SEC “Obey-The-Law” Injunctions Held Invalid
A guest post today from Debevoise & Plimpton attorneys Paul Berger, Colby Smith, Jonathan Tuttle and Ada Fernandez Johnson.
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SEC “Obey-The-Law” Injunctions Held Invalid
A recent Eleventh Circuit Court of Appeals decision could significantly impact the Securities and Exchange Commission’s (“SEC”) ability to seek broad federal court injunction orders directing defendants to refrain from any future violations of securities laws, often referred to as “obey-the-law” injunctions. In SEC v. Goble, No. 11-12059, 2012 WL 1918819 (11th Cir. May 29, 2012), the Eleventh Circuit vacated the “obey-the-law” injunctions entered against defendant Richard Goble, the founder of North American Clearing, Inc. (“North American”), because the injunctions did not satisfy Federal Rule of Civil Procedure 65(d)(1), which requires that injunctions describe, “in reasonable detail . . . the act or acts [sought to be] restrained or required.” The Eleventh Circuit’s strongly worded opinion and careful analysis could prompt other courts to question the benefit and efficacy of the SEC’s frequent practice of seeking broad “obey-the-law” injunctions. Although the case did not arise in the context of the Foreign Corrupt Practices Act (“FCPA”), such injunctions are fairly typical in SEC actions involving the FCPA, where the agency regularly seeks to impose injunctions that permanently prohibit future violations of the anti-bribery and books and records and internal control provision of the FCPA. Whether or not the SEC will continue to push for broad FCPA “obey-the-law” injunctions, or perhaps employ other available tools in light of the recent Eleventh Circuit opinion, remains to be seen.
Factual Background and the Eleventh Circuit’s Opinion
The SEC brought a civil enforcement action against Goble and others in 2008 alleging that Goble, the founder and owner of North American, had orchestrated a scheme to manipulate the amount of money required to be set aside in North American’s reserve account to protect the assets of its customers in the event the firm failed. After a bench trial, a district judge in the Middle District of Florida found that Goble had directed an employee to make a false entry in the company’s books, and thus found Goble liable for securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”). The Court also found Goble liable for aiding and abetting violations of the Customer Protection Rule, which is Section 15(c)(3) of the Exchange Act, and the books and records requirements in Section 17(a) of the Exchange Act.
On appeal to the Eleventh Circuit, defendant Goble argued, among other things, that the injunctions imposed by the district court were impermissible “obey-the-law” injunctions that violated Rule 65(d)(1) because they did not describe in sufficient detail the conduct that was prohibited. Rule 65(d)(1) states that “Every order granting an injunction and every restraining order must: (A) state the reasons why it issued; (B) state its terms specifically; and (C) describe in reasonable detail – and not by referring to the complaint or other document – the act or acts restrained or required.” In considering the propriety of the district court’s injunctions, the Eleventh Circuit was troubled by the conclusory language that restrained and enjoined Goble from violating cited laws and rules, without specifying the actual enjoined conduct. The Court concluded that the injunctions under Sections 15(c)(3) and 17(a) were impermissible “obey-the-law” commands and vacated them. The Court vacated the injunction under Section 10(b) on other grounds, but also said in dicta that it too appeared to be an impermissible “obey-the-law” injunction.
The Eleventh Circuit explained that because “obey-the-law” injunctions lack specificity, they necessarily deprive defendants of procedural safeguards alerting them to what could be a future charge of a violation of the securities laws. In making its ruling, the Court discussed its previous ruling in SEC v. Smyth, 420 F.3d 1225, 1233 n.14 (11th Cir. 2005), where the Court went out of its way to comment, albeit in dicta, that an SEC “obey-the-law” injunction was “unenforceable.” According to the Circuit Court, the specificity requirements of Rule 65(d)(1) were designed to prevent uncertainty and confusion by those subject to the injunction orders and to “avoid the possible founding of a contempt citation on a decree too vague to be understood.” Goble, at *11 (quoting Schmidt v. Lessard, 414U.S. 473, 476 (1974)). A defendant faced with an injunction should therefore be able to determine from the four corners of the injunction the proscribed conduct. The injunctions ordered by the district court failed this test and therefore had to be vacated. In making this ruling, the Eleventh Circuit acknowledged that in some circumstances, injunctions that order a defendant to comply with a statute can be appropriate where the terms of the statute at issue are specific enough so that the defendant “clearly [knows] what conduct the injunction addresse[s].” In dicta, the Court added that the issue of specifying the prohibited conduct is especially acute in the context of injunctions for Section 10(b) and Rule 10b-5 violations – perhaps the most common of the “obey-the-law” injunctions sought by the SEC – because of the “ever-changing judicial landscape” of rulings on § 10(b) violations.
