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News Corp. Development

By on February 4, 2015 in News Corporation
News Corp.

Before Wal-Mart’s FCPA scrutiny dominated the headlines in April 2012, the most intense instance of worldwide media coverage of Foreign Corrupt Practices Act scrutiny belonged to News Corporation in July 2011.  As noted in this prior post, various media outlets reported, among other things, that “up to five [U.K. police] officers were paid between them a total of at least £100,000 in cash from the News of the World” – a then News Corp. publication.  

From there, the story spread and grew to include allegations of potential other payments.

The prior post detailed, in a Q&A format, the various FCPA implications of News Corp.’s FCPA scrutiny including how police officers have been alleged recipients of improper payments in prior FCPA enforcement actions.  The prior post also discussed the obtain and retain business element of the FCPA and how, during the past decade, the DOJ has brought numerous FCPA enforcement actions outside the context of foreign government procurement.

Very soon after the story broke, The Wall Street Journal (which is published by Dow Jones – an entity owned by News Corp) went on the offensive  stating:

“The political mob has been quick to call for a criminal probe into whether News Corp. executives violated the U.S. Foreign Corrupt Practices Act with payments to British security or government officials in return for information used in news stories. Attorney General Eric Holder quickly obliged last week, without so much as a fare-thee-well to the First Amendment.”

“The foreign-bribery law has historically been enforced against companies attempting to obtain or retain government business. But U.S. officials have been attempting to extend their enforcement to include any payments that have nothing to do with foreign government procurement. This includes a case against a company that paid Haitian customs officials to let its goods pass through its notoriously inefficient docks, and the drug company Schering-Plough for contributions to a charitable foundation in Poland.”

“Applying this standard to British tabloids could turn payments made as part of traditional news-gathering into criminal acts. The Wall Street Journal doesn’t pay sources for information, but the practice is common elsewhere in the press, including in the U.S.”

Some were even so bold to suggest (again on the editorial page of the Wall Street Journal) that the FCPA inquiry of News Corporation was “inappropriate” because the  “the FCPA was certainly not intended to police news-gathering .”  I noted in response that bribery was not a First Amendment issue, but also agreed that the intense media coverage of News Corp.’s FCPA scrutiny shined a needed light on the FCPA’s new era.

I specifically noted that News Corp.’s FCPA scrutiny, like so many others, raised two distinct questions as to the FCPA’s new era of enforcement.  The first question is whether – given the DOJ and SEC’s current enforcement theories – the London police officer payments can expose News Corporation to FCPA liability.  That answer is yes and the First Amendment is not relevant to this question.  The second question is whether Congress intended, or whether Courts would agree, that the FCPA applies to the numerous FCPA enforcement actions (actions typically resolved through non-prosecution and deferred prosecution agreements and thus subject to little or no judicial scrutiny) in this new era that have nothing to do with obtaining or retaining foreign government contracts or influencing foreign laws or regulations.  The Story of the Foreign Corrupt Practices Act instructs that the answer is no and indeed the DOJ/SEC have an overall losing record when put to its burden of proof in such cases (see here).

Notwithstanding the open issues, News Corp.’s FCPA scrutiny escalated and the company’s internal investigation and cooperation in the government’s investigation followed a typical path as noted in this prior post.  As highlighted in this prior post, in connection with the Hollywood film studios sweep, New Corp.’s 20th Century Fox received an SEC letter of inquiry asking for “information about potential inappropriate payments and how [various] companies dealt with certain government officials in China.”

As noted in this prior post, in March 2013, no less than the Dow Jones owned Wall Street Journal reported as follows regarding News Corp.’s FCPA scrutiny.

“Since 2011, the Justice Department has been overseeing a criminal investigation of News Corp. relating to revelations that its British papers hacked phones and bribed public officials to get information for articles. Almost two years later, that probe is nearing completion, government and company officials said, setting the stage for settlement negotiations between the U.S. and News Corp.  News Corp., which has hired law firm Williams & Connolly to oversee the FCPA case, is expected to make its final presentation detailing the company’s global bribery investigation to the Justice Department next month, according to people familiar with the matter. It will be then up to the Justice Department to spell out what punishment or sanctions, if any, the agency wants, and at that point negotiations will likely begin. The Justice Department doesn’t publicly discuss cases that close without charges filed. Both sides expect an agreement would include a monetary settlement of some kind, based on the alleged violations in the U.K. The government has also investigated potential misconduct in the company’s former Russian outdoor billboard subsidiary, according to people familiar with the case, specifically whether it paid bribes to local officials to approve sign placements in that country.” (emphasis added).

Fast forward to the present.

Recently News Corp. disclosed as follows.

“On January 28, 2015, News Corporation (the “Company”) was notified by the United States Department of Justice that it has completed its investigation of voicemail interception and payments to public officials in London and is declining to prosecute the Company or Twenty-First Century Fox, Inc.”

The DOJ rarely responds to media requests about FCPA matters, but various sources have quoted a spokesperson from the DOJ sayings that it has closed its probe into “possible violations of the FCPA concerning bribes allegedly paid for news leaks.”

The New Corp. development is a fitting follow-up to yesterday’s post titled “The Black Hole of FCPA Enforcement.”

Words of course matter in an SEC filing and it is perhaps worth noting that News Corp.’s disclosure, by its own words, is limited to the DOJ and payments to public officials in London.

Perhaps time will tell another potential end result of this most notable instance of FCPA scrutiny, or perhaps it has already been told.

Friday Roundup

By on June 27, 2014 in Compliance, Enforcement Agency Policy, Enforcement Agency Speeches, Facilitating Payments, Investigative Fees, News Corporation, Voluntary Disclosure

Elevate, a surprise verdict? SEC Chair on compliance, self-reporting and cooperation, quotable, and for the reading stack.  It’s all here in the Friday Roundup.

