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Selective Prosecution?

The term selective prosecution is a legal term of art with rather exacting factors.  This post is not about the legal term of art selective prosecution, but rather selective prosecution as a practical matter, in order words, in layman terms.

As highlighted in the below chart, there have been eight corporate Foreign Corrupt Practices Act enforcement actions based largely on alleged improper payments to Nigerian officials in connection with Nigeria’s Temporary Import Process (TIP) for oil and gas rigs.

Company Settlement Amount Related Individual Actions 
Panalpina $81.9 million
$70.6 (DOJ)
$11.3 (SEC)
 
No
Pride Int’l $56.2 million
$32.6 (DOJ)
$23.5 (SEC)
 
No
Royal Dutch Shell $48.1 million
$30 (DOJ)
$18.1 (SEC)
 
No
Transocean $20.7 million
$13.4 (DOJ)
$7.2 (SEC)
 
No
Parker Drilling $15.9 million
$11.8 (DOJ)
$4.1 (SEC)
 
No
Tidewater $15.7 million
$7.4 (DOJ)
$8.3 (SEC)
 
No
Noble Corp. $8.2 million
$2.6 (DOJ)
$5.6 (SEC)
 
Yes
GlobalSantaFe $5.9 million
$5.9 (SEC)
No

As indicated in the above chart, the enforcement agencies collected approximately $253 million in the enforcement actions.  (Note certain of the enforcement actions also alleged other improper payments to Nigerian customs officials and, because of the “where else” question, certain of the enforcement actions also alleged improper payments in other countries as well).

To extent settlement amounts serve as a reasonable proxy for the severity of an FCPA enforcement action, the above chart highlights that among the TIP-related enforcement actions, the enforcement action against Noble Corp. was comparatively minor.  This conclusion is further bolstered by the fact that among the TIP-related enforcement actions to involve a DOJ component, the Noble enforcement action was the only action to be resolved via a non-prosecution agreement.

Nevertheless, as highlighted by the above chart, the Noble enforcement action was the only TIP-related enforcement action to result in any related charges against individuals.  In February 2012, the SEC charged Mark Jackson (Noble’s former CEO) and James Ruehlen (a current Noble executive) in a wide-ranging enforcement action charging violations of, among other things, the FCPA’s anti-bribery provisions and books and records and internal controls provisions.

This contemporaneous post flagged the SEC action as one to follow since the SEC has never been put to its burden of proof in an FCPA enforcement action.  The post further noted that the FCPA’s facilitation payments exception was likely to be at issue and even highlighted the unusual nature of the DOJ’s NPA against Noble Corp. which, not once but twice, stated that the alleged payments at issue “would not constitute facilitation payments for routine government actions within the meaning of the FCPA.”

In an ironic twist, after the enforcement agencies collected more than $200 million in the TIP-related enforcement actions against risk averse corporate defendants, Jackson and Ruehlen did indeed put the SEC to its burden of proof and the court ruled that the SEC “must bear the burden of negating the facilitating payments exception” and that the “exception is best understood as a threshold requirement to pleading that a defendant acted ‘corruptly.’”  (See here for the prior post).

The SEC, a law enforcement agency with merely a civil burden of proof, was never able to carry this burden and this was among other reasons why the SEC’s case against Jackson and Ruehlen failed – and yes – this is the only reasonable conclusion to be drawn from last week’s settlement (see here).

The above facts and circumstances from the many TIP-related enforcement actions should cause any reasonable observer to ask why Jackson and Ruehlen were singled out for prosecution by the SEC?

As will be explored in a future post that goes more in-depth into the SEC’s failed prosecution of Jackson and Ruehlen, the SEC’s case against the individuals  was all the more curious given that Noble actually booked the TIP-related payments as facilitating payments (the SEC of course disagreed with this position) and given that – per the SEC’s own briefing in the matter – its charges were based on little more than a series of supposed inferences supported by little more than circumstantial evidence.

Friday Roundup

Elevate, a surprise verdict? SEC Chair on compliance, self-reporting and cooperation, quotable, and for the reading stack.  It’s all here in the Friday Roundup.

