May 2nd, 2013

Judge Rejects A “Minimalist Conception” Of The Courts

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

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

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

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

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

Judge Marrero stated, in pertinent part, as follows.

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

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

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

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

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

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

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

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

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

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

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

Posted by Mike Koehler at 12:06 am. Post Categories: Neither Admit or Deny • SEC

No Comments

May 1st, 2013

We Really Ought To Pause And Reflect

As noted in this prior post, in October 2010 Judge Jackson Kiser (W.D. Va.) sentenced Bobby Elkin Jr. Elkin (the former Country Manager for tobacco company Dimon International Kyrgyzstan) pleaded guilty to a one count criminal information charging conspiracy to violate the FCPA. (See here for the prior post). Like many federal court judges before him and after him, Judge Kiser did not see the FCPA conduct at issue in the black and white terms the DOJ often portrays, but rather saw shades of gray. In rejecting the DOJ’s requested 38 month sentence, Kiser sentenced Elkin to probation. According to media reports, Judge Kiser stated that the CIA routinely bribes Afghan warlords, but the CIA’s conduct is not illegal and that this “sort of goes to the morality of the situation.”

Yes it does and it took this recent New York Times story “With Bags of Cash, CIA Seeks Influence in Afghanistan” to put our stark double standards in the headlines once again. (See this tag for numerous double standard posts). The NY article states, in pertinent part, as follows.

“For more than a decade, wads of American dollars packed into suitcases, backpacks and, on occasion, plastic shopping bags have been dropped off every month or so at the offices of Afghanistan’s president — courtesy of the Central Intelligence Agency. All told, tens of millions of dollars have flowed from the C.I.A. to the office of President Hamid Karzai, according to current and former advisers to the Afghan leader. [...] The C.I.A., which declined to comment for this article, has long been known to support some relatives and close aides of Mr. Karzai. But the new accounts of off-the-books cash delivered directly to his office show payments on a vaster scale, and with a far greater impact on everyday governing. [...] The cash does not appear to be subject to the oversight and restrictions placed on official American aid to the country or even the C.I.A.’s formal assistance programs, like financing Afghan intelligence agencies. [...]“

For additional coverage, see videos here and here from NBC and CNN.

As noted in my recent article, in this new era of FCPA enforcement those subject to the FCPA have been frequently reminded that ‘‘we in the United States are in a unique position to spread the gospel of anti-corruption, because there is no country that enforces its anti-bribery laws more vigorously than we do.’’ We have been told that “robust FCPA enforcement has become part of the fabric of the Justice Department” and that its “global anti-corruption mission has seeped into the Criminal Division.” We have been told by the DOJ that FCPA enforcement is “our way of ensuring not only that the Justice Department is on the right side of history, but also that it has a hand in advancing that history.”

The conduct at issue in the NY Times article of course goes above the DOJ, but what to think of our “unique position to spread the gospel of anti-corruption” after the NY Times article?

Is the U.S. truly on the “right side of history”?

During this era of FCPA enforcement, enforcement actions frequently include allegations of corporate payments to “foreign officials” for such items as wine, watches, cameras, kitchen appliances, business suits, television sets, laptops, tea sets and office furniture. Last week’s Ralph Lauren enforcement action (here) included allegations related to perfume, dresses and handbags.

This conduct pales in relation to the conduct described in the NY Times article and is made even more egregious given that FCPA enforcement actions invariably involve use of private shareholder/owner funds, whereas the campaign of bribery in Afghan is using public funds.

One of the best statements found in the FCPA’s extensive legislative history (see here for my article “The Story of the Foreign Corrupt Practices Act”) was from Theodore Sorensen. Sorensen’s career included several notable accomplishments and, as President Kennedy’s speechwriter, he had a way with words.

As to the basic issue of defining bribery, Sorensen observed as follows: [T]here will be countless situations in which a fair-minded investigator or judge will be hard-put to determine whether a particular payment or practice is a legitimate and permissible business activity or a means of improper influence. [...] Reasonable men and even angels will differ on the answers to these and similar questions. At the very least such distinctions should make us less sweeping in our judgments and less confident of our solutions.”

Sorensen’s insight was spot-on when made approximately 35 years ago and still holds true today.

The recent NY Times article concerning government sanctioned bribery using public funds really ought to cause us to pause and reflect on much in the bribery and corruption space.

