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Branch Office Of The Prosecutor

By on June 8, 2011 in FCPA Inc., FCPA Scholarship, Voluntary Disclosure

David Hilzenrath of the Washington Post recently profiled a dynamic that readers of this site know well – and that is “as the U.S. government steps up investigations of companies suspected of paying bribes overseas, law enforcement officials are leaving much of the detective work to the very corporations under suspicion.” See here for the article.

The article touches upon themes also addressed in Nathan Vardi’s “Bribery Racket” article in Forbes (see here) as Hilzenrath notes that “for the people who conduct the internal investigations – many of them former Justice and SEC employees – it is big business.” Hilzenrath notes – “The corporations, sometimes at the request of the government, hire teams of lawyers and accountants to interview employees, gather electronic records and sift through documents. The government reviews the results and decides whether further legwork is warranted – and ultimately, whether to pursue charges.”

The recent Washington Post article motivated me to read a law review article that has long been on my reading stack and that is “Branch Office of the Prosecutor: The New Role of the Corporation in Business Crime Prosecutions.” (See here).

Written by Harry First, the Charles Denison Professor of Law at New York University School of Law (see here) and published by the North Carolina Law Review, the “article describes the evolution of the public corporation’s role in the criminal justice process – from potential defendant to “branch office of the prosecutor,” partnering with the government in investigating business crime – and assesses the impact of this evolution on criminal justice policy.”

Chamber of Commerce Blasts FCPA-Related Civil Litigation

By on June 7, 2011 in Congressional Activity, FCPA Inc., Related Civil Litigation

A prior post (here) discussed the rise in claims and so-called investigations by plaintiff firms representating investors as soon as FCPA scrutiny is disclosed or soon after FCPA enforcement actions are resolved.

When a company’s FCPA violations are found to be condoned or encouraged by the board or officers, such plaintiff causes of action would seem to be warranted. However, these types of FCPA violations are rare – the more typical situation is where, because of respondeat superior, a company faces FCPA exposure because of the actions of a single or small group of employees whose conduct was in violation of the company’s FCPA policies and procedures. In these typical situations, I question what value these so-called “investigations” by plaintiff firms have or what purpose these derivative or securities fraud claims serve.

I do not find myself in complete agreement with the U.S. Chamber as to all of its FCPA reform proposals (see here for those proposals), but I agree with the Chamber sponsored Congressional testimony last month on the issue of FCPA-related litigation.

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Last month John Beisner (a partner at Skadden – see here) testified on behalf of the U.S. Chamber Institute for Legal Reform before the Subcommittee on the Constitution of the Committee on the Judiciary United States House of Representatives. The hearing, held on May 24th was titled “Can We Sue Our Way to Prosperity?: Litigation’s Effect on America’s Global Competitiveness.”

In his prepared statement (here) Beisner “highlighted four specific areas in which we are still seeing substantial litigation abuse” including “private lawsuits that piggyback on government investigations.”

As to this issue, the bulk of Beisner’s remarks focused on the FCPA and he stated as follows.

“More recently, the piggyback-litigation phenomenon has been most noticeable with respect to Foreign Corrupt Practices Act (“FCPA”) enforcement proceedings brought by the Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”). These piggyback cases tend to fall into two categories: (1) shareholder class actions alleging that a company did not adequately disclose its FCPA exposure; and (2) derivative actions against officers and directors alleging that they failed to prevent a company from bribing foreign officials.”

“Follow-on FCPA cases target companies at a difficult time. Companies going through DOJ or SEC FCPA enforcement proceedings often spend tens of millions of dollars, if not more, on attorneys and forensic accountants – on top of potentially multimillion-dollar criminal and civil fines and disgorgement – in order to determine whether their employees (often at a relatively low level) acted improperly. Enforcement proceedings also interrupt normal business operations, as companies make employees and documents available to lawyers, and take action against truly culpable employees. The investigations themselves are disclosable events and are almost always “bad news,” resulting in negative publicity. Shareholder suits against companies involved in enforcement proceedings threaten to further delay the companies’ ability to return to normal operations and to further damage shareholder value. These suits serve no purpose but to take money from current shareholders and transfer it to former (or other) shareholders – with a hefty slice cut out for the plaintiffs’ lawyers.”

“Derivative shareholder suits are equally problematic in this arena. These suits tend to target senior officers and directors, not the employees who actually paid any bribes or condoned others paying them. The reason is simple enough: directors and officers are backed by the deep pockets of the company’s D&O insurer; culpable employees have little money to pay in private civil damages, especially if they themselves have been the target of an individual enforcement proceeding.”

