Category: SEC

A Focus On SEC FCPA Individual Actions

Posts earlier this week (here and here) highlighted various facts and figures from 2013 and historically concerning DOJ FCPA individual prosecutions.  This post focuses on SEC FCPA individual actions in 2013 and historically.

SEC Enforcement Of The FCPA – Year In Review

Foreign Corrupt Practices Act enforcement, it is not just about the DOJ.  Granted, as a civil enforcement agency its sticks are less sharp than the DOJ’s, but the SEC also claims a significant piece of the FCPA enforcement pie (query whether it should – but that is a subject for another day – for instance as discussed in “The Story of the Foreign Corrupt Practices Act” the SEC wanted no part in enforcing the FCPA’s anti-bribery provisions).

Today’s post is a year in review of SEC FCPA Enforcement.  (See here for a similar post for 2012; here for a similar post for 2011; and here for a similar post for 2010).  Stay tuned for a similar post on DOJ FCPA enforcement in 2013.

Settlement Amounts

In 2013, the SEC collected approximately $300 million in 8 corporate FCPA enforcement actions.

By comparison, in 2012 the SEC collected approximately $118 million in 8 corporate FCPA enforcement actions.  In 2011 the SEC collected approximately $148 million in 13 corporate FCPA enforcement actions.  In 2010, the SEC collected approximately $530 million in 19 corporate FCPA enforcement actions.

The range of SEC FCPA enforcement actions in 2013 was, on the high end, $153 million in the Total enforcement action, and on the low end, $735,000 in the Ralph Lauren enforcement action.  Of the $300 million the SEC collected in 2013 corporate FCPA enforcement actions, approximately $219 million (73%) were in two enforcement actions (Total – $153 million and Weatherford – $66 million).

Two corporate FCPA enforcement actions from 2013 were SEC only (Philips Electronics and Stryker).

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.  The settlement amounts in these actions comprised approximately 57% of the SEC’s $300 million collected in 2013 corporate FCPA enforcement actions.

In 2013, the SEC collected approximately $208 million in disgorgement and prejudgment interest in enforcement actions that did not charge anti-bribery violations (either administrative actions that did not charge any FCPA violations or settled civil complaints that did not charge anti-bribery violations).  In other words, approximately 69% of the $300 million the SEC collected in 2013 FCPA enforcement actions was no-charged bribery disgorgement.  This is noteworthy because many question, and rightfully so, whether disgorgement is an appropriate remedy in cases that do not charge FCPA anti-bribery violations.  See here for a prior post on so-called “no-charged bribery disgorgement” cases.  In 2012, the SEC collected approximately $57.4 million in disgorgement and prejudgment interest in no-charged bribery disgorgement cases.  In 2011 the SEC collected approximately $51 million in disgorgement and prejudgment interest in n0-charged bribery disgorgement cases.

The $300 million the SEC collected in 2013 FCPA enforcement actions breaks down as follows:

$3.5 million in a civil penalty (Stryker);

$1.9 million in a civil penalty for lack of cooperation (Weatherford); and

$294.6 million in disgorgement and prejudgment interest.

Thus, 98% of SEC FCPA settlement amounts in 2013 consisted of disgorgement and prejudgment interest.  By way of comparison, in 2012 86% of SEC FCPA settlement amounts consisted of disgorgement and prejudgment interest.  In 2011, disgorgement and prejudgment interest comprised 94% of SEC FCPA enforcement settlement amounts.  In 2010, disgorgement and prejudgment interest comprised 96% of SEC FCPA enforcement settlement amounts.

If one tries to analyze why some SEC FCPA enforcement actions in 2013 included a civil penalty, disgorgement and prejudgment interest (Stryker), whereas other enforcement actions included only disgorgement and prejudgment interest (Philips Electronics, Parker Drilling, Ralph Lauren, Diebold, Weatherford, and ADM), whereas other enforcement actions included only disgorgement (Total), good luck and please enlighten us all with your insight.

Corporate vs. Individual Actions

Of the 8 SEC corporate FCPA enforcement actions from 2013, 0 (0%) have involved, at present, related SEC charges against company employees.  In 2012, 0 of the 8 corporate (0%) FCPA actions involved related SEC charges against company employees.  In 2011, 2 of the 13 (15%) corporate SEC FCPA enforcement actions involved related SEC charges against company employees.  In 2010, 3 of the 19 (15%) corporate SEC FCPA enforcement actions involved related SEC charges against company employees.