SEC v. Goble May Signal that Broad Injunctions Face Further Scrutiny
The Goble decision will undoubtedly have a significant impact on the SEC’s ability to continue seeking and enforcing “obey-the-law” injunctions in district courts in the Eleventh Circuit. What remains to be seen is whether the decision will have a more far-reaching impact. In SEC v. Zwick, No. 03 Civ. 2742(JGK), 2007 WL 831812, *19 (S.D.N.Y. Mar. 16, 2007), the District Court for the Southern District of New York expressly rejected the Eleventh Circuit’s analysis in Smyth, and upheld a broad “obey-the-law” injunction. The Zwick court relied on the Second Circuit’s decision in SEC v. Manor, 458 F.2d 1082, 1103 (2nd Cir. 1972), a decision that pre-dated Smyth but which expressly provided that an injunction that mirrored the text of Section 10(b) and Rule 10b-5 was appropriate. Given that the Eleventh Circuit has not backed down from its view in Smyth, and in fact has given it an articulate defense, other courts may be prompted to question future attempts by the SEC to obtain broad “obey-the-law” injunctions. It is also possible that the SEC may shift on its own towards a policy of pursuing more specifically tailored injunctions.
In light of the Goble decision, individuals and companies in active litigation with the SEC, as well as those considering settlement with the agency, may want to consider challenging any attempt by the SEC to impose “obey-the-law” injunctions. Although it is likely that the SEC will continue to pursue vigorously broad injunctive orders, the recent trend by federal judges to scrutinize SEC settlements may result in the SEC being more open to the suggestion that injunctions should be narrowly tailored and sufficiently specific so as to comply with Rule 65(d)(1). On the other hand, the SEC could respond in the FCPA context by turning more aggressively towards deferred prosecution-type remedies or by resorting to administrative actions where the agency can seek broadly worded cease and desist orders without the need for federal court approval. Those alternative remedies, however, lack the in terrorem effect of a broadly-worded legal prohibition that is backed by the ever-present threat of a federal contempt citation.
SEC To Be Put To Its Burden – Motion To Dismiss Filed In Jackson And Ruehlen Enforcement Action
In February, the SEC announced here charges against “three oil services executives [associated with Noble Corporation] with violating the FCPA by participating in a bribery scheme to obtain illicit permits for oil rigs in Nigeria in order to retain business under lucrative drilling contracts.” Previously Noble Corporation (along with several other companies in an enforcement action I dubbed CustomsGate) resolved an FCPA enforcement action involving both a DOJ and SEC component (total settlement amount was approximately $8.2 million ($2.6 million criminal fine via a non-prosecution agreement; $5.6 million in disgorgement and interest via a SEC complaint) – see here for the prior post.
Like the vast majority of FCPA defendants in SEC enforcement actions, one of the individual defendants, Thomas O’Rourke (the former controller and head of internal audit at Noble Corporation), chose to settle the SEC’s complaint without admitting or denying the SEC allegations.
Not so with the other two individual defendants: Mark Jackson (former Noble Corporation CEO) and James Ruehlen (current Director and Division Manager of Noble’s subsidiary in Nigeria). This prior post contained the comments of Jackson’s lawyer, David Krakoff (here – BuckleySandler) who stated as follows: “We unequivocally deny the SEC’s baseless allegations. Mr. Jackson will vigorously defend himself in court where the evidence will show what the SEC already knows, that at all times Mr. Jackson acted in good faith at Noble. He looks forward to clearing his good name in this proceeding.” The prior post also contained the comments of Ruehlen’s lawyer F. Joseph Warin (here – Gibson Dunn & Crutcher) who stated that “the claims against Mr. Ruehlen are wrong and they will be proven so at trial.”
I noted in the prior post that this could get interesting as the SEC is rarely put to its burden of proof in FCPA enforcement actions (or any of its actions for that matter).
Yesterday Jackson and Ruehlen filed separate motions to dismiss (see here and here).
To my knowledge, this is the first time since the SEC lost the Mattson and Harris individual enforcement actions in 2002 (see here for a prior post discussing the case) that the Commission will be put to its burden of proof in an FCPA enforcement action.
