News Corp Hires Mendelsohn … And More On The Revolving Door
The Wall Street Journal (here) reports that “News Corp. has hired Mark Mendelsohn, a partner in the Washington, D.C. office of Paul, Weiss, Rifkind, Wharton & Garrison LLP.”
From 2005 to 2010, Mendelsohn (here) was Deputy Chief of the DOJ Fraud Section and “was responsible for overseeing all DOJ investigations and prosecutions under the FCPA.” As such, Mendelsohn is widely viewed as the architect of this new era of FCPA enforcement. The WSJ previously noted (here) that “it has been up to the Justice Department – and specifically to Mr. Mendelsohn – to interpret [the “particularly vague” FCPA]” during its era of resurgence. As Dionne Searcey of the WSJ recently noted (here) Mendelsohn “presided over an across-the-board crackdown on corporate corruption abroad, levying record-breaking fines and prosecuting executives for bribery.”
How Mendelsohn (and those he supervised while at the DOJ) interpreted the FCPA was often aggressive, new, and novel. Indeed, in this interview with “The Boardroom Channel” Mendelsohn was asked about the increase in FCPA enforcement actions and candidly stated that “what’s really changed is not so much the legislation, but the enforcement and approach to enforcement by U.S. authorities.”
Prior posts (here and here) discussed News Corp.’s potential FCPA exposure given the London police officer payments at issue and how the conduct fits within the type of FCPA enforcement frequently pursued by the DOJ during this era of the FCPA’s resurgence. Mendelsohn’s DOJ FCPA unit did not invent FCPA enforcement actions involving payments to “foreign officials” to secure general business advantages (as opposed to foreign government contracts as were traditionally pursued), but these type of actions soared under his leadership. Thus, Mendelsohn’s News Corp. representation may now put him face-to-face with the same aggressive enforcement theories he championed while at the DOJ.
Nathan Vardi (who wrote a feature Forbes article (here) in 2010 titled the “Bribery Racket”) wrote yesterday at Forbes (here) “it will be interesting to see how Mendelsohn handles his new assignment.”
Seperately, Bloomberg reported (here) that News Corp’s independent directors have hired Mary Jo White and Michael Mukasey of the law firm Debevoise & Plimpton. While at the DOJ, White participated in FCPA prosecutions and Mukasey (the former Attorney General) recently testified on behalf of the U.S. Chamber of Commerce during the FCPA hearing last month in the House. See here for a summary of his testimony and the hearing.
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Mendelsohn’s 2010 departure from the DOJ’s FCPA unit to a private practice career was part of a clear trend of FCPA enforcement attorneys enforcing the law one day and then providing FCPA defense services the next.
In the latest example (see here, here and here for other recent examples), Paul Weiss announced recently (see here) that Bruce Searby, the prosecutor in the DOJ’s successful of Gerald and Patricia Green will be joining the firm’s Washington D.C. office. Mendelsohn stated in the release that the “growing intolerance of corruption … is leading to increasing scrutiny of organizations’ business activities and a greater focus on compliance and prevention” and that Searby’s addition will enable Paul Weiss “to help our clients better navigate the regulatory environment, conduct internal reviews, and, where necessary, respond to inquiries from U.S. and foreign authorities.” Paul Weiss chair Brad Karp noted that “the demand for top-tier legal advice on complying with domestic and foreign anti-corruption legislation has never been greater.”
I agree and that is why I believe it is in the public interest (recognizing the niched nature of both the DOJ and SEC FCPA units) that all FCPA enforcement attorneys should be prohibited when leaving the government from providing FCPA defense or compliance services for a five-year time period. For additional reading see this piece I co-authored.