Elevate Your FCPA Knowledge and Practical Skills

Join lawyers and other in-house counsel and compliance professionals from around the country – indeed the world –  already registered for the inaugural FCPA Institute July 16-17th in Milwaukee, Wisconsin.  The FCPA Institute is a unique two-day learning experience ideal for a diverse group of professionals seeking to elevate their FCPA knowledge and practical skills.  FCPA Institute participants will have their knowledge assessed and upon successful completion of a written assessment tool can earn a certificate of completion. In this way, successful completion of the FCPA Institute represents a value-added credential for professional development.

To register see here.

A Surprise Verdict?

As has been widely reported (see here and here for instance) Rebekah Brooks, a former senior News Corporation executive, was found not guilty of various counts (including conspiracy to commit misconduct – in other words bribery) by an English jury earlier this week.

The bribery-related verdict comes as a bit of a surprise given that Brooks – as highlighted in this previous post and as reported by the media:

“[Rebekah Brooks testified that] she authorized payments to public officials in exchange for information on “half a dozen occasions” during her time as a newspaper editor—but did so only in what she said was the public interest. […]  On the stand, Ms. Brooks, who edited News Corp’s Sun newspaper and its now-closed News of the World sister title, said the payments were made for good reasons, and done so on rare occasions and after careful consideration. “My view at the time was that there had to be an overwhelming public interest to justify payments in the very narrow circumstances of a public official being paid for information directly in line with their jobs,” said Ms. Brooks.”

As to the other defendants – Andy Coulson (a former senior News Corp. editor) and Clive Goodman (a former royal reporter for New Corp.’s defunct News of the World publication) –  the jury failed to reach a verdict on the bribery-related count.

At the beginning of the trials, in this October 2013 post, I observed:

“What happens in these trials concerning the bribery offenses will not determine the outcome of any potential News Corp. FCPA enforcement action.  But you can bet that the DOJ and SEC will be interested in the ultimate outcome.  In short, if there is a judicial finding that Brooks and/or Coulson or other high-level executives in London authorized or otherwise knew of the alleged improper payments, this will likely be a factor in how the DOJ and SEC ultimately resolve any potential enforcement action and how News Corp.’s overall culpability score may be calculated under the advisory Sentencing Guidelines.”

SEC Chair White on Compliance, Self-Reporting and Cooperation

SEC Chair Mary Jo White recently delivered this speech titled “A Few Things Directors Should Know About the SEC.”

Among other topics, White spoke about the importance of compliance, self-reporting and cooperation and relevant portions of the speech are highlighted below.

Compliance

“Ethics and honesty can become core corporate values when directors and senior executives embrace them.  This includes establishing strong corporate compliance programs focused on regular training of employees, effective and accessible codes of conduct, and procedures that ensure complaints are thoroughly and fairly investigated.  And, it must be obvious to all in your organization that the board and senior management highly value and respect the company’s legal and compliance functions.  Creating a robust compliance culture also means rewarding employees who do the right thing and ensuring that no one at the company is considered above the law.  Ignoring the misconduct of a high performer or a key executive will not cut it.  Compliance simply must be an enterprise-wide effort.”

Self-Reporting and Cooperation

“Even in the best run companies with strong boards, the right tone at the top and robust compliance programs, wrongdoing will almost inevitably occur from time-to-time.  What should you do when that happens?  How should you respond?  What does the SEC expect you to do?  When should a company self-report wrongdoing to the SEC or other authorities?  All of these questions require careful consideration and appropriate action. For tonight, I will focus just on the last one about self-reporting.

If your company has uncovered serious wrongdoing, you will need to decide whether, how and when to report the matter to the SEC.  One immediate question you will have to answer is whether what has been discovered constitutes material information that requires public disclosure.  If the answer is yes, that fact will also invariably dictate an obvious affirmative answer to broader self-reporting to the SEC.

In other situations, you will need to decide whether to call us about a serious, but non-material event – perhaps a rogue employee in a small foreign subsidiary has been bribing a foreign official in violation of the Foreign Corrupt Practices Act (“FCPA”).  You intend to take decisive action against the employee and enhance your FCPA compliance program.  Your disclosure lawyer’s view is that the occurrence does not require public disclosure.  That does not, however, end your inquiry or responsibilities.  Your company still needs to decide whether to self-report to the SEC, and consider what that may mean for the company.

As many of you know, the Commission in the 2001 Seaboard statement on cooperation, explained how self-reporting, cooperation, self-policing, and remediation factor into our decisions when considering enforcement actions.  And, I can tell you from experience that of those four factors, self-reporting is especially important to both the SEC and the Department of Justice.

