A Focus On SEC FCPA Individual Actions
Posts earlier this week (here and here) highlighted various facts and figures concerning DOJ FCPA individual prosecutions. This post focuses on SEC FCPA individual actions.
Like the DOJ, the SEC frequently speaks in lofty rhetoric concerning its focus on holding individuals accountable under the FCPA. For instance, in connection with the recent Garth Peterson enforcement action, Robert Khuzami (then Director of the SEC’s Division of Enforcement) stated (here) that the case “illustrates the SEC’s commitment to holding individuals accountable for FCPA violations.” Likewise, in connection with the 2011 SEC action against Paul Jennings, Cheryl Scarboro (then Chief of the SEC’s Foreign Corrupt Practices Act Unit) stated (here) that the SEC “will vigorously hold accountable” individuals for FCPA violations.
Since 2005, the SEC has charged 49 individuals with FCPA civil offenses. The breakdown is as follows.
- 2005 – 1 individual
- 2006 – 8 individuals
- 2007 – 7 individuals
- 2008 – 5 individuals
- 2009 – 5 individuals
- 2010 – 7 individuals
- 2011 – 12 individuals
- 2012 – 4 individuals
Similar to the prior DOJ figures, most of the individuals charged – 33 (or 67%) were charged since 2008. Thus, on one level the SEC is correct when it states that individual prosecutions are a focus at least as measured against the historical average given that between 1978 and 2004 the SEC charged 32 individuals with FCPA civil offenses.
Yet on another level, a more meaningful level given that there was much less overall enforcement of the FCPA between 1978 and 2004, the SEC’s statements (like the prior DOJ statements about its focus on individuals) represent hollow rhetoric as demonstrated by the below figures.
Of the 33 individuals charged with civil FCPA offenses by the SEC since 2008:
- 7 individuals were in the Siemens case;
- 4 individuals were in the Willbros Group case;
- 4 individuals were in the Alliance One case;
- 3 individuals were in the Maygar Telekom case; and
- 3 individuals were in the Noble Corp. case.
In other words, 64% of the individuals charged by the SEC with FCPA civil offenses since 2008 have been in just five cases.
Considering that there has been 57 corporate SEC FCPA enforcement actions since 2008, this is a rather remarkable statistic. Of the 57 corporate SEC FCPA enforcement actions, 45 (or 79%) have not (at least yet) resulted in any SEC charges against company employees. This figure is thus higher than the 74% figure (here) highlighted earlier this week regarding the DOJ. This is notable given that the SEC, as a civil law enforcement agency, has a lower burden of proof in an enforcement action.
Once again, like with the DOJ figures, one can ask the “but nobody was charged” question.
Yet, like with the DOJ figures and as highlighted in yesterday’s post (here), there is an equally plausible reason why so few individuals have been charged in connection with many corporate SEC FCPA enforcement actions. The reason has to do with the quality and legitimacy of the corporate enforcement action in the first place.
With the SEC, the issue is not so much NPAs or DPAs (the SEC has used such a vehicle just once to resolve an FCPA enforcement action – Tenaris 2011), but rather the SEC’s neither admit nor deny settlement policy. For more on this policy and its impact of SEC enforcement actions, see pgs. 946-955 of my article “The Facade of FCPA Enforcement.” In the article, I discuss the affidavit of Professor Joseph Grundfest (Standford Law School and former SEC Commissioner) in SEC v. Bank of America and how SEC enforcement actions “typically omit mention of valid defenses and of countervailing facts or mitigating circumstances that, if proven at trial, could cause the Commission to lose it case.” In the article, I also discuss the SEC’s frank admission in the Bank of America case that a settled SEC enforcement action “does not necessarily reflect the triumph of one party’s position over the other.” Individuals in an SEC FCPA enforcement, even if only a civil action, and even if allowed to settle on similar neither admit nor deny terms, have their personal reputation at stake and are thus more likely than corporate entities to challenge the SEC and force it satisfy its burden of proof at trial as to all FCPA elements.