Others have also recently brought attention to the public policy concerns of the revolving door. In this recent article in Forbes, Harvey Silvergate profiles a non-FCPA DOJ departure to the private sector and how the former DOJ prosecutor is now on the other side of cases the individual “so zealously prosecuted” during his DOJ career. As to the numerous DOJ departures, Silvergate writes as follows. “From an outside perspective, [such moves seem] like a zero-consequence decision: corporations now have lawyers who understand the federal prosecutorial machinery and, importantly, maintain their relationships with former colleagues remaining in government service. And, of course, the federal government will easily enough be able to find replacements among the many eager law school graduates seeking these plum positions. Everybody wins, right? Everybody, that is, except for the justice system as a whole. Underlying the revolving door is a pernicious underbelly of overzealous and often unfair prosecutions, juked conviction stats, and a culture of plea-bargaining that is spiraling out of control, all in order to bring down some of the biggies in the business world. In short, the revolving door is facilitated by a federal criminal justice system geared more for making prosecutors’ reputations on the scalps of private sector companies and executives, than for achieving true justice.” Silvergate correctly concludes by stating that “revolving door between the Department of Justice and white shoe law firms is a phenomenon that deserves more attention by the press and other elements of civil society…”.
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On July 12th, the Government Accountability Office (“GAO” – the investigative arm of Congress) released a report (here) titled “Existing [SEC] Post-Employment Controls Could Be Further Strengthened.” As to the SEC’s revolving door, the GAO states that it conducted its study because “this practice raises questions about the potential impact on SEC’s ability to effectively carry out its mission, including the potential for undue influence by former SEC employees on SEC matters or cases.”
On the same day the GAO released its report, the law firm Labaton Sucharow announced (here) that Jordan Thomas (a former Senior SEC attorney who “played a leadership role in the development and implementation of the SEC’s [new] Whistleblower Program”) joined the firm to “launch its Whistleblower Representation Practice.” According to the firm’s release, “Labaton Sucharow is the first and only law firm to recruit a senior SEC attorney to lead a national whistleblower practice focused exclusively on representing individuals who report violations of the federal securities laws.”
Mission Creep At The SEC?
Today’s post is from Bruce W. Bean (Professor and Director, LLM Program at Michigan State University College of Law – here).
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Last week FCPA Professor had a post (see here) describing the SEC’s internal search for the new Head of the Division of Enforcement’s FCPA Unit.
As previously reported (see here), Cheryl Scarboro, Head of the Commission’s FCPA Unit, will shortly join the Washington, D.C. office of Simpson Thacher.
The internal SEC marketing materials for this position state that this “Unit seeks to expand the Commission’s global reach in this area by executing targeted sweeps and sector-wide investigations, identifying systemic practices that give rise to potential FCPA violations and aggressively enforcing anti-bribery statutes.”
“[E]xpand the Commission’s global reach?” We do not find this concept in the FCPA. Nor is it in the original Securities Exchange Act that established the SEC. Has the Commission really run out of legitimate domestic prosecution targets? Does the Commission actually believe that, having long ignored stock manipulation by Wall Street traders (who can afford to mount a vigorous defense), it should declare victory in the domestic equities markets, shout “Mission Accomplished” and move on to police the rest of the world?
The most revealing aspect of this internal job posting for the new Head of the FCPA Enforcement Unit is this sentence, which encapsulates the SEC’s jurisdictional philosophy. “The Unit selects cases that present unique legal, evidentiary and policy challenges and attempts to develop case law and legal precedent that will have the greatest deterrent impact on conduct that violates the FCPA.”
Certainly “unique legal, evidentiary and policy challenges” are presented each time we have the Commission stretch and distort the language of the FCPA as it “attempts to develop case law.” For example, there is no FCPA language supporting the determination that millions of Chinese employees at State-Owned Enterprises are “foreign officials.” Similarly, we search in vain for the statutory basis for FCPA liability for a foreign company whose foreign subsidiary committed an act which the prosecutor claims violates the FCPA.
This newly developed FCPA “case law,” of course, is largely created by the enforcement attorneys. (See here for a prior post on “prosecutorial common law”). It is seldom fully litigated before the Judicial Branch. After all, few defendants can afford to litigate against the Government, and those that could most often do not wish to risk “debarment” from doing further business with the Government until proven innocent.
FCPA enforcement has come to mean, “Let’s see just how far we can push the inherent ambiguities in the statute.” When that rare defendant does stand up and fight as in U.S. v. Giffen, we see a multi-year, multi-million dollar legal defense during which a Federal Court ultimately did not endorse the prosecutor’s attempt to “develop new case law.”