Elevate Your FCPA Knowledge and Practical Skills

Join lawyers and other in-house counsel and compliance professionals from around the country – indeed the world –  already registered for the inaugural FCPA Institute July 16-17th in Milwaukee, Wisconsin.  The FCPA Institute is a unique two-day learning experience ideal for a diverse group of professionals seeking to elevate their FCPA knowledge and practical skills.  FCPA Institute participants will have their knowledge assessed and upon successful completion of a written assessment tool can earn a certificate of completion. In this way, successful completion of the FCPA Institute represents a value-added credential for professional development.

To register see here.

A Surprise Verdict?

As has been widely reported (see here and here for instance) Rebekah Brooks, a former senior News Corporation executive, was found not guilty of various counts (including conspiracy to commit misconduct – in other words bribery) by an English jury earlier this week.

The bribery-related verdict comes as a bit of a surprise given that Brooks – as highlighted in this previous post and as reported by the media:

“[Rebekah Brooks testified that] she authorized payments to public officials in exchange for information on “half a dozen occasions” during her time as a newspaper editor—but did so only in what she said was the public interest. […]  On the stand, Ms. Brooks, who edited News Corp’s Sun newspaper and its now-closed News of the World sister title, said the payments were made for good reasons, and done so on rare occasions and after careful consideration. “My view at the time was that there had to be an overwhelming public interest to justify payments in the very narrow circumstances of a public official being paid for information directly in line with their jobs,” said Ms. Brooks.”

As to the other defendants – Andy Coulson (a former senior News Corp. editor) and Clive Goodman (a former royal reporter for New Corp.’s defunct News of the World publication) –  the jury failed to reach a verdict on the bribery-related count.

At the beginning of the trials, in this October 2013 post, I observed:

“What happens in these trials concerning the bribery offenses will not determine the outcome of any potential News Corp. FCPA enforcement action.  But you can bet that the DOJ and SEC will be interested in the ultimate outcome.  In short, if there is a judicial finding that Brooks and/or Coulson or other high-level executives in London authorized or otherwise knew of the alleged improper payments, this will likely be a factor in how the DOJ and SEC ultimately resolve any potential enforcement action and how News Corp.’s overall culpability score may be calculated under the advisory Sentencing Guidelines.”

SEC Chair White on Compliance, Self-Reporting and Cooperation

SEC Chair Mary Jo White recently delivered this speech titled “A Few Things Directors Should Know About the SEC.”

Among other topics, White spoke about the importance of compliance, self-reporting and cooperation and relevant portions of the speech are highlighted below.

Compliance

“Ethics and honesty can become core corporate values when directors and senior executives embrace them.  This includes establishing strong corporate compliance programs focused on regular training of employees, effective and accessible codes of conduct, and procedures that ensure complaints are thoroughly and fairly investigated.  And, it must be obvious to all in your organization that the board and senior management highly value and respect the company’s legal and compliance functions.  Creating a robust compliance culture also means rewarding employees who do the right thing and ensuring that no one at the company is considered above the law.  Ignoring the misconduct of a high performer or a key executive will not cut it.  Compliance simply must be an enterprise-wide effort.”

Self-Reporting and Cooperation

“Even in the best run companies with strong boards, the right tone at the top and robust compliance programs, wrongdoing will almost inevitably occur from time-to-time.  What should you do when that happens?  How should you respond?  What does the SEC expect you to do?  When should a company self-report wrongdoing to the SEC or other authorities?  All of these questions require careful consideration and appropriate action. For tonight, I will focus just on the last one about self-reporting.

If your company has uncovered serious wrongdoing, you will need to decide whether, how and when to report the matter to the SEC.  One immediate question you will have to answer is whether what has been discovered constitutes material information that requires public disclosure.  If the answer is yes, that fact will also invariably dictate an obvious affirmative answer to broader self-reporting to the SEC.

In other situations, you will need to decide whether to call us about a serious, but non-material event – perhaps a rogue employee in a small foreign subsidiary has been bribing a foreign official in violation of the Foreign Corrupt Practices Act (“FCPA”).  You intend to take decisive action against the employee and enhance your FCPA compliance program.  Your disclosure lawyer’s view is that the occurrence does not require public disclosure.  That does not, however, end your inquiry or responsibilities.  Your company still needs to decide whether to self-report to the SEC, and consider what that may mean for the company.

As many of you know, the Commission in the 2001 Seaboard statement on cooperation, explained how self-reporting, cooperation, self-policing, and remediation factor into our decisions when considering enforcement actions.  And, I can tell you from experience that of those four factors, self-reporting is especially important to both the SEC and the Department of Justice.

What are the benefits to your company of self-reporting?  You can read about that in the SEC’s press releases on enforcement actions, which routinely highlight how the quality of a company’s cooperation has affected any resulting enforcement action.  Typically, a company realizes the benefits of cooperation through a reduced penalty, or, at times, no penalty or even not proceeding in an exceptional case.

Not that you should need any extra incentive, but keep in mind that there are also downsides in deciding not to self-report.  If the wrongdoing is not self-reported, the opportunity to earn significant credit for cooperation may be lost.  And, with our new whistleblower program … the SEC is more likely than ever to learn of the misconduct through another channel.

Let me just say a few words about how to cooperate with SEC investigations.

As an initial matter, the decision to cooperate should be made early in the investigation.  The tone and substance of the early communications we have with a company are critical in establishing the tenor of our investigations and how the staff and the Commission will view your cooperation in the final stages of an investigation. Holding back information, perhaps out of a desire to keep options open as the investigation develops, can, in fact, foreclose the opportunity for cooperation credit.  We are looking for companies to be forthcoming and candid partners with the SEC investigative team – and the board has a responsibility to ensure that management and the legal team are providing this kind of cooperation.

When choosing the path of self-reporting and cooperation, do so decisively.  Make it clear from the outset that the board’s expectation is that any internal investigation will search for misconduct wherever and however high up it occurred; that the company will act promptly and report real-time to the Enforcement staff on any misconduct uncovered; and that the company will hold its responsible employees to account.

There is, of course, cooperation and then there is cooperation, just as there are compliance programs that look great on paper but are not strongly enforced.  We know the difference.  Cooperation means more than complying with our subpoenas for documents and testimony – the law requires you to do that.  If you want your company to get credit for cooperation – and you should – then sincere and thorough partnering with the Division of Enforcement to uncover all the facts is required.”