In other words, and like in the DOJ context, perhaps the more appropriate question is not “but nobody was charged,” but rather – do SEC neither admit nor deny FCPA settlements represent provable FCPA violations.
It is also interesting to analyze the 12 instances since 2008 where an SEC corporate FCPA enforcement action resulted in related charges against company employees. With the exception of Siemens, KBR/Halliburton and Magyar Telekom, the corporate SEC FCPA enforcement actions resulting in related charges against company employees occurred in what can only be described as relatively minor (at least from a settlement amount perspective) corporate enforcement actions. These actions are: Faro Technologies, Willbros Group, Nature’s Sunshine Products, United Industrial Corp., Pride Int’l., Noble Corp., Alliance One, Innospec, and Watts Water.
[Note – the above data was assembled using the “core” approach as well as the definition of an FCPA enforcement action described in this prior post]
DOJ Prosecution Of Individuals – Are Other Factors At Play?
Yesterday’s post (here) focused on DOJ FCPA individual prosecutions and highlighted the following facts and figures.
- Since 2008, the DOJ has charged 77 individuals with FCPA criminal offenses.
- 61% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just four cases and 77% of the individuals charged by the DOJ since 2008 have been in just seven cases.
- There have been 53 corporate DOJ FCPA enforcement actions since 2008 and of the 53 corporate DOJ FCPA enforcement actions, 39 (or 74%) have not (at least yet) resulted in any DOJ charges against company employees.
These statistics should cause alarm, including at the DOJ as it has long recognized that a corporate-fine only enforcement program is not effective and does not adequately deter future FCPA violations. For instance, in 1986 John Keeney (Deputy Assistant Attorney General, Criminal Division, DOJ) submitted written responses in the context of Senate hearings concerning a bill to amend the FCPA. He stated as follows:
“If the risk of conduct in violation of the statute becomes merely monetary, the fine will simply become a cost of doing business, payable only upon being caught and in many instances, it will be only a fraction of the profit acquired from the corrupt activity. Absent the threat of incarceration, there may no longer be any compelling need to resist the urge to acquire business in any way possible.”
Likewise, in 2010 Hank Walther (Deputy Chief Fraud Section) stated that a corporate fine-only FCPA enforcement program allows companies to calculate FCPA settlements as the cost of doing business.
In my 2010 Senate FCPA testimony (here), I noted that the absence of individual FCPA charges in most corporate FCPA enforcement actions causes one to legitimately wonder whether the conduct giving rise to the corporate enforcement action was engaged in by ghosts. Others have rightly asked the “but nobody was charged” question, including perhaps most notably James Stewart in a New York Times column highlighted in this previous post.
However, as I stated in my Senate testimony, there is an equally plausible reason why no individuals have been charged in connection with many corporate FCPA enforcement actions. The reason has to do with the quality and legitimacy of the corporate enforcement action in the first place. Readers know well of the prevalence of non-prosecution and deferred prosecution agreements (NPA / DPA) in the FCPA context and how these agreements, not subject to any meaningful judicial scrutiny, are often agreed to by companies for reasons of ease and efficiency, and not necessarily because the conduct at issue violates the FCPA. For more on this dynamic, see my article “The Facade of FCPA Enforcement.” Individuals, on the other hand, face a deprivation of personal liberty, and are more likely to force the DOJ to satisfy its high burden of proof as to all FCPA elements.
In other words, perhaps the more appropriate question is not “but nobody was charged,” but rather do NPA and DPAs always represent provable FCPA violations.
I set out to test this with the following working hypothesis. Instances in which the DOJ brings actual criminal charges against a company or otherwise insists in the resolution context that the corporate entity pleads guilty to FCPA violations, represent a higher quality FCPA enforcement action (in the eyes of the DOJ) and is thus more likely to result in related FCPA criminal charges against company employees. Instances in which the DOJ resolves an FCPA enforcement action solely with an NPA or DPA, represent a lower quality FCPA enforcement action and is thus less likely to result in related FCPA criminal charges against company employees given that an individual is more likely to put the DOJ to its high burden of proof.