What are the benefits to your company of self-reporting?  You can read about that in the SEC’s press releases on enforcement actions, which routinely highlight how the quality of a company’s cooperation has affected any resulting enforcement action.  Typically, a company realizes the benefits of cooperation through a reduced penalty, or, at times, no penalty or even not proceeding in an exceptional case.

Not that you should need any extra incentive, but keep in mind that there are also downsides in deciding not to self-report.  If the wrongdoing is not self-reported, the opportunity to earn significant credit for cooperation may be lost.  And, with our new whistleblower program … the SEC is more likely than ever to learn of the misconduct through another channel.

Let me just say a few words about how to cooperate with SEC investigations.

As an initial matter, the decision to cooperate should be made early in the investigation.  The tone and substance of the early communications we have with a company are critical in establishing the tenor of our investigations and how the staff and the Commission will view your cooperation in the final stages of an investigation. Holding back information, perhaps out of a desire to keep options open as the investigation develops, can, in fact, foreclose the opportunity for cooperation credit.  We are looking for companies to be forthcoming and candid partners with the SEC investigative team – and the board has a responsibility to ensure that management and the legal team are providing this kind of cooperation.

When choosing the path of self-reporting and cooperation, do so decisively.  Make it clear from the outset that the board’s expectation is that any internal investigation will search for misconduct wherever and however high up it occurred; that the company will act promptly and report real-time to the Enforcement staff on any misconduct uncovered; and that the company will hold its responsible employees to account.

There is, of course, cooperation and then there is cooperation, just as there are compliance programs that look great on paper but are not strongly enforced.  We know the difference.  Cooperation means more than complying with our subpoenas for documents and testimony – the law requires you to do that.  If you want your company to get credit for cooperation – and you should – then sincere and thorough partnering with the Division of Enforcement to uncover all the facts is required.”

As highlighted in this previous post, here is what White had to say about cooperation issues as a lawyer in private practice.

“Today, before making their decisions about charging companies, some prosecutors are exerting considerable – some say, extreme -pressure on corporate behavior under the not so subtle threat that if the company doesn’t do as the government wishes, the company risks, at the end of the day, being indicted.”

[…]

“To ensure that a company does not become that ‘rare’ case resulting in a corporate indictment with all of its attendant negative consequences, a company must not poke the government in the eye by declining any of its requests or suggestion of how a cooperative, good corporate citizen is to behave in the government’s criminal investigation.  This template, in my view, can give prosecutors too much power.”

Quotable

Homer Moyer (Miller & Chevalier) states as follows in the June issue of Global Investigations Review.

“As this area of law has evolved, the challenges for all concerned have changed.  Agencies plainly hold most of the cards here.  They have great leverage in these cases.  […] [T]hey are rarely subject to judicial review.  That creates a special responsibility for enforcement agencies.

As a practical matter, they are creating the operative jurisprudence.  Companies and practitioners read those settlements and try to tease out of them the principles that have been at play.  So it’s important that the government articulates its legal rationales, and frankly it’s important the government self-policies.  It may invest in a lengthy investigation at the end of which it should take no action.  And that’s sometimes hard for an agency to do.

The agencies have, over the last 25 years, expanded their jurisdictional reach; they’ve expanded their theories of liability; they have expanded the penalties imposed with new kinds of penalties and new kinds of settlements.  So I think there’s a burden on the agencies, given that much sway, to act especially responsibly.

[…]

[T]he great interest in this area has been prompted in part by reports of enormous costs to corporations of investigations.  I think law firms have to address that.  Many of the reported cases are stupefying and, in my opinion, can be avoided.  But that takes a little clear-eyed thinking on the part of both outside law firms and corporations.”

Reading Stack

From Transparency International UK – Countering Small Bribes.  As described in this release:

“[The report] provides practical advice on addressing the challenge of countering small bribes including “grease payments”. It is also designed to be of assistance to regulators, law-makers, prosecuting agencies and professional advisers. Countering small bribes is a complex challenge for companies. Transparency International research shows that, globally, more than 1 in 4 people paid a bribe in a recent 12 month period, highlighting the scale of the problem facing companies. Demands most often occur in overseas markets, where employees may be vulnerable through travelling alone or the company needs to release critical goods from customs. The guidance provides a set of principles, discussion and advice designed to help companies operate to high ethical standards, protect their reputations and fulfill their legal obligations.”

