Friday Roundup
The SEC’s annual whistleblower report, a new FCPA map, taking FCPA reform too far, confessions of an FCPA “Mendelhead,” is too much FCPA training a bad thing, and Nigeria’s sovereign wealth fund … it’s all here in the Friday roundup.
SEC Whistleblower Report
The Dodd-Frank Act enacted in July 2010 contained whistleblower provisions applicable to all securities law violations including the Foreign Corrupt Practices Act. In this prior post from July 2010, I predicted that the new whistleblower provisions would have a negligible impact on FCPA enforcement. As noted in this prior post, my prediction was an outlier (so it seemed) compared to the flurry of law firm client alerts that predicted that the whistleblower provisions would have a significant impact on FCPA enforcement.
Whatever your view, I noted that the best part of the new whistleblower provisions were that its impact on FCPA enforcement can be monitored and analyzed because the SEC is required to submit annual reports to Congress. Recently the SEC released (here) its annual report for FY2011. However as noted by the SEC, “because the Final Rules [implementing the whistleblower program] became effective August 12, 2011, only 7 weeks of whistleblower tip data is available for fiscal year 2011.”
Appendix A to the report lists by subject matter “the 334 whistleblower tips received from August 12, 2011 through September 30, 2011.” However, the SEC noted as follows. “Of course, the Commission also receive [Tips, Complaints, and Referrals (“TCRs”] from individuals who do not wish or are not eligible to be considered for an award under the whistleblower program. The data in this report is limited to those TCR’s that include the required whistleblower declaration and does not reflect all TCRs received by the Commission during the fiscal year.”
As the SEC notes “as a result of the relatively recent launch of the program and the small sample size, it is to early to identify any specific trends or conclusions from the data collected to data.”
In any event, a chart titled “Whistleblower Tips by Allegation Type” in the SEC report shows that 3.9% of the 334 tips involve the FCPA. The SEC report is also an informative read as to the SEC’s implementation of the whistleblower award program and how it processes whistleblower tips.
The SEC whistleblower report from FY2010 is here.
FCPA Map
The Mintz Group (an international investigative services firm that specializes in FCPA and integrity due-diligence that also assists corporate counsel and outside counsel with investigations related to potential or alleged FCPA violations) recently released here a dandy interactive map allowing users to scroll over countries and learn of FCPA violations in those countries, as well as industry specific FCPA data.
Taking FCPA Reform Too Far
Writing recently at the Cato Institute’s blog (see here), Walter Olson commented “the Foreign Corrupt Practices Act: clarification is not enough.” Olson stated as follows. “The Foreign Corrupt Practices Act, enacted in 1977 and the subject of a high-profile federal enforcement campaign in recent years, is a feel-good piece of overcriminalization that oversteps the proper bounds of federal lawmaking in at least four distinct ways, any of which should have prevented its passage. It is extraterritorial, purporting to punish overseas misdeeds which deprive no Americans of liberty or property and whose punishment is better left in the hands of authorities elsewhere. It is vicarious, inflicting massive liability on businesses and unknowing higher-ups over the actions of rogue local subsidiaries, salespeople and facilitators. It is punitive, menacing its targets with twenty-year prison terms and inflicting huge penalties over less-than-huge misbehavior. And finally, it is vague, leaving companies to guess at the proper line between tolerated payments (e.g., gratuities to speed up visa and license issuance in developing countries) and improper “bribes,” and even such basic questions as who counts as “official.” In the face of a mounting outcry from the business community, the Obama administration has now finally conceded that there is some validity to this last point, and Criminal Division chief Lanny Breuer says the Department of Justice will develop guidelines to provide greater clarity as to what it believes the law does and does not forbid. Better than nothing, but why not consider the case for wider reform or even repeal?”
Similarly, Scott Greenfield who runs the blog Simple Justice (see here) stated as follows. “At its core, the FCPA is our government’s way of pretending to be the mean old school marm, telling all the nasty children of the world how to behave. If it doesn’t appeal to the school marm’s sensibilities, then it’s a crime, and demands a hard smack across the knuckles. A very expensive hard smack. […] We may hate corporations, but we need them, and we need them to be productive around the globe. To tie them down because of vague, child-like notions of fairness that conflict with cultural norms everywhere else is just foolish and counterproductive. Surviving and competing in foreign cultures isn’t wrong, and it shouldn’t be a crime. The FCPA has got to go.”