Thus, yesterday’s motion is a significant event in terms of the SEC’s FCPA enforcement program.
The remainder of this post summarizes the motion to dismiss (internal citations omitted).
Ruehlen Motion to Dismiss
Ruehlen was charged in the SEC complaint (here) with Count 1 – FCPA anti-bribery violations; Count 2 – aiding and abetting Noble Corp’s FCPA anti-bribery violations; Count 3 – aiding and abetting Noble Corp’s failures to make and keep accurate books, records, and accounts and to devise and maintain internal accounting controls; and Claim 4 knowingly circumventing Noble’s internal controls and falsifying or causing to be falsified Noble’s books, records, and accounts in violations of FCPA’s books and records provisions.
In summary, the motion states as follows.
“Despite the repetition of the word “bribe” fifty-three times in its Complaint, Plaintiff fails to allege a violation of law. The FCPA distinguishes between prohibited corrupt payments made to obtain or retain business (i.e., bribes), and permissible payments to “secure the performance of a routine governmental action,” such as “obtaining permits, licenses, or other official documents” or for “processing governmental papers” (i.e., facilitation payments). The Complaint assumes that all payments to foreign officials are per se illegal bribes, never acknowledging the FCPA’s exception for facilitation payments.
The distinction between a permissible facilitation payment and an unlawful bribe turns on the purpose and effect of the payment, namely whether it is being made to induce the recipient to act improperly based on his or her particular role, duties, or responsibilities in order to obtain or retain business—facts that the SEC must allege to state a claim. Despite investigating this matter for nearly five years, the SEC apparently does not know—and therefore cannot allege—the identity, role, duties, or responsibilities of any “Nigerian government officials” to whom Noble or Mr. Ruehlen allegedly authorized payments. By failing to identify the particular foreign officials to whom Noble and Mr. Ruehlen allegedly authorized payments, Mr. Ruehlen and this Court are simply left to guess whether the alleged unidentified government officials had the power to assist Noble in obtaining or retaining business by engaging in non-routine governmental action, as the statute requires. Accordingly, the SEC fails to satisfy its burden of pleading plausible facts under Federal Rule of Civil Procedure 8 and Twombly that the payments at issue were prohibited bribes under the FCPA, rather than lawful facilitation payments.
Second, without identifying the intended recipients of the alleged payments or alleging facts showing how these officials abused their authority on Noble’s behalf, Plaintiff fails to allege that Mr. Ruehlen acted “corruptly,” that is, with “a bad purpose or evil motive,” or with the “intent to influence a foreign official to misuse his official position.” To the contrary, the Complaint shows that Mr. Ruehlen reasonably believed that the payments were proper because, among other things, they had been reviewed and approved by Noble’s senior management who were tasked with ensuring Noble’s compliance with the FCPA and approving facilitation payments. The failure to plausibly allege facts showing corrupt intent provides an independent basis to dismiss the claims against Mr. Ruehlen.
Third, to the extent that Plaintiff’s first and second claims against Mr. Ruehlen survive these challenges, the Court must nevertheless dismiss them because the law in effect at the time failed to give Mr. Ruehlen “fair notice” of the interpretation now being advanced by the SEC in this case. In addition, the SEC’s strained and subjective interpretation of the FCPA’s facilitation payment exception makes it impossible for well-intentioned individuals to navigate between lawful and unlawful conduct and, therefore, is unconstitutionally vague as applied to Mr. Ruehlen.
Fourth, Claims 3 and 4 must be dismissed because the SEC fails to specify the particular book, record, or account that it claims Mr. Ruehlen knowingly falsified (or unreasonably caused to be false) or the particular internal control that he allegedly knowingly circumvented. Additionally, to the extent that the alleged violations refer to Noble’s decision to treat the special handling fees as facilitation payments rather than bribes, these violations are entirely predicated on the underlying FCPA violations alleged in Claims 1 and 2. Finally, this action is governed by the five-year statute of limitations. Because the claims against Mr. Ruehlen are principally based on alleged conduct that occurred outside the limitations period and because the SEC raises no basis for tolling, they are time-barred and must be dismissed.”
