Defamation Claims Increase Costs Of Cooperation With Government Investigations
A guest post today from Jeremy Byrum (McGuireWoods LLP). The post concerns a civil defamation claim relating to Royal Dutch Shell’s 2010 FCPA enforcement action. (See here for the prior post regarding the enforcement action).
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Defamation Claims Increase Costs of Cooperation with Government Investigations
Disclosing the results of a company’s internal investigation to government investigators is always fraught with potential problems. The most obvious is the danger of waiving attorney-client privilege and work product protections that would otherwise shield the internal investigation from discovery in parallel litigation. But another less heralded danger is the risk of defamation claims by employees identified through the investigation as having participated in illegal activity. The risk associated with such claims was on display in a recent ruling by a Texas court of appeals, which held that Shell Oil Company was only entitled to a conditional privilege, and not “immunity,” for statements it made in a written report to the Department of Justice (DOJ) regarding alleged violations of the FCPA.
On November 4, 2010, the DOJ announced more than $236 million in civil and criminal penalties from the settlement of alleged FCPA violations in Nigeria. The settlements followed a lengthy investigation of Panalpina Group, a Swiss logistics company, and several of its oil and gas clients, including Shell. According to the Texas court of appeals’ decision, the DOJ first requested a meeting to discuss Shell’s business with Panalpina in July 2007. Following that meeting, Shell agreed to conduct an internal investigation, which eventually culminated in a written report that was submitted to the DOJ in February 2009.
Following the 2010 settlements, a former employee sued Shell for defamation, claiming that Shell’s written report falsely stated that he recommended reimbursement to contractors for payments that he knew were bribes. The trial court granted summary judgment in favor of Shell, finding that Shell had an absolute privilege (i.e., immunity) for the statements it made to the DOJ. The Texas court of appeals reversed that finding on June 24, 2013, holding that Shell’s written report was only covered by a conditional privilege. Consequently, Shell is not immune from suit if the former employee can show that Shell’s actions were motivated by malice.
The key legal issue in the case was whether Shell’s statements were made in the context of an ongoing or proposed judicial or quasi-judicial proceeding. If so, then the statements would be absolutely privileged. But the appeals court rejected Shell’s argument that the DOJ’s solicitation and the resulting internal investigation were evidence of a proposed judicial proceeding. Likewise, the court rejected Shell’s argument that the 2010 settlement was evidence of a proposed judicial proceeding. In the absence of direct evidence that the DOJ was contemplating a judicial proceeding in February 2009, the court rejected Shell’s absolute privilege claim.
The case is also noteworthy for the policy arguments made in the majority and dissenting opinions. The dissent takes on the key policy issue—the potential chilling effect of the court’s ruling: “If absolute privilege is not available, a cooperating party runs the risk of defamation actions by anyone identified as having involvement in a potentially prohibited transaction. This risk creates a disincentive for companies to conduct their own investigations, to make frank assessments of fault, and to communicate findings to DOJ.” The majority focused on a rival policy argument, however, suggesting that absolute immunity would “discourage, rather than encourage, truth-telling” because companies have a “strong motive to deflect blame.” The majority concluded that a conditional privilege was sufficient protection to encourage companies to cooperate with law enforcement.
The court’s ruling no doubt raises additional concerns for companies considering the already difficult decision whether to disclose the results of an internal investigation. As the dissent notes: “A company like Shell is, in the face of a DOJ inquiry, in a quandary: it can provide inculpatory statements regarding actions taken on its behalf by its employees, recognizing that it is exposed to a defamation claim. Or it can face criminal prosecution or penalization for a failure to comply and cooperate adequately with the DOJ’s investigation.” But this may be less of a dilemma than the dissent imagines. A company’s concerns about potential defamation claims ordinarily will pale in comparison to the high stakes risks associated with a criminal investigation by the DOJ. Thus, the feared chilling effect is likely overstated.
Although the Texas court’s decision increases the potential costs of cooperating with a government investigation, it probably will not alter the level of cooperation in most cases. In all likelihood, companies will continue to assess the appropriate level of cooperation necessary to avoid or minimize their exposure in a criminal investigation, and will simply accept the possibility of defamation claims as an unfortunate cost of doing business.
An FCPA Lawyer In Paris
Today’s post is a Q&A with Bryan Sillaman (Hughes Hubbard & Reed). Sillaman is a member of the firm’s Anti-Corruption and Internal Investigations Practice Group and is currently working in the firm’s Paris office. Prior to joining Hughes Hubbard, Sillaman was an attorney in the SEC Enforcement Division where he conducted several Foreign Corrupt Practices Act investigations.
Q: What brought you to Paris and what is it like being an FCPA lawyer in Paris?