I respectfully disagree. While I agree that the FCPA ought to be reformed in certain respects and while FCPA enforcement has become unhinged, I do believe, as I have stated on several occasions including in my November 2010 Senate testimony (here), that the FCPA is a fundamentally sound statute that was passed by Congress for a specific valid and legitimate reason.
Confessions Of An FCPA “Mendelhead”
In response to my recent “luncheon law” post (see here), Howard Sklar (who previously ran anti-corruption compliance for Hewlett-Packard Co.) wrote on his Open Air Blog (here) as follows. “I used to go to these conferences with the expressed purpose of ‘reading the DOJ tea leaves for this season.’ The ‘used to’ in that sentence is important, but we’ll get to that in a minute. Because ‘reading the tea leaves’ was a crucial part of my risk assessment process. That’s a pitiful state of affairs, but there you are. During that period, several years ago, there really wasn’t anywhere else to go. I would reach out to fellow in-house practitioners and benchmark all the time, and I’d follow Mark Mendelsohn around like a puppy looking for scraps. It was a little sad, really. I know I’m a bit of a geek, and I know Mark Mendelsohn ain’t the Grateful Dead. But there I was, an FCPA Mendelhead.”
Over-Training?
Greg Esslinger (Senior Managing Director at FTI Consulting) recently posted (here) an interesting article on the ABA’s Global Anti-Corruption Task Force website. Titled “Anti-Corruption Compliance: Are Employees Becoming ‘Over-Trained’?” Esslinger writes as follows. “In response [to this new era of enforcement], companies have begun to provide more and more accessible (read: web-based) anti-corruption and related regulatory training programs. Predictably, a panoply of vendors have surfaced offering state-of-the-art customizable online training modules, complete with scenarios, live actors, knowledge checks and certifications. Online compliance training has now become a cottage industry serving a wide array of organizations faced with the daunting task of communicating a Western regulatory concept to tens of thousands of employees across multiple languages, cultures and jurisdictions – again, under the watchful eye of various enforcement bodies.” In the piece, Esslinger asks “whether repeated online and other mass training will over time actually have the unintended effect of desensitizing employees to, rather than making them more aware and cautious of, bribery and other corrupt activity.”
Training occurs in a variety of legal and non-legal contexts and if anyone is aware of social-science / behavioral research relevant to an “over-training” phenomena please share.
Nigeria Sovereign Wealth Fund
With certain companies reportedly under the FCPA microscope for dealings with sovereign wealth funds (see here for a prior post), its hard not to have the FCPA radars go off when reading this recent article by Azam Ahmed in the New York Times concerning Nigeria’s new sovereign wealth fund. The article states as follows. “In an effort to preserve and increase its oil revenue, the country recently established a so-called sovereign wealth fund, following the path of many resource-rich countries. Now, Wall Street titans like Goldman Sachs, Morgan Stanley and JPMorgan Chase are courting top government officials, aiming to grab a piece of a portfolio that could eventually be worth tens of billions of dollars.” The article further states as follows. “To grab a piece of the lucrative business, big banks and asset managers have tirelessly cultivated relationships with governments worldwide and added teams dedicated to sovereign wealth funds. In recent months, bankers, lawyers and consultants flew to the Nigerian capital of Abuja to pitch officials on their services. The government chose JPMorgan Chase as one of its advisers on the structuring of the fund.”
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A good weekend to all.
Meaningless Settlement Language?
Previous posts (here and here) have discussed scrutiny of SEC resolution procedures in the SEC v. Citigroup case. Although not an FCPA enforcement action, the SEC policies (such as settlement via neither admit nor deny language) being questioned by Judge Jed Rakoff (S.D.N.Y.) are the same in SEC FCPA enforcement actions. Thus, Judge Rakoff’s questions are relevant to SEC FCPA enforcement.
