SEC Enforcement Official Acknowledges The Underlying Logic Supporting A Compliance Defense
There is an underlying logic to a Foreign Corrupt Practices Act compliance defense.
In “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” I argued, among other things, that a compliance defense will better incentivize corporate compliance and reduce improper conduct. Compliance is a cost center within business organizations and expenditure of finite resources on FCPA compliance is an investment best sold if it can reduce legal exposure, not merely lessen the impact of legal exposure.
In a recent speech before the Society of Corporate Compliance and Ethics, Stephen Cohen (SEC Associate Director of Enforcement) rightly acknowledged the underlying logic supporting a compliance defense.
In his speech, Cohen “fully appreciated” that the compliance professionals in the room “are on the front lines in the battle to persuade companies to invest” in compliance programs. (emphasis added). Elsewhere, Cohen stated: “So, as you go back to your companies to advocate for more resources and stature, tell your management that they will get much more credit from regulators by demonstrating that misconduct is an outlier in a highly ethical and compliance-driven culture rather than a remedial step after investors suffered losses.” (emphasis added).
As highlighted in “Revisiting an FCPA Compliance Defense,” at present, the incentives organizations have to adopt FCPA compliance policies and procedures are solely to lessen the impact of legal exposure. These present incentives thus represent “baby carrots,” when what is needed to better incentivize more robust FCPA compliance are real “carrots.” An FCPA compliance defense is a real “carrot” that will better incentivize compliance across the business landscape. Organizations with existing FCPA compliance policies and procedures will be incentivized to make existing programs better. Likewise, organizations currently without stand-alone FCPA policies and procedures—and statistics indicate there are many—will be incentivized to spend finite resources to implement FCPA compliance policies and procedures.
In short, an FCPA compliance defense will best allow compliance professionals in the FCPA context to – in the words of Cohen – win “the battle to persuade companies to invest” in compliance programs and to “advocate for more resources and stature.”
A few other issues from Cohen’s recent speech.
It contains a curious reference to the Ralph Lauren enforcement action. As to the general topic that “isolated conduct combined with good compliance and internal controls make it less likely that [the SEC] will bring an action at all,” Cohen stated that a “great example for compliance professionals is the recent non-prosecution agreement with Ralph Lauren.”
This is a curious reference given that the DOJ (as highlighted in this prior post) specifically stated that “[Ralph Lauren – RLC] did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to [the relevant subsidiary].” Likewise, the SEC specifically stated that “RLC’s policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act (“FCPA”) compliance in place at that time of the misconduct warranted further strengthening to ensure effective compliance with the related laws.”
Yes, both the SEC and DOJ did commend RLC on its compliance remediation, but this goes to the following point Cohen made in his speech. He stated.
“I am surprised how infrequently companies try to persuade us at the front end of an investigation that they have a robust compliance culture and record of ethical conduct. Invariably, the discussion about a company’s compliance program takes place during settlement negotiations in the context of the substantial remediation that the company has undertaken since violations occurred.”
Aside from the above issues, Cohen’s speech did contain a useful section titled “Warning Signs” of value – in the FCPA context and otherwise – to the compliance practitioner. This section, stated in full, as follows.
“Warning Signs
Where we find fraud, there are often early warning signs that may have suggested a corporate compliance culture that is not meeting appropriate standards.
Pushing the envelope.
Risk-taking in the area of legal and ethical obligations invariably leads to bad outcomes. Any company or person prepared to come close to the line when it comes to legal and ethical standards is already on dangerous ground.
Tolerating close-to-the-line behavior sends a terrible message throughout an organization that pushing the envelope is acceptable.
Technical Compliance.
Be on the lookout for people who are overly technical in their approach to issues of ethics and professional responsibility. Pay particular attention to those who may disparage or diminish the importance of respect for the law and protecting the organization from reputational harm.
Be Skeptical.
Be skeptical of explanations that don’t add up regardless of who provides them. If someone explains something to you in a way that you don’t understand, don’t accept it.
In many ways, one of the important lessons of the financial crisis is that highly sophisticated models that can explain away risk but defy common sense shouldn’t be trusted. We often see people come in and testify that they failed to follow up on their hunches until after it was too late.
