1999″ by the 41 signatory countries to the OECD Convention. From this universe of cases, the Report then attempts to calculate several statistics.

Calculating statistics across 41 countries with different legal regimes, different ways of prosecuting cases, etc. is a monumental task.

It is also a task that yields statistics that are not very reliable or meaningful, particularly given certain of the methodologies and assumptions made in the Report.

For starters, the report itself notes as follows.  ”This report is peppered with unknown data, ranging from 2% to 36% depending on the particular data set.  Many of the concluded cases did not contain all the information needed to make a full analysis and were also not publicly available.”

Second, the report ”does not examine foreign bribery related offenses such as accounting.”  It is a bit unclear what this means, but if it means that FCPA books and records and internal controls cases only are not included in the dataset, then this is a significant limitation because actual charges in an FCPA enforcement action are often based – not solely on the conduct at issue – but other factors such as voluntary disclosure, cooperation, collateral effects, etc.  In short, several FCPA enforcement which could implicate the FCPA’s anti-bribery provisions do not as a technical matter.

Third, and as noted in footnote 11 of the report, “in the case of the United States, sanctions imposed by the Securities Exchange Commission (US SEC) and Department of Justice (US DOJ) are counted separately.”  Given that U.S. cases comprised approximately 1/4 of the total cases examined, this creative counting method is hugely significant.

Consider just 2013 FCPA enforcement in which there were 9 core corporate enforcement actions (ADM, Bilfinger, Weatheford, Diebold, Total, Ralph Lauren, Parker Drilling, Stryker and Phillips).  Yet if one counts DOJ and SEC actions separately, as did the OECD, notwithstanding the fact that most DOJ and SEC enforcement actions were based on the same core conduct, the number dramatically jumps to 15 corporate enforcement actions in 2013.  In other words and using just one year, one can clearly see how creative FCPA enforcement action counting methods dramatically changes the denominator for every statistic calculated.

One statistic that has generated much media attention from the OECD Report  (see here and here) is the finding that 53% of foreign bribery cases involved corporate management or CEOs.  However, the OECD Report - as noted in footnote 36 – defines “management” to mean senior level management, executives at the board level, directors and lower level management and states that “case data was insufficient to distinguish between these categories.”

To be sure in the FCPA context, certain enforcement actions have involved senior executive conduct and/or board conduct, but the vast majority of FCPA enforcement actions do not involve senior level management and a frequent allegation in such enforcement actions is that no one at the parent company resolving the enforcement action was aware of or participated in the alleged improper conduct.  To the extent there was a management level employee (and “title inflation” surely seems to be used in many FCPA enforcement actions) involved in the alleged improper conduct, the individual was employed by a legal entity (such as foreign subsidiary) separate from the entity actually resolving the enforcement action.

Because the OECD Report was “prepared with the aim of assisting the OECD Working Group on Bribery in International Business Transactions and the G20 Anti-Corruption Working Group in their efforts to combat transnational bribery,” it was imperative that the statistics in the Report be reliable and meaningful.

Based on the above information, you can decide for yourself whether this is the case.

Despite the statistical deficiencies of the OECD Report there are several “preliminary conclusions” in the report worthy of highlighting.

For instance, as to the long timeframes involved in foreign bribery cases, the report states “it is essential that law enforcement authorities undertake efficient and effective investigations to avoid unnecessary delays.”

As to settlements, the predominate vehicle by which foreign bribery cases are resolved, the report states that “settlement procedures should respect the principles of due process, transparency and consistency.”

As to compliance programs, the report states that there is “scope for greater incentivizing preventative anti-bribery compliance programs …”.

*****

DOJ Assistant Attorney General Leslie Caldwell delivered this speech in connection with the release of the OECD Report.

Posted by Mike Koehler at 12:03 am. Post Categories: Enforcement Agency PolicyEnforcement Agency SpeechesFCPA StatisticsOECD




December 3rd, 2014

FCPA Survey Results From The Classroom

Survey ResultsCall them green, inexperienced, and naive as to how things really work.

I call them good Foreign Corrupt Practices Act survey respondents because they are immersed in learning: (i) about black letter legal principles; (ii) legal authority as opposed to non-legal sources of information; and (iii) how the law and the adversarial system functions in other areas of law.  I call them good FCPA survey respondents because their answers are not influenced by client concerns, maintaining their own practice, or maintaining good will with the enforcement agency officials who possess the “carrots” and “sticks” relevant to FCPA enforcement.