Hughes Hubbard has had an office in Paris for nearly 50 years, and has a long history representing French companies. I was fortunate enough to be asked to come to Paris to assist one of our French clients with a global anti-corruption review. At the time, it was unclear how long I would stay, but that was nearly four and a half years ago. It has been fascinating and instructive to see how the FCPA and U.S. enforcement environment is perceived within Europe, and to also witness the development of other significant international anti-corruption initiatives, such as the passage of the U.K. Bribery Act, which got the attention of a lot of European companies. The industry of compliance appears to be steadily growing in France, with one of the French universities creating a Masters in Law in Business Ethics (Master Droit & Ethique des Affairs). While part of this seems to be in response to increased enforcement of European companies by the U.S., I also believe that the political climate in Europe generally, and France specifically, is becoming less tolerant of corruption – particularly at the governmental level – which has helped fuel the industry.
Q: How are European clients different from U.S. clients, perhaps in terms of voluntary disclosure, cooperation with enforcement agencies, etc.?
One thing to keep in mind when working with European companies is that, at least in certain countries, it was legal and in fact tax deductible to pay bribes until just over a decade ago. In this sense, anti-corruption compliance is a newer issue for many companies, although it is one that is gaining increased focus and attention, particularly within multinational corporations. It should also be remembered that for the first approximately twenty years of the FCPA’s existence, it was relatively rarely enforced. Thus, while perhaps some European countries are lagging the U.S. in bringing their own enforcement proceedings, there does appear to be an increased focus on the issue within the corporate community.
For better or worse, European conceptions of topics such as voluntary disclosure, cooperation, and remediation have been largely shaped to date by U.S. enforcement jurisprudence and posture. Therefore, in advising European companies on such issues, counsel naturally have differing philosophical viewpoints on the potential benefits and pitfalls of voluntary disclosure or cooperation. Anecdotally, however, I think that the concept of voluntary disclosing issues to the government (and potentially being prosecuted in return) strikes many European companies as contrary to sound logic. European clients also find fascinating the broad jurisdictional view taken by U.S. (and now U.K) regulators, as well as what until recent history is a new concept: that of the independent corporate monitor.
There are also more nuanced issues that can have a profound impact on how to conduct a compliance review with European companies that may, at first blush, seem unusual to U.S. counsel. For example, one of the initial differences that will likely become apparent is how European companies approach data privacy rights of employees and the handling or movement of potentially sensitive information. Europe in general, and certain countries like France in particular, have much stronger personal privacy data rights than those we may be familiar with in the United States, and these rights extend into an individual’s workplace. Counsel who are not wary of these issues and take them in consideration in structuring and conducting a review can face their own legal trouble. In addition to bestowing legal rights on individuals, these data privacy concerns must also be taken into account culturally, in the sense that counsel should be prepared for greater resistance to activities such as the collection of emails and electronic data that may be necessary, but nonetheless intrusive, steps towards conducting an effective review.
Q: You have travelled extensively as part of your FCPA practice (Angola, Brazil, China, Indonesia, Malaysia, the Middle East, Nigeria, Thailand and Venezuela). From these travels and experiences, what do you believe are the major root causes of FCPA violations?
Corruption is most certainly a two-way street. When it comes to bribe payers, unfortunately many cases seem to boil down to greed and a myopic focus on winning at all costs that is ever-too-present in many industries. For sure there are frequently claims that “everyone else is doing it,” but as we all learned when we were young, that doesn’t make it right. In terms of bribe recipients, while I will not claim to have researched the issue as much as others have in this field, anecdotally one of the major themes in countries we often visit is the absence of a fair and livable wage for government functionaries. In these cases, officials may feel as though there is no alternative but to seek payments from companies and their employees (who they may see living at a much higher standard) in order to earn a sufficient living. With larger-scale corruption, I think the same mentality exists, but in a more perverse way – officials placed in charge of vast amounts of resources see companies and others making significant amounts of money off of those resources and see no alternative but to seek what they come to view as their rightful piece of the pie.
Q: What do you know or realize now as it relates to the FCPA and FCPA compliance that you did not know or realize while at the SEC working on FCPA cases?
