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).
Scarboro to Simpson Thatcher
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.
A Q&A With Homer Moyer
In running a site called “FCPA Professor” it is only appropriate to touch base with a “Dean” on occasion.
I do so in this post with Homer Moyer, a “dean” of the FCPA bar. Moyer, a partner with Miller & Chevalier (see here) addresses a variety of topics in this Q&A – from evolution of the FCPA and FCPA enforcement to voluntary disclosure and investigative fees. Moyer closes out the Q&A with a few FCPA reform proposals of his own.
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Your government experience prior to law practice was with the Commerce Department, not the DOJ or SEC as is typical of many FCPA enforcement lawyers. How has your Commerce Department experience informed your FCPA practice?
I was at the Commerce Department when the FCPA was enacted, and I chaired an inter-agency group on FCPA issues. Of greater value to my later FCPA practice, however, was having served as general counsel of the Department that deals most directly with corporate issues and that both promotes and regulates American businesses. Also of great value were the experiences of having litigated cases as both a prosecutor and defense counsel. Perhaps most important, however, is having now seen hundreds of different FCPA issues for dozens of different clients.
Working on FCPA cases at the SEC or DOJ provides prosecutors with unique experience, but not the opportunity to counsel and represent corporate clients, manage complex legal issues for them, or help them devise and implement innovative compliance programs.
Describe your first FCPA matter or case? What were the issues? What were your client’s concerns?
One of my early cases, some 20 years ago, presented a host of issues that had not yet become commonplace. The case I have in mind involved potential vicarious liability for the acts of a third party, a third party who claimed that the work it did for a U.S. company created a “constructive partnership” that entitled it to share the company’s profits, questions of whether to consult voluntarily with DOJ, an industry with which DOJ was not yet well-acquainted, innovative compliance enhancements, related civil litigation, and forged evidence presented to a court.
That matter ended well, but it presented issues of first impression and foreshadowed how complicated FCPA cases could be.
The FCPA has evolved much since your first case. From your perspective, has this evolution been positive? Any negative aspects of this evolution? How has this evolution affected your practice and your clients?
The evolution of FCPA enforcement has unquestionably brought more and more attention to the issue of official corruption and has had an indisputable impact on corporate behavior, or the “supply side” of the bribery equation. In addition, it has done something that unilateral U.S. laws rarely do, namely, led to a far-reaching change and consensus in the international legal landscape, as now reflected in international anti-corruption conventions to which more than 150 countries have become signatories.
Despite two sets of amendments, the FCPA itself has changed relatively little since it was adopted in 1977. Its “evolution” has primarily been through a steady escalation in enforcement — the number and variety of enforcement actions, expansive interpretations of key provisions, the size and variety of penalties, the frequency of voluntary disclosures, and a steady rise in the levels of sophistication the government looks for in independent investigations, due diligence processes, and compliance programs.
Has this evolution been positive or negative? Few people would now dispute that corruption and bribery of foreign officials imposes staggering economic and social costs, frequently on countries that can afford it least. The question then becomes whether FCPA enforcement has made a positive difference in reducing or eliminating corruption. It probably has, but more relevant today is the continuing pervasiveness of official corruption and the daunting challenges to controlling it on a global basis.
With respect to the FCPA itself, complaints that it has created an “uneven playing field” have been somewhat undercut by aggressive FCPA enforcement against non-U.S. companies, by new international anti-corruption conventions, and by the beginnings of genuine enforcement in some other countries. And the lament that few FCPA cases are adjudicated in court does not distinguish FCPA enforcement from the enforcement patterns of many other regulatory laws. The infrequency of judicial review may occasionally embolden the government to overreach, but it has rarely resulted in abusive prosecutions.
In terms of our own practice, the increase in enforcement has plainly caused clients to be far more focused on anti-corruption issues than was once the case. This has certainly caused Miller & Chevalier’s long-standing FCPA practice to grow dramatically. It also appears to have created something of a traffic jam of newly minted “FCPA lawyers.”