In 2013, the SEC did not otherwise charge any individuals with FCPA offenses.  (See here for a prior post titled “What is an FCPA Enforcement Action”).

Voluntary Disclosures

Of the 8 corporate SEC FCPA enforcement actions in 2013, 3 enforcement actions (38%) (Ralph Lauren, Diebold, and ADM) were the result of corporate voluntary disclosures.  3 enforcement actions (38%) (Parker Drilling, Total and Stryker) appear to have been based on corporate disclosures following an industry sweep.  1 enforcement action (Philips Electronics) was based on a previous foreign law enforcement investigation, and 1 enforcement action (Weatherford) was based on the Iraqi Oil for Food program.

This remainder of this post provides an overview of corporate SEC FCPA enforcement in 2013.

ADM (Dec. 20th)

See here for the prior post.

Charges:  Settled civil complaint charging violations of the FCPA’s books and records and internal controls provisions

Settlement:  $36.5 million (disgorgement of $33.4 million plus prejudgment interest of $3.1 million)

Disclosure: Voluntary disclosure

Individuals Charged: No

Related DOJ Enforcement Action:  Yes

Weatherford International (Nov. 26th)

See here for the prior post.

Charges:  Settled civil complaint charging violations of the FCPA’s anti-bribery provisions, books and records provisions, and internal controls provisions.

Settlement:  Approximately $65.6 million (approximately $63.7 million in disgorgement and a $1.9 million civil penalty for lack of cooperation early in the investigation.

Disclosure:  The enforcement action was the result of the DOJ and SEC’s investigation of the company in connection with the Iraq oil-for-food program

Individuals Charged:  No

Related DOJ Enforcement Action:  Yes

Stryker (Oct. 24)

See here for the prior post.

Charges:  None.  Administrative cease and desist order finding violations of the FCPA’s books and records and internal control provisions.

Settlement: $13.2 million (disgorgement of $7.5 million, prejudgment interest of $2.3 million, and a civil penalty of  $3.5 million)

Disclosure:  According to the company’s disclosure – “in October 2007, the Company disclosed that the SEC has made an informal inquiry of the Company regarding possible violations of the Foreign Corrupt Practices Act in connection with the sale of medical devices in certain foreign countries.”

Individuals Charged:  No

Related DOJ Enforcement Action:  No

Diebold  (Oct. 22nd)

See here for the prior post.

Charges:  Settled civil complaint charging violations of the FCPA’s anti-bribery provisions and books and records and  internal controls provisions.

Settlement:  $22.9 million in disgorgement and prejudgment interest

Disclosure:  Voluntary disclosure

Individuals Charged:  No

Related DOJ Enforcement Action:  Yes

Total (May 29th)

See here for the prior post.

Charges:   None.  Administrative cease and desist order finding violations of the FCPA’s anti-bribery provisions and books and records and internal control provisions.

Settlement:  Approximately $153 million in disgorgement.

Disclosure:   The company disclosed as follows.  “In 2003, the SEC followed by the DOJ issued a formal order directing an investigation in connection with the pursuit of business in Iran by certain oil companies, including among others, Total.”

Individuals Charged:  No.

Related DOJ Enforcement Action:  Yes.

Ralph Lauren (April 22nd)

See here for the prior post.

Charges:  None.  Non-prosecution agreement.

Settlement:  Approximately $735,000 ($593,000 in disgorgement and $141,845 in prejudgment interest).

Disclosure:  Voluntary disclosure.

Individuals Charged:  No.

Related DOJ Enforcement Action:  Yes.

Parker Drilling (April 16th)

See here for the prior post.

Charges:  Settled civil complaint charging violations of the FCPA’s anti-bribery provisions, and books and records and internal controls provisions.

Settlement:  Approximately $4 million ($3.05 million in disgorgement and approximately $1.04 million in prejudgment interest)

Disclosure: Industry sweep connected to Panalpina enforcement action

Individuals Charged:  No

Related DOJ Enforcement Action:  Yes

Philips Electronics (April 5th)

See here for the prior post.

Charges:  None. Administrative cease and desist order finding violations of the FCPA’s books and records and internal control provisions.