“Often, lawyers filing shareholder class actions against companies under investigation or derivative actions against directors and officers of a company under investigation do not even wait until the government investigation is complete. Such tactics are particularly egregious, because they necessarily involve the company and senior management in defending against a private civil suit – and in making strategic judgments regarding such defense – when their focus should be on resolving the government’s investigation. Both the DOJ and the SEC have developed leniency policies for companies that actively assist in government investigations. These policies acknowledge that U.S. government resources are limited, and that cooperating companies can materially assist the government in enforcing the law and protecting shareholders. As part of cooperating with the government, companies in FCPA investigations frequently investigate their own potential wrongdoing and self-report misconduct to the government. When companies and their senior officers and directors face personal civil liability in addition to any exposure to the DOJ and SEC, their judgments regarding what issues to investigate and what results to report to the DOJ and SEC necessarily will be affected, possibly to the detriment of the integrity of the government’s investigation.”

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For additional reading on the rise in FCPA related civil litigation (see here from Jeffrey Johnston and Erika Tristan of Vinson & Elkins and here from Sean Griffin of Steptoe & Johnson).

What Others Are Saying About The SEC’s First DPA

By on June 6, 2011 in Deferred Prosecution Agreements, Disgorgement, Enforcement Agency Policy, Non-Prosecution Agreement, SEC, Tenaris

Non-prosecution and deferred prosecution agreements have been a staple of DOJ FCPA enforcement for years. 2010 saw 15 such resolution vehicles (4 NPAs) and (11 DPAs) (see here for the prior post) and these resolution vehicles are significantly different than a corporate entity being criminally charged or pleading guilty.

Last month, the SEC used a DPA for the first time in resolving the Tenaris FCPA enforcement action. See here for the prior post.

This post collects what others are saying about the SEC’s first DPA, including whether resolution via such a vehicle is all that different from traditional SEC resolution procedures.

In this publication, Shearman & Sterling noted as follows. “Prior to this settlement, the SEC had employed only two enforcement options: civil complaints seeking injunctive relief or administrative cease-and-desist orders. In both cases, even though the company could settle without admitting or denying the SEC’s allegations, the relevant adjudicator (either a judge or the Commission) necessarily made a formal finding that the company had indeed violated the law and that the injunction or order was necessary to prevent it from doing so again.” Shearman notes that “in the criminal context, DPAs and non-prosecution agreements, their slightly less formal cousins which do not involve filed charges, were first used in FCPA cases beginning in 2004” and further notes the benefits of a DPA compared to criminal charges. However, the Shearman publication states as follows. “It is not clear whether the benefits afforded by a civil DPA in a SEC enforcement action confer similar benefits. With due respect to the SEC, a civil enforcement adjudication is a much less fearsome matter than a criminal conviction. Further, although the issuance of an injunction or an order undoubtedly represents some finding of wrongdoing, since they are settled without the defendant company admitting or denying the relevant facts, they do not bar the company from contesting such facts in non-SEC proceedings. Further, they do not have the automatic collateral consequences of a criminal conviction. Thus, one must question what benefits a SEC DPA really affords.” As to the Tenaris DPA, Shearman states as follows. “Although the company was not required to pay a civil fine, the SEC has similarly forgone fines in some previous traditional settlements in the past, requiring the defendant company only to disgorge its illicit gains. Moreover, by tolling the statute of limitations, the company potentially extends its exposure and subjects itself to potential civil enforcement for a greater period of time than if it had settled the SEC matter in the traditional way. Finally, it is not clear that the company received any financial benefit from entering into a DPA as opposed to the usual consent judgment or administrative settlement. […] [T]he SEC appears to have exacted the full amount of disgorgement and interest in this matter.” The Shearman publication also contains an interesting discussion about the “concealed penalty” in the Tenaris DPA and states as follows. “The Tenaris DPA also reflects a disturbing development relating to the financial penalty, which may not be restricted to DPAs. Specifically, the SEC’s DPA with Tenaris provides that the company must “refrain from seeking or accepting a US federal or state tax credit or deduction for any monies paid pursuant to this Agreement.” Since the only monies paid related to disgorgement and prejudgment interest, this effectively precludes the company from recouping any taxes it might have paid on the profits it now has to disgorge, resulting in a hidden additional penalty.” Finally, Shearman touches upon an issue it has frequently raised in such FCPA alerts and that is the expansive jurisdictional theories frequently used by U.S. enforcement authorities to prosecute non-U.S. companies for FCPA offenses. As to Tenaris, the Shearman publication states as follows. “The Tenaris matter demonstrates the U.S. government’s continued aggressive approach to expanding the reach of the FCPA, no matter how attenuated or de minimis a non-U.S. company’s contact with the U.S. may be.”