Your point “that few FCPA cases are adjudicated in court does not distinguish FCPA enforcement from the enforcement patterns of many other regulatory laws” is a very valid point. However, isn’t a key difference though that other laws have benefited from several dozen circuit court opinions and perhaps a few Supreme Court decisions, such that the parameters of the law are at least set by someone other than the enforcement agencies? [Granted, 2011 will likely see several trial court decisions as to certain FCPA elements, but the FCPA is still a law that is lacking much meaningful precedential case law.]
One has to take the view — and I certainly do — that independent judicial review is a good thing — a critical part of our legal system and important to preserving the rule of law. Judicial review, or the prospect of judicial review, can help prevent regulatory or enforcement excesses. In some regulatory programs — environmental statutes come to mind — the level of judicial review is robust. And we are beginning to see more judicial review in FCPA cases involving individual defendants.
At the same time, some regulatory areas have been subject to as little, or even less, judicial scrutiny than the FCPA. Statutory restrictions on judicial review and judicial deference to agency interpretations of regulations having “national security” ramifications effectively reduce judicial oversight. One can look long and hard for good case law on the regulations enforced by the Office of Foreign Assets Controls (“OFAC”) or on export controls rules under the ITAR (International Traffic in Arms Regulations), each of which has seen regulatory overreaching and little accountability. One recent Federal Circuit Court opinion referred to the discretion reserved by the Executive Branch combined with the lack of clarity in the ITAR as something that would be expected of a totalitarian regime, not the United States Government.
In the end, however, the amount of judicial review is determined by the private sector. Clients are, of course, free to challenge FCPA enforcement actions, although historically corporate clients have tended to favor settlement as a preferable route. Moreover, recent FCPA court decisions reflect that courts will not necessarily interpret laws differently from enforcement agencies. Nonetheless, both corporate and individual defendants are free to challenge agency interpretations of the laws they enforce, and I and many other counsel would undoubtedly be available to help.
When President Obama, high-ranking DOJ officials and others in government talk about corruption and bribery, they talk about the bridge that crumbles because the contractor was selected based on a bribe payment or other similar scenarios. However, very few FCPA enforcement actions fit this scenario, rather the alleged violator is generally viewed as an industry leader that sells the best products for the best prices. Do you agree that a divide exists between such government or civil society statements and typical FCPA enforcement action scenarios? If so, how do we bridge this divide?
Bribery of foreign officials is, in the first instance, typically designed to overcome market forces and to distort competition, not to ensure the purchase of the best products at the best price. Whether or not a bridge is the best metaphor, FCPA violations reflect illicit payments that are made to enrich corrupt officials and that shift that cost to consumers and taxpayers. The consistent scenario in FCPA enforcement actions is that an alleged violator, or someone acting on its behalf, did, in fact, pay bribes, often egregious ones.
The most significant “divide” today is the uneven enforcement among signatories to anti-corruption conventions. Whereas the 1980s saw an industry push to repeal or relax the FCPA on the grounds that it was creating a competitive disadvantage for American companies, the more common complaint today is that other countries must consistently and meaningfully enforce their own anti-corruption laws to assure that the proverbial playing field is level.
Many calls to roll back the FCPA are now anomalous, as they would put the United States out of compliance with international conventions that the FCPA inspired and that the United States fought hard to achieve. They also run counter to the anti-corruption momentum of the last 20 years and would effectively legalize some practices that are coming to be universally condemned, if not yet universally punished.
I find that most U.S. multinational corporations would be delighted to compete on the merits. Indeed, some companies are affirmatively using integrity in the marketplace to gain a competitive advantage. Many have voluntarily prohibited “facilitating payments,” even though they are permissible under the FCPA. It is also interesting to note that Siemens, after paying record-shattering FCPA fines and taking aggressive steps to transform its entire corporate culture, has been posting record profits.
What is your reaction to this statement from a recent high-ranking DOJ official – ““the government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.” Do you believe that FCPA enforcement has become a government cash cow? FCPA enforcement fines and penalties simply go into the U.S. Treasury. Are there better places for this money accepting the notion that bribery results in victims?
FCPA fines probably don’t rise to the level of a governmental “cash cow.” In fiscal terms, they are of no real moment. The government unfortunately needs some much bigger revenue cows.
I do believe, however, that law enforcement penalties should be a consequence of, not a reason for, enforcing criminal laws. And although penalties have risen, I do not have the sense that revenue production has been a driver of FCPA enforcement.