*****

A good weekend to all.

When It Comes To Employee FCPA Training, Companies Should Consider Omitting Reference To The FCPA’s Facilitating Payments Exception And Affirmative Defenses

Employee FCPA training is obviously an essential component of an effective Foreign Corrupt Practices Act compliance program. Yet when it comes to employee training, companies should consider omitting reference to the FCPA’s facilitating payments exception and affirmative defenses.

You may be asking in your best Gary Coleman impersonation “whatcha talkin bout.”

What I am talking about begins with a parenting analogy.  Would a parent best achieve compliance with the command “clean your room” if the parent spent much time telling a child why they should clean their room, but then ended the conversation by telling the child various “outs” not to clean their room?

Of course not, and the same logic applies to rank-and-file employee FCPA training.

By including the FCPA’s facilitating payments exception and the FCPA’s affirmative defenses (the local law affirmative defense and the reasonable and bona fide expenditures affirmative defense) in employee training, companies are providing employees with concepts and words of art that employees can use to justify their conduct – conduct that could expose the company to FCPA scrutiny and enforcement based on enforcement agency theories.

By training rank-and-file employees on the FCPA’s facilitating payments exception – and its guiding principle of “routine government action” – companies are inviting employees to make discretionary, subjective calls as to what “routine government action” is.

By training rank-and-file employees on the FCPA’s local law affirmative defense, companies are inviting employees to justify their conduct if the conduct is accepted or condoned in a foreign country (even though the local law affirmative defense only applies to conduct lawful under the written laws and regulations of a foreign country).

By training rank-and-file employees on the FCPA’s reasonable and bona fide expenditures affirmative defense companies are inviting employees to make discretionary, subjective calls as to what “reasonable’ and “bona fide” mean as well as whether such an expense is “directly related” to business purposes specifically set forth in the affirmative defense.

A company with best-in-class FCPA compliance policies and procedures does not want rank-and-file employees making these discretionary, subjective calls in the global marketplace.

The point of employee FCPA training is to provide employees with “FCPA goggles” so that they can spot FCPA risk and report it to designated experts in the company to allow the experts to decide issues that could potentially implicate the FCPA’s facilitating payment exception and/or the FCPA’s affirmative defenses.

Many FCPA training courses in the marketplace contain discussion of the FCPA’s facilitating payments exception and affirmative defenses in rank-and-file employee training and thereby actually increase the company’s overall risk exposure.

The Global Anti-Bribery Course I have developed in partnership with Emtrain takes a different approach and best assists companies in reducing their overall risk exposure by omitting reference to the FCPA’s facilitating payments exception and affirmative defenses in rank-and-file employee training.  (Such concepts are – as is appropriate – included in the executive / manager version of the course).

To learn more about the course, see here.

To read what others are saying about the course, see here.

Much Activity In SEC Enforcement Action Against Jackson & Ruehlen

If you enjoy reading pleadings in Foreign Corrupt Practices Act enforcement actions, then your week is already off to a great start as there is much to read.

In advance of a scheduled July 9th trial in SEC v. Mark Jackson & James Ruehlen (an enforcement action filed in the S.D. of Tex. in February 2012 and highlighted in last Friday’s post), both parties filed numerous motions last Friday.

The SEC filed: (1) a motion for partial summary judgment on the inapplicability of the facilitating payment exception, and (2) a motion for a determination of foreign law pursuant to Federal Rule of Civil Procedure 44.1.  The SEC also filed 5 motions seeking to exclude defendants’ expert witnesses.  Both Jackson and Ruehlen filed separate motions for summary judgment as well as 3 motions seeking to exclude the SEC’s expert witnesses.

This post provides an overview of the motions.

SEC Motion for a Determination of Foreign Law

In pertinent part, the SEC states as follows:

“Questions of Nigerian law pervade this bribery case for two reasons. First, findings on threshold questions of Nigerian law are necessary for the jury to determine whether Defendants induced foreign officials “to do or omit to do any act in violation of the lawful duty of such foreign official[s]” in violation of Section 30A of the Securities Exchange Act of 1934 (the “Exchange Act”), an element of the SEC’s bribery claims. 15 U.S.C. §78dd-1(a)(3)(A)(ii) (emphasis added).  Questions of Nigerian law are also necessary to determine whether the payments at issue in this case fit within the narrow “facilitating payment” exception under the
Foreign Corrupt Practices Act (the “FCPA”).