Settlement:  Approximately $4.5 million (approximately $3.1 million in disgorgement and approximately $1.4 million in prejudgment interest)

Disclosure: Polish law enforcement investigation prompted the company to conduct an internal investigation which it then disclosed to DOJ and SEC.

Individuals Charged:  No.

Related DOJ Enforcement Action:  No.

Friday Roundup

Scrutiny alerts and updates, sunshine, year in review roundups, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts and Updates

H-P

The company has been under FCPA scrutiny since at least 2010 and recently disclosed, in pertinent part, as follows.

“The U.S. Department of Justice and the SEC have been conducting an investigation into the Russia GPO deal and potential violations of the Foreign Corrupt Practices Act (“FCPA”). These U.S. enforcement agencies, as well as the Polish Central Anti-Corruption Bureau, are also conducting investigations into potential FCPA violations by an employee of Hewlett-Packard Polska Sp. z o.o., an indirect subsidiary of HP, in connection with certain public-sector transactions in Poland. In addition, the same U.S. enforcement agencies are conducting investigations into certain other public-sector transactions in Russia, Poland, the Commonwealth of Independent States, and Mexico, among other countries.  HP is cooperating with these investigating agencies. In addition, HP is in advanced discussions with the U.S. enforcement agencies to resolve their investigations.”

JPMorgan

The New York Times returned – yet again (see here and here for prior NY Times article) – to JPMorgan’s hiring practices in China.  The article states:

“For Wall Street banks enduring slowdowns in the wake of the financial crisis, China was the last great gold rush. As its economy boomed, China’s state-owned enterprises were using banks to raise billions of dollars in stock and debt offerings — yet JPMorgan was falling further behind in capturing that business.  The solution, the executives decided over email, was to embrace the strategy that seemed to work so well for rivals: hire the children of China’s ruling elite.

[…]

In the months and years that followed, emails and other confidential documents show, JPMorgan escalated what it called its “Sons and Daughters” hiring program, adding scores of well-connected employees and tracking how those hires translated into business deals with the Chinese government. The previously unreported emails and documents — copies of which were reviewed by The New York Times — offer a view into JPMorgan’s motivations for ramping up the hiring program, suggesting that competitive pressures drove many of the bank’s decisions that are now under federal investigation.

The references to other banks in the emails also paint for the first time a broad picture of questionable hiring practices by other Wall Street banks doing business in China — some of them hiring the same employees with family connections. Since opening a bribery investigation into JPMorgan this spring, the authorities have expanded the inquiry to include hiring at other big banks. Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs and Morgan Stanley have previously been identified as coming under scrutiny. A sixth bank, UBS, is also facing scrutiny, according to interviews with current and former Wall Street employees.

[…]

The investigation has also had a chilling effect on JPMorgan’s deal-making in China, interviews show. The bank, seeking to build good will with federal authorities, has considered forgoing certain deals in China and abandoned one assignment altogether.”

Once again, the latest NY Times article sparked much commentary.  See here, here and here.

Former Siemens Executives

The Buenos Aires Herald reports:

“Seventeen people, including former managers of the Siemens company, were … accused of paying off officials in order to help win a contract to produce the national identity cards …”.  The decision was made by Federal Judge Ariel Lijo, who decided to indict them for having allegedly committed bribery.”

Regarding the defendants, the article states:

“Twelve people working for Siemens were included in the indictment: Uriel Jonathan Sharef, Ulrich Albert Otto Fritz Bock, Eberhard George Reichert, Luis Rodolfo Schirado, Andrés Ricardo Truppel, Ernst Michael Brechtel, Bernd Regendatz, Ralph Matthias Kleinhempel and José Alberto Ares. Sharef, for instance, was a member of Siemens’ managing board. He also was the first former board member of a Fortune Global 50 company to be indicted under the US Foreign Corrupt Practices Act, as happened in 2011.  Judge Lijo also charged Carlos Francisco Soriano, Miguel Ángel Czysch and José Antonio David as “middlemen” between the company and Menem’s administration to arrange the payment for benefitting the company in the bid. The magistrate also accused Antonio Justo Solsona, Guillermo Andrés Romero, Orlando Salvestrini, Luis Guillermo Cudmani and Federico Rossi Beguy, who allegedly worked for the company competing in the bid against Siemens IT Services and who presumably agreed not to challenge the government’s decision.”

