Several law firm client alerts and commentary about last week’s Nortek and Akamai Technologies enforcement actions are carrying forward the conventional wisdom that the companies benefited from their voluntary disclosure and cooperation because the SEC resolved the matters via non-prosecution agreements and the DOJ “declined” to prosecute. Taking it a stop further, this commentator asserts that “these enforcement actions resulted in excellent results for both companies.”
However, it is pure speculation to say that Nortek or Akamai benefited or that the enforcement actions resulted in excellent results for the companies.
To state the obvious, in the Nortek and Akamai enforcement actions (as well as other enforcement actions which originate from voluntary disclosures) we know what we know and we don’t know what we don’t know.
What we don’t know is what would have happened if Nortek and Akamai did not disclose its internal findings of possible FCPA issues to the SEC and DOJ.
This undisputed truth of FCPA enforcement actions was discussed in depth in the recent article “Grading the DOJ’s FCPA Pilot Program.”
As highlighted in the article, perhaps the biggest reason why the corporate community should take the DOJ’s FCPA pilot program with a grain of salt is that it only addresses a relatively minor component of the overall financial consequences to a business organization subject to FCPA scrutiny and enforcement. For obvious reasons, settlement amounts in an FCPA enforcement action tend to get the most attention. After all, settlement amounts are mentioned in DOJ / SEC press releases, press releases generate media coverage, and the corporate community reads the media. However, knowledgeable observers recognize that FCPA scrutiny and enforcement often result in ‘‘three buckets’’ of financial exposure to a business organization.
Bucket #1 is pre-enforcement action professional fees and expenses that directly flow from a voluntary disclosure.
Based on information in its SEC’s filings, through the 1st quarter of 2016, Nortek has disclosed approximately $4.4 million “in legal and other professional services incurred related to the FCPA investigation.” The Nortek settlement amount (bucket #2) was $322,000.
Thus, the ratio of pre-enforcement action professional fees and expenses to settlement amount in the Nortek action was (a higher than norm) 13:1.
(Note: issuers do not have an obligation to disclose pre-enforcement action professional fees and expenses, and like many issuers, Akamai Technologies has not disclosed specific expenses beyond the generic statement in its SEC filings that the company “has incurred costs with respect to our internal investigation.”)
In short, one can not seriously analyze whether Nortek or Akamai benefited from its voluntary disclosure or received an excellent result without taking into account the $4.4 million Nortek incurred in connection with its voluntary disclosure.
To be sure, Nortek would have spent x$ on its internal investigation regardless of whether it disclosed to the SEC and DOJ. However, it is safe to assume that x$ would have been significantly lower than the $4.4 million the company incurred if voluntary disclosure did not occur.
As hinted at in “Grading the DOJ’s FCPA Pilot Program,” no doubt there are some who are likely to respond along the following lines:
If Nortek / Akamai did not voluntarily disclose possible FCPA issues, it is likely that the enforcement agencies would have independently found out about the violations, and when that happened, the company would have incurred the same actual pre-enforcement action professional fees and expenses highlighted above plus, because of the lack of voluntary disclosure, a larger settlement amount.
Here again, this line of reasoning represents pure speculation.
I recognize that the following is anecdotal and is not offered to establish the truth of the matter asserted. However, I have been actively involved in the FCPA space for approximately 15 years both as a lawyer in private practice who conducted FCPA internal investigations around the world and in other professional capacities. To my knowledge, never once did the enforcement agencies independently find out about the underlying conduct in the absence of a voluntary disclosure, and in speaking to other FCPA practitioners about this precise topic, it has never happened to their clients either.
In assessing whether Nortek / Akamai benefited from voluntary disclosure or received excellent results, it must be acknowledged that a perfectly acceptable, legitimate, and legal alternative for the companies would have been to thoroughly investigate the issues, promptly implement remedial measures, and effectively revise and enhance compliance policies and procedures – all internally and without disclosing to the enforcement agencies.
Yet it is likely that an assessment of this alternative is going to be missing from most FCPA Inc. commentary on the Nortek / Akamai enforcement actions.
Thus, you may want to read this recent Law360 article titled “SEC, DOJ Not Fooling Many With Easy FCPA Deals.” Consistent with the observation in this prior post, the article states:
“Generally, attorneys agreed the SEC could have brought charges, but some expressed doubt that the DOJ would have prosecuted the case even if the companies hadn’t cooperated, based on the information made public in the NPAs. Although the declination letters said the DOJ had decided not to prosecute “despite the bribery by an employee of the company’s subsidiary in China,” experts said that because of the self-contained nature of the bribes, it was unlikely the DOJ could have pressed charges.”
In the article, Bill Steinman (Steinman & Rodgers) stated:
“While the enforcement agencies will say, ‘Look, everybody, quick, line up [and disclose],’ the resolution of these cases, I think, would not have been terribly different [in the absence of disclosure.” … Steinman stated that based on the facts in the NPAs, responsible public companies could make a decision not to disclose violations at all in the same circumstances. He noted that the FCPA doesn’t mandate self-disclosure and argued that companies with small, self-contained FCPA problems that they investigate and remediate could reasonably conclude they don’t need to tell the SEC or DOJ about the problem.”
Are there certain things we know from the Nortek and Akamai enforcement actions?
Most certainly yes.
The DOJ got to “market” its FCPA Pilot Program program, the SEC got to add a few notches (albeit minor) to its enforcement action belt, and FCPA Inc. made millions.
But what we don’t know is whether Nortek or Akamai benefited from its decision to voluntarily disclose or received excellent results.
Suggestions to the contrary are nothing more than pure speculation.