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Digi’s Disappearing Act … And A Proposal

By on August 4, 2010 in Declination Decisions, Digi International, FCPA Investigative Costs, FCPA Reform, Opinion Procedure Release, Voluntary Disclosure

SEC filings are carefully crafted, tightly worded documents created by in-house specialists and often vetted by outside professionals. In short, precise words matter in SEC filings.

In a July 22nd 8-K filing (here), Digi International Inc. provided an update on its previously disclosed FCPA internal investigation including this statement: “[t]he investigation also identified certain books and records and related internal controls issues under the FCPA.” (emphasis added).

Given the above wording, it would seem reasonable to conclude that the company (with the assistance and input from outside counsel) identified conduct that implicated the FCPA. Why else would the disclosure contain the clause “under the FCPA”?

Fast forward to August 2nd when the company issued a press release (here) stating, in reference to the July 22nd 8-K and the investigation, that: “Digi has now received confirmation through discussions with representatives of the DOJ and the SEC that they will not be initiating any enforcement proceedings against Digi.”

That’s quite the disappearing act. And a quick one at that.

As noted in a prior post (here) Digi is “the leading supplier of multifunction communication devices to the U.S. Federal Government.”

FCPA enforcement (or lack of enforcement in this case) is already largely an opaque process and Digi’s curious disappearing act serves as another example for why transparency and accountability in FCPA enforcement is needed.

So here is my proposal to shed more light on the DOJ and SEC’s enforcement of the FCPA.

In instances such as Digi (i.e. when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC and when the DOJ and the SEC decline enforcement) require the DOJ and the SEC to publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.

Here is why I think the proposal makes sense and is in the public interest.

For starters, the DOJ and the SEC are already wildly enthusiastic when it comes to talking about FCPA issues. Enforcement attorneys from both agencies are frequent participants on the FCPA conference circuit and there seems to be no other single law that is the focus of more DOJ or SEC speeches than the FCPA. Thus, there is clearly enthusiasm and ambition at both agencies when it comes to the FCPA.

Further, both the DOJ and the SEC have the resources to accomplish this task. Both agencies have touted the increased FCPA resources in their respective offices and the new personnel hired to focus on the FCPA. Combine enthusiasm and ambition with sufficient resources and personnel and the proposal certainly seems doable.

Most important, the DOJ is already used to this type of exercise. It is called the FCPA Opinion Procedure Release (see here) a process the DOJ frequently urges those subject to the FCPA to utilize.

Under the Opinion Procedure regulations, an issuer or domestic concern subject to the FCPA can voluntarily disclose prospective business conduct to the DOJ which then has 30 days to respond to the request by issuing an opinion that states whether the prospective conduct would, for purposes of the DOJ’s present enforcement policy, violate the FCPA.

The DOJ’s opinions are publicly released (see here for the most recent one) and the FCPA bar and the rest of FCPA Inc. study these opinions in great detail in advising clients largely because of the general lack of substantive FCPA case law.

If the DOJ is able to issue an enforcement opinion as to voluntarily disclosed prospective conduct there seems to be no principled reason why the enforcement agencies could not issue a non-enforcement opinion as to voluntarily disclosed actual conduct

Such agency opinions would seem to be more valuable to those subject to the FCPA than the already useful FCPA Opinion Procedure Releases. If the enforcement agencies are sincere about providing guidance on the FCPA, as they presumably are, such agency opinions would seem to provide an ideal platform to accomplish such a purpose.

Requiring the enforcement agencies to disclose non-enforcement decisions after a voluntary disclosure could also inject some much needed discipline into the voluntary disclosure decision itself – a decision which seems to be reflexive in many instances any time facts suggest the FCPA may be implicated.

(For more on the important voluntary disclosure decision and the role of FCPA counsel see here.)

Notwithstanding the presence of significant conflicting incentives to do otherwise, it is hoped that FCPA counsel advises clients to disclose only if a reasonably certain legal conclusion has been reached that the conduct at issue actually violates the FCPA. Accepting this assumption, transparency in FCPA enforcement would be enhanced if the public learned why the enforcement agencies, in the face of a voluntary disclosure, presumably disagreed with the company’s conclusion as informed by FCPA counsel. If the enforcement agencies agreed with the conclusion that the FCPA was violated, but decided not to bring an enforcement action, transparency in FCPA enforcement would similarly be enhanced if the public learned why.

A final reason in support of the proposal is that it would give companies such as Digi a benefit by contributing to the mix of public information about the FCPA.

In most cases, companies spend millions of dollars investigating conduct that may implicate the FCPA and on the voluntary disclosure process. When the enforcement agencies decline an enforcement action, presumably because the FCPA was not violated, these costs are forever sunk and the company can legitimately ask why it just spent millions investigating and disclosing conduct that the DOJ and the SEC did not conclude violated the FCPA.

However, if the enforcement agencies were required to publicly justify their declination decision, the company would achieve, however small, a return on its investment and contribute to the mix of public information about the FCPA – a law which the company will remain subject to long after its voluntary disclosure and long after the enforcement agencies declination decision. Thus, the company, the company’s industry peers, and indeed all those subject to the FCPA would benefit by learning more about the DOJ and the SEC’s enforcement conclusions.

Transparency, accountability, useful guidance, a return on investment.

All would be accomplished by requiring the enforcement agencies to publicly justify a declination decision in the limited instances where no enforcement action follows a voluntary disclosure.

Q & A With Martin Weinstein

By on May 18, 2010 in BAE, Egypt, FCPA Inc., FCPA Reform, Foreign Official, Guest Posts, Lockheed, Siemens

Martin Weinstein (here) is a “dean” of the FCPA bar. Much of my early understanding of the FCPA came as a direct result of working with Martin on FCPA investigations and enforcement actions. I also have Martin to thank for several of the stamps in my passport.