Allegations regarding the Argentine identity card project were included in the 2008 FCPA enforcement action against Siemens (see here) and also served as the basis for 2011 criminal and civil charges against several former Siemens executives, including those recently charged in Argentina (see here for the prior post summarizing the action).

As noted in this previous post, the U.S. charges against the former Siemens executives were brought after the DOJ faced scrutiny (including at the Senate’s 2010 FCPA hearing) for not bringing any individual enforcement action in connection with a bribery scheme “unprecedented in scale and geographic reach” in which there existed at Siemens a “corporate culture in which bribery was tolerated and even rewarded at the highest levels of the company.”

The U.S. criminal charges against former Siemens executives sits on the docket and a recent docket search indicates that there has not been any activity in the case in over two years.

Sunshine

Mark Cuban, who recently prevailed against the SEC in a long-running insider trading enforcement action, says in this Wall Street Journal article that he is “now considering a new venture publicizing SEC transcripts.”  Says Cuban, “I’m going to get as many as I can, and I’ll put it out there.” “Sunshine is the best disinfectant.”

The article further states:

“Mr. Cuban says he isn’t against the SEC as a whole but thinks that the lawyers who work there should be held responsible for their actions. “There’s such a revolving door, and it was run by attorneys with an attorney’s mind-set looking for their next job,” he says. “It’s a résumé builder.” Mr. Cuban says individual lawyers aren’t held accountable because the public is familiar only with the name of the SEC’s chair, Mary Jo White.  “No wonder they say or do whatever they damn well please,” he says. “I’m like, ‘OK, I’m going to start calling them out by name.’  George Canellos, co-director of the SEC’s enforcement division, sent a response to Mr. Cuban’s statements through an SEC spokesperson: “Mr. Cuban’s comments are without merit and uncalled for. Our lawyers acted in the finest traditions of government counsel and entirely appropriately in strongly advocating the position of the government in this matter.”

On a related note, did you know that the FCPA Professor Scribd page contains approximately 250 hard to find FCPA documents, pleadings, briefs, etc.

Year In Review Roundups

From the Wall Street Journal Risk & Compliance Journal page – a “Q&A with Asheesh Goel, Ropes & Gray, on The Year in FCPA“

From Trace Blog – “FCPA Corporate Settlements by the Numbers“

From Michael Volkov (Corruption, Crime & Compliance) – “The FCPA Person of the Year – The Prosecutor” and “FCPA Predictions for the New Year – 2014“

From Thomas Fox (FCPA Compliance and Ethics Blog) – “My Favorite Blog Posts from 2013“

Reading Stack

Thomas Fox (FCPA Compliance and Ethics Blog) and Jon Rydberg (Orchid Advisor) are out with a new book here titled “Anti-Bribery Leadership: Practical FCPA and U.K Bribery Act Compliance Concepts for the Corporate Board Member, C-Suite Executive and General Counsel.”

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A good weekend to all.

SEC Official – “FCPA Law .. Is Not Well Developed”

“FCPA law …  is not well developed.”

It’s an obvious statement that is known and understood by many.

Yet what makes the statement noteworthy is that it was recently made by Andrew Ceresney (Co-Director of the SEC’s Division of Enforcement).

It is thus arguably the most notable – and candid – statement by an FCPA enforcement official in recent years.

This prior post highlighted the recent comments of Deputy Attorney General James Cole before an FCPA audience.  This post contains excerpts of Ceresney’s speech at the same event and also provides certain commentary.

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As to the FCPA being a “fundamental part of the SEC’s mission,” Ceresney stated:

“[T]he SEC’s work in the FCPA arena over the last 35 years has been a fundamental part of the SEC’s mission. And the last 10 years have seen an even bigger increase in FCPA enforcement actions. As most of you know, three years ago, we formed a specialized Unit within the Division of Enforcement devoted to investigating potential FCPA violations. Our FCPA Unit has approximately three dozen dedicated attorneys and other professionals nationwide, including two industry experts who are forensic accountants with extensive private sector FCPA experience. Their work in marshaling expertise and developing cases has been remarkable — they and the other specialized units we created have fulfilled the promise of creating true centers of excellence within the Division that serve as resources to everyone within the Division. I always like to say that the purpose of specialized units was to expand the pie of cases in the Division, rather than just eating from the existing pie, and the FCPA unit has certainly done that.”