Your interesting question about whether penalties might be used to compensate the “victims” of corruption is a favorite in developing countries. It highlights the difficulties of tracing, seizing, and repatriating funds that corrupt officials have stolen from their countries. Even where recovery of funds is possible, assuring that they are then used to benefit the citizens who were cheated by official corruption is a challenge. That is, however, the right use of repatriated funds.
Because countries that have been cheated by their own rulers have rarely been able to recover the stolen funds, some have asked whether they should be compensated with funds collected as penalties in anti-corruption enforcement actions. This would be a break from past law enforcement patterns, and the idea appears not to have gained significant traction. The strongest case for making that break probably relates to funds collected as disgorgement of profits rather than pure fines. Indeed, one could argue that it would be more just for the bounties that whistleblowers can now earn under the Dodd-Frank law to go not to whistleblowers, but rather to the countries affected for the benefit of the victims of corruption.
Your response speaks of corrupt “officials,” “official corruption” and “rulers.” Yet, the vast majority of FCPA enforcement actions involve no such individual – rather the alleged recipient of the bribe is an employee of an alleged state-owned or state-controlled enterprise. In these cases, would not the most direct victim be the competitor who lost the contract or did not have the opportunity to bid. Are you in favor of an FCPA private right of action?
In most FCPA violations, there is more than one victim. Competitors can certainly be victims. So can government agencies or instrumentalities that are procuring goods or services. Even where there is an admitted bribe, however, determining which competitors may have been “victims” would undoubtedly be a messy and imperfect process. And allegations of improper payments are far more common than proof of improper payments, as any practitioner knows, and the complications of trying to identify victims and allocate compensation among everyone claiming status as a victim might make us long for the days when the principal issues were simply the ones you have asked about here.
What percentage of internal investigations you have worked on in the past 3-5 years that ended with a conclusion that the company violated the FCPA resulted in a voluntary disclosure? Same question for investigations you worked on during the time period 1995-2005? Why the difference?
Although we have clients who, after weighing all the relevant factors, have elected not to disclose, the percentage of matters that result in voluntary disclosures has plainly been rising. The reasons include changes in the sentencing guidelines, the enactment of Sarbanes-Oxley, greater Audit Committee oversight of investigations, the campaign by enforcement agencies to assure companies that voluntary disclosure and cooperation will result in “tangible benefits,” and the gradually spreading view that this is true, if not numerically predictable.
With Avon’s recent disclosure that it has spent over $100 million in professional fees and expenses in connection with an FCPA inquiry and other similar disclosures (albeit perhaps not as dramatic) have professional fees and expenses (law firm, accounting firm, etc.) associated with FCPA internal investigations gotten out of control?
I have to confess to being stunned at some of the reported costs of investigations. To be sure, the costs of investigations have risen with increased emphasis on electronic documents and the insistence that investigations must be independent, thorough, and knowledgeable.
Accepting those requirements, the cost-effectiveness of an investigation can be significantly improved by developing a careful work plan, utilizing a firm with experienced FCPA lawyers at all levels of seniority, tailoring the type of investigation to the type of issue, and making informed and reasonable judgments about when to stop an investigation and focus on remediation. In my experience, it is often possible to have a reasoned and productive dialogue with enforcement agencies about the scope and extent of investigations.
FCPA reform proposals are floating around and are reportedly being considered by certain members of Congress. In your view what reform proposals have merit and what issues are at the top of Homer Moyer’s FCPA reform list?
I find some of the calls for statutory reform less than compelling. Proposals to change the statute in ways that would be inconsistent with international conventions to which the U.S. is committed are unlikely to be successful, in my view, and could well open the door to other “reforms” that advocates for change might dislike, such as eliminating the exception for facilitating payments.
To be sure, in enforcing the FCPA, the government tries to overreach from time to time — exercising anti-bribery jurisdiction over foreign subsidiaries and aggressive applications of dd-3 jurisdictional on the grounds that some step in the process took place “in the territory of the United States” come to mind as occasional examples. When enforcement agencies overreach, they should be challenged.