The below survey data was collected – anonymously – this semester from students in my FCPA class at Southern Illinois University School of Law.  As noted in this prior post, the class is one of the only law school courses of its kind in the country.  (See here for media coverage of the class).  The prior post sets forth the learning objectives of the class and during the semester students had the opportunity to engage with FCPA lawyers in private practice, an FCPA violator and government cooperator, and in-house FCPA compliance attorneys at leading companies.

The survey results are set forth below.  (Next to each survey result, in ( ) is the response to the same question from last year’s class.  Note, in a few instances new questions were asked this year compared to last year, thus the reason for no previous response).

*****

(1)  In enforcing the FCPA, or any law for that matter, what is the best definition of success

The number of settlements the DOJ or SEC is able to secure = 15% (17%)
Instances in which the DOJ or SEC is put to its burden of proof and prevails = 85% (83%)
(2) Rank, in the order of importance (with 1 being most important and 4 being least important) what the FCPA means?
Judicial decisions construing the FCPA = average = 2.9 (3.1)
The FCPA’s statutory language = average = 1.2 (1.3)
Enforcement agency guidance, including resolved enforcement actions = average = 3.4 (3.4)
Congressional intent in enacting the FCPA = average = 2.4 (2.3)
(3)  You are the general counsel of ABC Inc.  A whistleblower has contacted the DOJ and SEC regarding potential FCPA violations in your China operations and the agencies have opened up an investigation.  After an internal review conducted by outside counsel, outside counsel advises you that based upon the factual evidence and relevant FCPA legal authority, should the enforcement agencies bring an action and be put to its burdens of proof in an adversarial proceeding, there is only a 30% chance that the enforcement agencies would prevail.  Should the enforcement agencies bring an action (i.e. the DOJ criminally charges the company and the SEC civilly charges the company), it is likely that the company’s stock price would fall at least 3% (and perhaps more) eclipsing $750 million in shareholder value.  Outside counsel advises you that during its negotiations with the DOJ and SEC, the agencies are willing to offer the company non-prosecution agreements in which the company will be required to pay $75 million in aggregate fine and penalty amounts to resolve its alleged FCPA scrutiny.  The non-prosecution agreements are unlikely to have any impact on the company’s stock price.  As general counsel, what course of action are you going to suggest to the company’s board of directors?
Put the DOJ and SEC to its burden of proof at trial = 15% (11%)
Agree to resolve the alleged FCPA scrutiny via the NPAs = 85% (89%)
(4) Are foreign policy implications present in most current FCPA enforcement actions given the alleged “foreign officials”?
Yes = 21% (18%)
No = 79% (82%)
(5) In your opinion, the 11th Circuit’s Esquenazi “foreign official” decision:
Provides clarity to the FCPA’s “foreign official” element = 71%
Results in less clarity as to the FCPA’s “foreign official” element = 29%
(6) Given the DOJ and SEC’s enforcement theories – most notably in enforcement actions involving foreign licenses, permits, etc. – does the FCPA’s facilitating payment exception have any real meaning in this new era of enforcement?
Yes = 27% (32%)
No = 73% (68%)
(7) Given the “carrots” and “sticks” relevant to resolving a corporate FCPA enforcement action, do statute of limitations have any real meaning in this new era of enforcement?
Yes = 8% (16%)
No = 92% (84%)
(8) FCPA enforcement actions often involve companies that are otherwise viewed as selling the best product or service for the best price.  With such companies, can it truly be said that the alleged improper payments were the sole reason the company secured the contract or other benefit received?  In other words, does a “but for” analysis have a place in arriving at FCPA fine and penalty amounts?
No – the full value of the benefit allegedly received should be the starting point for calculating fine and penalty amounts regardless of the type of company resolving the enforcement action = 33% (56%)
Yes – by using the full value of the benefit received, the calculation ignores the fact that the company may have secured the benefit regardless of the alleged improper payments = 67% (44%)
(9) Is disgorgement an appropriate remedy when the SEC charges only FCPA books and records and internal controls violations?
Yes = 17% (25%)
No = 83% (75%)
(10)  In an FCPA enforcement action involving both a DOJ and SEC component, the value of the benefit allegedly received by the company from the improper payments is a key factor in determining the criminal fine amount under the advisory Sentencing Guidelines.  The same figure is also likely to comprise the disgorgement amount in an SEC enforcement action.  This is:
Inappropriate “double-dipping” and thus unfair to the company and its shareholders = 92% (88%)
Appropriate, this is not “double-dipping” and even if it was it is still appropriate = 8% (12%)
(11) Is there a double standard when it comes to enforcement of the FCPA and the U.S. domestic bribery statute (18 USC 201)?  In other words, are corporate interactions with “foreign officials” subject to greater scrutiny and different standards of enforcement than corporate interactions with U.S. officials?
Yes, there is a double standard = 100% (94%)
No, there is no double standard = 0% (6%)
(12) Are you uncomfortable with “bribery, yet no bribery” cases such as Siemens and BAE where the enforcement agencies allege facts suggesting violations of the FCPA’s anti-bribery provisions, yet neither entity was actually charged with such violations?
Yes = 80% (56%)
No = 20% (44%)
(13) Since 2008, approximately 75% of corporate DOJ FCPA enforcement actions (and approximately 80% of corporate SEC FCPA enforcement actions) have not (at least yet) resulted in any related enforcement actions against company employees?  This is likely due to:
The quality and legitimacy of the corporate enforcement action that was resolved via an NPA or DPA = 56% (29%)
Other factors not calling into question the quality and legitimacy of the corporate enforcement action = 44% (71%)
(14)  Given the conduct at issue in the respective cases, does the disparity between the sentences of Joel Esquenazi and Carlos Rodriguez (180 months and 84 months), two individuals who tested their innocence, and Albert Stanley and Jeffrey Tesler (30 months and 21 months), two individuals who pleaded guilty, concern you?
Yes = 100% (79%)
No = 0% (21%)
If yes, were
Stanley and Tesler sentenced too lightly = 38% (27%)
Esquenazi and Rodriguez sentenced too harshly = 62% (73%)
(15) Do you believe that the following reasons have merit in terms of a possible explanation for the general increase in FCPA enforcement?