Jackson Motion to Dismiss
Jackson was charged in the SEC complaint (here) with Count 1 – FCPA anti-bribery violations; Count 2 – aiding and abetting Noble Corp’s FCPA anti-bribery violations; Count 3 – aiding and abetting Noble Corp’s failures to make and keep accurate books, records, and accounts and to devise and maintain internal accounting controls; Count 4 knowingly circumventing Noble’s internal controls and falsifying or causing to be falsified Noble’s books, records, and accounts in violations of FCPA’s books and records provisions and Rule 13b2-1; Count 5 – misleading auditors; Count 6 – signing false certifications; and Count 7 – control person liability.
In summary the motion states as follows.
“The Complaint against Jackson must be dismissed under Rule 12(b)(6) because it fails to state a claim that is plausible on its face. Only factual allegations—not unsupported conclusions or accusations of legal violations—may sustain a Complaint. But, stripped of its conclusions about what Jackson “knew,” the Complaint comes up woefully short in pleading several essential elements of Claim I, a Foreign Corrupt Practices Act (“FCPA”) anti-bribery violation—that Jackson acted with corrupt intent, and that he knew payments would be made to a foreign official to obtain sought-after unlawful acts from that foreign official. Instead, the factual allegations in the Complaint regarding alleged bribes are equally consistent, if not more, with wholly legal actions under the “facilitating payments” exception to the FCPA. The bribery claim therefore must be dismissed as implausible under controlling Supreme Court precedent. And because the other claims in the Complaint are entirely dependent on the existence of illegal bribes, they too must be dismissed. Finally, because the vast majority of the conduct alleged in the Complaint took place well over five years before the Complaint was filed, the bribery claim and many of the derivative claims are barred by the statute of limitations.”
The Latest Disclosures
A Friday focus on disclosures. The SEC asks Oracle – what about that FCPA issue, the SEC takes an interest in Libya, and yet another voluntary disclosure.
Oracle
As noted in this previous post, in September 2011 Joe Palazzolo and Samuel Rubenfeld broke the story in the Wall Street Journal, “U.S. Probes Oracle Dealings,” that “U.S. authorities are investigating whether Oracle Corp., one of the world’s largest software companies by sales, violated federal antibribery laws in its dealings abroad …”. According to the report, “agents in the FBI’s Washington field office and fraud prosecutors in the Justice Department’s Criminal Division are handling a criminal investigation, which has been underway for at least a year.” Palazzolo and Rubenfeld also report that the SEC is also investigating for possible civil violations. According to the report, “the agencies are examining whether Oracle employees or agents acting on the company’s behalf made improper payments in Africa in order to land sales of database and applications software.”
Since then, Oracle’s SEC filings have been silent as to any FCPA inquiry. The SEC wants to know why as demonstrated by this February Q&A between the SEC Division of Corporation Finance and Oracle filed by the company.
SEC: “We also note various news articles indicating that the company has been subject to investigations regarding possible Foreign Corrupt Practices Act violations for more than a year. Please tell us how you considered the guidance in paragraphs 50-3 through 50-5 of ASC 450-20-50 in evaluating the need to disclose these pending matters.”
Oracle Response: “We make a quarterly assessment of legal matters, including the matters referenced in the Staff’s inquiry above, to determine how those matters should be treated in the context of the accounting and disclosure requirements of paragraphs 50-3 through 50-5 of ASC 450-20-50. For those matters referenced above, we evaluated whether it was reasonably possible that a loss or a loss exceeding amounts already recognized may be incurred. We determined that the estimated ranges of additional losses for those matters referenced above, if any, either individually or in the aggregate, would not have a material effect on our consolidated financial position, results of operations or cash flows. Consequently, we believe our disclosures comply with the aforementioned guidance.”
ASC 450-20-50 you ask? ASC 450 is the former FASB 5 standard regarding gain and loss contingencies (i.e. when a company should record, disclose or not disclose certain contingencies).
Libya
Two foreign oil companies with ADRs traded on U.S. exchanges recently disclosed SEC scrutiny concerning conduct in Libya.
In this recent SEC filing, French oil company Total S.A. stated as follows.
“In June 2011, the SEC issued to certain oil companies – including, among others, TOTAL – a formal request for information related to their operations in Libya. TOTAL is cooperating with this non-public investigation.”
See here for a recent prior post concerning Total’s FCPA scrutiny in Iran.
In this recent SEC filing, Italian oil company Eni SpA stated as follows.
“On June 10, 2011 Eni received by the US SEC a formal judicial request of collection and presentation of documents (subpoena) related to Eni’ s activity in Libya from 2008 to 2011. The subpoena is related to an ongoing investigation without further clarifications nor specific alleged violations in connection to “certain illicit payments to Libyan officials” possibly violating the US Foreign Corruption Practice Act. At the end of December 2011, Eni received a request for the collection of further documentation aiming at integrating the subpoena previously received. Eni is fully collaborating with the US SEC.”
