A SEC Blast From The Past
This recent post highlighted 1979 comments from the DOJ’s Assistant Attorney General regarding the DOJ’s FCPA enforcement priorities. Today’s post is an SEC blast from the past.
The year was also 1979 and Wallace Timmeny (SEC Deputy Director, Division of Enforcement) authored an article titled “SEC Enforcement of the Foreign Corrupt Practices Act” in the Loyola of Los Angeles International and Comparative Law Review. The purpose of the article was to “discuss legal issues arising from the enforcement” of the FCPA in actions brought by the SEC. The article is an informative read as to the SEC’s early FCPA enforcement actions.
The article is also an interesting reading concerning the author’s description of “vicarious liability under the FCPA” and it states, in pertinent part, as follows.
“The liability of issuers for the acts or failures of foreign or domestic subsidiaries is not clearly specified in section 30A and section 13(b). Section 30A covers the conduct of registered and reporting companies and the conduct of any officer, director, employee, or agent of any such company or any stockholder of such company acting on behalf of the company. Thus, by its terms, section 30A does not refer to subsidiaries whose securities are not registered or which are not required to file reports pursuant to section 15(d). The legislative history of section 30A indicates that the section was not intended to cover the activities of foreign subsidiaries where there was no jurisdictional nexus with the United States and where the issuer of a reporting company had no knowledge of the payment.”
The article concludes as follows.
“As a nation we understand the implications of corrupt practices. Improper or questionable payments undermine our foreign policy and, in fact, place control of foreign policy in the hands of private individuals or companies who do not respond to the electorate. Corrupt practices can topple friendly governments, increase hostility to the United States, and provide ammunition to those who would topple our own system. Shoddy accounting practices foster those problems and result in significant detriment to individual investors, and to the marketplace in general, by undermining investor confidence. The problems leading to the passage of the FCPA have been more than sufficiently illumined in legislative history and in enforcement actions brought by government agencies. Against this background, it is unlikely that the courts will interpret the FCPA narrowly.”
Like the recent post regarding the DOJ blast from the past, Timmeny’s article also recognizes that the primary motivation of Congress in passing the FCPA was foreign policy related. (For more see my article “The Story of the Foreign Corrupt Practices Act“). In this prior post, also regarding the 1979 speech by the DOJ official, I asked as follows.
“Most enforcement actions in this new era involve alleged payments to state-owned or state-controlled enterprises with many attributes of private commercial enterprises, employees of various foreign health care systems such as physicians, or actions based on payments to ministerial or clerical officials concerning mundane foreign licenses, permits or customs issues. Can it truly be said that these enforcement actions concern payments that could lead to the downfall of foreign governments or payments that have significant foreign policy and national security implications?”
Timmeny’s article also predicted that it was “unlikely that the courts will interpret the FCPA narrowly.”
It is believed that the SEC has been put to its ultimate burden of proof in a core FCPA case only four times.
The SEC lost two cases. In SEC v. Eric Mattson and James Harris the court granted the defendants’ motion to dismiss and rejected the SEC “obtain or retain business” enforcement theory. In SEC v. Herbert Steffen, the court granted the defendants’ motion to dismiss and rejected the SEC’s jurisdictional theories.
Two cases remain pending. In SEC v Elek Straub et al. defendants’ pre-trial motion to dismiss was denied. In SEC v. Mark Jackson and James Ruehlen, the court granted defendants’ motion to dismiss the SEC’s claims that sought monetary damages while denying the motion to dismiss as to claims seeking injunctive relief. The dismissal was without prejudice and the SEC has filed amended complaints that have significantly narrowed the case.
A Proper Perspective On FCPA Disclosures
Intelligize, Inc., a corporate compliance resource provider, recently released a report titled “Managing Risk Better in 2013.” The report tracks public company disclosures filed with SEC between January and June of 2013 and compares such disclosures to those filed in the second half of 2012.
Under the heading “Foreign Corrupt Practices Act,” the report states as follows.
“A continuing concern to corporations is the extent to which they discover possible FCPA violations and the timing and extent of their disclosure of FCPA violations in their SEC filings. According to Intelligize’s analysis there have been over 2,000 references to the FCPA in companies’ SEC filings in the past six months. This represents a 33% increased compared to FCPA references in the previous six-month period.”