A typical SEC FCPA enforcement action involves a permanent injunction prohibiting future FCPA violations – see here for the recent Comverse SEC FCPA enforcement action containing such language. In this prior post regarding Diebold’s FCPA disclosure, I noted that Diebhold was already subject to an injunction prohibiting future FCPA violations (as a result of a non-FCPA FCPA enforcement action) and I asked whether Diebold was in jeopardy of violating that injunction.
If Diebold does indeed become a repeat offender, it will have company. For instance, in 2004 ABB Ltd. resolved an FCPA enforcement action (see here) and “consented to the entry of a final judgment enjoining it from future FCPA violations.” In 2010, ABB Ltd. again agreed to resolve an FCPA enforcement action – see here for the prior post. So much for that permanent injunction thing. Likewise, in 2001 Baker Hughes resolved an FCPA enforcement action (see here) and was ordered to cease and desist from any future FCPA violations. In 2007, Baker Hughes again agreed to resolve an FCPA enforcement action – see here. So much for that cease and desist thing.
Thus, Judge Rakoff’s question in the Citigroup action – whether SEC injunctions against future violations have any meaning is a good question. Specifically, Judge Rakoff requested an answer to the following question. “The proposed judgment imposes injunctive relief against future violations. What does the SEC do to maintain compliance? How many contempt proceedings against large financial entities has the SEC brought in the past decade as a result of violations of a prior consent judgment?”
In its Citigroup brief the SEC responded as follows.
“Civil contempt is a remedy available to the SEC in the event either (1) that a defendant is engaging in an ongoing violation of an injunction, or (2) compensation is due the SEC as a result of a defendant’s violation of an injunction. Because alternative effective remedies often are available, including the filing of an independent action with corresponding legal and equitable relief, the Commission has not frequently pursued civil contempt proceedings and does not appear to have initiated such proceedings against a ‘large financial entity’ in the last ten years. However, prior unlawful conduct by a corporate entity is considered in determining the appropriate penalty in any subsequent enforcement action.”
For additional information see this recent New York Times article from Edward Wyatt.
A Focus On Neither Admit Nor Deny
This previous post discussed the recent order by Judge Jed Rakoff (S.D.N.Y.) in the SEC v. Citigroup matter in which Judge Rakoff requested answers to several questions concerning SEC enforcement policy. As noted in the prior post, although the Citigroup matter is not an FCPA enforcement action, many of the questions posed by Judge Rakoff could also be asked in SEC FCPA enforcement actions such as “why should the Court impose a judgment in a case in which the S.E.C. alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?” As noted in the prior post, Judge Rakoff has been vocal critic in recent years of the SEC’s neither admit nor deny settlement procedure – a procedure used in SEC FCPA enforcement actions.
Last week, the SEC and Citigroup addressed Judge Rakoff’s questions, including as to neither admit nor deny.
In its brief (here), the SEC stated, in pertinent part, as follows.
“Obviously, there are advantages and disadvantages to both parties in a no admit/deny consent judgment. The defendant is not subject to collateral estoppel with regard to the claims asserted, but at the same time investors are able to pursue any available private remedies in addition to the relief obtained by the SEC. On the other hand, the Commission is able to bring the matter to a speedy resolution, obtain compensation for victims in a timely manner, and allocate its limited resources to bringing additional enforcement actions for the protection of still more investors. Courts repeatedly have recognized the balance of advantages and disadvantages in settlements entered pursuant to the no admit/deny policy and expressed a reluctance to upset that balance. The Commission respectfully submits that this Court should do the same.” (internal citations omitted).
In its brief (here), Citigroup stated, in pertinent part, as follows.
“[Citigroup] defers to the SEC with respect to its enforcement policies and practices, and agency decisions, regarding when and under what circumstances to resolve matters through settlement.”