Lack of Empowerment.
Another warning sign is an organization that limits the access of legal and compliance personnel to senior leadership of the company.
These leaders need to hear candidly and regularly from those on the front lines of compliance efforts. Compliance professionals are not hallway monitors. Companies that empower these professionals to act as trusted advisors are more likely to stay out of harm’s way.”
Hits And Misses From SEC Chair Mary Jo White’s Recent Speech
Last week, SEC Chair Mary Jo White delivered a speech titled “The Importance of Independence” at Fordham Law School.
White’s speech was spot-on in terms of her discomfort of Congress and others seeking to effectuate social policy or political change through use of the SEC’s powers of mandatory disclosure. White stated:
“When disclosure gets to be too much or strays from its core purpose, it can lead to ‘information overload’ – a phenomenon in which ever increasing amounts of disclosure make it difficult for investors to focus on the information that is material and most relevant to their decision-making as investors in our financial markets. To safeguard the benefits of this ‘signature mandate,’ the SEC needs to maintain the ability to exercise its own independent judgment and expertise when deciding whether and how best to impose new disclosure requirements. For, it is the SEC that is best able to shape disclosure rules consistent with the federal securities laws and its core mission. But from time to time, the SEC is directed by Congress or asked by interest groups to issue rules requiring disclosure that does not fit within our core mission.”
[As an aside, although not mentioned in White’s speech, this is exactly what happened with the SEC in terms of the FCPA. As detailed in the “Story of the Foreign Corrupt Practices Act,” the SEC wanted no part in enforcing the FCPA’s anti-bribery provisions as it viewed such enforcement beyond its core mission. However, Congressional leaders – most notably Senator William Proxmire – insisted largely because in the post-Watergate environment the DOJ was not viewed as sufficiently independent.]
Speaking of the Dodd-Frank Act, White stated:
“But other mandates [in Dodd-Frank], which invoke the Commission’s mandatory disclosure powers, seem more directed at exerting societal pressure on companies to change behavior, rather than to disclose financial information that primarily informs investment decisions. That is not to say that the goals of such mandates are not laudable. Indeed, most are. […] But, as the Chair of the SEC, I must question, as a policy matter, using the federal securities laws and the SEC’s powers of mandatory disclosure to accomplish these goals.”
(See here for the prior post – days after Congress passed Dodd-Frank in 2010 – noting that Section 1504 of Dodd-Frank “Disclosure of Payments by Resource Extraction Issuers” did not represent sound policy for the same reasons White identified above).
The final portion of White’s speech concerned “Judicial Involvement.” She stated as follows.
“I should not conclude this talk about the importance of independence without mentioning our third branch of government – the judiciary. When I urge the courts to defer to the SEC’s independence and expertise, I am really only making the point that separation of powers requires each of us to respect and stay in our respective lanes.
[…]
We recognize that, under the law, a court can review a settlement. But a court that reviews a settlement that a law enforcement agency like ours enters with a defendant has a more limited task. It is unlike a court’s wide-ranging inquiry into the merits of a class-action settlement, for example. A court reviewing a consent judgment in one of our cases has a narrower focus – making sure that the settlement is not ambiguous and that it does not affirmatively harm third parties or impose an undue burden on the court’s own resources.”
By requesting the judiciary to stay in its “respective lane,” White misses the point – sticking with the traffic analogy – that the SEC is driving a different car in an enforcement action compared to its typical regulator car. As the Supreme Court recently unanimously recognized in the Gabelli decision (see here for the prior post), “in a civil penalty action, the [SEC] is not only a different kind of plaintiff, it seeks a different kind of relief.”
As noted in this prior guest post, Gabelli is “an encouraging sign that the justices may be ready, willing, and able to take on other troubling issues that arise as federal law enforcement agencies continue to blur the lines between traditional criminal prosecution and increasingly punitive “civil” prosecution.”
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In another speech last week, this article quotes White as follows.