For more on the recent Libya disclosures, see here from Samuel Rubenfeld at Wall Street Journal Corruption Currents.
As highlighted in this prior post, in July 2010, Eni was a party in the DOJ/SEC’s Bonny Island Nigeria focused FCPA enforcement action which resulted in $365 million in combined fines and penalties.
Another Voluntary Disclosure
SL Industries (here – a New Jersey based designer, manufacturer and marketer of power electronics, motion control, power protection, and other related products) recently disclosed (here) as follows.
“The Company is conducting an investigation to determine whether certain employees of SL Xianghe Power Electronics Corporation, SL Shanghai Power Electronics Corporation and SL Shanghai International Trading Corporation, three of the Company’s indirect wholly-owned subsidiaries incorporated and operating exclusively in China, may have improperly provided gifts and entertainment to government officials. Based upon the initial investigation, which is ongoing, the preliminary estimate of the amounts of such gifts and entertainment does not appear to be material to the Company’s financial statements. There can be no assurance, however, that after further inquiry the actual amounts will not be in excess of what is currently estimated. Such estimate does not take into account the costs to the Company of the investigation or any other additional costs. The Company’s investigation includes determining whether there were any violations of laws, including the U.S. Foreign Corrupt Practices Act. Consequently, on March 29, 2012, the Company’s outside counsel contacted the DOJ and the SEC voluntarily to disclose that the Company was conducting an internal investigation, and agreed to cooperate fully and update the DOJ and SEC periodically on further developments. The Company has retained outside counsel and forensic accountants to assist in its investigation of this matter. Because the investigation is ongoing, the Company cannot predict at this time whether any regulatory action may be taken or any other adverse consequences may result from this matter.”
According to my tally, the new disclosures discussed above means that in the last six weeks, seven companies have newly disclosed FCPA scrutiny. See here for the prior post “The Sun Rose, a Dog Barked, and a Company Disclosed FCPA Scrutiny.” If SEC filings are your ideal form of pleasure reading, you can hardly wait to see what next week holds.
A good weekend to all.
Where Should The Money Go?
It is a thorny question with no easy answer. Where should the money go when a company resolves an FCPA enforcement action? It was addressed last year in connection with the Alcatel-Lucent enforcement action. (See here, and here for prior posts). Two recent events raise the issue again.
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Earlier this month, it was announced (here) that the U.K. “Serious Fraud Office, the Government of Tanzania, BAE Systems and the Department for International Development (DFID) … signed a Memorandum of Understanding enabling the payment of £29.5 million [$47 million USD] plus accrued interest to be paid by BAE Systems for educational projects in Tanzania.” As noted in the release, “textbooks will be purchased for all 16,000 primary schools in the country and as a result 8.3 million children will benefit” in subjects such as Kiswahli, English, Maths and Science. The release further notes that funds will also be used to “provide all 175,000 primary school teachers with teachers’ guides, syllabi and syllabi guides to help improve their teaching skills” as well as the purchase of desks. In the release, SFO Director Richard Alderman stated as follows. “This agreement is a first for the SFO which piloted it through the UK legal system. It provides a satisfactory outcome for all concerned but most of all for the Tanzanian people and I am personally delighted that SFO staff were able to achieve this.”
In this release, BAE stated as follows. “We are glad to finally be able to make the payment to the Government of Tanzania and bring this matter to a close. We are grateful to DFID for their work in agreeing the Memorandum of Understanding with the Government of Tanzania.” The BAE release states that the “payment follows the settlement agreed between BAE Systems and the SFO.” For a prior post on the settlement, see here.
To be sure, BAE’s payment to Tanzania, and the role of the SFO in brokering the payment, feels good. What is not to like about children receiving textbooks?
However, the feel good nature of this most recent BAE development should not mask the significant problems with the BAE enforcement action (on both sides of the Atlantic). As noted in this prior post, even the U.K. judge who accepted the SFO-BAE plea agreement called it “loosely and hastily drafted” and said the fine he levied reflected that he couldn’t “sentence for an offense which the prosecution failed to charge.”