The below statistics provide a compelling datapoint concerning the quality and legitimacy of many corporate DOJ FCPA enforcement actions.
Since NPAs and DPAs were first introduced to the FCPA context in December 2004 (see here), there have been 69 corporate DOJ FCPA enforcement actions.
-
12 of these corporate enforcement actions were the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations. 10 of these corporate enforcement actions – 83% – resulted in related criminal charges of company employees.
-
46 of these corporate enforcement actions were resolved solely with an NPA or DPA. In only 3 instances – 6.5% – were there related criminal charges of company employees.
-
A third type of corporate FCPA enforcement action is what I will call a hybrid action in which the resolution includes a guilty plea by some entity in the corporate family – usually the relevant foreign subsidiary – and an NPA or DPA against the parent company. Since the advent of NPAs and DPAs in the FCPA context, there have been 11 such corporate enforcement actions. In 3 of these actions – 27% – there were related criminal charges of company employees. This percentage is what one might expect compared to the two types of corporate FCPA enforcement actions discussed above, although it is interesting to note the following regarding these three instances. The DOJ ended up dismissing the charges against Si Chan Wooh (Schnitzer Steel), John O’Shea (ABB) was not found not guilty, and Bobby Elkin (Alliance One) received a probation sentence after the sentencing judge questioned many aspects of the enforcement action (see here for the prior post).
If the above statistics do not cause you to question the quality and legitimacy of many corporate FCPA enforcement actions, no empirical data ever will. For those who believe NPAs and DPAs always represent provable FCPA violations, the ball is now in your court to offer credible explanations for following datapoints.
If a corporate DOJ FCPA enforcement action is the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations, there is a 83% chance that related criminal charges will be brought against a company employee. If a corporate DOJ FCPA enforcement action is resolved solely with an NPA or DPA, there is a 6.5% chance that criminal charges will be brought against a company employee.
[Note – the above data was assembled using the “core” approach as well as the definition of an FCPA enforcement action described in this prior post]
A Focus On DOJ FCPA Individual Prosecutions
This post updates various facts and figures first published in September 2011 (see here, here) concerning the DOJ’s prosecution of individuals for FCPA offenses.
Since 2005, the DOJ has charged 93 individuals with FCPA criminal offenses. The breakdown is as follows.
- 2005 – 3 individuals
- 2006 – 6 individuals
- 2007 – 7 individuals
- 2008 – 14 individuals
- 2009 – 18 individuals
- 2010 – 33 individuals (including 22 in the Africa Sting case)
- 2011 – 10 individuals
- 2012 – 2 individuals
An analysis of the numbers reveals some interesting points.
Most of the individuals – 77 (or 83%) were charged since 2008. Thus, on one level the DOJ is correct when it states that individual prosecutions are a “cornerstone” of its FCPA enforcement strategy and that it has been “vigorous about holding individuals accountable” – at least as measured against the historical average given that between 1978 and 2004, the DOJ charged 53 individuals with FCPA criminal offenses.
Yet on another level, a more meaningful level given that there was much less overall enforcement of the FCPA between 1978 and 2004, the DOJ’s statements about its focus on individuals represents hollow rhetoric as demonstrated by the below figures.
Of the 77 individuals criminally charged with FCPA offenses by the DOJ since 2008:
- 22 individuals were in the Africa Sting case;
- 9 individuals (minus the “foreign officials” charged) were in the Haiti Teleco case;
- 8 individuals were in the Control Components case;
- 8 individuals were in the Siemens case;
- 4 individuals were in the Lindsey Manufacturing case;
- 4 individuals were in the LatinNode / Hondutel case; and
- 4 individuals were in the Nexus Technologies case.
In other words, 61% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just four cases and 77% of the individuals charged by the DOJ since 2008 have been in just seven cases.