As to the FCPA not being a fundamental part of the SEC’s mission, see here.  As Philip Urofosky (former DOJ Assistant Chief of the Fraud Section) stated in this article, “the SEC should get out of the anti-bribery business.”  Indeed, I would call this “granting the wish” because, as noted in my article “The Story of the Foreign Corrupt Practices Act,” the SEC never wanted any part in enforcing the FCPA’s anti-bribery provisions.

As to the global fight against corruption, Ceresney stated:

“The last 10 years also have yielded a sea change in attitudes towards foreign bribery. The groundbreaking cases that we have brought have sent an unmistakable message that most companies have heard loud and clear — obey the FCPA, and ensure that your employees are sensitive to FCPA issues, or face stiff penalties and other consequences.  But despite the hard work of the SEC and our sister agencies, far too many companies and individuals still believe that paying a bribe is the best way to win business. And there are still countries where bribes are viewed as a necessary evil. In fact, when I was in private practice, I often was told by business people that bribery was simply a fact of life in certain countries; it was simply accepted as a given. So there is still work to be done to fight corruption globally and there are still messages to be sent.”

As to how the SEC has contributed to a “culture of compliance,” Ceresney stated:

“The extent of the impact that we have had on the culture of FCPA compliance over the last 10 years cannot be overstated. I did a fair amount of FCPA work at Debevoise. Ten years ago, when I first went into private practice, the FCPA was an area in which few lawyers specialized; it certainly was not viewed as a practice area that could employ numerous lawyers. Companies did not have many compliance officers focused on the area; training of employees was minimal; the FCPA was rarely discussed during contract negotiations or focused on with agents or vendors; audits were not focused on FCPA compliance; and due diligence in connection with transactions rarely focused on FCPA issues. There was simply little recognition that such conduct needed attention.  Fast forward 10 years and there has been a sea change in focus on these issues. Most companies now have some form of an FCPA compliance program, often with professionals who spend a good chunk of their jobs focused on the FCPA. FCPA training is now a common requirement among multinational companies. Much time is now spent on ensuring that contracts have appropriate provisions on FCPA compliance. FCPA diligence is often done on agents and vendors in advance of retention, and many companies have sophisticated systems for assessing risk to determine the level of diligence that will be done. Issues relating to gifts and other events involving government officials are often escalated. I also have noticed a growing trend of companies hiring separate firms to do compliance due diligence in connection with transactions — a development that signals the importance placed on the FCPA, and the need for specialized counsel to focus on these issues.”

Would it not be sensible to more adequately reward these good faith commitments to FCPA compliance and allow good corporate citizens a better return on their compliance investments?  Yes it would, see here for my article “Revisiting an FCPA Compliance Defense.”

As to the difference between FCPA legal authority and non-legal sources of  FCPA information, Ceresney stated:

“[L]awyers now heavily scrutinize our FCPA actions to glean any information about our interpretation of the law. Each aspect of our actions is closely scrutinized to extract kernels of guidance and hopefully helps companies identify problems and comply in the future.”

[…]

In addition, this intense interest from companies and defense counsel about our FCPA efforts created a growing need to provide clear, meaningful guidance on how the government interprets and applies the FCPA — a need that culminated in the DOJ/SEC FCPA Resource Guide issued last year. As someone who was in the private sector at the time it was issued, I can attest firsthand that the Guide did a great job of providing a concrete sense of the government’s views. And building off of that success, it is important that we continue to find ways to educate and inform the industry about the limits of permissible conduct — whether it be through more guidance or through enforcement actions — because strong compliance programs that incorporate a company’s internal audit and financial controls at the outset enable companies to catch problems early and remediate quickly.”

[…]

“FCPA law … is not well developed.  Companies typically enter settlements in FCPA cases, leading to a paucity of case law.”

As to “international trends,” Ceresney stated:

“Another important trend in the last 10 years has been the immense growth in focus and legislation on corruption issues around the globe, and the tremendous increase in cooperation that we have received from other governments. Although the SEC and DOJ are at the forefront of this global fight against corruption, we cannot do it alone. There are capable and committed law enforcement partners worldwide, and their numbers are steadily growing. Over the past five years, we have experienced a transformation in our ability to get meaningful and timely assistance from our international partners. And through our collaborative efforts, the world is becoming a smaller place for corrupt actors.