In this publication, Gibson Dunn observes as follows. “One question raised by this case is where the SEC draws the line between use of a DPA and an NPA. Based on comments by the Commission staff in announcing the DPA, Tenaris was a DPA candidate because of its immediate disclosure and exceptional cooperation. However, it appears not to have been an NPA candidate because of the alleged underlying violation.” Gibson Dunn asks – “the key question now is how a defendant benefits from receiving an NPA or DPA from the SEC over a traditional settled enforcement action” and states as follows. “Turning to a DPA, the defendant agrees to what appear to be remedies very similar to those historically obtained by the SEC in a settled enforcement action, but potential defendants need to consider the risks and benefits of a DPA more carefully. Optically, for a company that does not go on to violate the agreement, a DPA can be favorably described as the SEC’s decision not to take an enforcement action against the defendant. This distinction is meaningful for a defendant’s public image and reputation. […] A second potential advantage of a DPA is avoidance of the collateral consequences. Some collateral consequences, such as disclosure obligations or disqualifications from participation in the securities industry, arise from the entry of an injunction, which a DPA avoids.” Gibson Dunn further states as follows. “On the other hand, the DPA’s model is untested. One reason parties settle SEC proceedings is to avoid the collateral estoppel effect of adverse findings of fact and conclusions of law in contested litigation which an adversary may use in a claim for damages or other relief. Generally, courts have concluded that they will not impose collateral estoppel based on factual recitations contained in settled SEC enforcement actions and that settled SEC complaints or administrative orders are not evidence. Because DPAs are new, there is less precedent on how courts will view similar factual recitations.” Finally, Gibson Dunn observes that “companies considering a DPA may wish to consider confirming that their insurance carriers will not construe a DPA as an admission that could adversely affect coverage for a company and/or its directors and officers.”

In this alert, Dewey & LeBoeuf stated as follows. “The Tenaris DPA is significant insofar as it shows the SEC’s willingness to cut a break to those companies that demonstrate “high levels of corporate accountability and cooperation” with SEC enforcement investigations. Tenaris was credited for “immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training.” These great lengths allowed it to obtain a more lenient sanction than it may have otherwise received. As companies under investigation by the SEC tend to go to such lengths in order to settle rather than litigate SEC cases, it is likely that we will see more DPAs from the SEC in the future. This is especially true with respect to SEC cases involving allegations of FCPA violations, which are routinely settled rather than litigated.”

In this alert, Debevoise & Plimpton states as follows. “… [T]he nature and circumstances of the settlement call into question how beneficial the settlement overall, and particularly the SEC’s novel form of resolution, actually was for Tenaris. The company, even by the government’s account, did everything right after discovering potentially improper conduct: It immediately and voluntarily disclosed the conduct at issue, retained outside counsel to conduct a worldwide investigation, cooperated extensively and in “real time” with the SEC and DOJ, and implemented substantial remedial measures and compliance enhancements. Yet Tenaris still had to pay millions in disgorgement and fines, adopt wide-ranging compliance requirements (including certification by all directors and members of management regarding compliance with a revised code of conduct) on top of the extensive reforms and enhancements the company had already implemented, commit to notify the DOJ during the two-year term of the NPA of any conduct by any Tenaris employee that violates U.S. federal or state criminal law or any non-U.S. fraud or anticorruption law (or even any investigation of such conduct) that comes to the attention of the company’s senior management, and, perhaps most significantly, agree not to dispute detailed accounts of the company’s conduct that include express statements that the conduct was “illegal” and “improper.” For example, although the DPA includes a pro forma recitation that Tenaris was not “admitting or denying” the SEC’s allegations, Tenaris agreed not to dispute a statement of facts that describes the payments as “illegal payments to OAO officials” and identifies those OAO employees as “‘foreign officials’ within the meaning of [the FCPA].” The SEC’s resolution of the Tenaris investigation by means of a DPA reflects the adoption by the SEC of aggressive techniques and practices employed by the DOJ in criminal matters – a trend that may continue as the SEC increases the vigor of its FCPA enforcement efforts.”

In this alert, Foley & Lardner noted as follows. “The agreement also does not contain an injunction or an order of a court, which reduces the risk of collateral actions (securities class actions, shareholder breach of fiduciary duty actions). Undoubtedly, Tenaris’s full disclosure and cooperation played a major role in SEC’s deciding to use a deferred prosecution agreement for the first time.”

