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Assessing the Power of the SEC to Impose Monetary Penalties In Administrative Proceedings Charging Violations of the FCPA

Foley & Lardner attorneys Kenneth Winer (here) and Manda Sertich (here) contribute this guest post regarding a little-noticed provision in Dodd-Frank and its impact on SEC FCPA enforcement.


Assessing the Power of the SEC to Impose Monetary Penalties In Administrative Proceedings Charging Violations of the FCPA

The SEC recently imposed a civil penalty in an administrative proceeding involving payments to foreign government officials. In In the Matter of Ball Corporation, Exchange Act Rel. No. 64123, AAER No. 3255 (Mar. 24, 2011)(here), the SEC charged that Ball Corporation’s Argentinean subsidiary offered and paid at least ten bribes, totaling at least $106,749, to Argentinean government employees for favorable import/export treatment and mischaracterized the nature of the payments in the subsidiary’s books and records. In settling its administrative enforcement action against Ball Corporation on March 24 of this year, the SEC imposed a civil penalty of $300,000.00. [In a number of administrative proceedings, the Commission has ordered disgorgement and pre-judgment interest in addition to cease-and-desist orders in FCPA administrative proceedings, without additional civil penalties. See In the Matter of Avery Dennison Corporation, Exchange Act Rel. No. 60393, AAER No. 3021 at 6 (July 28, 2009); In the Matter of Westinghouse Air Brake Technologies Corp., Exchange Act Rel. No. 57333, AAER No. 2785 at 7 (Feb. 14, 2008), In the Matter of Electronic Data Systems Corp., Exchange Act Rel. No. 56519, AAER No. 2725 at 9 (Sept. 25, 2007)].

Until 2004, the SEC’s authority to impose monetary penalties in administrative proceedings was limited to regulated entities (brokerage firms, investment advisers and investment companies) and to persons who were associated with regulated entities. In 2010, as part of the Dodd-Frank Wall Street Reform Act, Congress granted the SEC broad authority to impose civil monetary penalties in administrative proceedings. Section 929P of Dodd-Frank amended the Securities Exchange Act to permit the imposition of civil monetary penalties in administrative proceedings in which the SEC staff seeks the issuance of a cease-and-desist order. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

Law360 recently published an article analyzing the implications of Congress’s recent grant to the SEC of a broad power to impose civil monetary penalties in administrative proceedings stemming from the Dodd- Frank Act. Kenneth Winer & Laura Kwaterski, Assessing SEC Power in Administrative Proceedings (SecuritiesLaw360 Mar. 24, 2011). In this post, we discuss the implications this power poses for FCPA cases.

While the SEC’s interest in imposing monetary penalties in administrative proceedings is obvious given the rapid and inexpensive nature of such proceedings compared to federal district court trials, administrative proceedings risk incorrect factual and legal decisions against respondents because respondents do not have the same safeguards present in SEC administrative proceedings as in federal court. The three bases for this concern outlined in the Law360 article also apply in the FCPA context: (1) the limited discovery available to a respondent in an administrative proceeding; (2) the expedited pace of the administrative proceeding; and (3) the fact that the initial decision of the administrative law judge who presided at the hearing is subject to de novo review by the Commission.

With respect to the first basis for concern, in SEC administrative proceedings, the parties – except in rare circumstances – cannot depose witnesses. The inability to depose witnesses has only a limited adverse impact on the ability of the SEC to obtain incriminating evidence. The Staff can obtain incriminating evidence by using its investigative powers and the information- sharing arrangements that the SEC and DOJ have with law enforcement agencies across the globe. Although a respondent, like the SEC, can ask a witness to submit voluntarily to an interview, the typical respondent has far less leverage than the SEC to persuade a witness to agree voluntarily to an interview, especially given the SEC’s subpoena power and its ability to intimidate witnesses with its enforcement powers.

This concern may be particularly troublesome in FCPA cases, where potential key witnesses are often located in other countries, with little or no incentive to appear in an SEC administrative proceeding. Because the rules of evidence do not govern administrative proceedings, the SEC will be able to introduce statements of witnesses whom the respondent has had no opportunity to cross examine.

Next, as discussed in the Law360 article, in 2003 the Commission adopted a rule mandating that administrative proceedings must be completed at the ALJ level within 120 days, 210 days or 300 days. Additionally, SEC rules provide that the ALJs and the Commission shall “strongly disfavor” requests for extensions unless the moving party makes a strong showing that denial of the request would substantially prejudice his or her case. See 17 C.F.R. § 201.161(b)(1). At least as to individuals, the requirement of expedited administrative proceedings is also particularly worrisome when considered in the framework of the normal course of FCPA cases. The record developed in FCPA investigations often is extensive. It often will be unreasonable to expect an individual to prepare an appropriate defense in less than four months, especially when witnesses are likely to be scattered across the globe.

