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Words Matter As Ninth Circuit Concludes In Wadler Matter That The FCPA Is Not A “Rule Or Regulation” Of The SEC

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These pages have closely followed the civil lawsuit of Sanford Wadler (the former General Counsel and Secretary of Bio-Rad Laboratories) against the company and certain executive officers and board members alleging various unfair employment practices including that Wadler was terminated for blowing the whistle on certain potential FCPA issues.

As highlighted in this previous post, Wadler’s claims were fully litigated and in February 2017 a jury awarded Wadler $2.9 million in back pay and stock compensation and $5 million for punitive damages. The district court doubled the compensatory award pursuant to Dodd-Frank for a total award of approximately $11 million. As highlighted in this previous post, Bio-Rad filed an appeal in the Ninth Circuit challenging various aspects of the trial court decision.

Yesterday in this fragmented decision the Ninth Circuit largely ruled in favor of Wadler. Nevertheless, the court did conclude that the Foreign Corrupt Practices Act was not a “rule or regulation of the SEC” as that phrase in used in Section 806 of SOX which prohibits in certain instances issuers from retaliating against an employee who reports misconduct.

In terms of relevant background, as stated in the court’s opinion:

“At the close of trial, the judge gave several jury instructions concerning when an employee engages in “protected activity” for purposes of SOX, [relevant case law], and Dodd-Frank. For each of the three claims, the instructions stated that Wadler had to prove he engaged in protected activity under SOX, which in turn depended on whether he disclosed conduct that he reasonably believed violated a “rule or regulation of the” SEC. The main instruction at issue in this appeal, Instruction 21, stated that, under “the rules and regulations of the [SEC] applicable to Bio-Rad,” it is unlawful to (1) bribe a foreign official; (2) fail to keep accurate and reasonably detailed books and records; (3) knowingly falsify books and records; and (4) knowingly circumvent a system of internal accounting controls.”

In a footnote, the court stated:

“For simplicity, throughout this opinion we refer to the books-andrecords provisions listed in paragraphs two and three of Instruction 21, and the internal accounting controls provision in paragraph four of Instruction 21, collectively as the “books-and-records” provisions.”

The court continued:

“The jury returned a verdict in favor of Wadler on all three claims. As to all three claims in general, the jury awarded Wadler $2.96 million in compensatory damages for past economic loss against both Defendants. The district court doubled that amount under Dodd-Frank’s doubling provision, 15 U.S.C. § 78u-6(h)(1)(C)(ii), resulting in a total award of $5.92 million plus interest against Schwartz. Because the jury also awarded Wadler $5 million in punitive damages against the Company based on the Tameny claim, the total award against the Company was $10.92 million plus interest.

Bio-Rad subsequently filed a renewed motion for judgment as a matter of law (“JMOL”) and a motion for new trial. Bio-Rad argued, inter alia, that Wadler’s disclosure of alleged FCPA violations was not protected activity under SOX because provisions of the FCPA, a statute, do not constitute SEC rules or regulations for purposes of SOX § 806. The district court denied Bio-Rad’s motions. The court concluded that the FCPA is a “rule or regulation of the SEC” for purposes of SOX because “the FCPA is an amendment to the Securities . . . Exchange Act of 1934 and is codified within it.” This appeal followed.”

As stated by the court:

“Section 806 of SOX prohibits publicly traded companies from retaliating against an employee who lawfully reports

any conduct which the employee reasonably believes constitutes a violation of [18 U.S.C.] section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders . . . . 18 U.S.C. § 1514A(a)(1).

The question before us is whether the district court erred by instructing the jury that, for purposes of § 806, rules or regulations of the SEC include the FCPA’s books-and-records provisions, 15 U.S.C. § 78m(b)(5), (2)(A), and anti-bribery provision, id. § 78dd1(a).  We conclude that the court erred.”

The court’s opinion largely consisted of old-fashioned statutory construction. As stated by the court:

“In construing the provisions of a statute, “we begin with well-settled canons of statutory interpretation.” Zazzali v. United States (In re DBSI, Inc.), 869 F.3d 1004, 1010 (9th Cir. 2017). “A primary canon of statutory interpretation is that the plain language of a statute should be enforced according to its terms, in light of its context.” ASARCO, LLC v. Celanese Chem. Co., 792 F.3d 1203, 1210 (9th Cir. 2015). We also presume that Congress acts intentionally when it uses particular wording in one part of a statute but omits it in another. Dep’t of Homeland Sec. v. MacLean, 135 S. Ct. 913, 919 (2015). Thus, when a statute uses the phrase “law, rule, or regulation” in one section but uses only “law” in a different section, the word “law” does not encompass administrative rules or regulations. Id. at 919–20; Dep’t of Treasury, IRS v. Fed. Labor Relations Auth., 494 U.S. 922, 931–32 (1990).

Applying these principles here, we hold that § 806’s text is clear: an FCPA provision is not a “rule or regulation of the [SEC].” 18 U.S.C. § 1514A(a)(1). Although the words “rule” and “regulation” could perhaps encompass a statute when read in isolation, the more natural and plain reading of these words together and in context is that they refer only to administrative rules or regulations. That the phrase “rule or regulation” is used in conjunction with an administrative agency, the SEC, suggests that it encompasses only administrative rules or regulations. Most notably, Congress uses the phrase “any rule or regulation of the [SEC]” in the same list in which it uses “any provision of Federal law relating to fraud against shareholders,” id., which strongly suggests that there is a difference between the meaning of “rule or regulation” and “law.” See MacLean, 135 S. Ct. at 919–20; Dep’t of Treasury, IRS, 494 U.S. at 931–32. The most obvious explanation is that “law” encompasses statutes, like the FCPA, whereas “rule or regulation” does not.

[…]

In sum, statutory provisions of the FCPA, including the three books-and-records provisions and anti-bribery provision listed in Instruction 21, are not “rules or regulations of the SEC” under SOX § 806. The district court erred in instructing the jury otherwise.”

The Ninth’s Circuit’s decision in Wadler is rather narrow in its application given the specific words of Section 806. More broadly though, the statutory construction analysis of the appellate court is interesting because the FCPA contains a number of words that Congress intended to mean something and conversely does not contain certain words that Congress intended to omit from the FCPA. This statutory construction analysis is relevant to so many FCPA issues.

*****

In case you are wondering, after passage of the FCPA the SEC did indeed adopt rules to further implement certain of the FCPA’s provisions.

So-called Rule 13b2-1 provides that “no person shall directly or indirectly, falsify or cause to be falsified, any book, record or account subject to” the books and records provisions.

So-called Rule 13b2-2 provides, in pertinent part, that “no director or officer of an issuer shall, directly or indirectly”

(1) Make or cause to be made a materially false or misleading statement to an accountant in connection with; or

(2) Omit to state, or cause another person to omit to state, any material fact necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading, to an accountant in connection with:

(i) Any audit, review or examination of the financial statements of the issuer required to be made pursuant to this subpart; or

(ii) The preparation or filing of any document or report required to be filed with the Commission pursuant to this subpart or otherwise.

These rules are clearly “rules or regulations of the SEC” and the Ninth Circuit concluded that there was “sufficient evidence to support a SOX verdict under a properly formulated falsification instruction.”

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