Top Menu

Scarboro to Simpson Thatcher

Earlier this week, law firm Simpon Thatcher announced (here) that Cheryl Scarboro, Chief of the SEC’s FCPA Unit, will join the firm as a partner in its Government and Internal Investigations Practice.

The firm’s release notes that “[a]s head of the SEC’s FCPA practice, Ms. Scarboro played a role in all of the SEC’s recent major FCPA cases and acted as the SEC liaison with the Department of Justice (DOJ) and regulators around the world.”

Pete Ruegger, Chairman of the firm’s Executive Committee stated that Scarboro’s “extensive experience in high-profile SEC investigations and enforcement actions, particularly involving the Foreign Corrupt Practices Act, will enhance our talented Government and Internal Investigations Practice Group” and Paul Curnin, Co-Head of the firm’s Litigation Practice added as follows. “In recent years, the SEC and other regulatory bodies have increased their focus on identifying violations under the FCPA. Cheryl’s experience and insight developed over her 19 year tenure at the SEC will be extremely beneficial to our clients.”

Scarboro’s departure is the latest in a clear trend of high-profile SEC or DOJ FCPA enforcement attorneys, who enforce this niche law in often aggressive and novel ways, depart for high-paying jobs in the private sector to provide FCPA defense and compliance services – a niche legal practice that has expanded in response to enforcement – as noted by Simpson’s release. For other recent examples see here, here, and here.

So will say this is just how Washington works, others will say this is a pressing public policy issue deserving of attention. As explained in this piece, I fall into the latter camp and expressed my concerns (as noted in the article) when interviewed by the Government Accountability Office in March in connection with its Congressionally mandated study examining issues related to employees leaving the SEC to work for related private sector entities.

Dionne Searcey at the Wall Street Journal Law Blog (here) notes as follows. “When Scarboro joined the SEC 19 years ago the FCPA was barely a twinkle in enforcement authorities’ eyes. But in recent years amid an uptick in FCPA investigations as well as a huge increase in fines for offenses, Scarboro has had a hand in every major FCPA investigation the agency carried out and has worked closely with the Justice Department’s FCPA team.”

Samuel Rubenfeld at the Wall Street Journal Corruption Currents blog (here) notes as follows. “Scarboro is the latest SEC official to leave the enforcement world for private practice, marking a practice known as the “revolving door” that has received harsh criticism from activists and others.”

Joshua Gallu at Bloomberg notes (here) that “under Scarboro’s watch, the SEC focused corruption probes to look across industries and regions it considered more prone to bribery, instead of targeting individual firms.”

Luke Balleny at Trustlaw (a Thompson Reuters on-line publication) recently let me play U.S. Attorney General in a Q&A (here) and asked me how I would change FCPA enforcement. One suggestion I had was to require all FCPA Unit enforcement attorneys to sign a pledge whereby the enforcement attorney agrees, post-DOJ employment, not to provide FCPA defense or compliance services for a five-year time period – a suggestion I would also extend to SEC FCPA enforcement attorneys.


AG Holder On Corruption

Last week Attorney General Eric Holder was in Slovenia to speak at The Balkans Justice Ministerial. In his speech (here) AG Holder focused on the “global fight against corruption.”

Holder stated as follows.

“Corruption strikes hardest at the most vulnerable among us, siphoning scarce resources away from those most in need. It advances the selfish desires of a dishonest few over the best interests of those who work hard and obey the law. In countries rich and poor, large and small – corruption erodes trust in government and private institutions alike. It undermines confidence in the fairness of free and open markets. It stifles competition and repels foreign investment. It hinders progress, and it breeds contempt for the rule of law.”

“And yet corruption continues to flourish.”

Holder stressed that “all nations struggle against corruption” and that the U.S “is no exception.”

Holder called on all nations “to ratify – and to fully implement – the UN Convention Against Corruption.” (See here).

As to asset recovery, Holder repeated his call first made in Qatar (see here for the prior post) that asset recovery (i.e. ensuring that corrupt officials do not retain illicit proceeds) “isn’t just a global necessity – it’s a moral imperative.”

U.K. Oil for Food Sentence

With its approximately twenty corporate enforcement actions connected to the U.N. Iraq Oil for Food Program, the U.S. is clearly the leader in collecting corporate fines connected to this scandal plagued, defunct program.

The U.K. however has clearly emerged as the leader in holding individuals (not just corporations) to account for illegal behavior in connection with the program.