An eye-popping number right?
Not really, it is important to understand what these FCPA references represent and what they do not represent. The vast, vast majority of these disclosures do not represent disclosure of FCPA inquiries, investigations or scrutiny. Rather, FCPA risk has come to be included in the generic risks companies disclosure to investors pursuant to Item 1A (Risk Factors) required in most SEC filings.
Consider the recent SEC filing of pharmaceutical company Actavis Inc. as a random, yet representative, example. Under Item 1A, the company disclosed approximately 45 risk factors (such as the loss of key personnel could cause the business to suffer, global economic conditions could harm the business, and currency fluctuations could negatively impact the company).
One of the risk factors disclosed under the heading “our global operations expose us to risks and challenges associated with conducting business internationally” stated as follows.
“We operate on a global basis with offices or activities in Europe, Iceland, Africa, Asia, South America, Australasia and North America. We face several risks inherent in conducting business internationally, including compliance with international and U.S. laws and regulations that apply to our international operations. These laws and regulations include data privacy requirements, labor relations laws, tax laws, anti-competition regulations, import and trade restrictions, export requirements, U.S. laws such as the Foreign Corrupt Practices Act, and other U.S. federal laws and regulations established by the office of Foreign Asset Control, local laws such as the UK Bribery Act 2010 or other local laws which prohibit corrupt payments to governmental officials or certain payments or remunerations to customers. Given the high level of complexity of these laws, however, there is a risk that some provisions may be inadvertently breached by us, for example through fraudulent or negligent behavior of individual employees, our failure to comply with certain formal documentation requirements, or otherwise. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of compliance programs, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Our success depends, in part, on our ability to anticipate these risks and manage these challenges. These factors or any combination of these factors may adversely affect our revenue or our overall financial performance. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Our success depends, in part, on our ability to anticipate these risks and manage these difficulties.”
Friday Roundup
SEC tweaks its neither admit nor deny settlement policy, Tyco settlement approved, scrutiny alert, and for the reading stack. It’s all here in the Friday roundup.
SEC Tweaks Neither Admit Nor Deny Settlement Policy
Numerous prior posts have focused on the SEC’s controversial neither admit nor deny settlement policy. (See here for the subject matter tag).
Earlier this week, SEC Chairman Mary Jo White announced that the SEC would no longer maintain a blanket policy permitting defendants to settle SEC cases without admitting to wrongdoing. (See here for Alison Frankel’s excellent write-up at Thomson Reuters News & Insight). Frankel cites to an internal SEC email from Enforcement Division co-directors Andrew Ceresney and George Canellos as follows.
“While the no admit/deny language is a powerful tool, there may be situations where we determine that a different approach is appropriate. In particular, there may be certain cases where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate, even if it does not allow us to achieve a prompt resolution. We have been in discussions with Chair White and each of the other commissioners about the types of cases where requiring admissions could be in the public interest. These may include misconduct that harmed large numbers of investors or placed investors or the market at risk of potentially serious harm; where admissions might safeguard against risks posed by the defendant to the investing public, particularly when the defendant engaged in egregious intentional misconduct; or when the defendant engaged in unlawful obstruction of the commission’s investigative processes. In such cases, should we determine that admissions or other acknowledgement of misconduct are critical, we would require such admissions or acknowledgement, or, if the defendants refuse, litigate the case.”
Last month at a Corporate Crime Reporter sponsored conference Ceresney defended the neither admit nor deny settlement policy – see here.
Judge Leon Signs Off On Tyco Settlement
This previous post highlighted how Judge Richard Leon had been refusing to sign off on SEC FCPA settlements involving IBM and Tyco International. The common thread between the two enforcement actions would seem to be that both companies are repeat FCPA offenders. In 2000 IBM agreed to a permanent injunction prohibiting future FCPA violations and in 2006 Tyco agreed to a permanent injunction prohibiting future FCPA violations.
Earlier this week, Judge Leon approved a final judgment in the Tyco enforcement action that was filed in September 2012 (see here for the prior post). The final judgement contains the following paragraph.