“I realized just how much leverage the SEC has,” Ms. White said, speaking at the Women, Influence & Power in Law summit in Washington. Many public companies would sooner acquiesce to a demand for an admission than engage in a long-running dispute with the agency, she suggested. “You don’t want to be at war with your main regulator,” she added, saying the policy shift takes advantage of “perhaps more leverage than the SEC realized that it has.”
Spot-on and given that the SEC has acknowledged in litigation that an SEC settlement “do[es] not necessarily reflect the triumph of one party’s position over the other” (see “The Facade of FCPA Enforcement” for a more extensive discussion), White’s comments are hardly surprising.
Yet they do highlight why it is not wise policy to link whistleblower awards to SEC settlements (see here for the prior post) or suggest that SEC FCPA settlement money ought to be paid out to alleged “victims” (see here for the prior post).
In The Words Of Mary Jo White
SEC Chair Mary Jo White delivered a speech last week titled “Deploying the Full Enforcement Arsenal” before the Council of Institutional Investors.
The focus of White’s speech was on how the SEC is “deploying [its] full enforcement arsenal for the benefit of investors.”
While there was one reference to the Foreign Corrupt Practices Act in White’s speech, her speech was general in nature and touched upon the following issues (all of which are relevant to FCPA enforcement): SEC enforcement principles, how the SEC should be aggressive and creative when employing its enforcement tools, the importance of deterrence, corporate penalty issues, the SEC’s neither admit nor deny settlement policy and recent revisions to this policy, and the importance of individual enforcement actions.
After highlighting excerpts from White’s speech, this post discusses two issues where White’s rhetoric and the reality of the SEC’s FCPA enforcement program most diverge.
“Enforcement Principles
Another key priority for me, as you would expect, is our enforcement program – building on past successes and making it as strong and effective as it can be. A robust enforcement program is critical to fulfilling the SEC’s mission to instill confidence in those who invest in our markets and to make our markets fair and honest.
[…]
In many ways, the most visible face of the SEC is what we do to enforce the law. After all, most Americans do not see how well our experts examine a financial firm, review a regulatory filing, or conduct economic analysis on a complex rule.
But they do pay attention when we bring a major enforcement action against a major financial institution, when we charge a hedge fund executive with insider trading, when we freeze a suspected Ponzi schemer’s assets, or when we charge a CEO with fraud.
As many here know, I spent a good part of my professional life in the enforcement arena. I have focused much of my career not only on pursuing wrongdoers, but also on deterring wrongdoing.
When I arrived at the SEC, I came with a very high opinion of the enforcement division, having seen and admired their work up close – both as the U.S. Attorney when we worked side-by-side doing securities fraud cases, and from the other side of the table as a private lawyer.
Any objective and informed observer agrees that the SEC has an exceptional enforcement record. Its performance in the aftermath of the financial crisis was particularly impressive. Since 2008, the enforcement division has brought crisis-related actions against more than 160 entities and individuals, including many CEOs and other senior executives, barred dozens of fraudsters and returned billions of dollars to harmed investors. And they did it while also bringing literally thousands of other non-crisis-related cases at the same time – despite limits on resources and legal restrictions on the amount of penalties that the SEC can seek and recover.
As we continue to build on this impressive record, we will be guided by some overarching principles.
Be Aggressive and Creative
First, we must be aggressive and creative in the way we use the enforcement tools at our disposal.
That means we should neither shrink from bringing the tough cases, nor fail to bring smaller ones. When we detect wrongdoing, we should consider all the legal avenues to pursue it. If we do not have the evidence to bring a case charging intentional wrongdoing, then bring the negligence case that does not require intent.
And when we resolve cases, we need to be certain our settlements have teeth, and send a strong message of deterrence. That is why in each case, I have encouraged our enforcement teams to think hard about whether the remedies they are seeking would sufficiently redress the wrongdoing and cause would-be future offenders to think twice.
We obviously cannot put offenders in jail like a U.S. Attorney can. And in many cases, the law limits the penalties the SEC may obtain to amounts that both we and the public think are too low. Under current law, we cannot assess a penalty based on investor losses, but are limited instead to the usually much lower figure based on the ill-gotten gains of a defendant.