These questions of Nigerian law include: (i) whether the grant of a Temporary Import Permit (“TIP”) – a concession that allows an importer to avoid the payment of import duties – was discretionary; (ii) what was the permissible duration of a TIP and whether and to what extent a TIP may be extended; and (iii) whether Nigerian customs officials could lawfully accept payments to approve a TIP based on false paperwork showing that Noble’s rigs in Nigeria had been exported and re-imported, when the rigs in fact had never moved out of Nigerian waters. These questions of Nigerian law are, like questions of U.S. law, questions of law for the Court to decide, and each defines the scope of Nigerian customs officials’ “lawful duty” in connection with granting the TIPs and TIP extensions at issue in this case.

Second, rulings on these issues of Nigerian law are necessary in light of the Defendants’ purported expert evidence. Defendants intend to introduce expert evidence asserting that, among other things, the payment of bribes to civil servants in Nigeria “is common – and even expected”; the submission of falsified documents to Nigerian governmental agencies is “satisfactory” or “acceptable” from the Nigerian government’s perspective; that laws governing the issuance of temporary import permits are not laws but “internal rules or policies”; and that compliance with Nigerian law is unclear. Thus, the Defendants’ experts intend to opine directly or indirectly on what is allegedly “permissible” in Nigeria notwithstanding clear and undisputed provisions of Nigerian law to the contrary. Because foreign law is for the Court, not the jury, these issues of Nigerian law should be resolved by the Court.”

SEC Motion Regarding  Inapplicability of Facilitating Payment Exception

As noted in this prior post, in December 2012 Judge Ellison concluded, in what was believed to be an issue of first impression, that the SEC must bear the burden of negating the facilitation payments exception.

In its motion, the SEC states as follows.

“The SEC seeks partial summary judgment on the limited question of whether the payments to Nigerian government officials that Defendants authorized to secure Temporary Import Permits (“TIPs”) and TIP extensions fit within the narrow “facilitating payment” exception under the Foreign Corrupt Practices Act (the “FCPA”).

The SEC alleges that the Defendants violated the anti-bribery and accounting provisions of the FCPA by authorizing the payment of bribes on behalf of their employer – Noble Corporation – to Nigerian government officials to influence or induce these officials to grant Noble TIPs and TIP extensions. These TIPs allowed Noble to avoid paying import duties on oil drilling rigs that it operated in Nigeria. Because TIPs provide only a temporary exemption from import duties, at the expiration of a TIP and its allowable extension, Noble had an obligation to either pay the import duties due on the drilling rigs or export them out of Nigeria. Using bribes and other means, Defendants secured serial TIPs and TIP extensions, which enabled Noble to keep its rigs operating continuously in Nigeria well beyond the time period allowed under Nigerian law.

The FCPA broadly prohibits corrupt payments to foreign officials to influence any official act or induce any official to violate a lawful duty. See 15 U.S.C. § 78dd-1(a). But there is a narrow exception to that broad prohibition: Under subsection 78dd-1(b), the FCPA permits certain “facilitating or expediting payments” made “to expedite or to secure the performance of a routine governmental action.” 15 U.S.C. § 78dd-1(b). This so-called facilitating payment exception does not apply in this case, as a matter of law.

Summary judgment is appropriate for three reasons:

First, the law of decision is clear and binding. This Court previously held that payments to government officials for discretionary or illegal TIPs and TIP extensions are not permissible facilitating payments.

Second, the applicable foreign law is clear and undisputed. As demonstrated in the SEC’s Motion for a Determination of Foreign Law Pursuant to Federal Rule of Civil Procedure 44.1 (“Rule 44.1 Motion”), the relevant provisions of Nigerian law are clear and undisputed. First, under Nigerian law, customs officials have discretion to grant or deny TIPs and TIP extensions; these TIPs and extensions are a discretionary exemption from import duties, not an entitlement. Second, Nigerian law prohibits both the use of false paperwork to secure TIPs and payments to government officials to secure TIPs and TIP extensions. Third, Nigerian law provides that an initial TIP may not exceed twelve months and may only be extended once for up to an additional twelve months. These provisions of Nigerian law are clear and undisputed, and must be determined as a matter of law by the Court.