“[For a two year period Tyco is required to submit annual reports] to the Commission and this Court describing its efforts to comply with the Foreign Corrupt Practices Act (“FCPA”), and to report to the Commission and this Court immediately upon learning it is reasonably likely that Defendant has violated the FCP A in connection with either improper payments to foreign officials to obtain or retain business or fraudulent books and records entries …””
Final judgment in the IBM enforcement action from March 2011 (see here for the prior post) remains pending.
Scrutiny Alert
The Economic Times of India reports (here) that “five top executives at the Indian unit” of Bunge (a U.S. agribusiness and food company) “have resigned amid an internal audit into possible financial irregularities.” According to the report, Bunge (the parent company) “had objected to the manner in which its Indian subsidiary paid for the factory land in Kandla. Bunge was of the view that the transaction may not be compliant” with the FCPA.
Reading Stack
A profile (here) of “Calgary’s Top Corporate Corruption Lawyer” as well as background information on Canada’s Corruption of Foreign Public Officials Act.
As noted in this Bulletin from Blake, Cassels & Graydon, earlier this week “the amendments to the Corruption of Foreign Public Officials Act received royal assent following passage by the Parliament of Canada on Tuesday, June 18, 2013.” (See this prior post highlighting various issues raised during debate of the amendments).
*****
A good weekend to all.
Friday Roundup
Survey says, an editorial, I’ll second that, and spot-on. It’s all here in the Friday roundup.
Survey Says
The recently issued Kroll / Compliance Week Anti-Bribery and Corruption Benchmarking Report was based on responses from “nearly 300 executives” and “participants hailed from all manner of industry.”
Survey findings of note.
“Was the FCPA Guidance any help? Nearly 53 percent rated the guidance as “a good read, but it didn’t tell me anything new.” Another 23.5 percent deemed it very helpful, 18.8 percent didn’t know, and 4.6 percent said the guidance actually left them more confused.”
Regarding third parties:
- “The average respondent reports that his/her company conducts business with more than 3,500 third parties”
- “Most companies (79 percent) will drop a potential third party even upon rumor of bribery without any hard proof”
- “47 percent of all respondents said they conduct no anti-corruption training with their third parties at all”
Financial Times Editorial on Bribery Act
I was pleased to speak to the Financial Times in connection with its recent Bribery Act editorial. It stated in full as follows.
Government Needs to Clarify Application of Bribery Act
Britain was once considered a laggard in the international battle against corruption. The Bribery Act, which came into force in 2011, was the first overhaul of anti-corruption laws in almost a century. Two years on, the government wants to review it. This is sensible, as new legislation can have unintended consequences. But any review should not result in a weaker law. That would only allow greater scope for graft.
The government is responding to complaints from small and medium-sized businesses that the costs of compliance are too high. In particular, they are worried about the ban on facilitation payments, small amounts paid to officials to expedite services such as visas or customs checks. Businesses argue that Britain holds its companies to a higher standard than other countries – particularly the US, where such payments are not banned. They say this puts them at a disadvantage.
These concerns are understandable, but exaggerated. Facilitation payments have always been illegal in the UK. Yet conflicting signals from the authorities have sown confusion. Moreover, the absence of case law leaves companies in the dark as to how the law will be applied and what defence is valid. This has created a climate in which companies easily fall prey to firms peddling overly-prescriptive and costly advice on compliance.
More can and should be done to clarify the circumstances under which a company will be pursued. This will help to counter the scaremongering that has led some businesses to pass up export opportunities. To be fair, the guidelines already allow some flexibility for smaller businesses. They are not expected to use the same procedures as big multinationals. When choosing an agent to open a new market, for example, it might be sufficient to verify business references, conduct an internet search and refer to the local chamber of commerce or UK embassy, as long as the anti-corruption policy is widely enough disseminated. The government’s duty is to ensure resources are sufficient to meet such requests.
Authorities must also be consistent. Businesses will not respond to demands that breaches be reported if they fear they will be prosecuted for any and all transgressions.
British companies have other competitive advantages to win business with than bribery. Graft is an evil that blights developing economies and the companies which resort to it. The Bribery Act does not need changing. It just needs supporting.