Below is a Q & A exchange with Martin in which he talks about the FCPA’s early years, the current state of enforcement, and suggestions for change.

*****

Q: As a 1984 law school graduate did you have any exposure to the FCPA? Describe your first exposure to the FCPA?

A: When I was in law school, I never heard of the Foreign Corrupt Practices Act and didn’t even know that it existed until around 1991. I was an Assistant U.S. Attorney, and a witness I was interviewing mentioned to me that she thought that some payments had been made to an Egyptian government official. I remember turning to the investigating agent who was with me and saying, “isn’t there a statute somewhere that prohibits this?” That was my first exposure to the Foreign Corrupt Practices Act.

Q: You were lead DOJ counsel in the Lockheed case in the mid-1990’s. Generally describe this matter, how it was resolved, and whether resolution of this case, if brought in 2010, would look any different?

A: I was the lead counsel in the Lockheed case that was resolved in the mid-1990’s, specifically January 1995. It was, by all accounts, the first really serious corporate case brought in the then 20 year history of the Foreign Corrupt Practices Act. In that case, the company actually was indicted, and the allegations involved payments to a member of the Egyptian Parliament to obtain a contract through which the Egyptian Air Force would buy three C130 aircraft from Lockheed. There were two individuals also charged. The cases against all three defendants (the company and the two individuals) were resolved before trial, in the company’s case, literally days before the jury was to be selected.

The company agreed to plead guilty to a conspiracy to violate the Foreign Corrupt Practices Act. It agreed to pay a combination of civil and criminal damages in the amount of $24.8 million, which was twice the profit of the contract they had with the Egyptian military to sell the C130 aircraft.

One of the individuals pled guilty to a lesser charge, and the other individual, a marketing manager named Suleiman Nassar, actually fled to Syria. That was one of the most interesting parts of the case for me because I visited Damascus on several occasions and negotiated directly with the government. Nassar was imprisoned in Syria on these charges, but was ultimately released and returned to the U.S. to plead guilty to violating the FCPA and became, I believe, the first person to go to jail under the FCPA.

Q: Did FCPA enforcement, during the last decade, morph into something other than what Congress intended the FCPA to address when passed in 1977?

A: The last decade of FCPA enforcement has seen extraordinary evolution, and I think you have to say that when Congress passed the law in 1977, they did not envision the wide reach of enforcement today and the types of things that the government gets involved in, such as transactions, joint ventures, and successor liability. I do think that the DOJ and the SEC have stayed generally true to the vision of the FCPA, which focuses on things of value, primarily money, going to foreign government officials in exchange for business.

Q: What is your biggest challenge as an FCPA practitioner? How has your FCPA practice changed over the past decade?

A: The challenges as an FCPA practitioner have mainly involved keeping up with the pace of the enforcement agencies in recent years. Whereas cases used to involve U.S. companies and their businesses in a few countries, the typical case now involves enforcement actions by multiple sovereigns involving the same company at the same time, and that makes the practice more challenging and more fascinating.

Q: What are your clients’ biggest challenges / frustrations with the FCPA or FCPA enforcement? Have these challenges / frustrations changed over the past decade?

A: I think that companies’ main frustration is that even with an outstanding compliance program and 99% of the employees maintaining strict adherence to the laws, you can still have violations which expose the entire company to extraordinarily serious penalties. I think the government has, at times, lost track of the main motivations for this statute and has become focused on the amounts of penalties, the imposition of compliance monitors, and exercising government control over what are basically private businesses. The vast majority of companies are absolutely committed to following the spirit and the letter of the FCPA, but when a company gets into trouble, the whole enterprise can be put at risk because of the conduct of a few people, and that doesn’t seem right. I worry that the government has come to see private industry through “dirty” glasses: the punishments don’t seem to fit the crimes.

Q: The FCPA was passed in 1977, amended in 1988 and also amended in 1998. Given this approximate ten year cycle, is the FCPA in need of further amendment? If so, what would the “Weinstein” amendment look like?

A: I think the Weinstein amendment would focus on the very significant issue of who is a foreign official and what constitutes a state-controlled instrumentality. There is so little guidance in this area that an amendment to the law providing clarity to companies wishing to comply is really essential. For example, after the U.K. government takeovers of certain British banks and U.S. intervention in the auto industry, did all these private businesses become state-controlled instrumentalities rendering all their employees government officials? Companies should not have to guess who is and who is not a government official.

Q: Arguably the two most egregious bribery schemes in recent years involved Siemens and BAE. In both instances, the companies were not charged with FCPA antibribery violations. What message does this send?

A: Siemens and BAE were not charged with antibribery violations largely for two different reasons. In the Siemens case and a number of other cases, charging a company with antibribery violations renders it susceptible to significant suspension and debarment risks. If the government can find suitable alternatives to antibribery charges and still tell the full story of the conduct to the public, it is really a much more just solution not to expose the company to extreme suspension and debarment risks. In BAE, I think the issue was much more one of jurisdiction, and I think the government is going to find this issue repeatedly if it continues to seek to prosecute foreign companies that have relatively little contact with U.S. interstate commerce.

Q: How can law and business schools best expose future lawyers and business leaders to the FCPA? What advice do you have for law students interesting in a future FCPA practice?

A: The FCPA has been a fantastic area in which to practice and to watch evolve. For students who are interested in the field, I think the most important thing is to learn as much as you can about U.S. criminal law and U.S. securities law and their interplay with various anticorruption laws around the world. It has become a very complicated field and I think it is safe to say the stakes for companies and individuals have never been higher.

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