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DOJ, SEC Receive FCPA Training

The Department of Justice and the Securities and Exchange Commission enforce the Foreign Corrupt Practices Act.

It is thus a bit strange that the DOJ and SEC are receiving FCPA training.

Yet, piecing together information from two prominent law firm event calendars (see here and here) that is exactly what is occuring today in Washington D.C. at the SEC headquarters.

Described as a “joint FCPA training program” for the DOJ, SEC, and FBI and the “SEC’s FCPA Boot Camp” the speakers appear to include a who’s who of the FCPA defense bar.

What prompted this training session? What is the full agenda of topics? What type of questions will DOJ and SEC personnel ask?

Inquiring minds want to know.

Inquiring minds may also wonder – is it proper for the DOJ and SEC to receive training from lawyers and law firms that are frequent “adversaries” in FCPA enforcement actions?

The event is not included on the SEC’s event calendar (see here), but DC readers may want to show up at the SEC’s headquarters today and say “I’m here for the FCPA training” to see what happens.

If anyone has information or insight as to this event, please leave a comment.

A few other DOJ / SEC items of interest to pass along.

Make Your Voice Heard

According to this release, the SEC is seeking public comment on various sections of the recently enacted Dodd-Frank financial reform package. The SEC will post all submissions on SEC’s Internet Web site. As noted in the release, “members of the public who wish to submit official comments on particular rulemaking initiatives should submit comments during the official comment period that starts with the notice of the initiative published in the Federal Register.” (emphasis added).

To learn more about Section 922’s whistleblower provisons, see here and here. To learn more about Section 1504’s Resource Extraction Issuer Disclosure provisions see here.

The Revolving Door Continues to Revolve

Some of you, I know, think it is no big deal when a DOJ prosector enforces a law one day and then the next day defends clients against enforcement of that same law.

Others of you, I know, think that this is an important public policy issue worthy of discussion.

Whatever your persuasion, it should be noted that yet another DOJ attorney with FCPA responsibilties has left government service for a private law firm to engage in an FCPA practice.

According to this Main Justice story, Steven Fagell, Assistant Attorney General Lanny Breuer’s deputy chief of staff, is leaving the DOJ to return to Covington & Burling LLP (Breuer’s previous employer), the firm he worked at prior to joining the DOJ in January 2009. Main Justice reports that “as a member of the Criminal Division’s senior leadership team, Fagell served as a counselor to Breuer and worked on a broad range of issues including the Financial Fraud Enforcement Task Force and the Foreign Corrupt Practices Act.” According to Tim Hester, Covington’s managing partner, Fagell is expected to work on FCPA matters at the firm (see here).

For other recent movement betweent the DOJ and the FCPA bar see here, here and here.

Whistleblower Provisions … What Others Are Saying

The FCPA bar is an active group of writers.

And quick.

Below is a sample of other views on the whistleblower provisions of the Dodd-Frank financial reform bill signed by President Obama last week.

As noted in this prior post, the whistleblower provisions apply to all securities laws violations and the FCPA is part of the Securities Exchange Act. In the post, I set forth my reasons for why I believe the new whistleblower provisions will have a negligible impact on FCPA enforcement. As demonstrated by the below snippets, I am clearly an outlier, which is not surprising to me.

So if you have an unexplained fascination for law firm client alerts (as I often do) this post is for you.

Foley & Lardner (see here)

“The Act’s broad whistleblower provisions significantly increase the compliance risks companies doing business internationally face. Coupled with the fact that numerous recent FCPA enforcement actions have resulted in companies paying record fines — in many cases in the tens or even hundreds of millions of dollars — to settle enforcement actions, the Act will create enormous financial incentives for individual whistleblowers to report FCPA violations (or even speculative claims of a violation) to the SEC. Given this important legislative development, there is no better time for companies to evaluate their FCPA compliance programs to ensure they are in line with current best practices. An effective FCPA compliance program both minimizes a company’s risk of violations and provides protection to companies by maintaining the components of an effective compliance and ethics program set forth in the U.S. Sentencing Guidelines.”

Morrison & Foerster (see here)

“Although the new provisions apply to all violations of the securities laws, they are likely to have particularly significant impact on enforcement of the Foreign Corrupt Practices Act (“FCPA”), an area in which criminal and civil penalties and enforcement activity have increased sharply in recent years.”

“Although Dodd-Frank’s whistleblower provisions apply to any of the securities laws under which the SEC can bring enforcement actions, the Act will likely have an immediate and outsized impact on FCPA enforcement.”

“Given the large size of recent FCPA settlements and enforcement actions, the ability to aggregate the recoveries from “related judicial and administrative actions” when determining the whistleblower’s award, and the government’s continued focus on and increased resources devoted to FCPA enforcement, the Dodd-Frank whistleblower provisions are likely to result in even more FCPA investigations and enforcement actions.”

“The new whistleblower provisions could lead to more and/or earlier voluntary disclosures of potential securities law violations, as companies hoping to obtain the benefits of voluntary disclosure must move quickly, before the whistleblower makes his or her disclosure. They could also lead to more reports of minor violations previously deemed not significant enough to report.”

Proskauer Rose (see here)

“While the whistleblower bounty exists for all securities violations, the risk companies face is particularly great relative to the Foreign Corrupt Practices Act (“FCPA”), which broadly proscribes corruptly influencing foreign public officials. The remarkable monetary sanctions in FCPA enforcement actions, where SEC settlements in the tens or even hundreds of millions of dollars have become increasingly common, provide a compelling incentive for individuals to contact the SEC about suspected FCPA violations.”

“The dramatic increase in FCPA enforcement efforts, along with the comprehensive press coverage surrounding such efforts and the expected cottage industry of lawyers and others, will ensure that potential whistleblowers are aware of, and take full advantage of, this enticing incentive.”