[…]

As other countries begin to step up their efforts to combat corruption, it makes our job easier. Countries with strong anti-corruption laws are often great partners to us in combatting corruption. Scrutiny from the local government, in addition to us, will often be a strong deterrent to bribery. More and more, our investigations are conducted in parallel with a foreign government.

Obviously, evidence in many FCPA cases resides in foreign countries and in many instances, it is only with the assistance of local authorities that we are able to obtain evidence necessary for us to prove FCPA violations. We are having greater success working with the international community to receive documents and other types of foreign assistance.

[…]

[E]arlier this year, the SEC, in conjunction with the DOJ and FBI, hosted the first-ever Foreign Bribery and Corruption Training Conference for international law enforcement, which included representatives from over 50 law enforcement and regulatory agencies from 30 different countries. The Conference strengthened relationships among regulators and informed international officials about the latest developments in investigative techniques and multilateral requests for assistance. The more we can foster this sort of international cooperation, the more we can be successful in prosecuting FCPA cases.

I am encouraged by such close collaboration and fully expect the pace and extent of our cooperation with foreign agencies to grow over the coming years. Indeed, only recently, I have been involved in a case in which we are receiving cooperation from a country that has never before provided any meaningful assistance. This sort of progress gives me confidence that the future is even brighter.”

As to the “focus on individuals,” Ceresney stated:

“Another area of focus, and recent progress, has been our efforts to bring FCPA cases against individuals. To better root out corruption, we have ramped up our pursuit not just of companies, but of the individuals responsible for the corporate malfeasance.

A core principle of any strong enforcement program is to pursue culpable individuals wherever possible. After all, companies can only act through their people. Cases against individuals have great deterrent value, as they drive home to individuals the real consequences to them personally that their acts can have. In every case against a company, we ask ourselves whether an action against an individual is appropriate.

FCPA cases against individuals pose unique challenges. For example, we sometimes are unable to reach defendants who are in foreign jurisdictions, and the remedies we can obtain against such individuals are often quite limited, particularly when we cannot enforce judgments in those jurisdictions. Also, even when we can reach defendants, we often have difficulties obtaining foreign evidence and gaining access to overseas witnesses, particularly under circumstances that would allow us to use their testimony at trial. The length of time it takes to investigate these cases, particularly given the frequent need to collect foreign evidence, sometimes presents a statute of limitations issue. These are challenging cases, particularly in proving the culpability of individuals we can reach.

But we are overcoming these challenges through a variety of steps, including expanding the availability and use of Memoranda of Understanding with international financial regulators to obtain bank records, other documents, and testimony; using border watches and other methods of obtaining information from foreign nationals; subpoenaing U.S.-based affiliates of foreign companies; and more aggressively seeking videotaped depositions that we can use at trial if we cannot secure live testimony.

We have been successful in recent years in increasing the number of FCPA actions against individuals. Many of you are familiar with our pending litigation against various executives of Magyar Telekom, Siemens, and Noble. Litigation is ongoing against individuals in all three matters, and these cases have sent an unambiguous message that we will vigorously pursue cases to hold individual accountable for FCPA violations — including executives at the highest rungs of the corporate ladder. In fact, this April, we obtained the second highest penalty ever assessed against an individual in an FCPA case, when one of the Siemens executives agreed to pay $275,000.

[…]

And so despite the investigative headwinds that we often face in FCPA matters, we intend to be more creative and aggressive in pursuing such actions against companies and individuals. I expect that in the coming months, we will be filing more actions against individuals in FCPA cases.”

Fact.

Between 2008 to 2012, 79% of corporate SEC FCPA enforcement actions have not (at least yet) resulted in any SEC charges against company employees.  Thus far in 2013 there have been 7 corporate SEC FCPA enforcement actions and none have resulted (at least yet) in any SEC charges against company employees.

As to Ceresney’s statement that “FCPA cases against individuals pose unique challenges,” this is true.  Individuals are more likely than issuers to put the SEC to its burden of proof in FCPA enforcement actions and this recent post highlighted the SEC’s track record in such instances.