Posted by Mike Koehler at 12:04 am. Post Categories: Afghanistan • Double Standard

No Comments

April 30th, 2013

Recent Sentencing Activity

Previous posts have highlighted the sentences of various defendants in the so-called Carson / CCI enforcement action. The sentences were as follows.

Stuart Carson (four months in prison, followed by eight months of home detention).

Hong Carson (three years probation to include six months of home detention)
Paul Cosgrove (thirteen months of home detention)
David Edmonds (four months in prison followed by four months of home confinement).

In mid-March, Judge James Selna (C.D. Cal.) sentenced the remaining defendants in the case – Mario Covino, Richard Morlok and Flavio Ricotti.

This post highlights various issues connected to these sentences. Each of these defendants were the first to plead guilty in the case and cooperated with the DOJ in the prosecution of the above defendants – the so-called “Carson” defendants. Much is made in the sentencing memos of this and the fact that Covino, Ricotti, and Morlok did not force the DOJ to prove its case. (For more on the ending of the cases against the ”Carson” defendants as the DOJ was close to being put to its burden of proof, see prior posts here and here). The sentencing memos also shed light on the perceived unfairness from the defendants’ point of view of potentially receiving stiffer sentences than the ”Carson” defendants. This did not happen as Judge Selna sentenced Covino and Morlok to probation and Ricotti to time served.

Covino

Covino was sentenced to three years probation, including a three-month period of home detention.

As explained in the DOJ’s sentencing memorandum, Covino was the first CCI employee to plead guilty. The DOJ stated as follows.

“Beginning in February 2008, during the initial stages of the government’s investigation, defendant provided and subsequently continued to provide the government with invaluable information concerning the bribery practices at CCI. [...] Defendant had a first-hand view of CCI’s “friends in camp” sale model and the improper payments that were an integral part of that model. Defendant gave the government an insider’s view of the company’s sales practices, accounting systems, terminology, executives, employees, and agents, and provided a compelling narrative for the documents that indicated improper payments. Defendant entered into a plea agreement in December 2008 and pleaded guilty in January 2009. [...] The government’s indictment of six individual defendants followed in April 2009.”

The DOJ further stated that “for several of the counts and overt acts in the indictment, defendant’s statements were the only witness testimony the government had available to corroborate payment records and e-mails.”

In its sentencing memo, the DOJ made much of the fact that Covino’s early acceptance of responsibility ”can be contrasted with the much later acceptance of responsibility by the Carsons, Cosgrove, and Edmonds, each of whom pleaded guilty only after approximately three years of hard-fought, protracted litigation.” Elsewhere, the DOJ stated that it is “only fair” that Covino do “no worse than the defendants who resisted the government’s case for three years and only struck deals on the eve (or near eve) of trial.” The DOJ recommended a sentence of probation.

Morlok

Covino was sentenced to three years probation, including a three-month period of home detention.

As explained in the DOJ’s sentencing memorandum, Morlok was the “second CCI employee to plead guilty, doing so just a few weeks after Mario Covino.” The DOJ memo states that Morlok was CCI’s Finance Director from 2002 through 2007 and that in July 2007, ”shortly after a new Chief Financial Officer joined CCI and became defendant’s new boss, defendant precipitated a confrontation with senior sales executives over commission payments to Korea. This confrontation ultimately escalated into the new CFO’s discovery of the systematic corrupt payments made by CCI from 1998 until 2007 as alleged in the indictment. This discovery caused CCI to undertake an internal investigation that led to its voluntary disclosure to the Department of Justice.” In all other respects, the DOJ’s sentencing memorandum is similar to the above Covino sentencing memo.

Morlok’s sentencing memorandum makes much of the fact that the “Guidelines calculations contained in the plea agreements for the Carson Defendants are significantly less severe than those included in the plea agreements for Mr. Morlock and Mr. Covino, the two cooperators in this matter.” The sentencing memo states that “this inconsistency is a result only of a change in the government’s strategic position.” Morlok’s sentencing memo states that he “accepted responsibility for his conduct not only after the government’s investigation began, but well before that, when he took steps in 2004 and in 2007 to bring CCI’s misconduct to the attention of CCI’s parent company.” The memo states, “as the government points out, Mr. Morlok’s whistleblowing ultimately caused the internal investigation that led to CCI’s voluntary disclosure to the Department of Justice.”