Considering that there has been 53 corporate DOJ FCPA enforcement actions since 2008, this is a rather remarkable statistic. Of the 53 corporate DOJ FCPA enforcement actions, 39 (or 74%) have not (at least yet) resulted in any DOJ charges against company employees.
In recent years, the DOJ has consistently stated that prosecution of individuals is a “cornerstone” of its FCPA enforcement strategy. For instance, in a November 2012 speech (see here for the prior post), Assistant Attorney General Lanny Breuer stated as follows. “If you look at the FCPA over the past 4 years, you’ll see we really have been vigorous about holding individuals accountable.”
Yet, the above numbers paint a different picture, a very different picture – at least in certain enforcement actions. What type of enforcement actions?
A very interesting and significant picture emerges when analyzing DOJ individual prosecution data based on whether the corporate entity employing or otherwise involved with the individual charged was a public or private entity.
Of the 77 individuals charged by the DOJ with FCPA criminal offenses since 2008, 54 of the individuals (70%) were employees or otherwise affiliated with private business entities. This is a striking statistic given that 42 of the 53 corporate DOJ FCPA enforcement actions since 2008 (79%) were against publicly traded corporations.
In the 11 private entity DOJ FCPA enforcement actions since 2008, individuals were charged in connection with 6 of those cases (55%). In contrast, in the 42 public entity DOJ FCPA enforcement actions since 2008, individuals were charged in connection with 8 of those cases (19%). In short, and based on the data, a private entity DOJ FCPA enforcement is approximately three times more likely to have a related DOJ FCPA criminal prosecution of an individual than a public entity DOJ FCPA enforcement action.
[Notes – the above data was assembled using the “core” approach – see this prior post for an explanation. The term “public entity” is not limited to “issuers” under the FCPA, but rather a public entity regardless of which market it shares trade on. Thus, for instance, JGC Corp. of Japan and Bridgestone are both public entities even though its shares are not traded on a U.S. exchange.]
An FCPA Enforcement Action That Led To A Supreme Court Decision
[This post is part of a periodic series regarding “old” FCPA enforcement actions]
The first Foreign Corrupt Practices Act enforcement action to involve business conduct in Nigeria was a 1985 enforcement action against W.S. Kirkpatrick, Inc. (a privately held New Jersey avionics supply firm) and Harry Carpenter (Chairman and CEO of the company).
The criminal informations filed against the company (here) and Carpenter (here) alleged one count of violating the FCPA’s anti-bribery provisions and contains the same concise allegation.
“On or about December 21, 1982 … W.S. Kirkpatrick, Inc. … used a means and instrumentality of interstate commerce, that is, a Western Union international telex from Fairfield, New Jersey, to New York, New York, to order Standard Chartered Bank of New York to pay $580,973 to the Bank of New York for the account of Bank of Commerce and Credit International in Luxembourg corruptly in furtherance of an offer, payment, promise to pay and authorization of the payment of money to: (a) a person, that is Benson ‘Tunde’ Akindale through two companies, Deriks and Los, Panamanian bearer share corporations, while having reason to believe that a portion of such money would be offered, given, or promised, directly or indirectly to foreign officials, Nigerian Air Force officers, the Party of Nigeria, the Minister of Nigeria and other government defense personnel for the purpose of influencing the acts and decisions of such foreign officials and others in their official capacity and inducing them to use their influence within the Government of Nigeria in order to obtain a contract for flight training equipment for W.S. Kirkpatrick, Inc.”
An offer of proof filed in Carpenter’s case contains the following additional information.
Carpenter learned of the opportunity to sell various equipment to the Nigerian Air Force and he “believed Kirkpatrick needed an agent in Nigeria to assist in negotiating and obtaining the contract.” “On recommendation of two British businessmen, Carpenter contracted a London solicitor, who in turn put him in touch with Benson ‘Tunde’ Akindele, a Nigerian national.” According to the offer of proof, “Akindele offered to assist Kirkpatrick by serving as its local agent in Nigeria. Carpenter negotiated an agreement with Akindele which provided that Kirkpatrick would pay a commission equal to twenty percent of the contracted price of [the equipment] to two Panamanian bearer share corporations, which were set up, and controlled by Akindele to receive payments from Kirkpatrick.”