That is why I support, as did my immediate predecessors, legislation introduced in Congress that would allow us to seek penalties based on either three times the ill-gotten gains or the amount of investor losses – whichever is greater. Among other things, the proposed legislation also would authorize us to seek additional penalties if the wrongdoer is a recidivist – a repeat offender who has been undeterred by prior enforcement actions. These would be very powerful, additional tools.
In the meantime, we must make aggressive use of our existing penalty authority, recognizing that meaningful monetary penalties – whether against companies or individuals – play a very important role in a strong enforcement program. They make companies and the industry sit up and take notice of what our expectations are and how vigorously we will pursue wrongdoing.
Some years ago – in 2006 – the Commission issued a press release in the context of two settled cases setting forth the thinking of the five Commissioners at the time about the relevant factors to consider in deciding whether corporate penalties should be imposed and to what degree. Today, we have an entirely new Commission.
I have been asked what I consider the import today of this release to our consideration of corporate penalties. As an initial matter, it is important to remember that the release was not then, and is not now, binding policy for the Commission or the staff.
While it is not a binding policy, the 2006 press release in my view sets forth a useful, non-exclusive list of factors that may guide a Commissioner’s consideration of corporate penalties, such as the egregiousness of the misconduct, how widespread it was, and whether the company cooperated and had a strong compliance program. The enforcement staff still references these factors as well as other inputs when analyzing and proposing their own recommendations to the Commission.
Ultimately, however, each Commissioner has the discretion, within the limits of the Commission’s statutory authority, to reach his or her own judgment on whether a corporate penalty is appropriate and how high it should be.
The bottom line for me is that corporate penalties will be considered in all appropriate cases. Whether, in fact, to seek a corporate penalty and the appropriate amount are decisions that must be based on a consideration of all the facts and circumstances of each case and the objectives of a strong enforcement program.
Strong penalties are just a starting point. When we sue a company for wrongdoing, we should consider whether to require the company to adopt measures that make the wrong less likely to occur again.
This is something we already do, in some cases. For example, when we settle with a firm in a foreign corrupt practices case, we often require it to put in place better training and reporting programs. Such forward-looking measures can also be useful in other kinds of cases. When we enter into a settlement with a company involving systems control failures, for example, we should consider mandating new policies and procedures and other controls, and require that a compliance consultant test these controls.
Expect to see more such mandatory undertakings in future cases so that we are not just punishing past wrongs, but also acting to prevent future wrongs.
Demand Accountability
Another principle of an effective enforcement program is the recognition that there are some cases where monetary penalties and compliance enhancements are not enough. An added measure of public accountability is necessary, and in those cases we should demand it.
Until recently, the SEC – like most other federal agencies and regulators with civil enforcement powers – settled virtually all of its cases on a no-admit-no deny basis. Generally, a party would pay a hefty penalty and agree to an injunction against future misconduct, but neither admit nor deny the wrongdoing asserted by the SEC in a court complaint or set forth as findings in an order instituting administrative proceedings.
In most cases, that protocol makes very good sense. It makes sense because the SEC can get relief within the range of what we could reasonably expect to achieve after winning at trial. By settling, the agency is able to eliminate all litigation risk, resolve the case, return money to victims more quickly, and preserve our enforcement resources to redeploy to do other investigations – ordinarily, a significant win-win. But sometimes more may be required for a resolution to be, and to be viewed as, a sufficient punishment and strong deterrent message.
In 2012, the SEC changed the no-admit-no-deny language as it applied to settlements with parties that have pled guilty in a related criminal action. In these cases, we now explicitly reference these admissions in the SEC settlement. It was a first step towards greater accountability, and a good one.
But when I started at the SEC, I re-examined our approach and concluded that there are certain other cases not involving any parallel criminal case where there is a special need for public accountability and acceptance of responsibility.
As you might expect, much of my thinking on this issue was shaped by the time I spent in the criminal arena, where courts cannot accept a guilty plea without the defendant first admitting to the unlawful conduct. Anyone who has witnessed a guilty plea understands the power of such admissions – it creates an unambiguous record of the conduct and demonstrates unequivocally the defendant’s responsibility for his or her acts.