Perhaps it was more a function that I was at the SEC very early in my career, but I did not realize until traveling extensively assisting clients in this area the importance that companies place on practical guidance when it comes to anti-corruption compliance. It is one thing to recite to a client the FCPA’s statutory language, but quite another to provide helpful guidance on ways in which companies can operate in a legal and compliant way in very difficult locations and business environments. I and my colleagues operate from the premise that most people want to do the right thing, they just need the training and guidance to do so. I think this thirst for practical guidance is one of the reasons that DOJ/SEC Resource Guide to the U.S. Foreign Corrupt Practices Act has been well received within this community, and I applaud both agencies for the significant efforts that went into making it approachable and practical. Certainly, there remain very difficult questions, some of which do not have a clear answer. For example, when and to what extent is it appropriate to take personnel action against an employee? There may not be a black-and-white answer to this question, and in Europe, where labor laws tend to heavily favor employees, implementing appropriate employee sanctions can be quite difficult. Having been fortunate enough to have helped companies navigate through some of these issues, I acknowledge that I lacked a full appreciation earlier in my career for the time and energy that companies and their compliance personnel devote to implementing, in a practical way, the anti-corruption legal standards and guidance that govern their activity.
Can We Bring Quality FCPA Compliance and Investigative Services to the Underserved Middle Market?
Today’s post is from David Simon (Foley & Lardner).
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Professor Koehler (my former colleague at Foley & Lardner) has been critical of “FCPA Inc.” and, in particular, the astronomical costs associated with certain FCPA investigations and compliance measures. My friends in the C-Suite of FCPA Inc. have responded defensively – reacting at least in part to a perception that these criticisms suggest a corner-cutting approach to important work that must be done properly.
As an FCPA lawyer with a foot in both camps, let me try to find some common ground.
I share Mike’s concerns. While I understand that each case is different and that it is often necessary for investigating counsel to respond to outside forces that drive up costs, some of the eye-popping numbers can’t help but make one question the FCPA investigation/compliance value proposition.
This dynamic is especially troubling because, I fear, it drives the perception among many smaller and mid-sized companies that anti-bribery compliance is simply out of reach financially. A recent survey of global corruption compliance in the middle market conducted by McGladrey confirms that this segment of the market is underserved. That is dangerous and bad for all the interested parties – including the DOJ and SEC. It simply isn’t good public policy for sound FCPA compliance advice and investigative resources to be available only to the Exxon Mobils of the world.
That said, the quality of the work should not be compromised by maintaining some focus on the value proposition. Corner-cutting is not appropriate (and is almost never in the company’s long-term interests). But aren’t there ways to manage costs and still produce quality work? The answer is clearly yes. And while the options for delivering more for less are myriad, let me propose three fairly modest concepts, which, if implemented, would help bring quality FCPA representation to many more companies that really need it:
1. Give Strong but Practical Compliance Advice
We can start by heeding the counsel of the SEC and DOJ in last year’s Resource Guide:
- “DOJ and SEC have no formulaic requirements regarding compliance programs. Rather, they employ a common-sense and pragmatic approach to evaluating compliance programs.”
- “[T]here is no one-size-fits all program. . . . Indeed, small-and medium-sized enterprises likely will have different compliance programs from large multi-national corporations, a fact DOJ and SEC take into account when evaluating companies’ compliance programs.”
In other words, take it seriously, but be practical. And take a risk-based approach to FCPA compliance.
In a world where FCPA compliance was the company’s number one focus (above and beyond making and selling stuff), a company would conduct “Full Monty” due diligence on all of its distributors (maybe even its customers). It would employ a rigorous system for reviewing all gifts, meals and entertainment expenses in excess of $25. (After all, $25 is a lot of money to a customs official in Borneo . . .) It would conduct annual compliance audits of the books and records of all of its third-party intermediaries.
But really, does that approach make sense for most of our clients? While there may be companies that have a risk profile that justifies these procedures, for many – indeed, the vast majority – such an approach is simply impractical. Let’s not make the perfect the enemy of the good.
To lawyers and compliance professionals: Be practical. Be willing to sign-off on compliance procedures that are effective but tailored to the actual risk posed. Don’t be afraid to divert from “best practices” when best practices are not risk justified. Take a stand. But be prepared to defend your decisions.
And to the enforcement agencies. Be true to your word. “[D]o not hold companies to a standard of perfection.” Accept common sense compliance judgments, even when things ultimately go wrong.
2. Appropriately Scope FCPA and Bribery Investigations
When a company discovers conduct that may violate the FCPA or company policies, an investigation is necessary. It never makes sense for a company to ignore such a discovery. You are simply not serious about compliance if you do not take steps to understand what happened, why, how, and to respond appropriately. The enforcement agencies are entirely justified in requiring this and in taking companies to account for failing to investigate and respond to indications of wrongdoing.
The problem for many companies is that they hear the words “FCPA investigation” and think millions of dollars – or tens of millions, or hundreds of millions – in costs and fees. Too often, this leads companies to make the bad decision to forgo an investigation altogether.
But just as there is no “one-size-fits-all” FCPA compliance program, there is no “one-size-fits-all” FCPA investigation. Proportionality and reasonableness are key.