Last week, the U.K. Serious Fraud Office announced (here) that Mark Jessop admitted to breaking U.N. sanctions during the Oil For Food Program by making illegal payments to Saddam Hussein’s government. The release states that Jessop was sentenced to 24 weeks’ imprisonment. According to the release, Jessop was ordered to pay £150,000 to the Development Fund for Iraq and pay prosecution costs of £25,000. Jessop sold medical goods to Iraq, initially as an employee of a British surgical instruments company, but later through his own companies – JJ Bureau Ltd and Opthalmedex Ltd, of which he was sole director.

For other recent U.K. Oil for Food sentences, see here for the prior post.

Resource Extraction Disclosures

Remember Section 1504 of the Dodd-Frank Act? (See here for the prior post).

The Huffington Post reports (here) that the April 15th deadline for the SEC to issue final implementing regulations has passed. According to the SEC (see here) the new target date for final implementing rules is between August and December.

I guess this is what happens when an ill-conceived, poorly drafted law is inserted into a massive piece of legislation as a miscellaneous provision at the last moment without any meaningful debate or analysis.

World Bank News

Last week, the World Bank released (here) a “Declaration of Agreed Principles for Effective Global Enforcement to Counter Corruption.” See here for the press release.

The release also notes that the World Bank’s Integrity office’s (“INT”) FY10 results include “117 investigations in FY10, with 45 debarments of firms and individuals for engaging in wrongdoing.” For INT’s FY2010 Annual Report, see here.

“A Stew of Confusion and Hypocrisy Unworthy of Such a Proud Agency As The SEC”

A previous post (here) discussed the SEC’s long-standing practice of allowing defendants to settle enforcement actions “without admitting or denying” the SEC’s allegations.

It was noted that the SEC practice is not an FCPA specific issue, but it’s certainly an FCPA enforcement issue.

The previous post also discussed (as does “The Facade of FCPA Enforcement” – here) the SEC v. Bank of America case in which U.S. District Court Judge Jed Rakoff described the resolution as a “facade of enforcement.” Although not an FCPA case, the party’s briefs provide valuable insight into the same SEC enforcement procedures used in FCPA enforcement actions and the motivations of settling parties in a government enforcement action. Even the SEC noted in that case that “the terms of a reasonable settlement do not necessarily reflect the triumph of one party’s position over the other.”

The SEC’s “without admitting or denying” policy ran into Judge Rakoff again in a recent opinion and order (here) in SEC v. Vitesse Semiconducter Corp.

It is a must read for any SEC enforcement attorney, including FCPA attorneys.

Like a typical SEC FCPA enforcement action, in December 2010 (see here), the SEC filed a civil complaint against Vitesse (and others) and announced the same day that the enforcement action was settled.

Like a typical SEC FCPA enforcement action, Vitesse and the other defendants “without admitting or denying” the SEC’s allegations consented to entry of a final judgment permanently enjoining future securities law violations and ordering them to pay a civil penalties and disgorgement.

The opinion begins as follows.

“Pending before the Court is the joint proposal of plaintiff Securities and Exchange Commission (“S.E.C.”) and three of the five defendants – Vitesse Semiconductor Corporation (“Vitesse”), Yatin D. Mody, and Nicole R. Kaplan – to approve Consent Judgments that would resolve the case as to these defendants. The proposal raises difficult questions of whether the S.E.C.’s practice of accepting settlements in which the defendants neither admit nor deny the S.E.C.’s allegations meets the standards necessary for approval by a district court.”

Judge Rakoff then noted.

“Simultaneous with filing the Complaint on December 10, 2010, the S.E.C. – confident that the courts in this judicial district were no more than rubber stamps – filed proposed Consent Judgments against Vitesse, Mody, and Kaplan without so much as a word of explanation as to why the Court should approve these Consent Judgments or how the Consent Judgments met the legal standards the Court is required to apply before granting such approval.”

Judge Rakoff did find the financial and injunctive terms of the settlements “to be fair, reasonable, adequate, and in the public interest” but this issue was not the focus of his opinion.

Rather, Judge Rakoff launched into a discussion of the SEC’s “without admitting or denying” settlement policy.

Judge Rakoff noted.

“.. [T]here is a further aspect of the proposed Consent Judgments that is more troubling, to wit, the requested Court approval of settlements in which the defendants resolve the serious allegations of fraud brought against them “without admitting or denying the allegations of the Complaint.”

Judge Rakoff stated that, “to be sure, this is nothing new” and he sketched the history of this central feature of SEC enforcement practice.

Judge Rakoff noted that this settlement practice was “strongly desired” by defendants, but there “there were benefits for the SEC as well” including the fact that this practice has “made it easier for the SEC to obtain settlements.”

The end result of this enforcement practice, Judge Rakoff noted, “is a stew of confusion and hypocrisy unworthy of such a proud agency as the SEC.” He stated as follows.