Third, the material facts are not in genuine dispute. The payments to Nigerian government officials at issue in this case were themselves illegal in Nigeria and were authorized to obtain import duty exemptions that were (i) discretionary and (ii) in certain cases, illegal under Nigerian law. Specifically, each of the payments to Nigerian government officials at issue was authorized in connection with obtaining a valuable and discretionary government benefit – i.e., import duty exemptions for Noble’s rigs. Certain of the payments were made to obtain TIPs on false pretenses, in violation of Nigerian law. And, some of the payments were authorized to obtain TIP extensions that exceeded the number and duration of TIP extensions allowed under Nigerian law.

For these reasons, the SEC respectfully requests that the Court grant its motion for partial summary judgment that the facilitating payment exception is not applicable in this case.”

SEC Expert Motions

In addition to the above motions, the SEC also filed 5 motions seeking to exclude defendants’ experts:  (1) Alan Bell (CPA – regarding internal controls and books and records issues); (2) Gary Goolsby (CPA – regarding corporate governance and internal controls issues; (3) John Campbell (former U.S. ambassador to Nigeria – regarding Nigeria specific issues; (4) Professor Ronald Gilson (regarding various corporate governance and internal controls issues); and (5) H. Lowell Brown (regarding various FCPA compliance issues).

Jackson’s Motion for Summary Judgment

The motion, signed by David Krakoff (BuckeySandler) , states as follows.

“This case is entirely about Mr. Jackson’s state of mind: Did he act “corruptly” in violation of the FCPA when he approved certain payments to Nigerian customs officials? In denying the Defendants’ Motions to Dismiss, the Court held that an act is done corruptly when it is “done with an evil motive or wrongful purpose of influencing a foreign official to misuse his position.”  It is the SEC’s burden to prove that “Defendants acted corruptly.”

The SEC failed to come close to carrying that burden. Put simply, discovery revealed only one thing: Undisputed evidence that Mr. Jackson acted with the “good faith” belief that Noble’s payments facilitated getting temporary import permits and extensions to which Noble was entitled.  But as the Court observed regarding permit extensions, to establish corrupt intent the SEC must show “that Defendants knew they were not entitled to extensions as a matter of right upon satisfying certain basic threshold requirements.”

Mr. Jackson was repeatedly advised by Noble management that Noble was entitled to those permits and extensions. He was advised by management and PricewaterhouseCoopers that as long as the rigs had contracts to drill oil for the benefit of the Nigerian government, the rigs could stay in the country to perform those contracts. He was advised and observed that legal and audit experts were reviewing Noble’s FCPA compliance and, specifically, compliance in its Nigerian operations. And he was advised that Noble’s Nigerian lawyer had counseled that the use of the so-called “paper process,” where rigs obtained new permits without leaving the country, was legal in Nigeria.

The SEC has no evidence to prove Mr. Jackson’s state of mind was anything different. Despite many promises in the SEC’s pleadings, promises proved false by discovery, there was no evidence that Mr. Jackson believed Nigerian officials had discretion to deny Noble these permits and extensions. There was no evidence that he knew the “paper process” was illegal in Nigeria, so that any payments related to it had to be corrupt. And there was no evidence that he misled anyone – not the Audit Committee, not auditors, not anyone – about any of Noble’s facilitating payments. Instead, what he knew was that Noble’s legal counsel and internal auditors did not question the propriety of payments to Nigerian customs officials. No reasonable jury could conclude that Mark Jackson acted with the state of mind requisite for a violation of the FCPA. The SEC has not met its burden and the Court should grant summary judgment on all claims.”

Ruehlen’s Motion for Summary Judgment

The motion, signed by Nicola Hanna and Joseph Warin (Gibson Dunn), states as follows.

“The Complaint portrays Jim Ruehlen as a “rogue” employee who, shortly after being promoted to the first management-level position of his career, embarked on an intricate scheme to bribe Nigerian officials to obtain illegal temporary import permits for Noble’s rigs; routinely flouted company policy; ignored directions from Noble’s Audit Committee; and concealed illicit payments in Noble’s books and records. At the motion to dismiss stage, the Court was required to accept those allegations as true. Since then, 15 months of discovery have laid bare the utter falsity of the SEC’s narrative.