W.S. Kirkpatrick Inc. pleaded guilty and was fined $75,000 (see here) and Carpenter pleaded guilty, was sentenced to three years probation and ordered to pay a $10,000 fine (see here). Noted white collar criminal defense attorney Theodore Wells (here) represented Carpenter.
See here for the DOJ’s release which notes that the contract at issue was worth $10.8 million.
After the DOJ enforcement action, Environmental Tectonics Corporation (“ETC” – an unsuccessful bidder for certain of the Nigerian contracts which first brought the problematic conduct to the attention of the Nigerian Air Force and the U.S. Embassy) brought a civil action against W.S. Kirkpatrick, Carpenter, Akindele and others seeking damages under the Racketeer Influenced and Corrupt Organizations Act, the Robinson-Patman Act and the New Jersey Anti-Racketeering Act.
The defendants moved to dismiss the complaint on the ground that the action was barred by the act of state doctrine. The district court granted the motion and concluded that the act of state doctrine applies “if the inquiry presented for judicial determination includes the motivation of a sovereign act which would result in embarrassment to the sovereign or constitute interference in the conduct of foreign policy of the United States.” See 659 F.Supp. 1381. The court held that ETC’s suit had to be dismissed because, in order to prevail, it would have to show that “the defendants or certain or them intended to wrongfully influence the decision to award the Nigerian Contract by payment of a bribe, that the Government of Nigeria, its officials or other representatives knew of the offered consideration for awarding the Nigerian Contract to Kirkpatrick, that the bribe was actually received or anticipated and that ‘but for’ the payment or anticipation of the payment of the bribe, ETC would have been awarded the Nigerian Contract.”
The Third Circuit reversed finding that application of the act of state doctrine was unwarranted given the facts of the case. In particular, the Third Circuit found persuasive a letter to the district court by the State Department legal adviser which stated that a judicial inquiry into the purpose behind the act of a foreign sovereign would not produce the ‘unique embarrassment, and the particular interference with the conduct of foreign affairs that may result from the judicial determination that a foreign sovereign’s acts are invalid.”
Defendants then appealed to the Supreme Court which agreed to hear the case.
In 1990, Justice Scalia authored the opinion of a unanimous Supreme Court. See 493 U.S. 400. The opinion begins as follows. “In this case, we must decide whether the act of state doctrine bars a court in the United States from entertaining a cause of action that does not rest upon the asserted invalidity of an official act of a foreign sovereign, but that does require imputing to foreign officials an unlawful motivation (the obtaining of bribes) in the performance of such an official act.”
The Court concluded that the “factual predicate for application of the act of state doctrine does not exist” because nothing in the case required the Court to declare invalid the official act of a foreign sovereign. The Court reasoned that “neither the claim nor any asserted defense requires a determination that Nigeria’s contract with Kirkpatrick International was, or was not, effective,” that ETC “was not trying to undo or disregard the governmental action,” but rather that ETC was only trying to “obtain damages from private parties who had procured” the contract.
In short, the Court stated that the act of state doctrine “has no application to the present case because the validity of no foreign sovereign act is at issue.”
Empty Rhetoric
Assistant Attorney General Lanny Breuer once again took to the podium to highlight the DOJ’s FCPA enforcement program.
This time the event was the 13th Annual Pharmaceutical Regulatory and Compliance Congress. If you wanted to hear Mr. Breuer speak at the event, you had to pay approximately $2,000 per person (see here for the conference organizer’s website). (See here for the post earlier this week “It Ought to Stop”). In the past, the DOJ released a transcript of Breuer’s remarks at this annual event, but the DOJ press office responded to my inquiry by saying that Breuer spoke from talking points and that his full remarks would not be released.