As highlighted in this previous post, here is what White had to say about cooperation issues as a lawyer in private practice.

“Today, before making their decisions about charging companies, some prosecutors are exerting considerable – some say, extreme -pressure on corporate behavior under the not so subtle threat that if the company doesn’t do as the government wishes, the company risks, at the end of the day, being indicted.”

[…]

“To ensure that a company does not become that ‘rare’ case resulting in a corporate indictment with all of its attendant negative consequences, a company must not poke the government in the eye by declining any of its requests or suggestion of how a cooperative, good corporate citizen is to behave in the government’s criminal investigation.  This template, in my view, can give prosecutors too much power.”

Quotable

Homer Moyer (Miller & Chevalier) states as follows in the June issue of Global Investigations Review.

“As this area of law has evolved, the challenges for all concerned have changed.  Agencies plainly hold most of the cards here.  They have great leverage in these cases.  […] [T]hey are rarely subject to judicial review.  That creates a special responsibility for enforcement agencies.

As a practical matter, they are creating the operative jurisprudence.  Companies and practitioners read those settlements and try to tease out of them the principles that have been at play.  So it’s important that the government articulates its legal rationales, and frankly it’s important the government self-policies.  It may invest in a lengthy investigation at the end of which it should take no action.  And that’s sometimes hard for an agency to do.

The agencies have, over the last 25 years, expanded their jurisdictional reach; they’ve expanded their theories of liability; they have expanded the penalties imposed with new kinds of penalties and new kinds of settlements.  So I think there’s a burden on the agencies, given that much sway, to act especially responsibly.

[…]

[T]he great interest in this area has been prompted in part by reports of enormous costs to corporations of investigations.  I think law firms have to address that.  Many of the reported cases are stupefying and, in my opinion, can be avoided.  But that takes a little clear-eyed thinking on the part of both outside law firms and corporations.”

Reading Stack

From Transparency International UK – Countering Small Bribes.  As described in this release:

“[The report] provides practical advice on addressing the challenge of countering small bribes including “grease payments”. It is also designed to be of assistance to regulators, law-makers, prosecuting agencies and professional advisers. Countering small bribes is a complex challenge for companies. Transparency International research shows that, globally, more than 1 in 4 people paid a bribe in a recent 12 month period, highlighting the scale of the problem facing companies. Demands most often occur in overseas markets, where employees may be vulnerable through travelling alone or the company needs to release critical goods from customs. The guidance provides a set of principles, discussion and advice designed to help companies operate to high ethical standards, protect their reputations and fulfill their legal obligations.”

*****

A good weekend to all.

Friday Roundup

By on March 14, 2014 in Andras Balogh, Beny Steinmetz, Elek Straub, Foreign Issuers, Foreign Official, Frederic Cilins, Japan, News Corporation, Obstruction Charges, Tamas Morvai, World’s Most Ethical FCPA Violaters

Guilty plea in FCPA obstruction case, SEC trims a pending case, across the pond, turnabout is fair play, and for the reading stack.  It’s all here in the Friday roundup.

Cilins Pleads Guilty

Earlier this week, the DOJ announced that Frederic Cilins pleaded guilty “to obstructing a federal criminal investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.”  The DOJ release further states:

“Cilins pleaded guilty to a one-count superseding information …, which alleges that Cilins agreed to pay money to induce a witness to destroy, or provide to him for destruction, documents sought by the FBI.   According to the superseding information, those documents related to allegations concerning the payment of bribes to obtain mining concessions in the Simandou region of the Republic of Guinea.”

Cilins was originally charged in April 2013 (see this prior post for a summary of the criminal complaint) and there was much activity leading up to Cilins’s March 31st trial date.  For instance, on February 18th the DOJ filed a superseding indictment and on March 4th Cilins filed this motion to dismiss.  In pertinent part, the motion stated:

“For almost a year, the government has proceeded against Mr. Cilins under the theory that he criminally obstructed an investigation conducted by a federal grand jury in the Southern District of New York and the Federal Bureau of Investigation, after he first learned of that investigation in the spring of 2013. Now, on the eve of trial, the government has charged Mr. Cilins with conspiracy to commit criminal obstruction. The supposed conspiracy began in 2012, when, as the government admits, he had no intent to obstruct an American investigation—indeed, well before any such investigation had even been contemplated. The charge is instead based on a radical new theory: that Mr. Cilins interfered with a Guinean civil licensing investigation, which somehow amounts to a violation of U.S. obstruction law under 18 U.S.C. § 1519.

The government’s unprecedented and breathtaking attempt to federalize protection for investigations spread far and wide throughout the world has no basis in the text of the obstruction statute itself and no support in the case law. It also runs up against the well-established presumption that, absent strong evidence to the contrary, Congress did not intend to give federal statutes extraterritorial reach. Not only does § 1519 contain no textual evidence that Congress meant to give the law a worldwide sweep, the statute’s legislative history also confirms the obvious: that Congress wrote a federal obstruction statute in order to criminalize intentional interference with American investigations. The government’s new conspiracy count is fatally defective and must be dismissed.”

Cilins has been widely reported to be linked to Guernsey-based BSG Resources Ltd.  As reported here from 100 Reporters:

“The U.S. Justice Department has formally notified the Franco-Israeli billionaire Beny Steinmetz [the founder of BSG Resources] that he is the target of a federal probe of allegations of bribery in the Republic of Guinea, according to a source with knowledge of the matter. The disclosure places Steinmetz … personally at the center of a broad-based multinational corruption investigation involving some of the largest remaining untapped iron ore deposits in the world.  […] According to the source, who spoke on condition of anonymity, attorneys for Steinmetz have received a so-called “target letter” from federal prosecutors investigating allegations that Steinmetz’s mining company offered millions of dollars in bribes to win and keep the multi-billion dollar concession first awarded by the Guinean government in 2008.  The letter went to Steinmetz’s lawyers in January, the source said.”

