How Rare Are Parallel DOJ And SEC FCPA Enforcement Actions Against Individuals?
Yesterday’s post regarding the Foreign Corrupt Practices Act enforcement action against former SAP sales executive Vicente Garcia noted that it was rare instance of a parallel DOJ and SEC enforcement action against an individual.
A reader asks “how rare is rare” and this post provides the answer.
For starters, the SEC can only bring an FCPA enforcement action against issuers and associated persons, whereas the DOJ’s FCPA enforcement authority is not as limited. (See here for a prior post discussing DOJ and SEC FCPA jurisdiction).
Moreover, as highlighted in this post, approximately 85% of corporate SEC FCPA enforcement actions since 2008 have not resulted in any related enforcement activity against individuals.
Given the above dynamics, it is thus a rather small subset of actions in which a parallel DOJ and SEC enforcement action against an individual might occur.
Even though the DOJ and SEC are rarely put to its burden of proof – even in individual enforcement actions – it is nevertheless relevant in analyzing this issue to note that the SEC as a civil law enforcement agency has a burden of proof of preponderance of the evidence, whereas the DOJ as a criminal law enforcement agency has a much higher burden of proof of beyond a reasonable doubt.
Against this backdrop, the parallel DOJ and SEC enforcement action against Garcia is believed to be only the second such instance in the last 3.5 years and one of only a handful over last decade.
Other examples of parallel DOJ and SEC FCPA enforcement actions against individual are as follows.
Garth Peterson (associated with Morgan Stanley) 2012 (see here and here).
Various Siemens executives – 2011 (see here and here).
Ousama Naaman (associated with Innospec) 2010 (see here and here).
Bobby Elkin (associated with Alliance One International) 2010 (see here and here).
Albert Stanley (associated with KBR / Halliburton) 2008 (see here and here).
Si Chan Wooh (associated with Schnitzer Steel) 2007 (see here and here). (Note, four years after Wooh pleaded guilty, the court granted the DOJ’s motion to dismiss the case in the “interests of justice).
Jim Brown and Jason Steph (associated with Willbros) 2006, 2008 (see here and here) (see here and here).
Steven Ott, Roger Young, and Yaw Amoako (associated with ITXC Corp.) 2006, 2005 (see here and here) (see here and here).
The Lack Of Criminal Charges Against PetroTiger Was Not Unique
The FCPA-related media has a troubling tendency to take things that are not unique and try to make them unique.
For instance, this recent Compliance Week article stated:
“Typically, when the Justice Department brings charges of FCPA violations against company executives, charges against the company itself aren’t far behind. […] The decision not to pursue charges of any kind [against PetroTiger] is a marked departure from most FCPA cases, in which the Justice Department will give companies credit for strong compliance programs, often entering into non-prosecution agreements or deferred prosecution agreements, which almost always come with strings attached. It’s rare that companies get complete exoneration.”
Contrary to the above assertion, the lack of criminal charges against PetroTiger – even though there was an enforcement action against individuals associated with the company – was not unique.
This post highlights the 18 instances since 2000 of the DOJ bringing an enforcement action against an individual or individuals, but not an enforcement action against the business organization associated with the individual(s). (Note: excluded from the list is the manufactured Africa Sting enforcement action against 22 individuals employed by over a dozen companies).
Interesting fact, 16 of the 18 instances (89%) involved individuals associated with privately-held companies like PetroTiger. The only two instances to involve individuals associated with publicly-traded companies are highlighted below with ***.
- Dmitrij Harder (2015 – ongoing criminal prosecution of individual associated with Chestnut Consulting Group Inc., no enforcement action against Chestnut Group).
- Dmitry Firtash, Andras Knopp, Suren Gevorgyan, Gajendra Lal, Periyasamy Sunderalingam (2014 – ongoing criminal prosecutions of individuals associated with DF Group, no enforcement action against DF Group).
- Ernesto Lujana, Tomas Clark, Alejandro Hurtado,Benito Chinea, Joseph DeMeneses (2013-2014 – criminal prosecutions of individuals associated with Direct Access Partners, no enforcement action against Direct Access Partners).
- Washington Cruz, Amadeus Richers and Cecilia Zurita (2011 – criminal prosecutions of individuals associated with Cinergy Telecommunications Inc., enforcement action against Cinergy Telecommunications was dropped).
- Jean Fourcand (2010 – criminal prosecution of individual associated with Fourcand Enterprises, Inc., no enforcement action against Fourcand Enterprises).