And let’s not forgot how this story began. In 2004, the SFO began investigating whether BAE made bribe payments to secure Saudi fighter jet contracts. However, in late 2006, the SFO was forced to halt its investigation under pressure from the U.K. government, which cited national security concerns should the investigation go forward. However, because BAE also allegedly made bribe payments in numerous other countries to secure business, the SFO, under a new Director, revived its investigation of BAE, at least as to non-Saudi issues, including whether the company paid bribes to secure contracts in various European and African countries. After settlement talks stalled – the conventional wisdom is that BAE was unwilling to plead guilty to bribery related offenses given the collateral effect of the mandatory European Union debarment provisions – the SFO pressed ahead with the case. In late January 2010, the SFO issued a release (here) stating that Count Mensdorff, a former BAE agent, was criminally charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.” Then, in early February 2010, the SFO announced (here) its long-awaited resolution of the BAE matter. Despite allegations of wide-spread bribery on a global scale, and despite BAE’s agent being criminally indicted a few days earlier in connection with bribe payments in “certain Eastern and Central European countries” (presumably on evidence that such payments did indeed occur), the SFO resolution related solely to the company’s failure “to keep reasonable and accurate accounting records in relation to its activities in Tanzania.” Most dramatic, and in a strange turn of events, the SFO announced that it had withdrawn the criminal charges filed days earlier against Count Mensdorff. The same release also noted that “[t]his decision brings to an end the SFO’s investigations into BAE’s defense contracts.” For more on “BAE – Inside the SFO”, see this prior post.
In any event, at least some children in Tanzania received some textbooks from BAE as a result.
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As previously highlighted on the FCPA Blog (here), Socio-Economic Rights and Accountability Project (“SERAP”) (a non-governmental civil society organization in Nigeria) recently wrote a letter (here) to SEC Enforcement Division Director Robert Khuzami (with a copy to Assistant Attorney General Lanny Breuer and Deputy Chief, Fraud Section Charles Duross) regarding “FCPA civil penalty and disgorgement proceeds that companies agree to pay to resolve US Foreign Corrupt Practices Act investigations.” As the letter notes, “currently such proceeds, once paid, are retained by the U.S. government.”
In summary, the SERAP letter requests “that the Enforcement Division establish a case-by-case policy or process that would enable foreign governmental entities that have been victims of corruptly-procured contracts to apply for, subject to appropriate anti-corruption safeguards, some or all of the civil penalty and disgorgement proceeds that would eventually be paid by companies alleged to have violated the U.S. Foreign Corrupt Practices Act.” SERAP also suggests that “civil society groups in the home country, or U.S. non-profit organizations serving that country, be eligible within a short time-period to apply for such proceeds as well, or instead, for use for ‘public benefits projects’ in the affected foreign country, again subject to anti-corruption safeguards.”
The SERAP letter notes, among other things, as follows. “… Many citizens in a country where such bribery has occurred might consider FCPA civil penalties and disgorgement payments imposed by the US, and then kept by the US, as in fact representing funds that rightfully ‘belong’ to the victim.”
Stating that “corruptly procured contracts ‘cost’ the victim at least 10 percent extra” the SERAP letter says that “this figure ought to be a presumed measure of possible funds available for third-party application in the context of a civil FCPA settlement, particularly since the Enforcement Division typically settles an investigation before extensive evidence of damages, as opposed to liability, is placed in the public realm.”
The specific SERAP proposal is as follows. “…[A]fter, and ony after, public notice of an FCPA settlement agreement, the victim foreign government entity and any applicant NGO would have 60 days to file a request that the Enforcement Division pay some or all of the agreed payment proceeds to or for the benefit of the victim government entity or to a home country-based or US based NGO that would present a proposal [to] spend the proceeds for public purposes (e.g. on public health programs) in the country of the victim entity. Thereafter, the Enforcement Division would have 60 days to act upon the request, favorably or not in its discretion; in this context the Enforcement Division should provide a brief statement of its reasons for its decisions. In reaching its decisions the Enforcement Division would have the inherent authority to consult with Executive Branch agencies of the US government.
The SERAP letter raises some interesting issues regarding alleged victims of FCPA enforcement actions. The SERAP letter also raises some interesting questions, including the following.
If the SEC would be required to relinquish a certain portion of money recovered in an FCPA enforcement action, what impact would this have on FCPA enforcement? Would the SEC be less aggressive in bringing enforcement actions or perhaps more aggressive because more enforcement actions would be needed to sustain the current FCPA “revenue stream”? For instance, 10% of SEC FCPA “revenue” in 2011 was approximately $15 million, in 2010 approximately $53 million.