For additional coverage of Cilins’s plea, see here from Reuters (noting that the plea agreement does not require any cooperation with the government’s investigation) and here from Bloomberg.

SEC Trims a Pending Case

This recent post highlighted how the SEC has never prevailed in an FCPA enforcement action when put to its ultimate burden of proof.

Against this backdrop, it is notable, as reported by the Wall Street Journal here and citing an SEC official, that the SEC is dropping its claims that former Magyar Telekom executives Elek Straub, Andras Balogh and Tomas Morval bribed Montenegro officials.  (The SEC’s claims that the former executives bribed Macedonian officials remains active).

See this prior post summarizing the SEC’s original 2011 complaint.

Across the Pond

More from the U.K. trial of former News Corp. executive Rebekah Brooks.  From the Guardian:

“Rebekah Brooks has admitted rubber stamping payments to military sources while she was editor at the Sun at the Old Bailey phone hacking trial. Brooks also admitted on Monday that she did not question whether the source of a series of stories that came from a reporter’s “ace military source” was a public official who could not be paid without the law being broken. Crown prosecutor Andrew Edis, QC, quizzed her about a series of emails from the reporter requesting tens of thousands of pounds for his military source. She responded to one request for payment in under a minute and to another within two minutes, the phone hacking trial heard. “You really were just acting as a rubber stamp weren’t you,” Edis asked. Brooks replied: “Yes.”

As noted in previous posts here and here:

“What happens in these trials concerning the bribery offenses will not determine the outcome of any potential News Corp. FCPA enforcement action. But you can bet that the DOJ and SEC will be interested in the ultimate outcome. In short, if there is a judicial finding that Brooks and/or Coulson or other high-level executives in London authorized or otherwise knew of the alleged improper payments, this will likely be a factor in how the DOJ and SEC ultimately resolve any potential enforcement action and how News Corp.’s overall culpability score may be calculated under the advisory Sentencing Guidelines.”

Turnabout Is Fair Play

Last week’s Friday Roundup (here) highlighted how Senator Harry Reid (D-NV) called out Koch Industries on the Senate floor and accused the company of violating the FCPA.  The previous post noted that it was not just executives or companies that support Republican causes that have come under FCPA scrutiny (several Democratic examples could be cited as well).

Indeed, that is just what the Washington Examiner did in this article which states as follows.

“Senate Majority Leader Harry Reid, D-Nev., has received campaign contributions from people and political action committees linked to multiple companies suspected of violating the Foreign Corrupt Practices Act.  […]  [R]ecords reveal that Reid has accepted campaign money from individuals and political action committees associated with 10 companies linked to FCPA investigations.  The contributions total $515,100 between 2009 and 2013.”

The inference from both Senator Reid’s initial volley and the Washington Examiner report would seem to be that companies that resolve FCPA enforcement actions or companies under FCPA scrutiny are bad or unethical companies and that politicians who accept support from such companies are thus tainted as well.

Such an inference is naive in the extreme.

Yes, certain FCPA enforcement actions are based on allegations that executive management or the board was involved in or condoned the improper conduct at issue. However, this type of FCPA enforcement action is not typical.

A typical FCPA enforcement action involves allegations that a small group of people (or perhaps even a single individual) within a subsidiary or business unit of a business organization engaged in conduct in violation of the FCPA. Yet because of respondeat superior principles, the company is exposed to FCPA liability even if the employee’s conduct is contrary to the company’s pre-existing FCPA policies and procedures.

Also relevant to the question of whether companies that resolve FCPA enforcement actions are “bad” or “unethical” is the fact that most FCPA enforcement actions are based on the conduct of third-parties under the FCPA’s third-party payment provisions. Further, certain FCPA enforcement actions are based on successor liability theories whereby an acquiring company is held liable for the acquired company’s FCPA liability.

Finally, given the resolution vehicles typically used to resolve an FCPA enforcement – such as non-prosecution and deferred prosecution agreements – companies subject to FCPA scrutiny often decide it is quicker, more cost efficient, and more certain to agree to such a resolution vehicle than engage in long-protracted litigation with the DOJ or SEC. These resolution vehicles do not require the company to plead guilty to anything (or typically admit the allegations in the SEC context), are not subject to meaningful judicial scrutiny, and do not necessarily represent the triumph of one party’s legal position over the other. Rather resolution via such a vehicle often reflects a risk-based decision often grounded in issues other than facts or the law. Indeed, a former high-ranking DOJ FCPA enforcement official has stated that given the availability of such alternative resolution vehicles, “it is tempting for the [DOJ], or the SEC since it too now has these options available, to seek to resolve cases through DPAs or NPAs that don’t actually constitute violations of the law.”

Last, but certainly not least, many corporate FCPA enforcement actions concern conduct that allegedly took place 5, 7, 10 or even 15 years ago.

Reading Stack

An informative read from Catherine Palmer and Daiske Yoshida (Latham & Watkins) titled “Deemed Public Officials:  A Potential Risk For U.S. Companies in Japan.”  The article states:

“Deemed public officials are officers and employees of entities that are not government owned but serve public functions. This concept is somewhat analogous to state-owned enterprises, but rather than being government owned/controlled entities that participate in commercial activities, these are commercial entities that play quasi-government roles.  […] The statutes that authorized the establishment of these companies stipulate that their officers and  employees are “deemed to be an employee engaged in public service” for the purposes of the Penal Code of Japan.”

Another informative read from Wendy Wysong (Clifford Chance) titled “Why, Whether, and When the FCPA Matters in Capital Market Transactions: The Asian Perspective.”  The article, in part, covers the FCPA’s tricky “issuer” concept and explores FCPA liability in Rule 144A and Regulation S offerings.

*****

A good weekend to all.

Friday Roundup

By on February 28, 2014 in Bio-Rad, China, FCPA Inc., FCPA Statistics, Merck, Monitor, News Corporation, Non-Prosecution Agreement, Ralph Lauren Corp., SEC, Third Parties, Trade Barriers and Distortions, Voluntary Disclosure, Whistleblowers, World’s Most Ethical FCPA Violaters

Most admired, from the U.K., one way to avoid judicial scrutiny is to avoid the courts, another DOJ official departs, scrutiny updates, and survey says.  It’s all here in the Friday roundup.