“The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the S.E.C.; but, by gosh, he had better be careful not to deny them either (though, as one would expect, his supporters feel no such compunction). Only one thing is left certain: the public will never know whether the S.E.C.’s charges are true, at least not in a way that they can take as established by these proceedings. This might be defensible if all that were involved was a private dispute between private parties. But here an agency of the United States is saying, in effect, “Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it.” The disservice to the public inherent in such a practice is palpable.”

Judge Rakoff then stated as follows.

“… [T]he S.E.C.’s practice of permitting defendants to neither admit nor deny the charges against them remains pervasive, presumably for no better reason than that it makes the settling of cases easier. Although this Court must give substantial deference to the Commission’s views, even if only embodied in a practice rather than in a fully articulated policy, the Court is ultimately obliged to determine whether such a practice renders any given proposed Consent Judgment so unreasonable or contrary to the public interest as to warrant its disapproval.”

Because two of the individual defendants “have already admitted their guilt in the parallel criminal proceedings” and because Vitesse had already paid millions in a class action settlement, Judge Rakoff noted that “the public is not left to speculate about the truth of the essential charges.”

In conclusion, Judge Rakoff stated as follows. “Under these unusual circumstances but reserving for the future substantial questions of whether the Court can approve other settlements that involve the practice of “neither admitting nor denying” – the Court approves the proposed Consent Judgments.”

What would happen if a typical SEC FCPA enforcement action ever got before Judge Rakoff?

Judge Blasts SEC’s Lack of Dilligence

Dig into the details of most FCPA enforcement actions and one quickly discovers that the conduct at issue is old – in some cases very old.

The February 2011 enforcement action against Tyson Foods for instance related to conduct between 2004 and 2006. See here for the SEC’s complaint.

The January 2011 enforcement action against Maxwell Technologies alleged conduct going back to 2002. See here for the SEC’s complaint.

The December 2010 enforcement action against Alcatel-Lucent alleged conduct going back to 2001. See here for the SEC’s complaint.

The June/July 2010 Bonny Island bribery enforcement actions alleged conduct going back to 1995. See here for the SEC’s complaint against Technip for instance.

The FCPA does not have a specific statute of limitations, rather the “catch-all” provisions in 18 USC 3282 (for criminal actions) and 28 USC 2462 (for civil actions) apply.

Cooperation is often the name of the game in FCPA enforcement inquiries and, because of that, tolling agreements are frequently agreed to. Thus, discussing a fundamental black-letter law concept like statute of limitations in the FCPA context seems foolish.

But imagine a world (a world that perhaps is slowly developing – see here for instance) in which individuals and companies in FCPA enforcement actions do mount legal defenses based on black-letter legal principles such as statute of limitations.

In that world, it is likely one would see judicial opinions like the recent opinion from U.S. District Court Judge Jane Boyle (N.D. Tex.) in SEC v. Microtune, Inc. et al (see here for the opinion).

The relevant facts are as follows.

In June 2008, the SEC filed an enforcement action against Microtune and two of its former executives alleging a fraudulent stock-option backdating scheme between 2000 and mid-2003. As noted in the opinion, the “crux” of the limitations defense “was that most of the acts forming the basis of the SEC’s case occured between 2001 and mid-2003.”

The precise issue before the court was “whether the doctrine of fraudulent concealment, relied on by the SEC, operate[d] to toll the running of the five-year limitations period under the facts of the case.” The SEC argued that it was entitled to judgment as a matter of law on the limitations defense “because the ‘discovery rule’ and certain equitable tolling principles including ‘fraudulent concealment’ and the ‘continuing violations doctrine’ applied and salvaged claims that would otherwise be barred by the five-year statute of limitations.” The court had previously rejected the SEC’s “discovery rule” and “continuing violations doctrine” claims, and focused on the SEC’s “fraudulent concealment” theory for tolling the statute of limitations.

The court noted that in order for the SEC to prevail on its “fraudulent concealment” claim, it had to show that it “acted diligently once [the SEC] had inquiry notice, i.e., once [the SEC] knew of or should have known of the facts giving rise to [its] claim.” The court held that there was “no genuine issue of material fact as to whether the SEC acted diligently nor as to whether the SEC discovered the alleged wrongdoing within the limitations period.”

As noted in the opinion, “when asked about the SEC’s diligence” counsel for the SEC explained as follows: “we, often for resource reasons, wait until the company does its own investigation before we complete ours.” [In July 2006, Microtune announced it was commencing an internal review as to the alleged practices].