The main driver of investigation cost is scope. FCPA investigations that spin out of control usually do so because the scope is never clearly defined at the outset or because of significant scope-creep during the investigation. Think about our country’s history with Independent Counsel investigations. Without a clear, narrowly defined mandate, investigations can go on interminably. Investigators investigate. There is always some new lead to pursue, another witness to interview, another document to request and review.
The investigation scope needs to be reasonable and appropriately calibrated to the issues under investigation. Scope must be clearly defined, and the investigator must keep the scope front of mind. Discipline is key.
This is not to say that the scope should never change once defined. Often, new significant facts are discovered and new issues identified. Many times, these developments warrant a modification to the scope. But those decisions should be approached thoughtfully and intentionally. Scope modification is not the same thing as scope-creep.
Appropriately scoped investigations cost less. Companies with limited legal and compliance resources can access quality investigative services and can fulfill the agencies’ directive that “companies should have in place an efficient, reliable, and properly funded process for investigating the allegation and documenting the company’s response.”
To the SEC and DOJ: To make this work, you need to apply these same common-sense principles to your assessment of company investigations. Be reasonable. To outside auditors assessing the company’s response: Ditto.
3. Disaggregation of Services in FCPA and Bribery Investigations
One final modest idea to manage the cost of FCPA investigations: Consider disaggregating services.
It is not necessary to have high-priced lawyers conduct every aspect of every investigation. In the health care industry, they refer to “working at the top of your license.” In other words, to enhance the efficiency of the provision of care, each professional should be put to his or her highest and best use. Move the work down the chain of training and expertise where appropriate. Application of the same concept in FCPA investigations can have the same pro-efficiency effect.
As a preliminary matter, it isn’t necessary for a company to hire outside counsel to conduct every FCPA investigation. There are certainly some situations where the exclusive deployment of inside investigative resources is appropriate.
Even when outside counsel properly leads the investigation, the lead investigator should consider non-traditional deployment of resources so that everyone on the team is being put to his or her highest and best use. A couple of examples:
Consider enlisting internal company resources to accomplish some investigative tasks. Under the right circumstances, company IT personnel can help gather and process data for the investigation; internal audit or finance resources can help with the analysis of the books and records; and in-house counsel can perform certain investigative tasks. Independence and perceptions of independence must be taken into consideration in every case, of course. In some investigations, it won’t be appropriate to involve company personnel. But in some, it will be entirely reasonable and appropriate. And where it is, there will be substantial cost savings.
In addition, investigative counsel should consider outsourcing or alternative-sourcing aspects of the investigation. Document review is an obvious example. Consider using data review software to cull the relevant documents that warrant review. (It is noteworthy that DOJ recently approved the use of this approach in the AB InBev/Grupo Modelo merger review. If it works in antitrust, why not FCPA investigations?) This can save hundreds of hours of lawyer and staff time. It also often makes sense to outsource document review. There are a number of firms that conduct quality document review at a much lower cost than using attorneys (even contract attorneys.) I personally have used Novus Law, a document-related discovery firm, to handle all of the document review, management and analysis on a couple of document-heavy FCPA investigations. They do an outstanding job (no quality compromises) at a fraction of the cost.
These are just a few ideas for changing the way we provide compliance and investigative services to give better access to these critical services to more companies. How we do this is less important than that we do it.
Friday Roundup
The SEC files an amended complaint, Judge Leon strikes again, a provocative press release, a focus on lobbying and for the reading stack. It’s all here in the Friday roundup.
SEC Files Amended Complaint in Jackson / Ruehlen Matter
As highlighted in this prior post, this past December Judge Keith Ellison (S.D. Tex.) issued a lengthy 61 page decision (here) in SEC v. Mark Jackson and James Ruehlen. In short, Judge Ellison granted Defendants’ motion to dismiss the SEC’s claims that seek monetary damages while denying the motion to dismiss as to claims seeking injunctive relief. Even though Judge Ellison granted the motion as to SEC monetary damage claims, the dismissal was without prejudice meaning that the SEC was allowed to file an amended complaint. As explained in the prior post, Judge Ellison’s decision was based on statute of limitations grounds (specifically that the SEC failed to plead any facts to support an inference that it acted diligently in bringing the complaint) as well as the SEC’s failure to adequately plead discretionary functions relevant to the FCPA’s facilitation payments exception.
Last week, the SEC filed its amended complaint (here). The most noticeable difference in the amended complaint, based on my brief review of the 58 page document, appears to be several allegations regarding Nigerian law, including the Customs & Excise Management Act.