Unquestionably, there is marvelous deterrent value when the SEC makes clear that it aggressively pursues FCPA violators. Prosecutors also find good value in high profile prosecutions, since this accelerates their passage through the SEC’s revolving door to much more lucrative private practice.
A closing note of warning. As outrageous as it may seem, the SEC’s jurisdictional and enforcement philosophy is comparatively good news. On Friday, July 1, the former Head of the Unit, Cheryl Scarboro, is likely to start at Simpson Thacher. That is also the date the U.K. Bribery Act comes into force. The Bribery Act actually does purport to give British prosecutors statutory authority to pursue bribery anywhere on the planet Earth. Stay tuned!
What Does The SEC FCPA Unit Chief Do?
[The below post has been revised since first posted]
Wonder no longer.
Given Cheryl Scarboro’s recently announced departure from the FCPA Unit Chief position (see here for the prior post), the SEC recently posted the opening for the position.
The “Major Duties” portion of the job posting is actually an interesting and informative read.
Want proof that the SEC executes “targeted sweeps and sector-wide investigations.” It is in the job description.
The “Major Duties” section of the job posting states, in full, as follows.
“The Division of Enforcement assists the Commission in executing its law enforcement functions by, among other things, conducting investigations of possible violations of the federal securities laws, making recommendations to the Commission concerning enforcement actions and initiating and conducting administrative proceedings and civil actions arising out of its investigations. The Division of Enforcement’s Foreign Corrupt Practices Act Unit operates on a nationwide basis, exercises the full range of the Division’s investigative and law enforcement powers and focuses on actual and suspected violations of the Foreign Corrupt Practices Act (collectively, “FCPA”) . The Unit is comprised of staff from the Division of Enforcement and Regional Offices. The principal functions of the Unit include developing and maintaining significant specialized knowledge and expertise in the identification and investigation of FCPA violations. Members of the Unit gain in-depth knowledge of industries and regional practices as they may relate to potential FCPA violations on a global basis. Over the course of its investigations, and from case-to-case, the Unit develops specialized insights and understanding of foreign business practices by U.S. and international public companies involving all manner of questionable payments (bribes, kickbacks, gratuitous payments etc.) involving foreign officials, U.S. and foreign executives and the agents and intermediaries through whom they may operate. The Unit seeks to expand the Commission’s global reach in this area by executing targeted sweeps and sector-wide investigations, identifying systemic practices that give rise to potential FCPA violations and aggressively enforcing anti-bribery statutes. The Unit selects cases that present unique legal, evidentiary and policy challenges and attempts to develop case law and legal precedent that will have the greatest deterrent impact on conduct that violates the FCPA. Members of the Unit establish contacts and forge close relationships with foreign regulators and law enforcement authorities and US counterparts, including the U.S. Department of Justice and other federal and state regulatory authorities with interests in this area. The Unit communicates with staff throughout the Commission, the Division and regions and with other specialized units to disseminate information, share analysis, develop and distribute high quality enforcement leads and determine investigative strategies. The Unit performs risk assessment relating to areas within its specialty and communicates with the Division and other Commission offices and divisions concerning its findings. The Unit conducts regular and ongoing training for its staff, engages in public outreach and represents the Commission in industry meetings, conferences and other market-related events.”
One has to reach far into FCPA history to discover an instance where the SEC was challenged in an adversary proceeding and put to its burden of proof in an FCPA case. Thus the following sentence from the job description was a bit amusing – “the Unit selects cases that present unique legal, evidentiary and policy challenges and attempts to develop case law and legal precedent that will have the greatest deterrent impact on conduct that violates the FCPA.”
The position, only open to current SEC employees, has a pay range of $150,372 to $226,160.
However, the prestige of this position, the national and international platform it provides for speeches etc., and the knowledge and experience gained will allow the successful applicant (should he or she choose) a smooth transition into an FCPA private practice career at a major law firm and the ability to make several times the above salary range.
Branch Office Of The Prosecutor
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
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).