FCPA enforcement has become lucrative for the government – in the views of some – a “cash cow”

Yes, this reason has merit = 100% (83%)
No, this reason does not have merit = 0% (17%)

FCPA Inc. participants, who often serve as gatekeepers to FCPA enforcement actions and scrutiny, have a vested business interest in there being more FCPA enforcement and scrutiny?

Yes, this reason has merit = 81% (94%)
No, this reason does not have merit = 19% (6%)
(16) The typical career path of a DOJ or SEC enforcement attorney, after enforcing the FCPA, is to leave government service for the private sector to provide FCPA investigative and compliance services to business organizations subject to the FCPA enforcement climate.  This typical career path:
Concerns me and the issue ought to be addressed to a greater extent that it currently is = 63% (61%)
Does not concern me = 37% (39%)

(17) With increasing frequency, instances of FCPA scrutiny or enforcement are quickly followed by civil causes of action such as derivative claims or securities fraud claims brought by plaintiffs’ lawyers representing company shareholders.  Excluding the relatively rare situations in which a company’s FCPA scrutiny or liability is the result of board of director or executive officer conduct, such civil causes of action:

Have merit and provide shareholders the ability to recover for harm suffered as a result of the company’s FCPA scrutiny or liability = 46% (28%)
Lack merit and represent plaintiffs’ lawyers desire to feed-off this new era of FCPA enforcement = 54% (72%)

(18) Rank, in order of importance (with 1 being the greatest interest and 3 being the weakest interest) which law enforcement agency has the greatest interest in bringing an enforcement action when a foreign company or foreign national subject to the FCPA allegedly bribes a foreign official?
The “home” jurisdiction of the foreign company or foreign national = 1.5
The “home” jurisdiction of the foreign official allegedly bribed = 2.4
The U.S. = 2.1
(19)  Are you in favor of the FCPA being amended to include a compliance defense (meaning that a company’s pre-existing compliance policies and procedures, and its good-faith efforts to comply with the FCPA, would be relevant as a matter of law when a non-executive employee or agent acts contrary to those policies and procedures and in violation of the FCPA)?
Yes - 86%
No - 14%
Posted by Mike Koehler at 12:04 am. Post Categories: FCPA Statistics




December 2nd, 2014

Reading Assignments

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

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

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

Both suggested reads are excerpted below.

Judge Rakoff’s Speech

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

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

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

In the words of Judge Rakoff:

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

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

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

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

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

[...]

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

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

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

[...]