Most Admired

Are companies that resolve a Foreign Corrupt Practices Act enforcement or are otherwise under FCPA scrutiny bad or unethical companies?  To be sure, certain companies that have resolved FCPA enforcement actions are deserving of this label, yet most are not.  Indeed, as detailed in this prior post several companies have earned designation as “World Most Ethical Companies” during the same general time period relevant to an enforcement action or instance of FCPA scrutiny.

In a similar vein, several FCPA violators or companies under FCPA scrutiny can be found on Fortune’s recent “Most Admired Company” list.  In the top 50, I count 12 such companies including IBM, Johnson & Johnson, Microsoft, Wal-Mart, JPMorgan, and Cisco.

Let’s face it, not all companies that resolve FCPA enforcement actions or are under FCPA scrutiny are bad or unethical companies.  If more people would realize this and accept this fact, perhaps a substantive discussion could take place regarding FCPA reform absent the misinformed rhetoric.

From the U.K.

In this October 2013 post at the beginning of the U.K. trial of former News Corp. executives Rebekah Brooks, the former editor of News of the World, and Andy Coulson, another former News of the World editor, I observed as follows.

“What happens in these trials concerning the bribery offenses will not determine the outcome of any potential News Corp. FCPA enforcement action.  But you can bet that the DOJ and SEC will be interested in the ultimate outcome.  In short, if there is a judicial finding that Brooks and/or Coulson or other high-level executives in London authorized or otherwise knew of the alleged improper payments, this will likely be a factor in how the DOJ and SEC ultimately resolve any potential enforcement action and how News Corp.’s overall culpability score may be calculated under the advisory Sentencing Guidelines.”

Well …, this Wall Street Journal article reports as follows.

“[Rebekah Brooks testified that] she authorized payments to public officials in exchange for information on “half a dozen occasions” during her time as a newspaper editor—but did so only in what she said was the public interest. […]  On the stand, Ms. Brooks, who edited News Corp’s Sun newspaper and its now-closed News of the World sister title, said the payments were made for good reasons, and done so on rare occasions and after careful consideration. “My view at the time was that there had to be an overwhelming public interest to justify payments in the very narrow circumstances of a public official being paid for information directly in line with their jobs,” said Ms. Brooks.”

As noted in this previous post at the beginning of News Corp.’s FCPA scrutiny, any suggestion that the media industry is somehow excluded from the FCPA’s prohibitions is entirely off-base.

One Way to Avoid Judicial Scrutiny is to Avoid the Courts

In recent years, the SEC has had some notable struggles in the FCPA context and otherwise when put to its burden of proof in litigated actions or otherwise having to defend its settlement policies to federal court judges.  For instance, Judge Shira Scheindlin (S.D.N.Y.) dismissed the SEC’s FCPA enforcement against former Siemens executive Herbert Steffen.  In another FCPA enforcement action,  Judge Keith Ellison (S.D.Tex.) granted without prejudice Mark Jackson and James Ruehlen’s motion to dismiss the SEC’s claims that sought monetary damages.  In Gabelli, the Supreme Court unanimously rejected the SEC’s statute of limitations position.  Judge Richard Leon (D.D.C.) expressed concerns regarding the SEC’s settlement of FCPA enforcement actions against Tyco and IBM and approved the settlements only after imposing additional reporting requirements on the companies.  In addition, the SEC’s neither admit nor deny settlement policy has been questioned by several judges (most notably Judge Jed Rakoff) and the merits of this policy is currently before the Second Circuit.

The SEC’s response to this judicial scrutiny 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 detailed in this previous post concerning SEC FCPA enforcement in 2013, of the 8 corporate enforcement actions from 2013, 3 enforcement actions were administrative actions (Philips Electronics, Total, and Stryker) and 1 action (Ralph Lauren) was a non-prosecution agreement.  In other words, there was no judicial scrutiny of 50% of SEC FCPA enforcement actions from 2013.

Based on recent statements from SEC officials at the “SEC Speaks” conference this trend is going to continue.

According to this Vedder Price bulletin:

“Charlotte Buford, Assistant Chief Counsel, spoke about the SEC’s intention to use the administrative proceeding forum more frequently and in a wider variety of upcoming enforcement actions. Ms. Buford stated that in choosing the forum, the SEC considers factors such as speed and efficiency, the nature of the case, litigation considerations such as the amount of discovery needed, and settlement considerations. Ms. Buford noted that, although certain types of actions such as insider trading cases were historically brought in district court, two insider trading cases were recently brought as administrative actions. She also referenced the SEC’s recent action against Alcoa, Inc. involving FCPA violations, which was filed as a settled administrative proceeding. Ms. Buford indicated that the SEC will continue to increase its use of administrative proceedings in the coming years.”

This Perkins Coie alert adds the following:

“[Kara Brockmeyer – Chief of the SEC’s FCPA Unit] also noted that companies can expect to see more cases resolved in administrative proceedings, and that the FCPA Unit is considering bringing litigated FCPA cases through administrative proceedings as well.”

SEC administrative settlements in the FCPA context were rare prior to 2010 largely because the SEC could not impose monetary penalties in such proceedings absent certain exceptions.  However, the Dodd-Frank Wall Street Reform Act granted the SEC broad authority to impose civil monetary penalties in administrative proceedings in which the SEC staff seeks a cease-and-desist order.  However, Congress’s grant of such authority to the SEC – no doubt politically popular in the aftermath of the so-called financial crisis – has directly resulted in less judicial scrutiny of SEC enforcement theories including in the FCPA context.

Like so much of what is happening in the FCPA space (and government regulation of corporate conduct generally), this is a troubling development.

