Section 1504 (see here for the prior post) of the Dodd-Frank Wall Street Reform and Consumer Protection Act is not the only provision of the “financial reform package” that may impact Foreign Corrupt Practices Act compliance and enforcement.
Sections 922-924 of the Act President Obama is expected to sign soon also has the potential to impact FCPA enforcement.
Because it creates new whistleblower provisions applicable to all securities laws violations and the FCPA is part of the Securities and Exchange Act of 1934.
This post will cover three topics: an overview of the new whistleblower provisions; some thoughts on whether whistleblower provisions applicable to FCPA enforcement is wise policy; and some thoughts on whether the new whistleblower provisions will impact FCPA enforcement, and if so, to what extent.
Section 922 amends the Exchange Act by including a new section, 21F, titled “Securities Whistleblower Incentives and Protection.”
Pursuant to the new section:
* any whistleblower (meaning “any individual who provides, or 2 more more individuals acting jointly who provide, information relating to a violation of the securities laws” to the SEC)
* who voluntarily provides original information (meaning information that: (a) “is derived from the independent knowledge or analysis of a whistleblower;” (b) “is not known to the [SEC] from any other source, unless the whistleblower is the original source of the information;” and (c) “is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information”)
* to the SEC that leads “to the successful enforcement” of a “covered judicial or administrative action” (meaning “any judicial or administrative action brought by the [SEC] under the securities laws that results in monetary sanctions exceeding $1,000,000″)
* shall be entitled to an award equal to “not less than 10%” and “not more than 30%” “of what has been collected of the monetary sanctions imposed” in the underlying SEC enforcement action.
Monetary sanctions include “any monies, including penalties, disgorgement, and interest ordered to be paid” by the SEC.
In determining the amount of the award the whistleblower shall receive, the SEC “shall take into consideration: (i) the significance of the information provided by the whisteblower to the success [of the enforcement action]; (ii) the degree of assistance provided by the whistleblower [or the whistleblower's legal representative] [in the enforcement action]; (iii) “the programmatic interest of the [SEC] in deterring violations of the securities laws by making awards to whistleblowers who provide information that lead to the successful enforcement of such laws; and (iv) such additional relevant factors as the [SEC] may establish by rule or regulation.”
Pursuant to the new whistleblower provisions, a whistleblower may be represented by counsel.
The provisions allow a whistleblower to submit information to the SEC anonymously, however in such a case, the whistleblower “shall be represented by counsel” and the whistleblower’s identity must be disclosed to the SEC before an award is made to such a whistleblower.
Section 922 specifically authorizes a whisteblower to receive an award “regardless of whether any violation of a provision of the securities laws, or a rule or regulation thereunder” underlying the SEC enforcement action “occurred prior to the date of enactment” of the provisions.
As with many whistleblower provisions, Section 922 prohibits employers from directly or indirectly discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating against a whistleblower.
Section 922 also authorizes the SEC to share whistleblower provided information with other U.S. government agencies, including the Attorney General, as well as foreign securities authorities and foreign law enforcement.
In addition to the “original information” limitation discussed above, Section 922 also precludes the following categories of persons from receiving whistleblower awards: (a) various government and law enforcement agency employees; (b) “any whistleblower who is convicted of a criminal violation related to the [enforcement action];” and (c) “any whistleblower who gains the information through the performance of an audit of financial statements required under the securities laws and for whom such submission would be contrary to the requirements of section 10A of the Exchange Act.”
Pursuant to Section 922, the SEC “shall have the authority to issue such rules and regulations as may be necessary or appropriate” to implement the above-described provisions.
Wise Policy As Applied to FCPA Enforcement?
As indicated above, the new whistleblower provisions are applicable to all securities laws violations – not just the FCPA.
While the new provisions may or may not represent needed legislation as applied to non-FCPA securities law violations, I do not believe that the whistleblower provisions represent wise policy as applied to FCPA enforcement.
Quite simply the FCPA is enforced like no other securities law (at least that I am aware of).
Against the backdrop of little substantive FCPA case law, the FCPA is enforced based largely on government enforcement agency interpretations that have never been accepted by a court. For every FCPA enforcement action alleging conduct that all reasonable minds would agree violates the FCPA, there is seemingly three FCPA enforcement actions alleging conduct that many reasonable minds question whether the conduct even violates the FCPA. Yet, these latter FCPA enforcement actions, notwithstanding the dubious and untested legal theories they are based on, are routinely settled by companies via a resolution vehicle that does not require the company to admit or deny the SEC’s allegations. Quite simply, a settled SEC FCPA enforcement action does not necessarily represent the triumph of the SEC’s legal position over the company’s, but rather reflects a risk-based decision primarily grounded in issues other than facts and the law. It is simply easier and more cost-efficient for a company to settle an SEC FCPA enforcement (notwithstanding whatever dubious and untested legal theory it is based on) than to participate in long, protracted litigation with its principal government regulator. Ask any seasoned FCPA practitioner and, in a candid moment, they will tell you the same thing.