Ricotti

Ricotti was sentenced to time served.

As explained in the DOJ’s sentencing memorandum, after the grand jury indictment in the case in April 2009, Ricotti, an Italian citizen and resident, was detained in Germany, subsequently extradicted, and following his guilty plea served nearly 11 months in federal custody. The memo indicates that Ricotti was the third CCI employee to plead guilty after Mario Covino and Richard Morlock, both of whom pleaded guilty pre-indictment. In all other respects, the DOJ’s sentencing memorandum is similar to the above Covino and Morlok sentencing memos. Given Ricotti’s time in custody, the DOJ recommended a sentence of time served.

Ricotti’s sentencing memo makes much of the fact that given his time in custody he “already served the longest sentence in this case despite having cooperated and pleaded guilty long” before the other defendants “some of whom are significantly more culpable than Mr. Ricotti.” Ricotti’s sentencing memo states as follows.

“Most of this time [Ricotti's time in custody] was in the United States, thousands of miles away from any family or friends. Although he speaks English, Mr. Ricotti was completely cut off from Italian life and language. Thus, Mr. Ricotti served ‘harder’ time than most defendants in this jurisdiction who usually have some cultural and family ties to the U.S.”

The sentencing memo also states as follows. “After Mr. Ricotti began to cooperate and pleaded guilty, the remaining defendants continued their pitched litigation campaign against the government’s case for another year and forced the government to prepare for trial. Nonetheless, they received disparately more favorable plea agreements and hence lighter sentences than Mr. Ricotti.”

*****

Thomas Farrell, a defendant in the long-running Bourke/Kozeny matter concerning alleged payments in Azerbaijan, was also recently sentenced. Farrell, according to the DOJ, was involved in various investment vehicles used by Bourke, Kozeny and others in connection with the bribery scheme and pleaded guilty in 2003 to conspiracy to violate the FCPA and a substantive FCPA violation. Judge Shira Scheindlin sentenced Farrell to time served with no period of supervised release.

Posted by Mike Koehler at 12:03 am. Post Categories: Carson • FCPA Sentences • Flavio Ricotti • Mario Covino • Richard Morlock • Thomas Farrell

2 Comments

April 29th, 2013

Ralph Lauren Enforcement Action Commentary – Hits And Misses

Much of what is written about Foreign Corrupt Practices Act enforcement these days seems to be mere carrying forward of DOJ and SEC statements, as if those comments represent a universal truth.

Last year at this time, Morgan Stanley’s so-called “declination” dominated the conversation. Why was it a “declination”? It seemed simply because the DOJ said it was, even though a bit of independent analysis would quickly reveal that there was likely no criminal case to be made against Morgan Stanley based on the DOJ’s own allegations and comments from the judge who sentenced Garth Peterson. (See here for the prior post “Stop Drinking the Kool-Aid”).

Last week, the DOJ and SEC announced double non-prosecution agreements against Ralph Lauren Corporation (“RLC”). (See here for the prior post). Because it was the SEC’s first use of an NPA in the FCPA context, the SEC portion of the enforcement action received the most attention.

Why did the SEC use an NPA to resolve RLC’s alleged scrutiny? The SEC said that it was because RLC voluntarily disclosed, provided extensive and thorough cooperation, and implemented various remedial measures.

Sensing an avalanche of FCPA Inc. information carrying forward the SEC’s comments, I noted in this post last Tuesday as follows.

“Of course, these are not distinguishing factors. Many SEC FCPA enforcement actions are the result of corporate voluntary disclosures where companies are likewise commended on the information and cooperation provided. In the Tenaris DPA action, the SEC (see here) said substantively the same thing. In the recent Philips SEC enforcement action, the SEC (see here) said substantively the same thing.”

The RLC enforcement action was released during the early days of a new era of SEC leadership and one law firm alert on the action stated that ”the SEC’s enforcement division is clearly using the NPA with RLC as an opportunity to do some cheerleading for the Enforcement Cooperation Initiative” (see here for more of that initiative launched in January 2010).

Many FCPA Inc. industry participants picked up the pom-poms are started cheering alongside the SEC.

One headline read – ”Self-Reporting FCPA Violations Pays Off: Just Ask Ralph Lauren.”