In other “SEC Speaks” tidbits, the Vedder Price bulletin also states:

“Kara Brockmeyer, Chief of the FCPA Unit, noted that her unit brought a variety of cases in 2013, which included “old school” bribery cases funneling money, improper travel and entertainment, and improper charitable donations. Ms. Brockmeyer stated that the SEC continues to see issues with third-party intermediaries, as many companies enter into arrangements with third parties without adequately explaining the roles of the third parties. Ms. Brockmeyer lauded companies for “putting more thought” into compliance programs and internal controls, as well as for their decisions to self-report. She also discussed the Cross-border working group, which has brought 21 fraud actions involving 90 individuals or entities and has revoked the registrations of 63 companies since this initiative started three years ago.”

The Perkins Coie alert also states:

“Turning to the area of cooperation credit and non-prosecution agreements (NPAs), Chief Brockmeyer stated that the 2013 Ralph Lauren case is a good example of where such an outcome was warranted.  Several factors that weighed in favor of that favorable NPA settlement resulted from the company: self-reporting the suspected bribery within two weeks of finding violations; discovering the violations on its own through internal monitoring activities; assisting the SEC’s investigation by providing English language translations of foreign documents, and bringing witnesses to the United States for questioning; and undertaking extensive remediation efforts, including a worldwide investigation to determine if there were any systemic issues.  Finally, Chief Brockmeyer added that it was significant that Ralph Lauren’s investigation determined that the bribery issues were confined to one country; if the violations were found to be more widespread, the company would likely still have received cooperation credit, but would not have been a candidate for a NPA.

Chief Brockmeyer stated that the SEC will continue to address Compliance Monitorship requirements on a case-by-case basis.  Recently, the SEC has imposed both “full” monitorships, as well as some “hybrid” monitorships that include 18 months of monitoring, combined with 18 months of self-monitoring by the company.  She noted that some companies might even qualify for just internal monitoring, but all these considerations depend heavily on the state of the company’s compliance program.

Finally, Chief Brockmeyer indicated that whistleblower tips continue to serve as a primary lead for the SEC in identifying potential FCPA actions.  The SEC is using these tips to identify specific sectors or industries that are not paying sufficient attention to corporate compliance or internal controls.  The SEC is also focused on enforcing the anti-retaliation whistleblower provisions in Dodd Frank.  In some instances, the SEC has observed that companies have required employees to sign confidentiality agreements that appear to bar an employee from becoming a whistleblower.  She opined that such agreements would violate Dodd-Frank’s prohibition against regulated entities taking actions to impede employees from making whistleblower complaints.”

Another DOJ Official Departs

When Lanny Breuer departed as DOJ Assistant Attorney Criminal Division in March 2013, Mythili Raman became Acting Assistant Attorney and carried forward much of the same rhetoric Breuer frequently articulated concerning the DOJ’s FCPA enforcement program.  (See here for my article “Lanny Breuer and Foreign Corrupt Practices Act Enforcement).

In speeches (here and here) Raman stated that the DOJ’s “stellar FCPA Unit continues to go gangbusters, bringing case after case,” “our recent string of successful prosecutions of corporate executives is worth highlighting” and “we are not going away … our efforts to fight foreign bribery are more robust than ever.”

Like other DOJ FCPA officials before her, Raman frequently highlighted certain enforcement statistics, yet conveniently ignored the most telling enforcement statistic of all – the DOJ’s dismal record when actually put to its burden of proof in FCPA enforcement actions.  In short, for a long time the DOJ’s FCPA Unit has had a distorted view of success.

Certainly, the DOJ and SEC have had “success” in this new era of FCPA enforcement exercising leverage and securing large corporate FCPA settlements against risk-averse corporations through resolution vehicles often not subjected to any meaningful judicial scrutiny.  However, by focusing on the quantity of FCPA enforcement, the quality of that enforcement is often left unexplored.  The simplistic notion advanced by the enforcement agencies seems to be that more FCPA enforcement is an inherent good regardless of enforcement theories, regardless of resolution vehicles, and regardless of actual outcomes when put to its burden of proof.  This logic is troubling and ought to be rejected.  In a legal system founded on the rule of law, a more meaningful form of government enforcement agency success is prevailing in the context of an adversarial system when put to the burden of proof.  As to this form of success, during this new era of FCPA enforcement, the DOJ and SEC have had far less “success” in enforcing the FCPA.

Recently the DOJ announced that Raman is departing from her position. (See here).  In this related Q&A with the Wall Street Journal Law Blog (LB) Raman confirmed that the DOJ measures success in terms of quantity without regard to quality.

LB: [On enforcement of the Foreign Corrupt Practices Act, which has increased in recent years] do you think you’re winning? Are there fewer bribes being paid now?

MR: We often measure our success by numbers of enforcement actions but actually at the end of the day…. the deterrent effect is what actually matters. I don’t know if fewer bribes are being paid or not. But I do know that there are many more companies who know what their obligations are now.

For additional coverage of Raman’s departure, see here and here.

Scrutiny Alerts

Last summer German healthcare firm Fresenius Medical Care AG disclosed an FCPA internal investigation (see here for the prior post).  In its recently filed annual report, the company stated as follows:

“The Company has received communications alleging certain conduct in certain countries outside the U.S. and Germany that may violate the U.S. Foreign Corrupt Practices Act (“FCPA”) or other anti-bribery laws. The Audit and Corporate Governance Committee of the Company’s Supervisory Board is conducting an internal review with the assistance of independent counsel retained for such purpose. The Company  voluntarily advised the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) that allegations have been made and of the Company’s internal review. The Company’s review and dialogue with the SEC and DOJ are ongoing.  The review has identified conduct that raises concerns under the FCPA or other anti-bribery laws that may result in monetary penalties or other sanctions. In addition, the Company’s ability to conduct business in certain jurisdictions could be negatively impacted. Given the current status of the internal review, the Company cannot reasonably estimate the possible loss or range of possible loss that may result from the identified matters or from the final outcome of the continuing internal review. Accordingly, no provision with respect to these matters has been made in the accompanying consolidated financial statements.  The Company’s independent counsel, in conjunction with the Company’s Compliance Department, have reviewed the Company’s anti-corruption compliance program, including internal controls related to compliance with international anti-bribery laws, and appropriate enhancements are being implemented. The Company is fully committed to FCPA compliance.”