- Juan Diaz (2009 – criminal prosecution of individual associated with JD Locator Services Inc., no enforcement action against JD Locator Services).
- Antonio Perez, Joel Esquenazi and Carlos Rodriguez (2009 – criminal prosecutions of individuals associated with Terra Telecommunications Corp., no enforcement action against Terra Telecommunications).
- Marguerite Grandison (2009 – criminal prosecution of individual associated with Telecom Consulting Services Corp., no enforcement action against Telecom Consulting Services).
- Charles Jumet, John Warwick (2009 – criminal prosecutions of individuals associated with Ports Engineering Consulting and Overman Associates- no enforcement action against Ports Engineering Consulting Corp or Overman Associates).
- Shu Quan-Sheng (2008 – criminal prosecution of individual associated with AMAC International Inc. – no enforcement action against AMAC International Inc.)
- Leo Smith and Martin Self (2007-2008 – criminal prosecutions of individuals associated with Pacific Consolidated Industries – no enforcement action against Pacific Consolidated Industries).
- Gerald and Patricia Green (2008 – criminal prosecutions of individuals associated with Film Festival Management – no enforcement action against Film Festival Management).
- *** Yaw Osei Amoako, Steven Ott, Roger Young (2006-2007 – criminal prosecutions of individuals associated with ITXC Corporation – no enforcement action against against ITXC Corp.)
- Richard Novak (2006 – criminal prosecution of individual associated with “several internet businesses” – no enforcement action against the businesses).
- *** David Kay, Douglas Murphy (2002 – criminal prosecutions of individuals associated with American Rice, Inc. – no enforcement action against American Rice).
- Richard Pitchford (2002 – criminal prosecution of individual associated with the Central Asia American Enterprise Fund – no enforcement action against the Central Asia American Enterprise Fund).
- Daniel Rothrock (2001 – criminal prosecution of individual associated with Allied Products Corp. – no enforcement action against Allied Products Corp.) ***
- Richard Halford, Albert Reitz, Robert King, Pablo Hernandez (2001 – criminal prosecutions of individuals associated with Owl Securities and Investments, Limited – no enforcement action against Owl Securities).
The SEC Frequently Alleges Or Finds Only Books And Records And Internal Controls Violations In FCPA Enforcement Actions
This recent post highlighted critical commentary regarding the recent BHP Billiton enforcement action.
One theme from much of the commentary was that the BHP action was somehow unique in charging (or finding as the case may be since it was an SEC administrative action) books and records and internal controls violations in the absence of anti-bribery violations.
More broadly, some FCPA commentators have suggested (here and here) that the SEC is placing a new emphasis on internal controls in the absence of anti-bribery violations.
However, the enforcement approach in BHP Billiton was hardly unique and more broadly the SEC has long charged or found books and records and internal controls violation in the absence of anti-bribery violations or findings.
Set forth below are numerous instances over the past five years in which the SEC has alleged or found only books and records and internal controls violations in Foreign Corrupt Practices Act enforcement actions. (All actions can be found on the SEC’s FCPA website).
2014
Avon
Bruker
HP
In other words 3 of 7 (43%) corporate SEC FCPA enforcement actions in 2014 did not allege or find anti-bribery violations.
2013
ADM
Stryker
Philips Electronics
In other words, 3 of 8 (38%) corporate SEC FCPA enforcement actions did not allege or find anti-bribery violations.
2012
Allianz
Oracle
Pfizer
Orthofix
In other words, 4 of 8 (50%) corporate SEC FCPA enforcement actions did not allege of find anti-bribery violations.
2011
Aon
Watts Water
Diageo
Comverse
Rockwell Automation
Ball Corp
IBM
Tenaris
In other words 8 of 13 (62%) corporate SEC FCPA enforcement actions did not allege or find anti-bribery violations.
2010
Natco
Veraz Networks
General Electric
In other words, 3 of 19 (16%) corporate SEC FCPA enforcement actions did not allege or find anti-bribery violations. (Note 2010 enforcement statistics are impacted by the 7 related Panalpina enforcement actions. If one counts these related actions as one, 3 of 12 (25%) corporate SEC FCPA enforcement actions did not allege or find anti-bribery violations).
So prominent is SEC FCPA enforcement actions without anti-bribery violations or findings that the term non-bribery charged disgorgement has been part of the FCPA vocabulary for years. (See here).