As to the “importance of cooperation,” Ceresney stated:

“[W]e have been very successful in the FCPA arena in fostering self-reporting and cooperation by companies with our investigations. Institutions and individuals are uniquely positioned to help us and help themselves by aggressively policing their own conduct.

Since launching our Cooperation Program in 2010, the Commission has made it clear that it will reward companies or individuals who cooperate, despite the fact that a violation has occurred. But receiving credit requires timely self-reporting, candor, thoroughness, prompt remediation and a serious commitment to act lawfully in the future.

Some lawyers sometimes ask me what is the incentive to notify us promptly about wrongdoing that you uncover? The answer is simple — if we find the violations on our own, the consequences will surely be worse than if you had self-reported the conduct. Companies must keep in mind that the risk of not coming forward grows by the day as our whistleblower program continues to pick up steam. We are increasingly sourcing our own cases through whistleblower tips — which have come from individuals in nearly 70 different countries — and just last month, we made our largest-ever whistleblower award: over $14 million. Given the high-dollar value of FCPA monetary relief—often in the tens or hundreds of millions of dollars—we expect FCPA violations to become an increasingly fertile ground for Dodd-Frank whistleblowing. In fact, during the last fiscal year we received 149 whistleblower tips related to the FCPA. All of which reinforces the value of reporting misconduct directly to the SEC in the first instance, and then demonstrating extraordinary levels of cooperation thereafter.

We have a wide range of tools available to us to facilitate and reward meaningful cooperation — from reduced charges and penalties, to taking no action at all. We have tried through our actions to be clear about the benefits that companies obtain through cooperation. Two recent examples highlight the importance of and benefits from cooperation.

In April, we entered into a Non-Prosecution Agreement with Ralph Lauren Corporation arising out of FCPA violations — our first-ever NPA in an FCPA case under our Cooperation Program. In that case, Ralph Lauren’s Argentine subsidiary bribed officials to secure the importation of its products in Argentina. Ultimately, we decided an NPA was appropriate due to Ralph Lauren’s prompt reporting of violations on its own initiative; voluntary and expeditious production and translation of documents and production of witnesses; thorough and real-time cooperation with the investigation; and significant remedial measures.

But our cooperation program is not limited to corporations. Just last week, we entered into our first-ever deferred prosecution agreement with an individual. We decided a DPA was appropriate in the matter because the individual contacted government authorities about the misconduct, which involved a hedge fund manager misappropriating investor assets, and provided immediate and complete cooperation with the SEC during our investigation. As a result of the individual’s assistance, we were able to file an emergency action and freeze over $6 million in assets.

As these examples make clear, the benefits of responding appropriately to violations and cooperating fully with the SEC can be substantial. And it is incumbent on us to clearly, and loudly, communicate these rewards because cooperation helps us as well. It enhances our ability to detect misconduct and increases the efficiency and effectiveness of our investigations.

Ultimately, it is important to keep in mind that greater cooperation benefits all market participants. Faster detection helps us minimize investor harm in the short run, while the implementation of preventive measures from cooperation agreements improves the transparency and fluidity of our markets in the long run.”

In conclusion, Ceresney stated:

“[L]et me assure you that we will remain the vigilant cop on the beat when it comes to the FCPA. I am confident that we will remain aggressive and proactive in enforcing the FCPA. And through strong enforcement, we will continue to level the playing field for U.S. companies doing business abroad and hold corrupt actors accountable when they fail to play by the rules. We also recognize, however, that successful enforcement is assisted by cooperation from others.  Through rigorous compliance programs and internal controls, companies can identify and eliminate corruption before it takes root.  Through greater international collaboration and enforcement, we can gather evidence more easily and expand our reach.  And through greater cooperation from companies and individuals in our investigations, we can bring cases faster and ensure fair, transparent, and efficient markets. The U.S. has been a leader in the world’s anticorruption efforts since the passage of the FCPA and with your help we will continue to lead the charge.”

The Equity Facade Of SEC Disgorgement

A guest post today by Russ Ryan, a former Assistant Director of the SEC’s Division of Enforcement, who has spent the last ten years as a partner in the Washington, DC office of King & Spalding where he represents clients in FCPA and other SEC investigations.