Bio-Rad Laboratories disclosed as follows yesterday in an earnings release.

“[Fourth quarter] results included an accrued expense of $15 million in connection with the Company’s efforts to resolve the previously disclosed investigation of the Company in connection with the United States Foreign Corrupt Practices Act; this is in addition to an accrued expense of $20 million in the third quarter of 2013.”

Survey Says

The American Chamber of Commerce in Shanghai recently released its China Business Report (2013-2014).

Notable findings include the following:

“Generally consistent with previous years, 80 percent of respondents cited bureaucracy as the No. 1 challenge, with 72 percent declaring difficulties from an unclear regulatory environment and 70 percent were concerned over problems with tax administration rounding out the top three leading legal and regulatory challenges that companies said hindered their business.”

As I’ve frequently stated, the root causes of much bribery and corruption are various trade barriers and distortions. These barriers and distortions – whether complex customs procedures, import documentation and inspection requirements, local sponsor or other third-party requirements, arcane licensing and certification requirements, quality standards that require product testing and inspection visits, or other foreign government procurement practices – all serve as breeding grounds for harassment bribes to be requested. Simply put, trade barriers and distortions create bureaucracy. Bureaucracy creates points of contact with foreign officials. Points of contact with foreign officials create discretion. Discretion creates the opportunity for a foreign official to misuse their position by making demand bribes.

The report also stated:

“Efforts by the Chinese government to target companies for corruption investigations have sharply increased companies’ concern over compliance with China’s laws and regulations. In 2013, 46 percent of companies said compliance with domestic laws was more important to their business, up from 31 percent in 2012, compared to international anti-bribery laws such as the FCPA (32 percent).

Twice as many respondents said that China’s more aggressive regulatory enforcement for anti-corruption and anti-competition has greatly increased or increased their own business risk (18 percent) than those who say their business risk has greatly decreased or decreased (8 percent). The issue of corruption and fraud was most strongly felt in the healthcare industry (24 percent), which contended with high profile government investigations of foreign and domestic pharmaceutical companies in 2013.”

The impetus for much of this concern is the result of GSK’s (and other pharma and healthcare related companies) scrutiny by Chinese authorities for alleged improper business practices.  (See here for the prior post).

*****

A good weekend to all.

Across The Pond

By on October 29, 2013 in Abdirahman Omar, Chris Smith, Enforcement Agency Policy, Enforcement Agency Speeches, Ghana, Kenya, Mauritania, News Corporation, Nick Smith, Publishing Industry, Serious Fraud Office, Smith & Ouzman Ltd, Somalia, Tim Forrester, United Kingdom, Voluntary Disclosure

Posts last week largely focused on two Foreign Corrupt Practices Act enforcement actions (see here, here and here).

This post goes across the pond to check in on three U.K. developments.

First, a recent Serious Fraud Office (“SFO”) pre-Bribery Act enforcement action against Smith & Ouzman Ltd. and related individuals, second recent speeches by SFO officials, and third the start of criminal trials against various former top-level executives of News Corp.’s News of the World publication.

SFO Flexes Its Pre-Bribery Act Muscle

The U.K. Bribery Act went live on July 1, 2011 and its provisions are forward looking only (this is the most obvious reason why there has yet been a FCPA-like Bribery Act enforcement).  However, the SFO recently flexed its muscles in an enforcement action concerning conduct pre-dating the Bribery Act.

Last week, the SFO announced that “Smith & Ouzman Limited [a U.K. based printing company specialising in security documents such as ballot papers], two of its directors, an employee and one agent have been charged by the Serious Fraud Office with offences of corruptly agreeing to make payments totaling nearly half a million pounds, contrary to section 1 Prevention of Corruption Act 1906.”

According to the SFO release:

“The individuals, all British nationals, are:

Chris Smith – the former Chairman of Smith and Ouzman Limited

Nick Smith – the Sales and Marketing Director of Smith and Ouzman Limited

Tim Forrester –  the International Sales Manager for Smith and Ouzman Limited

Abdirahman Omar – an agent for Smith and Ouzman Limited

The alleged offences are said to have taken place between November 2006 and December 2010 and relate to transactions in Mauritania, Ghana, Somaliland and Kenya.”

SFO Director David Green On Self-Reporting

This October 2012 post highlighted an SFO release detailing “revised policies” concerning, among other things, corporate self-reporting.

Last week, SFO Director released this statement concerning self-reporting.

“It is now a year since I changed the published SFO guidance on self-reporting by corporates.  The guidance I inherited contained an implied presumption that self-reported misconduct would be dealt with by civil settlement rather than prosecution.  I took the view that no prosecutor should appear to offer such a guarantee in advance. As a prosecutor, you can never anticipate what set of facts and conduct might be next in through the door.  I took the guidance back to the historic position agreed with the Director of Public Prosecutions: that we would apply the full code test for crown prosecutors to self-reported criminality. In other words, we ask (after our own investigation): is there sufficient evidence to prosecute, and if so, is a prosecution in the public interest?  The SFO’s message is carefully expressed and nuanced. Assume the evidential sufficiency test is passed. If a company made a genuine self-report to us (that is, told us something we did not already know and did so in an open- handed, unspun way), in circumstances where they were willing to cooperate in a full investigation and to take steps to prevent recurrence, then in those circumstances it is difficult to see that the public interest would require a prosecution of the corporate. Some parts of the blogosphere seem to have difficulty with this, writing that it means self-reporters will be prosecuted. It means no such thing.”

As to Green’s comment about the blogosphere, the prior post stated.  “For the most part, although much ink is likely to be spilled by FCPA Inc. / Bribery Act Inc. in the coming days, the SFO’s “revised policies” are a yawner.”

Back to Green’s statement.

“Some corporate lawyers complain that the new approach (actually, the principled, established approach) creates “uncertainty”. I disagree: and I think that when they say “certainty” it is code for “guarantee”.  For the avoidance of doubt, the SFO continues to receive self-reports, and I anticipate the numbers will only rise as Deferred Prosecution Agreements (DPAs) bed in next year.  So why should a company self-report instances of suspected criminal misconduct to the SFO?