Judge Boyle was not persuaded and stated as follows. “While perhaps an understandable method of allocating Commission resources, such justification does not excuse the SEC’s apparent inactivity from mid-2004 to mid-2006, when further investigation would have uncovered the full extent of Microtune’s backdating and would have allowed the SEC to bring a complaint against Microtune much earlier than 2008.”

Accordingly, the judge dismissed all claims against the defendants falling outside of the five year limitations period – except those saved as a result of tolling agreements reached in 2007 and 2008.

See here for an article about the ruling from Shannon Green at Corporate Counsel.

Ask any FCPA practitioner and, in a candid moment, they will tell you that SEC FCPA inquiries often unnecessarily drag on for many years, including long stretches of complete inactivity, unreturned phone calls, and other delays due to SEC resource issues – including turnover of SEC attorneys assigned to the case.

Again, because cooperation tends to be the name of the game in FCPA inquiries and because tolling agreements are frequently agreed to, the SEC’s lack of diligence in an FCPA matter is generally not a relevant issue.

However, every once in a while it is interesting to think of what would happen if FCPA enforcement largely took place in the context of an adversarial system.

The recent Microtune decision would seem to provide a glimpse.

Without Admitting or Denying

It’s not an FCPA specific issue, but it’s certainly an FCPA enforcement issue.

A company is the subject of a SEC FCPA enforcement inquiry.

A civil complaint is generally filed, and then, on the same day, the company “without admitting or denying” the SEC’s allegations agrees to resolve the case.

See here for the recent SEC FCPA enforcement action against Maxwell Technologies.

At PLI’s “SEC Speaks” event last week, SEC Commissioner Luis Aguilar shared (see here) his “wishes for 2011” including “the Enforcement Division must bring cases with obvious deterrent effect.”

Commissioner Aguilar stated as follows:

“As we work to build a pro-active regulator, my second wish is that the SEC Division of Enforcement brings cases that have obvious deterrence value. I know that this is a wish that is shared by our Enforcement staff. This means that when the Commission announces the resolution of a matter we would notice a reaction that we haven’t always witnessed.

I envision a world where when the SEC announces a settlement in a high profile case, its impact is clearly noted — and leaves little doubt that it will make people that are engaged in similar activities think twice. An enforcement action by the SEC should be serious business, and it should cause an organization to seriously review how it has been operating. Moreover, our enforcement actions should have market-wide impact, and there should be sanctions that are significant enough to stop similar conduct in its tracks. The possibility of being sanctioned by the Commission should not be considered part of the cost of doing business.

I envision a world where our remedies are calibrated to be meaningful, not merely routine – and where federal judges can clearly see that the SEC understands its mission and seeks to protect investors and deter wrongdoers by obtaining appropriate sanctions and meaningful deterrence.

An additional wish for 2011 is to see defendants take accountability for their violations and issue mea culpas to the public. I hope that 2011 brings an end to the press release issued by a defendant after a settlement explaining how the conduct was really not that bad or that the regulator over-reacted. I hope that this revisionist history in press releases will be a relic of the past. If not, it may be worth revisiting the Commission’s practice of routinely accepting settlements from defendants who agree to sanctions “without admitting or denying” the misconduct.” (emphasis added).

I agree. It is worth revisiting this central feature of SEC settlements.

The policy was first adopted in 1972 (see here) and states as follows.

“The Commission has adopted the policy that in any civil lawsuit brought by it or in any administrative proceeding of an accusatory nature pending before it, it is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur. Accordingly, it hereby announces its policy not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings. In this regard, the Commission believes that a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations.”

The resolution policy can lead to absurd results (see here).

In the FCPA context, I submit this SEC resolution policy contributes to a “facade of enforcement” and results in companies resolving an SEC FCPA enforcement action notwithstanding dubious or untested legal theories and regardless of valid and legitimate defenses.


It is simply easier and more cost efficient to settle an enforcement action “without admitting or denying” the SEC’s allegations than to engage in long protracted litigation with a primary regulator.

My recent “Facade of FCPA Enforcement” piece (here) contains a discussion of the SEC v. Bank of America case. Although not an FCPA case, the party’s briefs provide valuable insight into the same SEC enforcement procedures used in FCPA enforcement actions and the motivations of settling parties in a government enforcement action. Even the SEC noted in that case that “the terms of a reasonable settlement do not necessarily reflect the triumph of one party’s position over the other.”

Thus, I agree with Commissioner Aguilar that it is worth revisiting the Commission’s practice of routinely accepting settlements from defendants who agree to sanctions “without admitting or denying” the misconduct.

This policy contributes to a “facade of enforcement,” including in the FCPA context, and the starting analysis should be – why did the Commission adopt this policy in the first place?

Powered by WordPress. Designed by WooThemes