*****

This post concerns my article “The Equity Facade of SEC Disgorgement” (a title I readily admit was inspired and partially borrowed from Professor Koehler’s article “The Facade of FCPA Enforcement“) recently published in the online edition of the Harvard Business Law Review.

As most FCPA practitioners know, it is now common for the SEC to demand disgorgement of tainted profits in FCPA enforcement actions (for instance, as noted in this FCPA Professor post, 86% of SEC FCPA settlement amounts in 2012 consisted of disgorgement and prejudgment interest).  In parallel SEC and DOJ resolutions involving issuer defendants, it is often the case that disgorgement is ordered in the civil SEC case while any fines and penalties are paid in the DOJ criminal case.  Of course, the SEC also seeks disgorgement in many kinds of other cases involving tainted profits, not just FCPA cases, and the prevailing truism is that this is a remedy in equity.  My article suggests this truism is actually a fallacy in many SEC cases, particularly those where the defendant does not, for whatever reason, still actually possess or control the tainted profits when the court orders them disgorged.

The issue is most likely to arise in cases against individuals rather than companies, but it could arise in either.  For instance, in the FCPA context, a potential scenario could include some or all of the following:  foreign subsidiary in X country realizes profits from a tainted transaction, parent sells the subsidiary to another company which temporarily benefits from the tainted contract(s), but the subsidiary is ultimately shut down because it eventually starts losing money overall, and whatever profits were once realized have long since been redeployed elsewhere within both the prior owner and current owner.

In the individual context, a common non-FCPA scenario is insider trading cases against “tippers” who are ordered to disgorge not only their own profits (if any) but also those of their direct and indirect tippees.  Another is the classic case of the defendant who quickly spends or squanders his ill-gotten gains from a violation before getting caught by the SEC.  In the FCPA context, for example, suppose an issuer’s agent makes a big payday from a transaction tainted by his own bribery, but then promptly squanders all his loot on an unrelated deal that fails miserably before the bribes are discovered and prosecuted.

In all these cases, the named defendant holds none of the tainted profits when the government comes along, and thus is hardly in a position to “disgorge” anything.  The SEC and the courts typically ignore this fact and order disgorgement anyway, but that renders the whole notion of disgorgement a misnomer, and in any event the remedy is simply not a remedy in equity.  It is quintessentially a remedy at law – a personal obligation to pay a sum of money to a plaintiff based on a violation of law.

Anyone who doubts this should read Justice Scalia’s majority opinion in Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002), an ERISA case I confess I was not even aware of until a few years ago when first considering the issue that led to my article.  The Great-West case dealt with restitution, but clearly distinguished between restitution in equity (where the defendant actually still possesses the funds ordered returned to the plaintiff) and restitution at law (where, as in Great-West, the defendant no longer possesses the funds and the court is simply ordering the defendant to pay a sum of money as a substitute for the actual tainted profits).

So what’s the big deal?

Plenty.  The securities laws don’t authorize the SEC to seek, or courts to order, money damages or any other similar remedies at law, although of course the statutes do provide separately for punitive relief in the form of civil penalties.  The only two sources of legal authority for disgorgement are that (1) it is included among the ancillary equitable remedies inherently available to the court once its equitable powers are invoked by the SEC’s request for an injunction and (2) it is authorized by a provision in the Sarbanes-Oxley Act – codified at Exchange Act section 21(d)(5)  – saying the SEC can obtain any “equitable relief.”  In either case, however, so-called “disgorgement” is authorized only if it is truly a form of equitable relief rather than legal relief.  Removing the façade of equity from many SEC cases could also affect whether the putative disgorgement claim was subject to any statute of limitations or entitled the defendant to a jury trial (both of which protections are now typically denied to defendants facing SEC disgorgement claims).

If you are an SEC expert and thinking “but wait, can’t the SEC also order disgorgement in administrative proceedings without going to court at all?,” go to the head of the class.

You’re right, the SEC can indeed do so, because Congress has said so in the parts of the securities laws dealing with administrative proceedings.  But think about it:  If Congress can bestow this power to order disgorgement upon an independent Executive Branch administrative agency acting in its law enforcement role, without the involvement of an Article III court, doesn’t that undermine – if not completely negate – any premise that the remedy is inherently an equitable one, i.e., something typically ordered by an Article III court exercising its core judicial powers in equity?

If you’re still reading at this point, I encourage you to check out my entire article and see what you think.