But what about resolutions that do not require a guilty plea?
In 1994, when I was a U.S. Attorney, I entered into the first-ever deferred prosecution agreement (DPA) with a company – a tool the Department of Justice frequently uses today. Essentially, a DPA is an agreement that the government will file a criminal charge, but defer its prosecution for a period of time during which the party must demonstrate good behavior and satisfy the other terms of the agreement. These terms can include very significant payments of money, enhanced compliance requirements, and sometimes an outside monitor.
Back in 1994, there was no template for those agreements. Nothing required an admission or confession of wrongdoing. But I decided in that particular case that a public admission of wrongdoing was required for the resolution to have sufficient teeth and public accountability. So considering this history, it should not be surprising that I would follow that same approach in my new role as Chair of the SEC.
Since laying out this new approach, the most frequent question we get is about the types of cases where admissions might be appropriate.
Candidates potentially requiring admissions include:
- Cases where a large number of investors have been harmed or the conduct was otherwise egregious.
- Cases where the conduct posed a significant risk to the market or investors.
- Cases where admissions would aid investors deciding whether to deal with a particular party in the future.
- Cases where reciting unambiguous facts would send an important message to the market about a particular case.
To reiterate, no-admit-no-deny settlements are a very important tool in our enforcement arsenal that we will continue to use when we believe it is in public interest to do so. In other cases, we will be requiring admissions. These decisions are for us to make within our discretion, not decisions for a court to make.
Pursue Individuals
Another core principle of any strong enforcement program is to pursue responsible individuals wherever possible. That is something our enforcement division has always done and will continue to do. Companies, after all, act through their people. And when we can identify those people, settling only with the company may not be sufficient. Redress for wrongdoing must never be seen as “a cost of doing business” made good by cutting a corporate check.
Individuals tempted to commit wrongdoing must understand that they risk it all if they do not play by the rules. When people fear for their own reputations, careers or pocketbooks, they tend to stay in line.
Of course, there will be cases in which it is not possible to charge an individual. But I have made it clear that the staff should look hard to see whether a case against individuals can be brought. I want to be sure we are looking first at the individual conduct and working out to the entity, rather than starting with the entity as a whole and working in. It is a subtle shift, but one that could bring more individuals into enforcement cases.
When we do bring charges against individuals, we also need to consider all the possible remedies to prevent future wrongs. One of the most potent tools the SEC has is a court order imposing a bar on an individual – a bar from, for example, working in the securities industry or serving on the board of a public company. Such an order not only punishes past actions, but also can reduce the likelihood that the defendant can defraud and victimize the public again.
[…]
Win at Trial
Finally, a strong enforcement regime is only effective if we have the ability to back it up in court.
So, we need to maintain and enhance our ability to win at trial. For us to be a truly potent regulatory force, we need to remain constantly focused on trial readiness.
Indeed, because of our increased demands for admissions, we recognize that we may see more financial firms that say: “We’ll see you in court.” But that will not deter us. The SEC has a well-established record of winning when we go to trial – our recent win in the Tourre case is just the latest example. We must continue to sustain this successful record and ensure that we have sufficient resources available to litigate cases.
Significant and consistent trial wins also gives us the credibility we need to achieve strong and meaningful settlements, in every area that we will be pursuing in the coming years.
Conclusion
Going forward, I know you will be watching to see what we produce, as you should. A strong enforcement program provides greater protection for all investors participating in our markets. We should be judged by the quality of the cases we bring, by the aggressive and innovative techniques we use to pursue wrongdoers, by the tough sanctions and meaningful remedies we impose, and where appropriate by the acknowledgements of wrongdoing that we require.
Throughout my tenure as SEC Chair, I will continuously look for ways to make our enforcement program stronger.
The more successful we are at being – and being perceived as – the tough cop that everyone rightfully expects, the more confidence in the markets investors will have, the more level the playing field will be and the more wrongdoing that will be deterred.”
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There are two issues where White’s rhetoric and the reality of the SEC’s FCPA enforcement program most diverge.
First, White stated “any objective and informed observer agrees that the SEC has an exceptional enforcement record” and that “the SEC has a well-established record of winning when we go to trial.”