Potpourri
A mixture of various things worthy of highlighting.
*****
Recently, former high-ranking SEC officials William McLucas and Matthew Martens took to the pages of the Wall Street Journal with this piece titled “How to Rein in the SEC.”
The authors stated as follows concerning the SEC’s recent preference of resolving enforcement actions internally through its own administrative process.
“The timing of the agency’s decision in late 2013 to move toward more in-house proceedings couldn’t have been worse. In the months surrounding the SEC’s shift, it suffered several high-profile defeats in federal court. In October 2013, the SEC lost the trial on its insider-trading charges against Mark Cuban, the owner of the Dallas Mavericks NBA franchise. A few months later, the SEC lost an accounting-fraud trial against the chief financial officer of a publicly traded company in Kansas. A number of other SEC actions against supposed inside traders were dismissed by federal courts or rejected by juries. (Disclosure: The authors participated on various sides of some of these matters.)
It was against this backdrop that the SEC publicly vowed to bring more cases as administrative proceedings. The agency contends that it was simply making use of new tools provided by the Dodd-Frank law, which authorized the SEC to charge virtually any offense in an administrative forum and to impose extraordinarily harsh financial penalties without the benefit of a jury. But the Dodd-Frank power to move more cases in-house was conferred in 2010 and lay largely unused until the agency’s 2013 announcement of its new plans to make greater use of that authority.
One need not be a conspiracy theorist to wonder whether at least part of the SEC’s rationale was to avoid the federal courts. In government as in comedy, timing is everything. And here the SEC’s timing raises serious questions about the agency’s move toward the in-house forum.”
Three cheers for this observation.
In my 2014 article “A Foreign Corrupt Practices Act Narrative,” I likewise observed as follows.
“The SEC’s response to [recent] judicial scrutiny [of SEC enforcement theories] has been, as strange as it may sound, to bypass the judicial system altogether when resolving many of its enforcement actions including in the FCPA context.”
As reported today by the Wall Street Journal:
“A federal judge ruled Monday that the Securities and Exchange Commission’s use of an in-house judge to preside over an insider-trading case was “likely unconstitutional,” a potential blow to the agency’s controversial use of its internal tribunal. The decision possibly creates a serious headache for the SEC, which is increasingly using its five administrative-law judges to hear its cases, rather than sending them to federal court, legal experts said. Although the ruling was preliminary, and won’t necessarily be duplicated in other federal courts, it could have ramifications for other SEC cases and potentially other federal agencies.”
*****
AlixPartners recently released this “Combating Corporate Corruption” survey. Among the results that caught my eye.
“As much as 64% of our respondents said they believe there are places in the world where it’s impossible to do business without encountering corruption. When asked to identify such places, 62% cited Russia; 53%, Africa; and 46%, China. Still, a number of companies opted to do business in high-risk regions; specifically, 66% said they have not avoided doing business in a region because of the risk of corruption. Although battling corruption remains a priority, our findings suggest that many companies see an uneven playing field.
Among survey participants who are with organizations that have dedicated compliance programs, such programs are tailored to a variety of legal requirements (figure 3). For example, 73% said the program specifically addresses the US Foreign Corrupt Practices Act; 55%, the UK Bribery Act; and 44%, the US Office of Foreign Assets Control.”
[…]
“We asked respondents to take stock of their most-successful anticorruption programs and to cite what they see as the top factors in reducing corruption risk in their organizations. The most-important practices they identified were proper anticorruption training for employees (44%), compliance policies that specifically address corruption (42%), and internal audits (usually done on an annual basis) (39%) (figure 4). Only 21% cited expanding the scope of their audits for foreign subsidiaries, and just 11% mentioned the increased use of incentives.”
I am all for creative marketing teasers, but the below statement from the survey report is not true. (See here).
“Anticorruption enforcement remained active in 2014, with a sharp rise in enforcement actions taken by both the US Department of Justice and the US Securities and Exchange Commission against corporate defendants.”
*****
Comparing enforcement of the FCPA with enforcement of FCPA-like laws around the world is not a valid comparison for the reasons highlighted in this article “Ten Seldom Discussed FCPA Facts That You Need to Know.”
There are other limitations as well. As noted in the most recent version of Trace International’s Global Enforcement Report:
“The TRACE Compendium and the GER 2014 cannot provide a precise and objective measurement of global anti-corruption enforcement. Instead, they are meant to provide general information on trends in international anti-corruption efforts on a broad scale.”