The undisputed evidence establishes that Mr. Ruehlen—a diligent and hardworking operations employee with an impeccable reputation for honesty and integrity—at all times acted  in good faith and under the close supervision of Noble’s most senior executives. At no point did he attempt to conceal any conduct or circumvent controls or company processes. To the contrary, it was Mr. Ruehlen who in 2004 first reported Noble’s use of the so-called “paper process”—the central focus of the SEC’s claims in this matter. And it was Mr. Ruehlen who received approval for every one of the payments at issue from Noble’s senior management, executives who had access to experts to assess the nature and propriety of those payments. It is undisputed that none of those executives or experts ever raised concerns to Mr. Ruehlen about the payments. The evidence also shows that Mr. Ruehlen, who had no accounting or legal training, had no role in determining how the payments—which were well known within Noble’s corporate hierarchy—were recorded in Noble’s books. And to compound the irony of the SEC’s charges against Mr. Ruehlen, it was Mr. Ruehlen who independently raised new concerns regarding the temporary import process in early 2007, prompting Noble’s internal investigation and voluntary disclosure to the U.S. government.

Notwithstanding this evidence—much of which was known to the SEC well before it filed this action—the SEC charged Mr. Ruehlen with violating the FCPA’s books and records and internal accounting control provisions (collectively, the “accounting provisions”) “under every stretched legal theory imaginable.” Purportedly to “streamline the presentation of evidence to the jury,” the SEC—on the eve of summary judgment—voluntarily dismissed two of those claims (that Mr. Ruehlen failed to “implement” a system of internal accounting controls and aided and abetted Noble’s alleged failure to “devise and maintain” such a system). But the SEC’s remaining FCPA accounting provision claims fail for the same reasons as the claims it now tacitly admits lacked merit—Mr. Ruehlen simply had no responsibility for or authority over the accounting function at Noble, and had no role in determining how the payments at issue were recorded. Moreover, the SEC failed to develop any evidence during discovery to support the numerous—and illogical—ways that Mr. Ruehlen allegedly “circumvented” Noble’s system of internal accounting controls. The Court should grant summary judgment on these claims in light of the undisputed evidence.

The Court should also grant summary judgment on the SEC’s claims for violations of the FCPA’s anti-bribery provisions. Whether the SEC can prove these claims turns entirely on Mr. Ruehlen’s state of mind—i.e., whether he acted “corruptly.” The undisputed evidence shows that Mr. Ruehlen, like many others within the company, believed in good faith that the payments were to secure or expedite temporary import permits to which Noble was entitled.”

In addition to the above motions, the defendants also jointly filed 3 motions seeking to exclude SEC experts:  (1) Jeffrey Harfenist (CPA – as to various internal controls issues); (2) Wayne Kelley (as to various customs and practices in the oil and gas industry); and (3) Kofo Olugbesan (a former official of the Nigerian Customs Service).

Friday Roundup

Another acknowledgment of the logic, whistleblower statistics, a guilty plea, and for the reading stack.  It’s all here in the Friday roundup.

Another Acknowledgment of the Logic

Previous posts here and here have highlighted recent speeches by top SEC officials in which they acknowledge the underlying logic supporting a compliance defense.  Deputy Attorney General James Cole did the same in this recent speech before a bank compliance officer crowd.

“At the Department of Justice, we know that compliance officers within financial institutions, and the lawyers, bankers, and others who work with them, are the first line of defense against abuse within these institutions.  Compliance officers are critical to protecting both a bank’s reputation and its bottom line.  They’re essential when it comes to preventing criminal activity – and if that effort is not entirely successful, detecting and reporting such conduct.  It is not an exaggeration to say that compliance is fundamental to protecting the security of our financial institutions and is essential to the integrity of our entire financial system. Despite, and in some ways because of, this crucial role, I know that working in compliance is often difficult.  Compliance is seldom thought of as a ‘money-maker’ for any bank, and it may be challenging to get sufficient resources and authority to do the job well.  To some, compliance may not seem to fit within the culture of a fast-moving, cutting-edge institution.  And at times, certain business units or managers may seem downright hostile toward the compliance function. We at the Department of Justice understand this reality.  And we appreciate that, despite these challenges, you and your colleagues are fully committed to helping protect the integrity of your institutions and our financial system.”