Judge Leon Strikes Again
This prior post generally discussed Judge Richard Leon’s rejection of the SEC v. IBM FCPA settlement, a case that still lingers on the docket.
As noted in this Main Justice story and this Wall Street Journal story, Judge Leon has struck again. According to the reports, yesterday Judge Leon conducted a scheduled hearing in SEC – Tyco FCPA case in chambers, much to the dismay of media assembled in open court.
As noted in this prior post, in September 2012, the DOJ and SEC announced an FCPA enforcement against Tyco International Ltd. and a subsidiary company. Total fines and penalties in the enforcement action were approximately $26.8 million (approximately $13.7 million in the DOJ enforcement action and approximately $13.1 million in the SEC enforcement action). As noted in this SEC release, Tyco consented to a final judgment that orders the company to pay approximately $10.5 million in disgorgement and approximately $2.6 million in prejudgment interest. Tyco also agreed to be permanently enjoined from violating the FCPA.
Although both the IBM and Tyco enforcement actions involve the SEC’s neither admit nor deny settlement language, this would not seem to be the key thread between these two enforcement actions that is drawing the ire of Judge Leon. Rather as explained in this post summarizing the IBM enforcement action and this post highlighting various notable features of the Tyco action, both companies are repeat FCPA violators. In resolving the “original” FCPA enforcement actions – IBM in 2000 and Tyco in 2006 – both companies agreed to permanent injunctions prohibiting future FCPA violations.
This prior post titled “Meaningless Settlement Language” detailed Judge Jed Rakoff’s discussion of so-called “obey the law” injunctions in SEC v. Citigroup and this prior guest post discussed an Eleventh Circuit decision last year vacating a SEC “obey the law” injunction.
A Provocative Press Release
The law firm Bienert, Miller & Katzman (“BMK”) represented Paul Cosgrove (a former executive of Control Components Inc.) in the so-called Carson enforcement actions. The Carson action involved a notable “foreign official” challenge and as highlighted in previous posts here, here, and here, after Judge Selna issued a pro-defendant jury instruction, the DOJ soon thereafter offered the remaining defendants (Stuart Carson, Hong Carson, David Edmonds, and Cosgrove) plea agreements which the defendants accepted. As to those plea agreements, I ended each post by saying – the conclusions are yours to reach. In Fall 2012, the defendants were sentenced as follows: S. Carson (four months in prison), H. Carson (three years probation), Edmonds (four months in prison) and Cosgrove (15 months of home detention). See this prior post regarding Carson sentencing issues.
In a January 17th press release (here), BMK stated as follows.
“BMK and counsel for three other defendants … conducted a worldwide investigation and developed evidence suggesting the government’s evidence was incomplete, the court documents indicate. Ultimately, most companies bought CCI valves because they were the best in the world (not because of bribes); most of the supposed “public officials” denied receiving any bribes; and, in most cases, the alleged improper payments were never actually made, according to court records.
Further, through an aggressive litigation and motion strategy, counsel were able to obtain jury instructions that highlighted the government’s heavy burden of proof at trial. For example, the trial court agreed with defense counsel that the government was obligated to prove defendants’ knew they were dealing with “foreign officials,” something that would have been extremely difficult for the government to prove. The supposed bribery recipients worked for companies that appeared to operate like private companies in the United States, making it very unlikely that the defendants realized they were dealing with “government officials.”
BMK and other defense counsel raised several other issues that brought the government’s ability to obtain a conviction, or defend an appeal, into serious doubt. These motions called into question whether the alleged bribe recipients were even “public officials” as intended by the FCPA; whether the Travel Act even applied to the case; and, whether defendants were entitled to millions of pages of documents that had been withheld from them by CCI, their former employer. Each of these issues likely would have been decided for the first time on an appeal in this case.”
[Full disclosure – I was an engaged expert in the Carson cases, filed a “foreign official” declaration in connection with the motion to dismiss, and was disclosed as a testifying expert for the trial]
Lobbying
In my double-standard series (here), I have highlighted various aspects of lobbying here in the U.S. The beginning of the recent opinion in U.S. v. Ring (D.C. Circuit) is an interesting read. In pertinent part, it states as follows (internal citations omitted).