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

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

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

Justice Scalia / Thomas Statement

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

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

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

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

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

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

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

Posted by Mike Koehler at 12:02 am. Post Categories: Enforcement Agency PolicyProsecutorial Common LawSEC




December 1st, 2014

Items Of Interest From The Recent Dutch Enforcement Action Against SBM Offshore

Dutch-based SBM Offshore recently resolved an enforcement action in the Netherlands.  With a settlement amount of $240 million, the SBM Offshore enforcement action is believed to be the third largest bribery enforcement action of 2014 with China’s $490 million enforcement action against GlaxoSmithKline and the U.S.’s $384 million enforcement action against Alcoa consisting of the top two.

The enforcement action was pursuant to Article 74 of the Dutch Penal Code, a provision of Dutch law that has been criticized by the OECD.

As stated by the OECD, Article 74 of the Dutch Penal Code “essentially involves the payment of a sum of money by the defendant to avoid criminal proceedings.”  Regarding such out-of-court settlements, the OECD has further noted that “out-of-court settlements in the Netherlands do not require an admission of guilt.”

In its December 2012 Phase 3 review of the Netherlands, one of the follow-up items listed was: “the use of out-of-court transactions for foreign bribery offences, as governed by article 74 of the  Dutch Penal Code, to ensure that they result in the imposition of effective, proportionate and dissuasive sanctions (Convention, Article 3.1).”

Regarding the SBM Offshore action, the Dutch Prosecutor’s Service announced:

“SBM Offshore has accepted an offer from the Dutch Public Prosecutor’s Service to enter into an out-of-court settlement. The settlement consists of a payment by SBM Offshore … of US$ 240,000,000 in total. This amount consists of a US$ 40,000,000 fine and US$ 200,000,000 disgorgement. This settlement relates to improper payments to sales agents and foreign government officials in Equatorial Guinea, Angola and Brazil in the period from 2007 through 2011 [...]. According to the [Dutch prosecutors] those payments constitute the indictable offences of bribery in the public and the private sector as well as forgery.”

According to the release, the reasons for the out-of-court settlement include:

  • SBM Offshore itself brought the facts to the attention of the authorities …SBM Offshore itself investigated the matter and agreed to fully cooperate with subsequent criminal investigations …;
  • there has been a new Management Board since 2012;
  • after it became aware of the facts, the newly established Management Board of SBM Offshore, at its own initiative, has taken significant measures to improve the company’s compliance; and
  • as noted in SBM Offshore’s press release, the current Management Board and Supervisory Board regret the failure of control mechanisms in place in the past.

According to the release, “from 2007 to 2011, SBM Offshore paid approximately US$ 200 million in commissions to foreign sales agents for services.  The largest part of these commissions totaling US $180.6 million, relate to Equatorial Guinea, Angola and Brazil.”

As to Equatorial Guinea, the release states:

“In early 2012, it came to SBM Offshore’s attention that one of its former sales agents might have given certain items of value to government officials in Equatorial Guinea. This reportedly involved one or more cars and a building. In the opinion of the Openbaar Ministerie and the FIOD, SBM Offshore’s former sales agent paid a significant portion of the commissions paid to him by SBM Offshore on to third parties, who in turn would have forwarded parts of these payments to one or more government officials in Equatorial Guinea. There also are other payments, such as education and health insurance costs. In the opinion of the [Dutch authorities], such (forwarded) payments took place with the knowledge of people who at the time were SBM Offshore employees, including someone who at the time was a member of the Management Board. From 2007 through 2011, SBM Offshore paid that particular sales agent USD 18.8 million in total in relation to Equatorial Guinea.”

As to Angola, the release states:

“In the period from 2007 through 2011, SBM Offshore also used several sales agents in Angola. These sales agents received commissions for services regarding certain projects in Angola. In the opinion of the [Dutch authorities], Angolan government officials, or persons associated with Angolan government officials, who are associated with at least one of these sales agents, received funds. In addition, there are payments for travel and study costs to one or more Angolan government officials or their relatives. Also with respect to Angola, the [Dutch authorities] are of the opinion that such payments took place with the knowledge of people who at the time were SBM Offshore employees. In the period from 2007 through 2011, SBM Offshore paid USD 22.7 million in commissions to its sales agents in connection with Angola.”

As to Brazil, the release states:

“With regard to Brazil, certain “red flags” relating to the main sales agent used in Brazil were found during the internal investigation commissioned by SBM Offshore. These red flags included:

  • the high amounts (in absolute terms) of commission that were paid to the sales agent and its companies;
  • a split between commissions paid to the sales agent between its Brazilian and its offshore entities; and
  • documents indicating the sales agent had knowledge of confidential information about a Brazilian client.