Another headline read – “Another Example Of The Benefits Of FCPA Self-Reporting.”

A law firm alert stated as follows. “The NPA in this case resulted from Lauren’s prompt self-reporting and extensive cooperation. Prior to the Lauren NPA, the SEC seemed to provide limited credit to public companies for cooperation in FCPA investigations.”

Another law firm alert stated as follows. ”With the announcement of the Ralph Lauren resolution … the SEC and DOJ have taken pains to highlight that beyond self-disclosure, the expedient and thorough reporting of a potential violation, real-time cooperation, and implementation of effective remedial measures may yield more positive results for companies subject to the FCPA.”

As is often the case, the FCPA Inc. material then closed with marketing pitches concerning FCPA compliance services.

Many others highlighted that the SEC mentioned that “Ralph Lauren Corporation has ceased operations in Argentina” and “is in the process of formally winding down all operations there” to make the causal inference that RLC did this because of the FCPA enforcement action and/or risk associated with the FCPA. However, as noted in my post last Tuesday, a few minutes of internet research will quickly reveal that RLC made the decision in August 2012 to suspend and wind-down its Argentine operations based on import controls put on foreign companies and associated foreign currency controls intended to control one of highest rates of inflation in the world. In doing so, RLC joined several other luxury brands Ermenegildo Zegna, Escada, Calvin Klein Underwear, Cartier, Yves Saint Laurent, Hermes, and Louis Vuitton – to have abandoned or are considering leaving Argentina.

Against the backdrop of misses, it was refreshing to read a hit - Covington & Burling’s release titled “The Ralph Lauren Case: Inadequate Rewards for Exemplary Corporate Cooperation.” The alert states, in pertinent part, as follows.

“Although the government will no doubt cite these NPAs as an exemplar of the benefits of self-reporting and cooperation, we think they reaffirm the importance of careful consideration before a company decides to self-report potential unlawful conduct.

Based on the facts recited in the SEC NPA, Ralph Lauren appears to have held itself to an extremely high standard of compliance. On its own initiative, the company adopted a new Foreign Corrupt Practices Act policy and distributed it to employees, which led some Argentine employees to raise concerns about the company’s customs broker. The company immediately conducted an internal investigation, which ultimately uncovered improper payments and gifts to government officials. Within two weeks of this discovery, Ralph Lauren self-reported its findings to both the SEC and the DOJ. The NPA also highlights that Ralph Lauren adopted numerous remedial measures, including firing its customs broker and implementing further enhancements to its compliance program, cooperated extensively with the SEC, and undertook a world-wide review of its operations that uncovered no other violations.

It is difficult to imagine a set of facts more deserving of a non-public declination based on the criteria outlined by the SEC and the DOJ late last year in their FCPA Resource Guide: detection of the wrongdoing by the corporation itself; a thorough internal investigation of the misconduct; implementation of remedial measures, including termination of employees engaged in wrongdoing and improvements in internal controls and compliance programs; and voluntary disclosure to the DOJ and/or the SEC.

[…]

The Ralph Lauren NPAs are far less advantageous to the company than a declination, which would have involved no public allegations of wrongdoing and no fines. By contrast, in addition to paying approximately $1.6 million in penalties and disgorgement, under the DOJ NPA, the company had to publicly admit and accept responsibility for the illegal conduct, which potentially exposes it to shareholder lawsuits and reputational damage. The company also was required to agree to toll the statute of limitations, implement further extensive changes to its compliance program, and submit annual reports to the DOJ detailing its remediation efforts. If Ralph Lauren is found to have breached any of the terms of the agreements — determined solely by the SEC or the DOJ — it may still face the original charges by both agencies, plus potentially new charges based on any information collected during the course of the NPAs.

The benefits to the government from entering into these NPAs are clear. NPAs — unlike deferred prosecution agreements and SEC injunctive actions — are not filed with any court, thus escaping the kind of judicial scrutiny that has recently been given to some SEC settlements. Moreover, the SEC and DOJ are able to emphasize, once again, the importance of voluntary disclosure and cooperation, while still requiring significant ongoing obligations on the part of the company.