The SERAP proposal appears to assume that all FCPA enforcement actions involve foreign government procurement. This is not the case. Approximately 50% of recent FCPA enforcement actions (i.e. in the past five years) do not involve foreign government procurement, but rather issues relating to foreign taxes, customs duties, or foreign licenses, permits, certifications and the like. Is the victim analysis the same in these FCPA enforcement actions compared to foreign government procurement enforcement actions?
Are individuals or organizations located in the country giving rise to the FCPA enforcement action really the most direct victims of the conduct at issue? In the procurement context, what about a competitor who may have lost out on the foreign business because it was unwilling to make an improper payment? With victim issues attracting new attention, should an FCPA private right of action receive new attention?
Last, but certainly not least, companies settling SEC FCPA enforcement actions are allowed to settle without admitting or denying the SEC’s allegations. Even the SEC itself has stated that this settlement device often leads to settlements that “do not necessarily reflect the triumph of one party’s position over the other.” Given this dynamic, would SERAP’s proposal lead to undeserved “windfalls” for civil society organizations? [In this prior post, I asked the same question as to Dodd-Frank Act whistleblowers.]
Second Circuit As To SEC Settlement Policy – “It Is Not … The Proper Function Of Federal Courts To Dictate Policy To Executive Administrative Agencies”
Previous posts (here, here, and here) have discussed Judge Jed Rakoff’s (S.D.N.Y.) concerns of the SEC’s neither admit nor deny settlement policy. Judge Rakoff’s concerns have not been in FCPA cases, but the SEC uses the same settlement policy in FCPA cases – both corporate and individual resolutions.
Yesterday, in the SEC v. Citigroup enforcement action (in which Judge Rakoff previously denied the consent judgement between the parties stating that the SEC’s long-standing resolution policy was “hallowed by history, but not by reason”), the Second Circuit rebuked Judge Rakoff (see here for its opinion). The Second Circuit’s decision did not squarely address the merits of the SEC’s settlement policy, rather the issue before the Court was whether to stay the district court proceedings pending a merits based review of the issues. In granting the stay, the Court concluded “that the S.E.C. and Citigroup have a strong likelihood of success in their joint effort to overturn the district court’s ruling.”
The court began its opinion as follows. “The challenge by both parties to the district court’s order raises important questions. These include the division of responsibilities as between the executive and the judicial branches and the deference a federal court must give to policy decisions of an executive administrative agency as to whether its actions serve the public interest (and as to the agency’s expenditure of its resources).”
The court stated as follows. “The numerous factors that affect a litigant’s decision whether to compromise a case or litigate it to the end include the value of the particular proposed compromise, the perceived likelihood of obtaining a still better settlement, the prospects of coming out better, or worse, after a full trial, and the resources that would need to be expended in the attempt. In the case of a public executive agency such as the S.E.C., the factors include also an assessment of how the public interest is best served.”
As to Judge Rakoff’s decision, the Court stated as follows. “A still more significant problem is that the court does not appear to have given deference to the S.E.C.’s judgment on wholly discretionary matters of policy. The S.E.C.’s decision to settle with Citigroup was driven by considerations of governmental policy as to the public interest. The district court believed it was a bad policy, which disserved the public interest, for the S.E.C. to allow Citigroup to settle on terms that did not establish its liability. It is not, however, the proper function of federal courts to dictate policy to executive administrative agencies. Elsewhere the Court stated that the “scope of a court’s authority to second-guess an agency’s discretionary and policy-based decision to settle is at best minimal.” The Court noted as follows. “This does not mean that a court must necessarily rubber stamp all [agreements] made by such an agency. It does mean at least that a court should not reject the agency’s assessment without substantial reason for doing so.” The Court found that Judge Rakoff did not give proper deference to the SEC, but rather just disagreed with its settlement policy.
In so holding, the court stated as follows. “We express no opinion one way or the other on what settlement policy would best serve the public interest. Our point is rather that it is not the proper function of federal courts to dictate to executive administrative agencies what policies will best serve the public interest.”
Given that both the SEC and Citigroup were united in opposing Judge Rakoff’s order and thus there was no adversarial briefing, the Court ordered that counsel be appointed in connection with the merits proceeding to argue in support of Judge Rakoff’s position.
For more on the Second Circuit decision, see here from Thomson Reuters, here from the New York Times, and here from the Wall Street Journal