The internal investigation conducted by SBM Offshore did not yield any concrete evidence that payments may have been made to one or more government officials in Brazil. In the period from 2007 through 2011, SBM Offshore paid USD 139.1 million in commissions to its sales agents in connection with Brazil.

A mutual legal assistance request in the context of the investigation conducted by the [Dutch authorities] established that payments were made from the Brazilian sales agent’s offshore entities to Brazilian government officials. These findings resulted from means of investigation inaccessible to SBM Offshore.”

The release states, under the heading “Further Investigation” as follows.

“It appears from the criminal investigation that certain natural persons have been involved in the criminal offences committed in the opinion of the [Dutch authorities]. In a case like the one at hand, the [Dutch authorities] has jurisdiction if criminal acts are committed in the Netherlands, or when criminal acts are committed abroad by persons with the Dutch nationality. From the current state of affairs of the investigation, this does not appear to be the case. The [Dutch authorities] will cooperate fully with the countries that have jurisdiction to prosecute the natural persons involved.”

In this release, SBM Offshore stated that “the United States Department of Justice has informed SBM Offshore that it is not prosecuting the Company and has closed its inquiry into the matter.”

The SBM Offshore release further states:

Self-Reporting

The settlement with the [Dutch authorities] is a result of the discussions between the [Dutch authorities] and SBM Offshore, which started after SBM Offshore voluntarily informed the [Dutch authorities] and the United States Department of Justice of its self-initiated internal investigation in the spring of 2012. The findings of the internal investigation were communicated in SBM Offshore’s press release of April 2, 2014. SBM Offshore fully cooperated with the [Dutch authorities] and the United States Department of Justice.

Remedial Measures

With its voluntary reporting of the internal investigation to the [Dutch authorities], the United States Department of Justice and the market in April 2012, SBM Offshore made it clear that it wants to conduct its business transparently. The Supervisory Board appointed a new Management Board that took office in the first half of 2012. The new Management Board has repeatedly stressed the importance of compliance inside and outside the organisation. The Company, with the assistance of its advisors, enhanced its anti-corruption compliance program and related internal controls. The Company shared these measures with the [Dutch authorities] and the United States Department of Justice. The measures include:

  • the appointment of [a] Chief Governance and Compliance Officer, a newly created Management Board position;
  • the appointment of a seasoned compliance professional as Compliance Director, another newly created position;
  • the enhancement of anti-corruption related policies and procedures designed to ensure compliance by Company employees as well as third parties;
  • at the inception of the internal investigation, a review of all sales agents who were active at that time;
  • a decision to no longer use sales agents in those countries where the Company itself has a substantial presence;
  • the enhancement of compliance procedures related to the retention of sales agents, other intermediaries and joint venture partners;
  • the launch of a significant training effort for employees in compliance-sensitive positions;
  • the enhancement of mechanisms to report potential wrongdoing;
  • the enhancement of the Company’s internal financial controls related to anti-corruption compliance and internal audit processes; and
  • disciplinary actions against employees who were involved in or had knowledge of possible improper payments, including termination of employment agreements.

Although the current Management Board and the Supervisory Board regret that in the past, SBM Offshore’s processes relating to the monitoring of its sales agents appeared to not have been of a standard that allowed SBM Offshore to ensure the integrity of the actions taken by its sales agents, SBM Offshore believes that with these measures it offers a transparent and open Company to its clients and other stakeholders.

In the release Bruno Chabas (CEO of SBM Offshore) stated:

“SBM welcomes the conclusion of all discussions with the Dutch and U.S. authorities. We have been open, transparent and accountable throughout this difficult process which has addressed issues from a past era. We can now focus on the future, secure in the knowledge that we have put in place an enhanced compliance culture which embeds our core values.”

To some, the lack of a DOJ enforcement action against SBM Offshore was a declination.  However, such a conclusion implies that there was actually an FCPA enforcement action to bring against SBM Offshore.

Two points are relevant to this issue.  First, as noted in this Global Investigations Review article, SBM Offshore’s outside counsel comments that the company disclosed to the Dutch authorities an the DOJ “before we had done much of the internal investigation.” Second, SBM Offshore could only be prosecuted for FCPA anti-bribery violations to the extent the conduct at issue had a U.S. nexus.

Posted by Mike Koehler at 12:04 am. Post Categories: 2014 Enforcement ActionsAngolaBrazilDeclination DecisionsEquitorial GuineaNetherlandsSBM OffshoreVoluntary Disclosure