I’ll Second That
Earlier this week in a Wall Street Journal editorial titled “Mum’s the Word About SEC Defeats” Russ Ryan (Partner, King & Spalding and former Assistant Director of the SEC Enforcement Division) stated as follows. “Like other federal agencies, the SEC has long been good at publicizing its initial accusations of wrongdoing – which is fair enough – but not so good at letting the public know when those accusations turn out to be unfounded or an overreach.” As Ryan rightly noted, in this internet age, “SEC publicity is permanent and widely dispersed. The regulator’s accusations can persist indefinitely among the top search-engine results for the names of those accused.”
I’ll second that and have previousy written about the same dynamics Ryan highlights under the heading “Writer’s Cramp at the DOJ.” See prior posts here and here.
Spot On
Colleen Conry (Ropes Gray) stated as follows in a recent Law360 interview.
Q: What aspects of your practice area are in need of reform and why?
A: The government’s attempts to hold foreign companies accountable for having compliance programs that are on par with those we see at companies that are headquartered in the United States are challenging. Foreign companies often lack notice of that expectation and as a result suffer the consequences. Over time, I hope the government will at least consider as one factor the compliance standards that are the norm in the country in which the foreign entity operates.
*****
A good weekend to all.
Double-Dipping
In this 2011 letter from Senator Mike Crapo to then SEC Chairman Mary Schapiro, Crapo asked, among other FCPA questions “under what circumstances, if any, is it appropriate for both the SEC and the DOJ to seek the recovery of penalties from the same entity for the same conduct.”
As noted in this prior post, Chairman Schapiro responded as follows.
“The Commission and Department of Justice do not obtain duplicative penalties in FCPA cases. Typically, the Commission will obtain monetary sanctions in the form of disgorgement (ill-gotten gains) while the Department of Justice obtains monetary sanctions in the form of penalties. In those rare cases where both the Commission and the Department of Justice obtain penalties, the total penalty assessed against the company is no greater than it would be if either the Commission or DOJ alone obtained the penalty.”
Nice answer, but as I noted in the prior post, DOJ penalties are calculated by reference to the advisory U.S. Sentencing Guidelines where an important factor in determining the ultimate penalty amount is value of the benefit received by the company from the conduct at issue.
Among the FCPA reform proposals advanced by Philip Urofosky (former DOJ Assistant Chief of the Fraud Section) in this article is to “eliminate overlapping enforcement jurisdiction” – in other words Urofosky writes, “the SEC should get out of the anti-bribery business.”
He writes as follows.
“The SEC’s enforcement of the anti-bribery provisions raises a fundamental matter of fairness. Take two companies, one public and one private, and assume that both violate the FCPA and realize the same illicit gain from the violation. The private company will be subject only to DOJ’s jurisdiction and will therefore be exposed to a criminal fine of up to twice its gain. The public company, on the other hand, will be subject both to that criminal fine and to a civil fine and disgorgement of the illicit proceeds, thus potentially paying a third more in fines than the private company for the same conduct.”
Should the SEC be removed from enforcing the FCPA’s anti-bribery provisions, I’d call it “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. For additional support for this reform proposal, see Professor Barbara Black’s article (here) “The SEC and the Foreign Corrupt Practices Act: Fighting Global Corruption Is Not Part of the SEC’s Mission.”
Despite the SEC’s response that it does not double-dip in FCPA enforcement actions involving a DOJ component, like in many instances of enforcement agency rhetoric, the reality suggest something different.
Consider the recent Total enforcement action (see here for the prior post). At $398 million in total fine and penalty amounts, the action is the third largest in FCPA history. The action involved a DOJ component ($245.2 million) and a SEC component ($153 million).
It is clear from the enforcement agency documents that approximately $150 million represented a double-dip.
The DOJ DPA sets forth the Sentencing Guidelines calculation and notes that the base fine was $147 million “which corresponds to the value of the benefit received in return for the unlawful payments.” This base fine amount is the most significant factor determining the fine amount after the culpability score multiplier is added to it.
The SEC’s order states that Total’s improper payments “netted Total approximately $150 million in profits.” Based on this figure, the SEC ordered Total to pay $153 million in disgorgement and prejudgment interest.
In other words, Total repaid the approximate $150 million benefit it received from the alleged improper payments twice – first to the DOJ and then to the SEC.
This is called double-dipping.
And it is not unique to the Total enforcement action. Nearly every FCPA enforcement action that involves a DOJ and SEC component, in which the SEC seeks disgorgement, involves the same dynamic.