[…]

The notion that compliance must be firmly embedded in a corporation’s culture has been raised before, including at this conference, by many government officials.  You’ve heard a great deal about the importance of ‘tone at the top.’  Indeed, companies regularly argue during negotiations that they have taken various steps to set the right tone at the highest levels of their institutions.  But based on what we have seen, we cannot help but feel that the message is not getting through often enough or clearly enough. Despite years of admonitions by government officials that compliance must be an important part of a corporation’s culture, we continue to see significant violations of law at banks, inadequate compliance programs, and missed opportunities to prevent and detect crimes.”

In “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” I argue, among other things, that a compliance defense will better incentivize corporate compliance and reduce improper conduct.  Compliance is a cost center within business organizations and expenditure of finite resources on FCPA compliance is an investment best sold if it can reduce legal exposure, not merely lessen the impact of legal exposure.

In short, an FCPA compliance defense will best allow compliance professionals in the FCPA context to – in the words of Cole – “get sufficient resources and authority to do the job well.”

Will the DOJ and SEC ever be capable of realizing that a compliance defense is a race to the top, not a race to the bottom?  (See here for the prior post).  Will the DOJ and SEC ever have the courage to realize that a compliance defense can best help the enforcement agencies accomplish its laudable goals? (See here for the prior post).

Whistleblower Statistics

The Dodd-Frank Act enacted in July 2010 contained whistleblower provisions applicable to all securities law violations including the Foreign Corrupt Practices Act.  In this prior post from July 2010, I predicted that the new whistleblower provisions would have a negligible impact on FCPA enforcement.  As noted in this prior post, my prediction was an outlier (so it seemed) compared to the flurry of law firm client alerts that predicted that the whistleblower provisions would have a significant impact on FCPA enforcement.  So anxious was FCPA Inc. for a marketing opportunity to sell its compliance services, some even called the generic whistleblower provision the FCPA’s “new” whistleblower provisions.

So far, there have not been any whistleblower awards in connection with FCPA enforcement actions.  Given that enforcement actions (from point of first disclosure to resolution) typically take between 2-4 years, it still may be too early to effectively analyze the impact of the whistleblower provisions on FCPA enforcement.

Whatever your view, I previously noted that the best part of the new whistleblower provisions were that its impact on FCPA enforcement can be monitored and analyzed because the SEC is required to submit annual reports to Congress.  Recently, the SEC released (here) its annual report for FY2013.

Of the 3,238 whisteblower tips received by the SEC in FY2013, 4.6% (149) related to the FCPA.  As noted in this similar post from last year, of the 3,001 whisteblower tips received by the SEC in FY2012, 3.8% (115) related to the FCPA.  In FY2011 (a partial reporting year)  3.9% of the 334 tips received by the SEC related to the FCPA.

Yes, there will be in the future a whistleblower award made in the context of an FCPA enforcement action.  Yes, there will be much ink spilled on this occasion and wild predictions about this “new trend.”  Yet, I stand by my prediction – now 3.5 years old, that Dodd-Frank’s whistleblower provisions will have a negligible impact on FCPA enforcement.

“Foreign Official” Pleads Guilty

Earlier this week, the DOJ announced that Maria Gonzalez, the alleged “foreign official” at the center of the FCPA enforcement actions against individuals associated with broker-dealer Direct Access Partners LLC, pleaded guilty to “conspiring to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses.”  Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes – an alleged state-run economic development bank in Venezuela) is to be sentenced on August 15, 2014.

As noted in the DOJ’s release:

“Previously, three former employees of the Broker-Dealer – Ernesto Lujan, Jose Alejandro Hurtado, and Tomas Alberto Clarke Bethancourt – each pleaded guilty in New York federal court to conspiring to violate the Foreign Corrupt Practices Act (FCPA), to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses, relating, among other things, to the scheme involving bribe payments to Gonzalez.  Sentencing for Lujan and Clarke is scheduled for Feb. 11, 2014, before U.S. District Judge Paul G. Gardephe.  Hurtado is scheduled for sentencing before U.S. District Judge Harold Baer Jr. on March 6, 2014.”

Reading Stack

An interesting read from a Vietnam media source regarding the notion that – just like in tango – it takes two in a bribery scheme and that many instances of bribery are the result of harassment by foreign officials and extortion-like demands.  When passing the FCPA in 1977, Congress fully recognized and understood this reality and that is why it did not seek to capture facilitation payments in the FCPA.  (See here for more reading).

*****

A good weekend to all.

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