Not true in the FCPA context where the SEC has an overall losing record in FCPA enforcement actions when put to its ultimate burden of proof. As noted in this prior post, the SEC lost the Eric Mattson and James Harris individual enforcement actions at the motion to dismiss stage and as noted in this prior post, the SEC lost the Herbert Steffen individual enforcement action at the motion to dismiss stage. As noted in this prior post, in the Mark Jackson and James Ruehlen individual enforcement actions the court granted, without prejudice, the SEC’s claims that sought monetary damages and upon repleading the SEC’s ongoing case is a shell of its former self. In the ongoing enforcement action against Elek Straub and other former executives of Magyar Telekom, the court denied the defendants’ motion to dismiss (see here for the prior post).
Second, White stated “another core principle of any strong enforcement program is to pursue responsible individuals wherever possible. That is something our enforcement division has always done and will continue to do.”
As noted in this prior post, between 2008-2012, 79% of SEC corporate FCPA enforcement actions have not (at least yet) resulted in any SEC charges against company employees. This figure is likely to climb when re-calculated to include 2013 SEC FCPA enforcement actions. Thus far this year there have been 4 SEC corporate FCPA enforcement actions and none of the actions have (at least yet) resulted in any SEC charges against company employees.
Friday Roundup
A roundup of comments made yesterday by Charles Duross (DOJ FCPA Unit Chief) and Kara Brockmeyer (SEC FCPA Unit Chief) at the ABA’s National Institute on the Foreign Corrupt Practices Act in Washington, D.C.
Resources
Duross stated that the DOJ has “20 full-time prosecutors” focused on the FCPA, an “embarrassment of riches” in terms of resources compared to the past he said. He indicated that the DOJ’s FCPA unit also makes frequent use of Assistant U.S. Attorneys, particularly in litigated cases. Duross countered the notion that his unit sits “back on our hands” waiting for the next case to come in. He stated that DOJ FCPA attorneys are “actively encouraged to follow-up on leads” and cited the BizJet enforcement action as an example where the case involved a voluntary disclosure, individuals cooperating, and charging individuals under seal (see here for a prior post).
According to Brockmeyer, the SEC FCPA Unit “has about three dozen” staff dedicated full-time to the FCPA. This number is in addition to other enforcement attorneys in SEC offices outside of DC who may also work on FCPA cases. Her best guess is that approximately 75% of SEC FCPA cases are handled in Washington, D.C. with the rest of the cases handled by regional offices (such as Fort Worth, Salt Lake City, etc.) with coordination from D.C.
Law Enforcement Partners
According to Duross, domestic law enforcement partners include U.S. Attorneys Offices and the FBI. He also mentioned the IRS as a partner in FCPA cases and indicated that the Haiti Teleco case was an “IRS case from start to finish” and thus it was not surprising that the prosecutions in that case included money laundering charges.
Challenges
Despite an “embarrassment of riches” in terms of resources compared to the past, Duross indicated that the FCPA Unit, like other DOJ offices, “could always use more resources.” He cited the following challenges in bringing FCPA cases: foreign evidence collection, foreign laws concerning data privacy, foreign blocking statutes, and multi-jurisdictional issues. As to the later, Duross stated that with increasing frequency more than one sovereign is involved in bribery and corruption investigations and that this is a “fact of life.” He indicated that the U.S. has encouraged foreign jurisdictions to increase their involvement in this area and that since “we invited them to the party” “we must now deal with it.”
Brockmeyer cited the same general challenges as Duross in terms of enforcing the FCPA.
Case Origins
Brockmeyer indicated that the SEC FCPA Unit tracks its inventory of cases and she shared the following. 30% – 40% of cases come from corporate voluntary disclosures. According to Brockmeyer, the number of voluntary disclosures has been steady compared to prior years, but as a percentage of the overall enforcement pie it is shrinking because the overall enforcement pie is growing. Other sources Brockmeyer identified included whistleblower tips (including more sophisticated and detailed tips), enforcement attorneys reading the news, that a “pretty significant number of investigations” began as “spin-offs” of other investigations, and that “increasing number of referrals” are from foreign law enforcement authorities.”