Thankfully, the on-line news agency Main Justice covered the event (see here). Its report notes that Breuer called the DOJ’s aggressive anti-corruption enforcement a “signature achievement” of the Obama administration.
Time out.
It’s a “signature achievement” that the DOJ’s largest single investigation and prosecution of individuals in the history of the DOJ’s enforcement of the FCPA (a prosecution Breuer previously called a “turning point”) ended with the DOJ going 0-22 which prompted the judge to call the end of the cases a “long and sad chapter in the annals of white collar criminal enforcement”? (See here for the prior post regarding the Africa Sting case).
It’s a “signature achievement” when a federal court judge vacates the convictions and dismisses the indictments in a case (a prosecution Breuer previously called an “important milestone”) because the instances of prosecutorial misconduct, in the words of the judge, were so varied and occurred over such a long time “that they add up to an unusual and extreme picture of a prosecution gone badly awry”? (See here for the prior post regarding the Lindsey Manufacturing case).
It’s a “signature achievement” when a federal court judge grants, at the close of the DOJ’s case, a motion for dismissal and states that “the problem here is that the principal witness against [the defendant] … knows almost nothing.” (See here for the prior post regarding the O’Shea case). As noted in this previous post, the judge in the O’Shea case also stated as follows. “The Government should have been prepared before they brought the charges to the Grand Jury. [A key FCPA element is] something you have to prove. And you shouldn’t indict people on stuff you can’t prove.”
As noted in my article “What Percentage of DOJ FCPA Losses Is Acceptable?” all of the above events occurred in the past 9 months.
It’s a “signature achievement” to bypass judicial scrutiny in resolving FCPA enforcement actions? Thus far this year, 100% of corporate FCPA enforcement actions have been resolved via a non-prosecution or deferred prosecution agreement. In 2011, 82% of corporate FCPA enforcement actions were resolved with such vehicles and in 2010 88% of corporate FCPA enforcement actions were resolved with such vehicles.
If Breuer’s concept of “signature achievement” means that the DOJ has created an environment in which a thriving FCPA industry has incentives to make voluntary disclosures which the DOJ then processes without judicial scrutiny, then perhaps Breuer’s terminology has some meaning. But in all other respects, Breuer’s “signature achievement” remark is empty rhetoric.
And its not the only example of empty rhetoric in his speech.
Main Justice also reports that Breuer highlighted the DOJ’s prosecution of individuals and stated as follows. “If you look at FCPA over the past 4 years, you’ll see we really have been vigorous about holding individuals accountable.”
You gotta be kidding me.
I have looked at FCPA enforcement over the past four years and here are the facts.
Thus far in 2012, 100% of corporate FCPA enforcement actions have not resulted in any individual charges against company employees. In 2011, approximately 75% of corporate FCPA enforcement actions have not resulted in any individual charges against company employees. In 2010, approximately 70% of corporate FCPA enforcement actions have not resulted in any individual charges against company employees. As noted in this previous post, since 2008, approximately 70% of corporate FCPA enforcement actions have not resulted in any individual charges against company employees.
In my 2010 Senate testimony (here) and in this prior post, I offer an explanation for this, but the explanation only magnifies the “facade” of FCPA enforcement.
Upon learning of Breuer’s “signature achievement” comment, Paul Calli (Carlton Fields) who successfully represented Stephen Giordanella in the Africa Sting case stated as follows. “ I don’t think Breuer is purposefully trying to mislead and scare the American business community when he withholds the truth that is the recent series of historic losses suffered by the DOJ’s FCPA unit and its repeat offenses of misconduct as found by three different federal judges across the country. Instead, I think Breuer is playing the role of cheerleader and spinning it his way by – to borrow from the old Johnny Mercer song – accentuating the positive and eliminating the negative. Truth is, I don’t think he is that involved in the decisions.”
Whatever the reason or motivation for much of Breuer’s recent speech, the fact remains it is littered with empty rhetoric.