“[Citigroup] respectfully submits that, as a general matter, the ‘public interest’ is served by sophisticated litigants compromising complicated matters in a manner that avoids wasteful litigation and exposing both parties to extreme results. In evaluating whether the Proposed Judgment is fair, reasonable, adequate, and in the public interest, we respectfully submit that the Court should consider the potential impact on Citigroup Inc.’s shareholders of any outcome other than a negotiated, ‘no admit, no deny’ settlement. Here, Citigroup’s management and Board exercised their business judgment in choosing to settle the matter on these terms and avoid a litigated proceeding with the SEC and the host of adverse collateral consequences that course would entail.”
“This Court has cataloged the many risks faced by a public company that chooses to engage in protracted litigation with its regulators, including private litigation risk, reputational harm, and the risk of collateral regulatory consequences. These concerns, while present in virtually every SEC enforcement action, are magnified for financial institutions in today’s punitive market environment, where litigating with a regulator may have devastating consequences (regardless of the strength of the institution’s defenses).” (internal citations omitted).
“Citigroup’s management and Board also appropriately considered the potential substantial adverse collateral consequences to Citigroup if it chose to litigate (and ultimately were to lose) a lawsuit against the SEC or settle in a manner in which it was required to ‘admit’ liability.”
Even though SEC v. Citigroup is not an FCPA matter, the questions Judge Rakoff is asking, and the parties responses, provide valuable insight into the same SEC enforcement procedures used in FCPA enforcement actions. The matter also provides a rare public glimpse into what is often not aired in public – the motivations of settling parties in a government action, including the motivations of a corporate litigant to settle a dispute with a primary regulator for ease and efficiency. Thus, while outside the FCPA context, SEC v. Citigroup is a case to follow. Judge Rakoff has indicated he will soon author a written decision on whether to accept the settlement.
Coming Attraction – Judge Rakoff vs. The SEC (Again)
One of the most exciting things that could happen in terms of SEC FCPA enforcement is for a future case to be assigned to Judge Jed Rakoff (S.D.N.Y.).
I have been highlighting for some time Judge Rakoff’s criticism of the SEC’s without admitting or denying settlement procedure. See here for the “Facade of FCPA Enforcement” (at pages 946-955 discussing the SEC v. Bank of America case), here for Judge Rakoff’s comments in the Vitesse Semiconducter case in which he called the procedure (in existence since 1972) “a stew of confusion and hypocrisy unworthy of such a proud agency as the SEC” and here for general discussion.
On October 19th, the SEC announced here resolution of a (non-FCPA) enforcement action against “Citigroup’s principal U.S. broker-dealer subsidiary [for] misleading investors about a $1 billion collateralized debt obligation tied to the U.S. housing market in which Citigroup bet against investors as the housing market should signed of distress.” “Without admitting or denying the SEC’s allegations,” Citigroup consented to settle the SEC’s charges by paying $285 million ($160 million in disgorgement plus $30 million in prejudgment interest and a $95 million penalty). As noted in the SEC’s release “the settlement is subject to court approval.”
That is where Judge Rakoff comes in. As I commented in this New York Times article by Peter Lattman, given Judge Rakoff’s prior rulings, if anyone is going to rattle the SEC’s cage on its settlement procedures, it would be Judge Rakoff.
Yesterday, Judge Rakoff issued an order (here) convening a hearing on November 9th. Among other questions Judge Rakoff wants answered at the hearing are the following (internal citations omitted).
“1) why should the Court impose a judgment in a case in which the S.E.C. alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?
2) Given the S.E.C.’s statutory mandate to ensure transparency in the financial marketplace, is there an overriding public interest in determining whether the S.E.C.’s charges are true? Is the interest even stronger when there is no parallel criminal case?
3) What was the total loss to the victims as a result of Citigroup’s actions? How was this determined? If, as the S.E.C.’s submission states, the loss was “at least” $160 million … what was it at most?
4) How was the amount of the proposed judgment determined? In particular, what calculations went into the determination of the $95 million penalty? Why, for example, is the penalty in this case less than one-fifth of the $535 million penalty assessed in SEC v. Goldman Sachs? What reason is there to believe this proposed penalty will have a meaningful deterrent effect?
5) The S.E.C.’s submission states that the S.E.C. has “identified … nine factors relevant to the assessment of whether to impose penalties against a corporation and, if so, in what amount. But the submission fails to particularize how the factors were applied in this case. Did the S.E.C. employ these factors in this case? If so, how should this case be analyzed under each of those nine factors?