The benefits to Ralph Lauren, on the other hand, are less clear. It is likely that the government applied a discount when deciding what sanctions to impose based on the company’s self-reporting and cooperation. However, it is not at all clear that any such discount was sufficient to cover the incremental investigative and other costs incurred by the company as a result of the self-report, and the additional burdens the company has agreed to shoulder by entering into the NPAs. For other companies contemplating whether to self-report potential FCPA violations, the case reinforces the importance of closely evaluating the risks and rewards of potential outcomes, especially given the government’s apparent reluctance to grant a declination even when presented with a textbook case of extraordinary cooperation.”

Covington & Burling of course is the law firm former Assistant Attorney General Lanny Breuer recently joined as Vice-Chair (see here for the prior post). Breuer was not listed as an author of the alert, but several former DOJ and SEC enforcement attorneys, including Steve Fagell (a former member of Breuer’s DOJ senior leadership team) are listed as authors.

The RLC enforcement action involved, per the DOJ / SEC allegations, payments by one person in one of RLC’s approximate 95 subsidiaries. The payments at issue, involving customs issues, likey did not even violate the FCPA as Congress intended. [For more on what Congress intended - including, as to alleged payments to ministerial officials, see my article "The Story of the Foreign Corrupt Practices Act.'). Indeed, when the government has been put to its ultimate burden of proof in cases occurring outside the context of procurement, the government has an overall losing record. (See this prior post). In the only case that the government has won in this context, - the Fifth Circuit decision in U.S. v. Kay- the decision was equivocal and the Court recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business." Indeed, the Court specifically rejected the DOJ's contrary argument and stated as follows. “[I]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”]

Against this backdrop and as a further sign of just how backwards the FCPA conversation of late has become, the Society of Corporate Compliance & Ethics (SCCE) released this statement praising the DOJ and SEC for its handling of the RLC action.

SCCE representatives stated as follows.

“As with the recent Morgan Stanley case, the government has made it clear that companies who take compliance seriously and are committed to finding, fixing, and solving legal and regulatory problems are in a far better position than those who do not invest in real, robust, and effective compliance programs. I can think of no better proof of the value of strong compliance and ethics programs than the DOJ’s and SEC’s recent actions.”

“When the government visibly acknowledges and credits internal compliance efforts, Boards and management take note of their tangible value and are reminded of the need to support empowered, independent compliance officers and functions.”

When the DOJ (and now the SEC) use resolution vehicles that are not subject to one ounce of judicial scrutiny, this is not something to praise, it is something to lament.

When the DOJ and SEC take action against an entity (one of the world’s most admired companies according to this recent Fortune list) that had an isolated instance of conduct that likely did not even violate the FCPA as Congress intended, this is not something to praise, it is something to lament.

When the DOJ and SEC extract approximately $1.6 million from an entity that acted like a responsible corporate citizen upon learning of an issue, and then imposes annual government reporting obligations on that company, and otherwise “muzzles” the company, this is not something to praise, it is something to lament.

Posted by Mike Koehler at 12:10 am. Post Categories: Non-Prosecution Agreement • Permits / Licenses / Customs / Tax • Ralph Lauren Corp.

No Comments

April 26th, 2013

Friday Roundup

Simply inexcusable, tell us who, an interesting case study, and for the reading stack. It’s all here in the Friday roundup.

Simply Inexcusable

The government holds those subject to the FCPA to high standards. If the proverbial “right hand” in a company doesn’t know what the “left hand” is doing, the government is likely to call that an internal control failure.

Ought not the government be held to the same standard?

What follows is simply inexcusable.

In February 2012, Judge Lynn Hughes (S.D.Tex.) signed this final dismissal of the FCPA enforcement action against John O’Shea. The motion followed Judge Hughes granting O’Shea’s motion for acquittal after the DOJ’s case in chief in the FCPA trial. (See here for the prior post). During the case, Judge Hughes stated, among other things, as follows. “The problem here is that the principal witness against Mr. O’Shea . . . knows almost nothing. . . .; The government should have been prepared before they brought the charges to the Grand Jury. . . . You shouldn’t indict people on stuff you can’t prove.’’

Following the acquittal and dismissal, O’Shea has attempted to resume a normal life without the specter of criminal charges and possible jail time occupying his mind. It is understandable that O’Shea wants his reputation and “old” life back. But removing the taint of being labeled a criminal law violator by the government has not come easy for O’Shea.

Case in point is the following story.