My dream list of “reforms” might read something like the following:
• Internal DOJ guidance that voluntarily disclosed matters must normally be resolved by the Department within 90 days after completion of an internal investigation; that agencies should make public their calculations of credit for voluntary disclosure and coordination; and that the Department will publish sanitized summaries of its declinations.
• An amendment to tweak the whistle-blower provision of Dodd-Frank to relieve the SEC of the conundrum of implementing the statute consistent with its terms but in a manner that does not undercut effective corporate compliance programs;
• An agreement among prosecutors that in the case of parallel investigations by more than one country, private parties may request state-to-state consultations (as called for by the OECD convention), and the consulting states should assure that investigations are coordinated and penalties made complementary so that companies do not face redundant penalties or unnecessarily overlapping investigations.
• Insistence by the OECD that OECD membership for China, Russia, and India must include accession to the Anti-Corruption Convention, accelerated peer review, and possible reconsideration of OECD membership if implementation and enforcement of anti-corruption laws prove to be insufficient.
• Multilateral reform measures designed to minimize current legal impediments to identifying and seizing funds stolen by corrupt officials and to facilitate repatriation of such funds.
Another Top SFO Official To Depart
The U.K. Bribery Act is set to go live on July 1st.
But will anyone be left at the SFO to enforce the new law?
Of course there will be. As has been witnessed in the U.S., carrying the “enforcement stick” makes one a valuable target for law firm recruiters in this era of increased enforcement – as the firms are eager to provide clients with insight and advice from those who carried or shaped the “enforcement stick.”
Coming on the heels of other recent high-level SFO departures (see here and here for the prior posts), yesterday it was reported (see here for the coverage from Legal Week) that Vivian Robinson (SFO – General Counsel) will soon leave the agency and join the London office of U.S. based law firm McGuireWoods LLP.
Over the past year, Robinson has been a very active speaker on behalf of the SFO on the Bribery Act. See here and here for prior posts as to certain of Robinson’s speeches or commentary.
Commenting on his move, Robinson told Legal Week – “It has also been a privilege to take part in bringing to the attention of a wide national and international audience the importance of the new Bribery Act, its implications, and the essential role to be played by the SFO as principal enforcer of its provisions.”
As has been previously reported, Richard Alderman (Director of the SFO) is also looking to soon retire from the SFO.
FCPA Insurance
This “new era of FCPA enforcement” (see here) has resulted in “a thriving and lucrative anti-bribery complex” that is – in the words of the DOJ’s former FCPA head from a different era – “good business for law firms […] good business for accounting firms, […] good business for consulting firms, the media – and Justice Department lawyers who create the marketplace and then get [themselves] a job.” (See here).
FCPA practices are now profit centers at law firms and accounting firms and dozens of companies have appeared on the landscape to provide all imaginable services related to the FCPA. Persons “working in this growing field” can now even receive “a professional accreditation” as an anti-bribery compliance specialist. (See here).
As if further evidence was needed that FCPA Inc. is indeed a full-fledged industry in and of itself, an insurance company has begun to offer Foreign Corrupt Practices Act insurance.
Chartis, a New York based “world leading property-casualty and general insurance organization” recently announced (here) the introduction of “Investigation Edge, developed by its Executive Liability Division as the first insurance solution to cover company costs arising from SEC investigations, including those related to internal investigations.”
According to the release, “Investigation Edge covers legal expenses, discovery costs and insurable settlements resulting from investigations by enforcement authorities – including the SEC and the Department of Justice – into insider trading, restatements, accounting fraud and reporting violations.”
Need a specific endorsement for FCPA issues?
No problem – as the release notes “coverage is also available via endorsements for investigations into Foreign Corrupt Practices Act violations and derivative investigations.”
It is not surprising that an insurance company is now offering such a product.
FCPA professional fees and expenses have reached, in some cases, nine figures such as Avon’s recent disclosure that it has spent approximately $100 million just to investigate conduct that may implicate the FCPA. In addition will be any enforcement action fines, penalties, and disgorgement, as well as any post-enforcement action compliance fees and expenses. In addition, collateral civil litigation seems to have become a new norm (see here for example).
However, would it not be easier, more cost efficient, and more desirable for any number of policy reasons to address the root causes for why the “new era of FCPA enforcement” exists in the first place?
For some – yes.
For others – no. The current era is suiting them just fine.