6) The proposed judgment imposes injunctive relief against future violations. What does the S.E.C. do to maintain compliance? How many contempt proceedings against large financial entitities has the S.E.C. brought in the past decade as a result of violations of prior consent judgments?
7) Why is the penalty in this case to be paid in large part by Citigroup and its shareholders rather than by the culpable individual offenders acting for the corporation? If the S.E.C. was for the most part unable to identify such alleged offenders, why was this?
8 What specific “control weaknesses” led to the acts alleged in the Complaint? How will the proposed “remedial undertakings” ensure that those acts do not occur again?
These same questions could be asked in nearly every SEC FCPA enforcement action and I can only hope that Judge Rakoff will one day ask the same questions in the context of an FCPA enforcement action.”
SEC Chairman Schapiro’s FCPA Responses
As noted in this prior post, on June 30th, Senator Mike Crapo (R-ID) sent SEC Chairman Mary Schapiro a letter requesting answers to a number of FCPA related questions. In this September 23rd letter, SEC Chairman Schapiro responds.
Chairman Schapiro begins as follows. “Contuined strong enforcement of the FCPA sends the message that American companies operating abroad will not pay bribes as a ‘cost of doing business.’ The deterrence message of the Commission’s FCPA enforcement program incentivizes companies to self-assess and update their compliance and internal controls – all of which benefits companies’ operations overall and provides greater transparency to investors. While I certainly appreciate and share your concerns about the costs of FCPA compliance in certain circumstances, I believe that the risks to investors and costs to companies posed by outdated or weak FCPA compliance measures are equally significant.”
Compliance Defense?
As to a potential FCPA compliance defense, Chairman Schapiro began by stating a common enforcement agency response … we already consider compliance. She stated as follows. “The Commission, in deciding whether to approve the filing of an FCPA enforcement action against a public company, already considers as one mitigating factor whether the company’s compliance program was reasonably designed and operated in a manner to detect and prevent FCPA violations.” “Similarly,” Chairman Schapiro stated, “companies facing FCPA inquiries can obtain credit for cooperation under the Commission’s new Cooperative Initiative, in which cooperation is defined to include, among other factors, having reasonable internal controls and compliance measures.” Given the above, Chairman Schapiro states that “it seems unnecessary – and even counterproductive – to recognize a formal affirmative defense for having such a program, given that there are at least three significant costs associated with such a defense.”
Chairman Schapiro then identifies the following three issues.
“First, the reasonableness of a compliance program is best measured not by how it exists on paper, but by how it operates in practice. Consequently, the ease with which an employee was able to circumvent anti-corruption controls is some evidence – not sufficient evidence, but some evidence – that internal controls were insufficient. The Commission would not want to be foreclosed from bringing FCPA charges under those circumstances, since holding companies accountable for weak internal controls incentivizes companies to create a robust FCPA compliance environment.”
“Second, providing an affirmative defense for reasonably designed compliance programs could allow companies to retain ill-gotten gains. A company could engage in bribery or other corrupt behavior, obtain a benefit from such conduct (i.e. securing lucrative contracts), and yet not disgorge its ill-gotten gains. Enabling companies to retain proceeds generated from the payment of bribes would disincentivize those companies from adopting rigorous anti-corruption programs.”
“Third, sanctioning corrupt behavior sends a strong message of general deterrence to all similarly situated companies that there is a high financial and reputational cost to be paid if they bribe foreign officials. There is often no substitute for the deterrent impact of financial and reputational sanctions, which prevent improper behavior from becoming ingrained as just another ‘cost of doing business.’ That deterrence message likely would be diluted if such an affirmative defense was adopted.”
“Foreign Official”?
According to Chairman Schapiro, the FCPA “sufficiently defines the term foreign official.” She stated as follows. “Given the various forms of government found around the world, it would be impractical to articulate each of the myriad of ways that one could use to identify a foreign official in particular countries or cultures. In addition, Commission and Department of Justice enforcement actions also provide guidance on the meaning of ‘foreign official’ in various contexts. Finally, companies with a strong compliance culture have policies prohibiting all bribery in order to send a clear corporate message that such practices are not condoned.”