A third basis for concern identified in the Law360 article, de novo review by a commission, applies fully to the FCPA context. Both respondents and the public often have trouble understanding how it is fair and appropriate for the very commission that authorizes the institution of an enforcement proceeding to be able to overrule the factual findings of the ALJ who presided at the hearing, and this is no different with respect to FCPA enforcement proceedings.

The broad grant of the power to impose monetary penalties in administrative proceedings is especially significant in the context of the FCPA for at least two reasons. First, the SEC’s enforcement of the FCPA has been characterized by aggressive interpretations of the statute that have not been tested in the courts. In a civil action, a defendant could test such interpretations through motion practice. In administrative proceedings, however, a respondent’s ability to file motions testing aggressive legal theories is very limited. See, e.g., In the Matter of John P. Flannery and James D. Hopkins, Order on Motions for Leave to File Motions for Summary Disposition, Administrative Proceeding File No. 3-14081 (Jan. 10, 2001). In addition, a respondent will only be able to obtain judicial review of the SEC’s aggressive interpretation by appealing to the Court of Appeals the final decision that the Commission issues upon review of the initial decision of the administrative law judge who presided over the administrative proceeding.

Second, the SEC has sought substantial monetary penalties in settling enforcement actions involving the FCPA. For example, in 2007 the SEC filed a settled enforcement action charging Baker Hughes Incorporated with violations of the FCPA. Baker Hughes agreed to pay a civil penalty of $10 million for violating a 2001 Commission cease-and-desist Order prohibiting violations of the books and records and internal controls provisions of the FCPA, in addition to a payment of $23 million in disgorgement and prejudgment interest. SEC v. Baker Hughes Incorporated and Roy Fearnley, Civil Action No. H-07-1408, United States District Court for the Southern District of Texas (Houston Division) (EW) (Filed April 26, 2007). In 2010, the SEC filed a settled civil action against ABB, Ltd., in which it charged the company with bribing Mexican government officials to secure business with state-owned utilities companies and Iraqi government officials to obtain contracts under the U.N. Oil-for-Food Program. Pursuant to this settlement, ABB Ltd. was ordered to pay $16.51 million in civil penalties, in addition to nearly $23 million in disgorgement and prejudgment interest.

Individuals have also paid substantial civil penalties in settling such enforcement actions. Most recently, in January of this year, the SEC settled an enforcement action with Innospec’s former CEO, Paul Jennings, based on allegations that Jennings played a “key role” in Innospec’s bribery activities in Iraq and Indonesia. The executive was ordered to pay a $100,000 civil penalty, in addition to disgorging $116,092 and paying prejudgment interest in the amount of $12,945. SEC v. Paul W. Jennings, 1:11-CV-00144 (D.D.C. filed Jan. 24, 2011). In 2006, the Senior Vice President of Sales and marketing for Invision was ordered to pay a $65,000 civil penalty based on allegations that he aided and abetted InVision’s failure to establish adequate internal controls to prevent the company from violating the FCPA and that he indirectly caused the falsification of the company’s books and records. SEC v. David M. Pillor, Case No. C-06-4906-WHA (N.D. Cal. filed Aug. 15, 2006). Also in 2006, three senior employees of ABB Ltd. were ordered to pay civil monetary penalties ranging from $40,000 to $50,000 for violating the anti-bribery provisions of the FCPA and the books and records and internal accounting control provisions of Exchange Act Section. (One employee was also ordered to pay $64, 675 in disgorgement and prejudgment interest.) SEC v. John Samson, John G. A. Munro, Ian N. Campbell, and John H. Whelan, Civil Action No. 06 CV 01217(D.D.C. filed July 5, 2006).

In addition to increasing the risk that innocent parties will mistakenly be found to have violated the FCPA, the broad power Congress granted the SEC to impose civil monetary penalties in administrative proceeding adds additional pressure on individuals and entities to settle with the SEC even though they have not violated the law. Before seeking larger civil penalties in the FCPA context, the Commission therefore should consider whether the efficiency it gains by bringing enforcement actions administratively warrants the risk that the innocent will wrongly be found liable and the credibility that the Commission risks losing by aggressively exercising this broad grant of power.

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