In this alert, Bryan Cave noted as follows. “It is telling that the SEC’s first use of a DPA occurred in an investigation involving alleged violations of the Foreign Corrupt Practices Act (“FCPA”). Such investigations, which typically require reviews of detailed financial records, e-mails and other documents in numerous jurisdictions, often in languages other than English, present substantial challenges to the SEC and other authorities. In these situations, what the SEC describes as “extraordinary cooperation” on the part of a corporation has particular value.”

In this alert, Dechert stated as follows. “It is noteworthy that the SEC chose to offer a DPA to Tenaris but an NPA to Carter’s. The SEC has offered no public explanation why it used different cooperation tools, and in fact the instructions in the SEC manual for the use of the two types of agreements are similar. The SEC press releases for both use similar language to describe the cooperation from the respective companies. One explanation for this different treatment may lie in the seriousness with which the SEC views FCPA violations. While NPAs are typically reserved for those viewed by the charging agency as witnesses with little or no criminal exposure, DPAs are often accompanied by a formal charging document, are filed with a court, and generally include a rigorous set of corrective measures that the cooperating company must undertake in order for the prosecution to remain deferred. Thus, the DPA is likely to remain a favored agreement in the FCPA context, where there will invariably be additional measures for the corporate defendant to undertake in the area of compliance and/or monitoring. Moreover, there are potentially additional adverse consequences if the DPA is violated, so it is a more rigorous enforcement tool.”

In this alert, Cahill Gordon & Reindel note as follows. “Significantly, the DPA does not require Tenaris to make an admission of wrongdoing, or admit to a statement of facts detailing the misconduct, as is common in agreements of this type in the criminal context. Such admissions can be used against a company by criminal authorities or by private plaintiffs, neither of whom are bound by the DPA.”

Scarboro to Simpson Thatcher

By on June 3, 2011 in FCPA Inc., SEC

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.

Survey Says …

By on June 2, 2011 in Due Diligence, Facilitating Payments, FCPA Statistics, Third Parties

KPMG Forensic recently released (here) its 2011 “Global Anti-Bribery and Corruption Survey.” KPMG “surveyed 214 executives in the U.S. and U.K. to identify their most vexing anti-bribery and corruption (“AB&C”) compliance challenges and to understand how companies are preventing, detecting and responding to AB&C risk.” In summary form, the KPMG survey found that “despite a greater awareness of the business and legal imperatives for well-developed AB&C compliance programs among survey respondents, many compliance programs lack sufficient depth and breadth to effectively mitigate AB&C risk around the world.”

According to the survey, “the three most significant AB&C compliance challenges cited by both U.S. and U.K. respondents are auditing third parties for compliance, difficulty in performing effective due diligence on foreign agents/third parties, and variations in country requirements and local laws on issues such as data privacy and facilitating payments.”

Some survey results that caught my eye.

Nearly 60% of survey respondents said it was “not at all challenging” to “continue to run business while managing investigations.”

Even though third-party (agent, distributor, joint venture partner, etc) risk ranked high in the survey results, only approximately 60% of respondents actually distribute AB&C policies and procedures to third parties and 60% of respondents said that most third party agents are not required to take AB&C training (in 2008 the U.S. response was 93%). Of further interest regarding third-parties, nearly 60% of respondents have “right to audit” clauses in contracts with third parties, but approximately 65% of respondents indicated that they have not exercised their “right to audit.”

Even though facilitating payments are exempted under the FCPA (they are not under the U.K. Bribery Act or the OECD Convention) only 13% of U.S. respondents allow such payments (in 2008, 24% of U.S. respondents said they allowed such payments).

“More than 70% or respondents (73% in the U.K. and 70% in the U.S.) agreed there are places in the world where business cannot be done without engaging in bribery and corruption.”

“To mitigate the risk of doing business in countries in which bribery and corruption is perceived to be endemic, respondents’ favored strategy was to provide additional training (43% of UK and 49% of US respondents), with enhanced internal controls, more closely monitoring operations, conducting due diligence on third parties, and obtaining compliance certifications all following closely.”

“An additional risk mitigation strategy – selected by 32% of U.K. and 25% of U.S. respondents – was to not do business in certain countries.” The survey results do not breakdown this response in any detail, but it would be interesting to know which countries the 25% of U.S. respondents were not willing to do business in because of corruption concerns. My guess is that these countries are not high-growth, high-potential markets.

The KPMG survey was conducted via telephone between October-November 2010 and included 214 executives (106 in the U.S., 108 in the U.K.) who identified themselves as “one of the most senior persons in charge of day-to-day AB&C matters at their company.”

KPMG Forensic assists “clients in achieving the highest levels of business integrity through the prevention, detection, and investigation of fraud and misconduct …”.

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