Against this backdrop, is it wise to award a whistleblower 10-30% of the fines, penalties and disgorgement the SEC recovers in an FCPA enforcement action? Is it wise to award a whistleblower in connection with an FCPA enforcement action when the contours of the FCPA largely remain undefined by the courts? It is wise to award a whistleblower when the company, for reasons other than law or fact, does not even mount a legal defense?
I submit that the answer to each of these questions is no.
Impact on FCPA Enforcement?
Much has been written about the whistleblower provisions and the impact on FCPA enforcement – beginning when the provisions were first included in Congressional financial reform bill drafts.
Among other law firms with an FCPA practice or FCPA practitioners writing about the subject, Morgan Lewis stated that the “new law is likely to greatly increase the number of FCPA matters under government investigation” (see here); Fried Frank predicted that the “new whistleblower program may end up playing a key role in identifying and prosecuting violations of the FCPA” (see here); and Richard Cassin on the FCPA Blog guessed that the “bounty program will result in more FCPA cases against corporations” (see here).
I am not so sure and my guess is that the new whistleblower provisions will have a negligible impact on FCPA enforcement.
For starters, the SEC has long had a similar whistleblower program for insider trading. The results? According to a Senate report accompanying the financial reform package, less than $160,000 paid out to five whistleblowers.
In addition, the new whistleblower provisions will only be triggered when a public company issuer is the subject of an FCPA enforcement action. No public company issuer, means no SEC jurisdiction, means no whistleblower awards. There are many more private companies subject to the FCPA than public company issuers and the new whistleblower provisions should not impact this prong of FCPA enforcement which is indeed large. For instance, with a few exceptions, the vast majority of companies indirectly implicated (at least at this point) in the Africa Sting case are all private companies.
Furthermore, and perhaps most important, most FCPA enforcement actions already result from voluntary disclosures. Is the universe of FCPA enforcement actions really going to expand when public company issuers are already largely voluntarily disclosing conduct to the SEC – presumably the same conduct that a whistleblower would disclose?
On this issue, one thing the new whistleblower provisions may do is pit the whistleblower vs. the company in a strange, yet competitive, high-stakes game of “who has the fastest car” to Washington to disclose the conduct. Simply put, if the whistleblower loses, the information he or she discloses will no longer be “original information” and thus no award. If the company loses, the disclosure will no longer be “voluntary” and the hoped for credit under the DOJ’s Principles of Prosecution of Business Organizations and the Sentencing Guidelines will disappear. Against this backdrop, it may be that more conduct will be disclosed that may not even violate the FCPA because the risks of having the “slower car” are to great to pass up. But then again (as detailed in this post) a company voluntarily disclosing conduct that may not even violate the FCPA seems to a norm these days.
If the new whistleblower provisions do indeed have an appreciable impact on FCPA enforcement, the following questions, among others, come to my mind.
Will a law firm with an established FCPA practice start representing whistleblowers on the theory that a contingent fee on a 10-30% cut of an FCPA settlement is more profitable than hourly fee investigations or compliance?
Will a go-to FCPA plaintiffs firm emerge? Which firm/lawyer will it be?
Will the new whistleblower provisions trigger more substantive FCPA case law? How many enforcement actions based on whistleblower information that a company paid for a bottle of wine and opera tickets for an employee of a Chinese state-owned enterprise (ignoring the fact that the company did the same thing for other customers) will it take before a company says – enough of this silliness – will someone please litigate the enforcement agencies “foreign official” interpretation?
Will a “sophisticated” whistleblower with knowledge of the enforcement agencies many dubious and untested legal interpretations use this “gray space” as a point of entry into a much larger potential award on the theory that the “sophisticated” whistleblower is well aware that the enforcement agencies will ask the “where else” question before agreeing to resolve an enforcement action even if the whistleblower is unaware of anything else besides the provided information (which may not even violate the statute) guessing that there is some books or records or internal control issue somewhere in the company that will crop up and raise the award level? (For more on this “where else” question see this prior post).
The new whistleblower provisions provide much to think about and raise the above (and no doubt numerous other) questions.
The best part of the new whistleblower provisions would seem to be that its impact on FCPA enforcement can be monitored and analyzed as Section 922 requires the SEC to submit annual reports to Congress on its whistleblower award program including “the type of cases in which awards were granted.” Section 922 also requires the SEC to “establish a separate office within the [SEC] to administer and enforce” the new whistleblower provisions and requires the SEC Inspector General to conduct a study of the whistleblower provisions.