SEC Guidance?
“Both the Commission and the Department of Justice have numerous mechanisms for providing guidance on FCPA matters. Perhaps the most important guidance comes from the enforcement actions that are brought by the Commission and the Department of Justice. The Commission uses it pleadings and accompanying public news releases to highlight and reinforce the key elements of each case. Additionally, senior staff in the Division of Enforcement speak regularly at industry conferences and provide guidance on the FCPA program. “
For a prior post on “prosecutorial common law” – see here.
As relevant to Chairman Schapiro’s “guidance” response, readers may be interested in my “Facade of FCPA Enforcement” article (here) in which I discuss the frequency in which FCPA enforcement actions are resolved based on uninformative, bare-bones statements of facts or allegations or conclusory legal statements; the increasing trend of FCPA enforcement actions resolved based on untested and dubious legal theories, as well as enforcement theories seemingly in direct conflict with FCPA’s statutory provisions; and the opaque nature of FCPA enforcement and how similar enforcement actions, based on the government’s own allegations, are resolved with materially different charges and penalties.
In short, the notion that settled SEC civil complaints or administrative orders (or now SEC NPAs or DPAs or DOJ NPAs or DPAs for that matter) provide meaningful guidance or should serve as FCPA caselaw is absurd. In my Facade article, I detail cases in which the SEC admits that the terms of an SEC settlement “do not necessarily reflect the triumph of one party’s position over the other.” I also highlight statements from former SEC Commissioner and current Standford law professor Joseph Grundfest that, among other things, SEC complaints “typically omit mention of valid defenses and of countervailing facts or mitigating circumstances …”. In the words of Professor Grundfest, the “natural result” of settling an SEC enforcement action “is a one-sided record in which the Commission asserts its version of the facts and the law, and the settling defendants commit not to challenge that rendition.”
On the same general topic, albeit in the DOJ FCPA context, see this recent piece from Michael Volkov “The FCPA & Voluntary Disclosure An Engimatic Threat to Due Process” (“the Justice Department has started to cite as precedent its own decisions respecting the outer reaches of the law”).
Strict Parent Company Liability for Foreign Subsidiary Actions?
Chairman Schapiro’s response states in full as follows. “A U.S. parent company may be liable under the FCPA for bribes paid by its foreign subsidiary in certain circumstances, such as where the parent company had knowledge of the foreign subsidiary’s bribery or where the subsidiary acted as the parent’s agent. ‘Knowledge’ under the FCPA’s anti-bribery provisions encompasses actual knowledge, conscious disregard of, or willful blindness to the subsidiary’s illicit activities. In addition, under agency law, an agent’s knowledge can be imputed to the principal (parent). Accordingly, in the absence of the requisite evidence, the Commission does not charge a U.S. parent company with a violation of the FCPA’s anti-bribery provisions in connection with the foreign subsidiary’s actions. In addition, the Commission may, based on its analysis of the particular facts and circumstances of some cases, charge the foreign subsidiary directly with violation of the FCPA’s anti-bribery provisions while separately charging the parent company with violations of the books and records and internal control provisions of the FCPA. This is because the public company parent typically is responsible for the accuracy of the books and records of its overall operations, including those of its controlled foreign subsidiaries. While the FCPA’s books and records and internal controls provisions do not contain a ‘knowledge’ requirement, the Commission exercises its discretion and flexibility in charging these provisions.”
For previous posts on the issue of strict liability see here and here.
Double-Dip Penalties?
Chairman Schapiro stated 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.”
However, 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.
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For your viewing pleasure here – an October 5th rountable program sponsored by the Heritage Foundation on corruption, economic growth, and freedom.
For the calendars of Indianapolis area readers see here. A luncheon address – “Compliance in a New Era of FCPA Enforcement” I am giving next Tuesday (Oct. 11th) to the World Trade Club of Indiana. The event, sponsored by Butler University College of Business, begins at 11:30 at the downtown law offices of Baker & Daniels.