(i) A self-report at the very least mitigates the chances of a corporate being prosecuted.  It opens up the possibility of civil recovery or a DPA; (ii) There is the moral and reputational imperative: it is the right thing to do and it demonstrates that the corporate is serious about behaving ethically; (iii) If the corporate chooses to bury the misconduct rather than self-report, the risk of discovery is unquantifiable. There are so many potential channels leading to exposure: whistle-blowers; disgruntled counterparties; cheated competing companies; other Criminal Justice agencies in the UK; overseas agencies in communication with SFO; and the SFO’s own developing intelligence capability, to name but a few;(iv) If criminality is buried and then discovered by any of the above routes, the penalty paid by the corporate in terms of shareholder outrage, counterparty and competitor distrust, reputational damage, regulatory action and possible prosecution, is surely disproportionate; (v) Last but not least, burying such information is likely to involve criminal offences related to money laundering under sections 327-9 of the Proceeds of Crime Act.

There are, I suggest, very powerful arguments in favour of self-reporting.  Once the decision to self-report has been made by the corporate, then the question of timing arises. Common sense suggests that an initial report of suspected criminality should be made to the SFO as soon as it is discovered. This surely protects the company against the SFO finding out by other means whilst the company investigates further. The corporate can then investigate in depth and report back to the SFO. The SFO will carry out its own assessment with possible use of S2A powers (in the case of bribery), and, if justified, the opening of a criminal investigation and the exercise of S2 powers.  One argument I have heard against self-reporting is that the SFO does not prosecute corporates, because it is said to be too difficult in our jurisdiction.  Certainly I am used to unfavourable comparisons being made of the SFO with US prosecutors in this area of activity.  The reason is simple: a US prosecutor uses the respondeat superior principle: a corporate is vicariously liable for the acts of its managers and employees.”

There is another simple reason for the disparity between U.S. and U.K. “prosecutions” for bribery and corruption offenses.  Simply put, the U.S. has the option of a non-prosecution or deferred prosecution agreement.  At present, the U.K. does not have these options, although it is close to utilizing DPAs.  As even the OECD has observed (see here) “it seems quite clear that [NPAs and DPAs] is one of the reasons for the impressive FCPA enforcement record in the U.S.”  I’ve long viewed the U.K.’s desire to use DPAs as a public relations tactic to catch up in the enforcement competition game (see here).

Back to Green’s statement.

“In English law, the test for corporate criminal liability requires proof that the “controlling mind” of the company (ie, board level senior management) was complicit in the relevant criminality. Absent emails, or a cooperating witness, that is never an easy thing to show.  An answer to this would be to extend the principle contained in S7 of the Bribery Act 2010, which creates the corporate offence of a company failing to prevent bribery by its employees, with a statutory defence of adequate procedures.  The reach of the section could easily be extended to cover not just bribery but acts of fraud by employees.

I have heard objections to such a change:-  (a)  That this would be punishing mere corporate negligence (to which I say, it would be about improving bad corporate culture).  (b) That prosecution of the corporate adds nothing to the prosecution of the guilty individuals (I am not proposing that a corporate should face prosecution in every case- far from it. But there will be cases where it is right and just that failure to prevent certain types of conduct should result in the corporate being marked with a criminal conviction).  (c)  That it would simply punish the shareholders (shareholders, particularly large institutional shareholders, should be vigilant about where they invest and how the corporate in which they invest behaves).

I would argue that prosecution of a corporate would be appropriate where, for example, the company profited from fraud by its employees; where a particular illegal practice was common and tolerated in a particular sector; where deterrence was needed in a sector; or where a company has brought in a compliance regime but senior management had failed to ensure enforcement of that regime.  Such a change would also cure a problem inherent in the DPA regime. If prosecution of a corporate is currently difficult, why should a corporate agree to enter a DPA at all?  DPA’s represent a very useful addition to the prosecutors’ toolbox for use in appropriate circumstances. They avoid the collateral damage caused by a full blown prosecution of a corporate. They are not a panacea. But the problem I have highlighted (which admittedly will not necessarily arise in every case) needs to be addressed. I think it comes to this: if the public interest demands more corporate prosecutions, then this change would help make that happen.”

In a separate speech before the World Bribery and Corruption Compliance Forum in London, Alun Milford (General Counsel of the SFO) touched upon many of the same issues Green discussed.

Among other things, Milford talked about the “Bribery Act industry” and I took note of Milford’s following statement given my often expressed view that an FCPA compliance defense can better incentivize corporate conduct and further advance the objectives of the FCPA.  Milford stated that “the Bribery Act [which contains an adequate procedures defense] has led to a significant amount of work in developing stronger, more ethical corporate cultures.”

Former News Corp. Exec Trials

In July 2011, worldwide media attention was focused on News Corp (see here).

The conduct at issue had many prongs, including various privacy issues.  One prong concerned allegations that News Corp’s News of the World publication paid up to five U.K. police officers to obtain information that better allowed it to write juicy stories.  Thus began News Corp.’s FCPA-like scrutiny and since then the original point of inquiry has – as is typical – expanded to include other conduct.

As to the alleged U.K. payments at issue, focus turned to the old “who knew what and when did they know it” question.  Several individuals associated with News of the World were criminally charged, including for conduct implicating the alleged bribery prong of News Corp’s scrutiny.

Two individual charged were Rebekah Brooks, the former editor of News of the World and Andy Coulson, another former News of the World editor.  The criminal trial of these individuals, along with others, began this week in London.

What happens in these trials concerning the bribery offenses will not determine the outcome of any potential News Corp. FCPA enforcement action.  But you can bet that the DOJ and SEC will be interested in the ultimate outcome.  In short, if there is a judicial finding that Brooks and/or Coulson or other high-level executives in London authorized or otherwise knew of the alleged improper payments, this will likely be a factor in how the DOJ and SEC ultimately resolve any potential enforcement action and how News Corp.’s overall culpability score may be calculated under the advisory Sentencing Guidelines.

For more on the trials and individuals involved see here, here, here and here.

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