Despite the many limitations, the GER does as good of job as any tracking global enforcement of FCPA-like laws.
Moreover, given my own focus on FCPA enforcement statistics and concern of the various creative counting methods used by others (see here for example), I particularly like the Introduction of the GER in which Trace articulates a similar “core” approach that I use in keeping my enforcement statistics. The GER states:
“When a company and its employees or representatives face multiple enforcement actions involving substantially the same conduct, only one enforcement action is counted in the GER 2014. If a company does not face an enforcement action but its employees or representatives do, the enforcement action is counted as one enforcement action.”
Friday Roundup
Survey says, scrutiny alert, chuckle, and for the reading stack. It’s all here in the Friday roundup.
Survey Says
Items that caught my eye from Kroll/Compliance Week’s recent 2015 Anti-Bribery and Corruption Benchmarking Report (a report based on approximately 250 survey responses from compliance professionals of large companies).
The average respondent to the survey was associated with a company that employs 22,000 employees and has more than 2,900 third party relationships.
In the minds of some, FCPA compliance is easy. But as previously highlighted here, consider if the respondent companies were 99% compliant on a daily basis. 99% success in most all areas of life is rewarded, but 99% compliance for the respondent companies would mean 220 employee and 29 third party violations.
Against this backdrop, I am not at all surprised that approximately 50% of respondents in the survey were less than confident that company financial controls can catch potential books and records violations of the FCPA.
After all, the FCPA’s books and records (and internal control provisions) are among the broadest legal provisions one can find even if they are qualified in several respects.
As noted in the report accompanying the survey findings:
“There is a little bit of anti-bribery and anti-corruption fatigue at the board level across large organizations. In 2009 and 2010 lawyers and regulators predicted doomsday scenarios, bolstered by an explosion in the growth of formal investigation and fines imposed. That uptick leveled off in recent years, leading some companies to believe they have more time to get their houses in order.”
Perhaps the lesson is that boards should take with a grain of salt the doomsday scenarios of FCPA Inc. because they are often self-serving.
Scrutiny Update
As previously highlighted here, in September 2013 Hyperdynamics disclosed:
“[On] September 2013 [the company] received a subpoena from the United States Department of Justice (DOJ) requesting that the Company produce documents relating to its business in Guinea. In 2006, a Production Sharing Contract was signed by the Company and the government of Guinea granting rights to an oil and gas concession offshore Guinea. The Company understands that the DOJ is investigating whether Hyperdynamics’ activities in obtaining and retaining the concession rights and its relationships with charitable organizations potentially violate the U.S. Foreign Corrupt Practices Act or U.S. anti-money laundering statutes. The Company has retained legal counsel to represent it in this matter and is cooperating fully with the government. The Company is unable to predict when the investigation will be completed, what outcome may result and what costs the Company will incur in the course of the investigation.”
Last week the company disclosed:
“As set forth in the attached letter, the United States Department of Justice (DOJ) has closed its investigation into possible violations by Hyperdynamics of the Foreign Corrupt Practices Act (FCPA) without bringing any charges against the Company. Hyperdynamics had cooperated with the government’s investigation, and DOJ noted the value of the Company’s cooperation in its letter. Ray Leonard, President and CEO, commented, “This is an important development for Hyperdynamics. We are extremely pleased to be informed that the DOJ has closed its inquiry into this matter.” As previously disclosed, both the DOJ and SEC issued subpoenas to Hyperdynamics concerning possible violations of the FCPA and other laws. The SEC investigation has not yet been resolved.”
To those who frequently overuse the “d” word (as in declination), this was a DOJ declination. However, when a company merely receives a subpoena and the DOJ closes its investigation, I prefer to call that the law enforcement investigative process.
Nevertheless, it what seems to be a new trend for FCPA Inc., the law firm representing Hyperdynamics issued this press release stating:
“Covington represented Hyperdynamics in an investigation conducted by the U.S. Department of Justice into potential violations of the Foreign Corrupt Practices Act related to its business activities in the Republic of Guinea. The Justice Department has completed its investigation without bringing any charges against the company. Hyperdynamics received a subpoena from the Justice Department in September 2013 concerning possible violations of the FCPA and other laws relating to its business in Guinea. The Houston-based oil and gas company fully cooperated with the government’s investigation and the Justice Department noted the value of the company’s cooperation in its declination letter. […] The SEC also issued a subpoena to Hyperdynamics concerning possible violations of the FCPA and other laws. The SEC investigation has not yet been resolved. The Covington team handling the matter included Lanny Breuer, Nancy Kestenbaum and Barbara Hoffman.”