“Lobbying has been integral to the American political system since its very inception. […] As some have put it more cynically, lobbyists have besieged the U.S. government for as long as it has had lobbies.” […] By 2008, the year Ring was indicted, corporations, unions, and other organizations employed more than 14,000 registered Washington lobbyists and spent more than $3 billion lobbying Congress and federal agencies. […]
The interaction between lobbyists and public officials produces important benefits for our representative form of government. Lobbyists serve as a line of communication between citizens and their representatives, safeguard minority interests, and help ensure that elected officials have the information necessary to evaluate proposed legislation. Indeed, Senator Robert Byrd once suggested that Congress “could not adequately consider [its] workload without them.” […]
In order to more effectively communicate their clients’ policy goals, lobbyists often seek to cultivate personal relationships with public officials. This involves not only making campaign contributions, but sometimes also hosting events or providing gifts of value such as drinks, meals, and tickets to sporting events and concerts. Such practices have a long and storied history of use—and misuse. During the very First Congress, Pennsylvania Senator William Maclay complained that “New York merchants employed ‘treats, dinners, attentions’ to delay passage of a tariff bill.” […] Sixty years later, lobbyists working to pass a bill that would benefit munitions magnate Samuel Colt “stage[d] lavish entertainments for wavering senators.” […] Then, in the 1870s, congressmen came to rely on railroad lobbyists for free travel. […]. Indeed, one railroad tycoon complained that he was “averag[ing] six letters per day from Senators and Members of Congress asking for passes over the road.”
Reading Stack
Some dandy articles/essays to pass along regarding the FCPA books and records provisions, victim issues and criminal procedure.
FCPA Books and Records Provisions
Michael Schachter (Willkie Farr & Gallagher and a former Assistant United States Attorney in the Southern District of New York, where he focused on criminal prosecution of securities fraud and was a member of the Securities and Commodities Fraud Task Force) recently authored an article concerning the FCPA’s books and records provisions. Titled “Defending an FCPA Books and Records Violation” and published in the New York Law Journal, the article begins as follows.
“In recent years, the books and records provisions of the [FCPA] have taken on new life, as both the [DOJ and SEC] have announced their intention to bring more charges, especially against individuals, for violation of this section of the FCPA. A review of recent enforcement actions reveals that the Justice Department and the SEC consider the books and records requirement violated whenever corrupt payments are made to a foreign official and recorded in a corporation’s books as anything other than a ‘bribe,’ including, but not limited to, such things as commissions, social payments, or after sales service fees. This article proposes that the books and records provision is, in fact, narrower than the Justice Department and the SEC interpretations suggest, and argues that both agencies may be using the provision to punish behavior falling outside the FCPA’s reach.”
Spot on. See prior posts here and here. See here for a word cloud of the FCPA’s books and records and internal control provisions.
Corporate Employer’s As Victims
The title of Professor Peter Henning’s recent White Collar Crime Watch post in the New York Times DealBook was “How Can Companies Sue Defendants in Insider Trading Cases?” The post concerned the Mandatory Victims Restitution Act and Professor Henning writes that it “has been interpreted to allow companies that incur costs in cooperating with the government to seek repayment of their expenses from defendants” and the “statute requires a court to order the reimbursement to victims of ‘other expenses incurred during participation in the investigation or prosecution of the offense.'”
The parallels to a company incurring expenses in connection with FCPA investigations based on employee conduct is obvious.
Yet, Professor Henning writes as follows.
“[T]he crucial word in the Mandatory Victims Restitution Act is “incurred,” and there isn’t a consensus among federal courts over what expenses are covered. Companies want it to include all costs related to any part of the case, including dealing with the S.E.C. even though it can only pursue a civil enforcement case. Defendants take a much narrower view, arguing that mandatory restitution covers only expenses arising as direct result of the criminal prosecution by the Justice Department.
Ham Sandwich Nation
Glenn Reynolds (University of Tennessee College of Law) recently published an essay titled “Ham Sandwich Nation: Due Process When Everything is a Crime” (see here to download). The essay does not mention the FCPA, yet it is very much applicable to the FCPA. In just the past year, approximately 25 individuals criminally indicted by the DOJ have put the DOJ to its burden of proof and ultimately prevailed. Ham Sandwich Nation would also seem applicable given the extensive use of NPAs and DPAs in the FCPA context. The thesis of the essay is spot on. Reynolds write as follows.
“Though people suspected of a crime have extensive due process rights in dealing with the police, and people charged with a crime have even more extensive due process rights in courts, the actual decision whether or not to charge a person with a crime is almost completely unconstrained. Yet, because of overcharging and plea bargains, that decision is probably the single most important event in the chain of criminal procedure.”
Year In Review
The Year in Review version of Debevoise & Plimpton’s always informative and comprehensive FCPA Update is here. Among the many topics discussed in the FCPA Update is the notion that many FCPA enforcement actions are based on very old conduct and the following observation. “Targets of enforcement actions also run the risk that regulators – whether consciously or not – apply current expectations of appropriate compliance measures and effective internal controls mechanisms when evaluating the adequacy of procedures that existed at times when less rigorous standards may have commonly been considered acceptable.” For my similar previous observation, see this prior post.