Duross said that the DOJ FCPA Unit does not formally track its inventory like the SEC but his “general sense” was that voluntary disclosures are less than 50% of the inventory of cases. According to Duross, voluntary disclosure as a source of FCPA cases “is less than people tend to think it is.” According to Duross, the number of voluntary disclosures has remained steady, but most “get declined and nobody ever hears about them.”
Duross said that over the past several years, FBI agents and DOJ prosecutors (outside of the FCPA unit) have become more sophisticated about the FCPA and that more cases are coming to the FCPA Unit’s attention from others in the field who may spot FCPA issues in their other cases. Brockmeyer agreed with this comment and stated that SEC enforcement attorneys handling typical accounting fraud cases are also now looking for indicia of FCPA issues.
Related to the above issue, both Brockmeyer and Duross talked about so-called “industry sweeps” (see here for the prior post).
According to Brockmeyer, an industry sweep is not a situation where an existing case may suggest a wider problem in an industry and lead to investigations of others. Nevertheless, she did indicate that “very occasionally” the SEC does engage in industry sweeps, but “not as often as people think,” where the SEC, in its role as a regulator, sends out “high-level requests for information” to certain industries in which the SEC thinks there are FCPA risk factors. As to the predication leading to such an inquiry, Brockmeyer said that such a sweep can result even if there is no specific tip as to the industry. Nevertheless she stated that the SEC is not going to send out information letters “willy-nilly” because the SEC does recognize that when it sends out letters there are costs to the company’s associated with the request.
Duross agreed that following the evidence in one particular case to perhaps another company is not an “industry sweep,” it is simply following the evidence.
Future
According to Duross, the future of the DOJ FCPA’s unit is “bright,” there is a “tremendous pipeline of cases,” and that his unit continues “to do proactive cases” using all of the resources in its toolkit (i.e. wiretaps, etc.).
According to Brockmeyer, the SEC has become more focused on how compliance programs and internal controls are “intertwined.” She indicated that companies have generally become more sophisticated when it comes to compliance programs, but that much work still needs to be done in monitoring compliance programs and how compliance can impact a company’s overall internal financial controls.
Other Issues
As to the “where else” question (see here for the prior post), Duross suggested that often company lawyers are seeking to over do it through a global search of operations for FCPA issues. He discussed a case in which a company and its professional advisors came to a meeting with a global search plan and he said “no, no, no, that is not what I want.” He indicated that the lawyers and other professional advisors in the room “looked unhappy,” but that the general counsel of the company was happy. (For more on this dynamic, see this prior post).
As to a compliance defense, as I highlight in my article “Revisiting an FCPA Compliance Defense,” the DOJ already recognizes in various ways a de facto compliance defense to the FCPA. Further support for this proposition is found in the following comment from Duross. He indicated that a large company (he did not provide the company’s name – other than it would be recognizable to the audience) was a “serial reporter” of FCPA issues to the DOJ’s FCPA Unit. Duross said that this company has a “good compliance program and system” in place and does “robust” internal investigations when issues arise. Duross said that he and his unit have a “relationship of trust” with this company and its counsel and that “frankly, most of the time” the issue is “not a particularly large issue.” According to Duross this company remediates the issue and then it “goes on its way.”
As to the media, Duross indicated that media reports (domestic and foreign) have led the DOJ to open up FCPA investigations. He stated “what happens in China, doesn’t stay in China.” Duross stated that while the media can be critical of the DOJ’s FCPA unit and its efforts, that is not necessarily a “bad thing” because “criticism of us can be useful and cause us to look inward.” Duross indicated that “we should be held accountable for what we do – good and bad.” Duross shared that one of his biggest surprises upon becoming FCPA Unit chief is realizing how the unit “operates under a microscope” which highlights the need for his unit “to have its A game” at all times. Duross stated that media reporting of bribery and corruption issues can also spread a message of general deterrence.
Scrutiny Alerts
A roundup of the latest scrutiny alerts. As Christopher Matthews at the Wall Street Journal’s Risk & Compliance Journal stated “if you’re a corruption probe enthusiast, the hits just keep coming out of China these days.”