Lanny Breuer is the former head of the DOJ’s criminal division.
According to disclosures by Hyperdynamics, the company spent approximately $11.2 million on its FCPA scrutiny.
Chuckle
There has been much recent discussion and war of words concerning the length of FCPA scrutiny (see here and here).
Against this backdrop, I had a good chuckle when I recently stumbled upon this 2005 speech by the DOJ’s then Assistant Attorney General of the Criminal Division.
“Simply put, speed matters in corporate fraud investigations. The days of five-year investigations, of agreement after agreement tolling the statute of limitations – while ill-gotten gains are frittered away and investor confidence sinks – are increasingly a thing of the past.”
For the Reading Stack
As highlighted in this prior post, last month Paul Pelletier (former principal deputy chief of the DOJ Criminal Division’s Fraud Section) penned a dandy Wall Street Journal editorial titled “The Foreign Bribery Sinkhole at Justice.”
In this recent piece Pelletier goes into more-depth on the same topic. In pertinent part he writes:
“[T]he pattern of costly delay in FCPA investigations continues unabated. While every government investigation and resolution poses unique facts and circumstances that may serve to delay the investigatory process, these recent long-developing FCPA resolutions, together with the findings of the OECD report, are convincingly problematic. The staggering investigative costs, ultimately borne by employees and shareholders alike, however, also can reach unconscionable levels.
[…]
The Department of Justice has recently articulated that at least part of the rationale or justification for these interminable investigations is that “[c]ompared to other white collar crime, the challenges associated with FCPA investigations can be much greater.” The DOJ offered “overseas evidence” as one basis for this greater challenge.2
But this statement fails to explain the more than twofold increase in investigatory durations from historical norms. A dispassionate, experience-based analysis of this overly broad assertion exposes a faulty premise. Simply put, the DOJ can and must do better.
[…]
With a cooperating corporation, FCPA investigators routinely find themselves in the unique position of having prompt access to overseas evidence and witnesses without a need to resort to cumbersome international treaty requests. Such cooperation is much like the prosecution having secured a cooperator with unfettered access to the critical evidence.
[…]
Regardless of the reason or reasons for these protracted investigations, both the continued vitality of the DOJ’s FCPA enforcement efforts and the prominence of the United States as the global leader of anti-corruption enforcement would seem to demand a renewed effort to dramatically reduce the time frame necessary to achieve resolution.
[…]
Legitimate enterprises benefit from those kinds of real-time revelations, and criminal political regimes can be immediately identified and deterred. Moreover, when a criminal resolution discloses and punishes criminal conduct that occurred five or more years earlier, any deterrent effect of the resolution is significantly diminished. This is particularly true in industries where the overseas corrupt conduct flourishes with abandon.
At that late stage, the principal deterrent effect is relegated to the size of the monetary penalty — something the DOJ continues to emphasize with all too much frequency and relish. As recent cases have demonstrated, lengthy FCPA investigations also place untenably wasteful financial burdens on corporations, their employees and their shareholders.
[…]
Given that the DOJ’s FCPA unit within the Fraud Section has more than doubled in size from 2009 to today and has been fortified by a dedicated squad of FBI agents, it is puzzling that many of these investigations seem to drag on interminably. The DOJ must strive to be more than just “FCPA Inc.,” churning out stale resolutions notable only for their record-breaking penalties.”
In conclusion Pelletier writes:
“The interests of justice are neither served nor advanced when FCPA investigations routinely drag on for five or more years. Rigorous and prompt FCPA enforcement with respect to current bribery schemes can have a dramatic impact on the insidious and corrosive effect of corruption overseas. Real-time enforcement is just one component of what must be a larger proactive strategy to root out overseas corruption, which includes punishing the bribe takers as well as the bribe payers and dispossessing the government officials of access to ill-gotten gains.
Curing the deficiencies that lead to costly and wasteful delays will require a systemic and sustained effort, primarily by the DOJ. It will also require a more focused approach by outside counsel. Although the ameliorative benefits resulting from such change will not be achieved overnight, the long-term vitality and efficacy of the DOJ’s anti-corruption enforcement efforts ultimately rests on the government’s ability to sustainably alter the status quo.”
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A good weekend to all.