Foreign Corrupt Practices Act issues often co-exist in two parallel universes.
One universe is ruled by all-powerful gods with big and sharp sticks in which subjects dare challenge the gods. Another universe consists of checks and balances in which independent actors call the balls and strikes.
The first universe refers to FCPA enforcement by the DOJ and SEC. The second universe refers to litigation of FCPA-related claims in which judges make decisions in the context of an adversarial legal system. This second universe is often referred to as the rule of law universe.
There are several examples of theories used in the first universe that do not work in the second universe. For instance, the FCPA enforcement agencies frequently take a seeming “if / then” position when it comes to issuer internal controls. In other words, if some misconduct occurred somewhere within an issuer’s business organization or if some employee within that organization circumvented the issuer’s internal controls, then the issuer did not have effective internal controls.
However, when this simplistic theory is used in civil litigation, courts have routinely concluded that just because improper conduct allegedly occurred does not mean that internal controls must have been deficient. (See e.g., Midwest Teamsters Pension v. Baker Hughes, 2009 WL 6799492 (S.D. Tex. 2009); Freuler v. Parker Drilling 803 F.Supp.2d 630 (S.D. Tex. 2011).
This post concerns the most recent example regarding the parallel universe. Interestingly, the recent development comes from the same judge (U.S. District Court Judge Melinda Harmon (S.D. Tex.) highlighted in this September 2015 post about the parallel universe.