O’Shea was recently hired by a company and traveled to Canada for a business trip. The trip was uneventful until O’Shea tried to enter Canada. It turns out the relevant government databases were not updated to reflect the disposition of his case – something that happened 14 months ago!

O’Shea indicated that he spent the entire afternoon with officials of the Canadian government to persuade them that he should not be put on the next plane back to the U.S. with U.S. marshals. O’Shea reports that the Canadian official was open-minded enough to visit internet sites suggested by O’Shea (including FCPA Professor) as proof that he was no longer a criminal defendant in the U.S.

After his business trip to Canada, O’Shea also had problems re-entering the U.S. from Canada and could not help but wonder whether someone would be waiting for him upon arrival in Houston. O’Shea reports that thankfully his fears were not realized, but he can not help but wonder what would have happened if his business trip was to some country other than Canada.

In short, the government’s internal control failure was simply inexcusable.

Tell Us Who

In the aftermath of this week’s Ralph Lauren enforcement action (see here for the prior post) alleging payments to Argentine customs officials, the Argentine government wants to know who the customs officials are.

As noted in a Law360 article, “in a letter to U.S. Ambassador to Argentina Vilma Martinez, the head of Argentina’s tax agency, Ricardo Echegaray, said that it was necessary for the Argentine government to have names and more detailed information about the alleged bribery to aid in a newly launched criminal investigation into the matter.” The article further stated as follows. “While seeking the names of Argentine officials implicated in the scheme, Echegaray also put the blame on Ralph Lauren’s customs brokers, who are not government officials, but rather private professionals hired to deal with trade matters. Echegaray likened these brokers’ roles to those of a tax adviser or accountant which companies hire for assistance.”

The question asked by the Argentine official is obviously a legitimate question.

But query whether the DOJ and/or SEC even know who the officials are.

As noted in this previous post concerning the SEC’s briefing in the Jackson and Ruehlen case involving alleged payments to Nigerian customs officials, the SEC argued that the name, titles and exact positions of foreign officials allegedly bribed need not be known in order to state a claim under the FCPAs anti-bribery provisions.

As highlighted in this previous post, in ruling on Jackson and Ruehlen’s motion to dismiss, Judge Keith Ellison (S.D.Tex.) noted in a footnote as follows.

“[T]he Court must disagree with Judge Hughes’s oral statements in a recent criminal FCPA prosecution. [U.S. v. O'Shea] (“You can’t convict a man promising to pay unless you have a particular promise to a particular person for a particular benefit. If you call up the Basurtos and say, look, I’m going to send you 50 grand, bribe somebody, that does not meet the statute.”). This Court holds that asking a third-party to bribe a government official, in order to induce that official to act in one of the proscribed ways detailed in [the FCPA], would meet the statute. The government does not have to “connect the payment to a particular official.”

Case Study

This post earlier this week regarding Wal-Mart noted that savvy investors should have recognized the NY Times induced “FCPA dip” of the company’s stock as a buying opportunity because the market often overreacts to FCPA issues.

In this post earlier this week regarding Ralph Lauren Corp.’s (RLC) FCPA enforcement action, it was noted that the RLC enforcement action was a rare instance of an issuer not previously disclosing its FCPA scrutiny. Thus, the first instance of public scrutiny appears to have been announcement of the enforcement action on Monday morning. RLC’s stock dipped approximately 2% on the news and closed at $165.93. The “FCPA dip” lasted only a day, as Tuesday the stock rebounded and then some and closed yesterday at $175.38.

Reading Stack

Miller & Chevalier’s seasonal FCPA alerts are always information reads. The firm recently released its FCPA Spring Review 2013.

Is sex as a “thing of value”? See here from Wendy Wysong (Clifford Chance) – with a particular focus on Asia.

Should you be looking for further citations that more FCPA enforcement is good for FCPA Inc., see this recent article in Lawyers Weekly, an Australian publication. The article begins as follows. “A crackdown on foreign bribery has created “a mountain of work” for lawyers, a Jones Day partner has said ahead of a major international anti-corruption conference.”

*****

A good weekend to all.

Posted by Mike Koehler at 12:11 am. Post Categories: Anything of Value • FCPA Inc. • Foreign Official • Identity of Foreign Official • John Joseph O'Shea • Permits / Licenses / Customs / Tax • Ralph Lauren Corp. • Reputational Damage

No Comments