Danone
As noted in this article, Dumex Baby Food Co., a subsidiary of France’s Danone SA, is “launching a probe of its infant-formula marketing after China’s state broadcaster alleged the formula maker pays hospital staff to use its products and influence sales.” Danone has ADRs that are traded in the U.S.
Novortis
Novortis, already on the scrutiny list see here, was the focus of recent media articles (see here) suggesting that “it would investigate allegations published in a Chinese newspaper that its eye care unit Alcon bribed doctors.” Novortis has ADRs that are traded in the U.S.
Gabriel Resources
Gabriel Resources, a Canada based company with shares traded “over the counter” in the U.S., was the focus of this article concerning allegations of bribery in Romania in connection with a proposed gold mine.
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A good weekend to all.
Attorney General Holder’s Speech Has Broad Application
Yesterday Attorney General Eric Holder delivered this speech at the Annual Meeting of the ABA House of Delegates.
Below are snippets from his speech.
“It’s time – in fact, it’s well past time – to address persistent needs and unwarranted disparities by considering a fundamentally new approach.”
“[W]e must face the reality that, as it stands, our system is in too many respects broken. The course we are on is far from sustainable. And it is our time – and our duty – to identify those areas we can improve in order to better advance the cause of justice for all Americans.”
“[W]e need to examine new law enforcement strategies – and better allocate resources.”
“I’ve also issued guidance to ensure that every case [the DOJ] bring serves a substantial federal interest …”.
“As a society, we pay much too high a price whenever our system fails to deliver outcomes that deter and punish crime …”.
“The bottom line is that, while the aggressive enforcement of federal criminal statutes remains necessary, we cannot simply prosecute or incarcerate our way to becoming a safer nation. To be effective, federal efforts must also focus on prevention and reentry. We must never stop being tough on crime. But we must also be smart and efficient when battling crime and the conditions and the individual choices that breed it.”
“Today – together – we must declare that we will no longer settle for such an unjust and unsustainable status quo. To do so would be to betray our history, our shared commitment to justice, and the founding principles of our nation. Instead, we must recommit ourselves – as a country – to tackling the most difficult questions, and the most costly problems, no matter how complex or intractable they may appear.”
“This is our chance – to bring America’s criminal justice system in line with our most sacred values. This is our opportunity – to define this time, our time, as one of progress and innovation. This is our promise – to forge a more just society. And this is our solemn obligation, as stewards of the law, and servants of those whom it protects and empowers: to open a frank and constructive dialogue about the need to reform a broken system.”
Holder’s speech focused primarily on the war on drugs, violent crime, and incarceration rates.
However, the above quotes have broad application, including in the FCPA context.
Disparity? See here, here, here and here for previous posts.
Broken? As highlighted in this post, how many former high-ranking DOJ officials and/or former DOJ FCPA enforcement attorneys does it take before the current DOJ realizes that its FCPA enforcement policies and procedures are, in certain cases, broken? See also here.
Better allocate resources? There is a way to do that in the FCPA enforcement context while at the same time best advancing the laudable objectives of the FCPA. See here.
Cases that serve a substantial federal interest? Perhaps you’ve heard that a substantial majority of the top FCPA enforcement actions in terms of settlement amounts have been against foreign companies based on sparse U.S. jurisdictional allegations. See here for instance.
A system that fails to deliver outcomes that deter and punish crime? As highlighted in this prior post, the DOJ itself has acknowledged that it does not even know if NPAs and DPAs in the FCPA context deter.
As highlighted in this previous post, there is a way forward in the FCPA context – a system that will better promote compliance and hold wrongdoers accountable.
It will however require courage and bold leadership to – in the words of Holder “open a frank and constructive dialogue about the need to reform a broken system.”
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I also drew inspiration from the following in Holder’s speech.
“[T]o question that which is accepted truth; to challenge that which is unjust; to break free of a tired status quo; and to take bold steps to reform and strengthen America’s criminal justice system – in concrete and fundamental ways.”
These are among the reasons why I write about the FCPA and related topics.