“The increased possibility that FCPA violators will face substantial sanctions (for violations that may have been “under the radar” previously) also suggests that companies have even greater reason to inhibit bribery and fraud from occurring in the first place. The importance of effective internal controls and compliance programs to detect and prevent FCPA and other securities violations has intensified. With the new bounty, companies will need to adapt to this defining change in the legal landscape.”

Fulbright & Jaworski (see here)

“In light of the current aggressive FCPA enforcement environment, Section[] 922 […] stand to further increase the number of FCPA-related investigations initiated by corporate counsel and U.S. enforcement authorities, as well as the number of civil and criminal enforcement actions brought by the SEC and U.S. Department of Justice (“DOJ”). Before the Act is signed into law, companies doing business overseas—particularly publicly traded companies in the oil, natural gas, or minerals industries—should take the time to review their compliance policies and procedures and determine what, if any, changes must be made to account for the changing enforcement landscape as a result of the Dodd-Frank Act.”

“In light of Section 922 and the financial incentives it provides, companies should expect an increase in whistleblower allegations and associated investigations—particularly in the context of the FCPA, where several recent civil and criminal recoveries have been $100 million or more. This expectation will also affect companies’ determinations regarding self-reporting, should allegations arise, both in terms of whether to self-report the allegations and how quickly to do so (e.g., before an internal investigation has been conducted). At the very least, companies should reassess internal compliance policies and procedures to ensure their adequacy in anticipation of such increased enforcement activity.”

McDermott Will & Emery (see here)

“When combined with recent efforts to step up enforcement, these new provisions significantly alter the incentives for potential whistleblowers, making it more likely that those on the fence will race to government, rather than report to their employer. Take the Foreign Corrupt Practices Act as an example. In the past few years, both the SEC and the U.S. Department of Justice (DOJ) have dramatically increased their enforcement of this statute, resulting in a recent number of groundbreaking settlements, including an $800 million payment by Siemens; a more than $575 million sanction and disgorgement against Kellogg Brown & Root and a $185 million payment by Daimler. With recoveries like this, a potential 30 percent share is akin to winning the lottery for a whistleblower. Under such circumstances, even a loyal employee may find it difficult to turn down such a potential jackpot.”

Holland & Knight (see here)

“The Wall Street Reform and Consumer Protection Act approved by Congress and set to be signed into law by President Obama next week contains a whistleblower provision that will have a significant impact on Securities and Exchange Commission (SEC) enforcement of the Foreign Corrupt Practices Act (FCPA).”

“This new provision increases the likelihood that information regarding improper payments will come to the attention of the SEC. Moreover, when combined with recent enforcement actions by the SEC that have held U.S. parent companies strictly liable for the improper conduct of their foreign subsidiaries, the compliance and enforcement risks for U.S. public companies engaged in overseas business activities cannot be overstated.

We strongly urge U.S. companies to take immediate steps to strengthen their FCPA compliance programs and undertake training of their employees and third parties, including agents and distributors. U.S. companies should also be proactive in conducting compliance audits of their overseas operations.”

Mark Mendelsohn, Paul, Weiss, Rifkind, Wharton & Garrison (former DOJ FCPA top cop) in the American Lawyer

“[Mendelsohn] offered the usual cautionary caveat about it being too soon to know, but he did say the new provisions may create a regulatory backlog because employees now have an incentive to go to the SEC with matters that previously would have been handled internally. ‘As a company, you want to have mechanisms for people to report things up the chain internally,’ Mendelsohn said. ‘The whistleblower legislation cuts against that by incentivizing people to go outside the company with information.'”

It is just not law firms with FCPA practices that have put pen to paper. Below is a sample of what some “whistleblower” law firms are saying.

Finch McCranie (see here)

“Bribery of foreign government officials in international business transactions, and false entries in books and records of those companies within the statute, are the targets of the FCPA. Whistleblowers whose information helps the SEC recover monetary sanctions from those corrupt entities in FCPA cases now have an enforceable right to a monetary award of 10-30%. Based on the increasing number and size of these FCPA cases, the rewards to whistleblowers can be meaningful–as they must be to cause whistleblowers to come forward. Over the past decade, the government has pursued more and more FCPA cases, and some recover hundreds of millions of dollars.”

Pietragallo Gordon Alfano Bosick & Raspanti (see here)

“Some believe that this new provision will have significant impact in the context of the Foreign Corrupt Practices Act, which prohibits companies from engaging in certain practices, including bribery, in foreign countries. Recent settlements by the SEC with international corporations have demonstrated the possibility of FCPA settlements in the hundreds of millions of dollars. Whistleblowers contemplating the new SEC whistleblower provisions of the Wall Street Reform Act will have a huge new financial incentive to come forward with allegations of wrongdoing, in both domestic markets and abroad.”

*****

Staying on the whistleblower topic, last week the SEC announced (see here) the award of $1 million to Glen and Mary Kaiser “who provided information and documents leading to the imposition and collection of civil penalties” in an insider trading case. As noted in the SEC release, “this is the largest award paid by the SEC for information provided in connection with an insider trading case.” The release notes that the award was pursuant to the old insider trading whistleblower program and further notes that this program “has since been repealed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added new Section 21F to the Securities Exchange Act, authorizing the Commission to award bounties to parties who provide information leading to recovery of monetary sanctions in a broader range of cases, not limited as before to civil penalties recovered in insider trading cases.”

If indeed the SEC does award whistleblower payments in connection with an FCPA enforcement action, let’s hope that the SEC makes such an award known as in the above example.

The Financial Reform Bill’s Whistleblower Provisions And The FCPA

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.

Why?

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.

Overview

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.

Why?

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.

My reasons?

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.

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