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A good weekend to all.
Friday Roundup
A prosecutorial common law defeat, the SEC repeats its prior positions, better but not good, document issues, and recent scrutiny news.
Prosecutorial Common Law Defeat
One of the best guest posts in FCPA Professor history was this 2011 post from Michael Levy in which he described the concept of prosecutorial common law. Prosecutorial common law is all around us. Take a look at the footnotes of the recent FCPA Guidance – most of the “authority” cited for “legal” propositions is DOJ or SEC settlements.
For obvious reasons, prosecutorial common law does not sit well with federal court judges. For instance, in U.S. v. Bodmer, Judge Shira Scheindlin of the Southern District of New York, in rejecting the DOJ’s position that the FCPA’s criminal penalty provisions applied to a foreign national prior to the 1998 FCPA amendments, noted as follows – “the Government’s charging decision, standing alone, does not establish the applicability of the statute.” Likewise as noted in this previous post about the Giffen enforcement action, Judge William Pauley of the Southern District of New York stated that prosecutorial common law “is not the kind or quality of precedent this Court need consider.”
Prosecutorial common law recently suffered a major defeat when the Second Circuit, in a non-FCPA case, rejected (see here for the opinion) a DOJ theory of prosecution concerning off-label promotion of drugs that it has previously used to secure billions (yes that is a “b”) in recent settlements with pharmaceutical companies.
Commenting on this recent development, Levy stated as follows. “It is amazing to me how consistently this pattern seems to repeat but, given the incentives on both sides, I don’t really see any structural solutions that would change it.”
For additional reading, see this client alert from Debevoise & Plimpton, this client alert from Arnold & Porter, and this client alert from Gibson Dunn.
SEC Responds to Magyar Telekom Execs Motion to Dismiss
Given the SEC’s positions in its recent response to Herbert Steffen’s motion to dismiss (see here for the prior post), it comes as little surprise that the SEC is taking the same positions in its response to the motion to dismiss filed by former Magyar Telecom executives Elek Straub, Andras Balogh and Tamas Morvai.
In its response brief (here), the SEC states, in summary form, as follows.
“The defendants move to dismiss the complaint, arguing that (1) the Court lacks personal jurisdiction; (2) the SEC’s claims are time-barred; (3) the complaint fails to allege facts supporting the SEC’s anti-bribery claims; and (4) the complaint fails to allege facts supporting the SEC’s lying to auditors claims. The Court should deny the motion on all four grounds.
First, the defendants are subject to personal jurisdiction because their conduct caused foreseeable consequences in the United States. The complaint alleges that the defendants orchestrated a bribery scheme in Macedonia; that they concealed their bribes through the use of sham contracts and falsified books and records; that they lied to Magyar’s auditors by signing false annual and quarterly certifications; and that their actions caused Magyar to file annual and quarterly reports with the SEC in the United States that misrepresented the company’s financial statements and included false Sarbanes-Oxley certifications.
Second, the complaint was timely filed within the statute of limitations set forth at 28 U.S.C. § 2462. That provision expressly states that the limitations period does not begin to run until the defendants are “found within the United States.” The defendants acknowledge in their brief that they have remained outside of the United States since their commission of this scheme. Thus, the statute of limitations period has not begun to run as to them. In any event, claims for equitable relief are not subject to the limitations period of Section 2462, which by its terms applies only to “penalties.”
Third, the complaint pleads all facts necessary to support every element of every claim against the defendants. The defendants met the “interstate commerce” prong of Exchange Act Section 30A, 15 U.S.C. § 78dd-1, by sending, in furtherance of their bribery scheme, electronic mail messages that were routed through servers located in the United States. Because the use of interstate commerce is a jurisdictional element, the Exchange Act does not require that defendants know, let alone “corruptly” intend, that their messages would reach the United States. The complaint sufficiently identifies the foreign officials whom the defendants bribed; Section 30A does not require that the officials be expressly named. And the complaint sufficiently identifies the specific false statements made by each defendant to Magyar’s auditors and why those statements were material.”
Of particular note as to “foreign official,” the SEC makes the sweeping statement that “there is no requirement under the FCPA or in the case law interpreting it that the SEC’s complaint [needs to] identify bribed foreign officials by name.” The SEC then states in a footnote as follows. “Any such requirement would be completely at odds with the FCPA’s statutory scheme. […] By its very structure, [the anti-bribery provisions were] drafted to prohibit corrupt transactions in which the precise identity of a government official might not be known even to the payor.”
As noted in this previous post, the SEC is asserting the same “foreign official” position in the Mark Jackson / James Ruehlen challenge. Oral arguments are to take place today on that motion in Houston.
It should be noted that in the DOJ’s unsuccessful prosecution of John O’Shea, Judge Hughes stated as follows. “[W]hile the Government does not have to trace a particular dollar to a particular pocket of a particular official, it has to connect the payment to a particular official, that the funds made under his authority to a foreign official, who can be identified in some reasonable way, that is, with no reasonable doubt.” Judge Hughes also stated as follows. “You can’t convict a man promising to pay unless you have a particular promise to a particular person for a particular benefit. If you call up the [intermediary] and say, look, I’m going to send you 50 grand, bribe somebody, that does not meet the statute.”
Corruption Perception Index
Transparency International (“TI”) recently released its annual Corruption Perceptions Index (“CPI”) (see here). The CPI ranks countries/territories based on how corrupt their public sector is perceived to be and is a composite index drawing on corruption-related data collected by a variety of reputable institutions and reflecting the views of observers from around the world including experts living and working in the countries/territories evaluated.
The top three (very clean) countries in the CPI were Denmark, Finland and New Zealand. The bottom three (highly corrupt) countries were Afghanistan, North Korea and Somalia.
The United States placed 19th on the list of 176 countries. While this is better than last year’s 24th place finish, as noted in this prior post it’s a bit ironic that as the U.S. aggressively expands its Foreign Corrupt Practices Act enforcement theories, the U.S. remains far from the top of the CPI.
Assistant Attorney General Lanny Breuer recently spoke of the U.S. FCPA enforcement effort in religious terms (“we in the United States are in a unique position to spread the gospel of anti-corruption, because there is no country that enforces its anti-bribery laws more vigorously than we do”), yet CPI’s rankings should again cause pause as to our claimed moral superiority.
Document Issues
I am not one to usually highlight FCPA Inc. marketing material, but I thought this video clip from e-discovery firm H5 was instructive as to many of the document issues involved in an FCPA investigation. The enforcement agencies have commented from time to time that FCPA Inc. has a tendency to sometimes over do it in this area, but be that as it may – data collection, data storage, data analysis, etc. are among the reasons why FCPA investigations often soar into the millions.
Recent Scrutiny News
Rolls-Royce
Reuters reports (here) that Rolls-Royce, the world’s second-largest maker of aircraft engines “said the [U.K. Serious Fraud Office] had asked it to conduct an internal inquiry into dealings involving intermediaries in China, Indonesia and other overseas markets.” According to the report, “a source close to the investigation said the allegations relate to events in the “distant past” and Rolls-Royce had told the U.S. Department of Justice about the inquiry.”
As noted in this previous post, in June, Data Systems & Solutions, LLC, a wholly-owned subsidiary of Rolls-Royce Holdings, resolved an FCPA enforcement action.
Barclays
Reuters also reports (here) that a previously disclosed DOJ and SEC “investigation into whether Barclays Plc paid bribes to win a banking license in Saudi Arabia has spread to other banks that operate in the region.”
Net 1
Earlier this week, Net 1 UEPS Technologies Inc. disclosed in an SEC filing (here) as follows.
“On November 30, 2012, we received a letter from the U.S. Department of Justice, Criminal Division (the “DOJ”) informing us that the DOJ and the Federal Bureau of Investigation have begun an investigation into whether Net 1 UEPS Technologies, Inc. and its subsidiaries, including their officers, directors, employees, and agents (collectively, “Net 1”) and other persons and entities possibly affiliated with Net 1 violated provisions of the Foreign Corrupt Practices Act and other U.S. federal criminal laws by engaging in a scheme to make corrupt payments to officials of the Government of South Africa in connection with securing a contract with the South African Social Security Agency to provide social welfare and benefits payments and also engaged in violations of the federal securities laws in connection with statements made by Net 1 in its SEC filings regarding this contract. On the same date, we received a letter from the Division of Enforcement of the Securities and Exchange Commission (the “SEC”) advising us that it is also conducting an investigation concerning our company. The SEC letter states that the investigation is a non-public, fact-finding inquiry.”
In this additional release, the company states as follows.
“These investigations appear to be directed at matters which are similar to those that were the subject of articles which appeared in various South African newspapers after AllPay Consolidated Investment Holdings (Pty) Limited (“AllPay”) instituted legal proceeding in the South African courts to set aside the contract awarded to us in January 2012 by SASSA. AllPay was an unsuccessful bidder for the SASSA contract.”
News of the company’s FCPA scrutiny caused the company’s U.S. listed shares to plunge approximately 58%. This of course caused several plaintiff law firms to announce investigations of their own. See here, here, and here. In the meantime, the company’s shares have risen 46%.
It’s an FCPA world.
*****
A good weekend to all.