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Of Note From The Pfizer Enforcement Action

Yesterday’s post (here) went long and deep as to the Pfizer / Wyeth enforcement action.  Today’s post continues the analysis by highlighting additional notable issues.

FCPA Reform Issue

For the second time in recent months, the DOJ has attempted to address an FCPA reform proposal in an enforcement action press release.  See here and here for prior posts concerning the Garth Peterson enforcement action / Morgan Stanley no enforcement action.

As noted here and here (among other posts), one FCPA reform proposal seeks to address an acquiring company inheriting the acquired company’s FCPA exposure.

The DOJ’s release (here) in the Pfizer enforcement action stated as follows.  “In the 18 months following its acquisition of Wyeth, Pfizer Inc., in consultation with the department, conducted a due diligence and investigative review of the Wyeth business operations and integrated Pfizer’s Inc.’s internal controls system into the former Wyeth business entities.  The department considered these extensive efforts and the SEC resolution in its determination not to pursue a criminal resolution for the pre-acquisition improper conduct of Wyeth subsidiaries.”

Kudos to the DOJ … in part.

As evident from a close read of the statement of facts attached to the DPA (here), a substantial portion of the improper conduct giving rise to the allegations in Pfizer HCP’s information resulted from Pfizer’s acquisition of Pharmacia Corporation in 2003.  The statement of facts state as follows.  “[In April 2003] Pfizer acquired Pharmacia Corporation in a stock-for-stock transaction.  Pharmacia’s international operations were combined with Pfizer’s, including Pharmacia’s operations in Bulgaria, Croatia, Kazakhstan and Russia which were thereafter restructured and incorporated into Pfizer HCP.”  [Conduct in these countries was the focus of the information].

No Knowledge at Corporate Headquarters

Pfizer’s press release (here – pursuant to the DPA, Pfizer had to consult with the DOJ prior to issuing) stated as follows.  “There is no allegation by either DOJ or SEC that anyone at Pfizer’s or Wyeth’s corporate headquarters knew of or approved the conduct at issue before Pfizer took appropriate action to investigate and report it.  As soon as these local activities came to the attention of Pfizer’s corporate headquarters, they were voluntarily brought to the attention of the DOJ and SEC. Today’s settlements are focused solely on these local activities.”

You do wonder whether those opposed to FCPA reform (such as here) actually read FCPA resolution documents and understand this as well as other alleged facts in the Pfizer action such as the successor liability issue discussed above and that the conduct at issue in the DOJ enforcement took place between 6 – 15 years ago.  Probably not.

Curious Charging Decisions

In criminal actions, the DOJ’s burden of proof is beyond a reasonable doubt.  In civil actions, the SEC’s burden of proof is a more lenient preponderance of the evidence.  Given these different burdens of proof, it is common for the SEC to charge FCPA anti-bribery violations even in the absence of similar DOJ charges.

The exact opposite happened in this enforcement action.

The DOJ’s information charges FCPA anti-bribery violations, however, the SEC’s complaint which tracks the DOJ’s allegations (and then some) merely charge FCPA books and records and internal control violations.

Thinking About Disgorgement

There are certain exceptions, but one FCPA-related issue that has always intrigued me is that most corporate FCPA violators are otherwise viewed as selling the best product or service for the best price.  In my 2010 opening remarks at the World Bribery and Corruption Compliance (see here) I observed as follows.  “Another issue in need of deeper analysis is the commonly held enforcement view that the contract (and thus net profits of the contract) at issue was secured solely because of the alleged improper payments made by the corporate. This ignores the fact that most of the companies settling enforcement actions are otherwise viewed as industry leaders presumably because they offer the best product or service for the best price. With such companies, can it truly be said that the alleged improper payments were the sole reason the company secured the contract at issue, thus justifying the company being forced to disgorge all of its net profits associated with the contract? Does a but for analysis have a place in bribery laws – in other words should the enforcement agency have to prove that but for the improper payment, the company would not have secured the contract at issue?”

Given my interest in this issue, I was delighted to read (as highlighted in this prior post) a piece titled “Economic Analysis of Damages under the Foreign Corrupt Practices Act,” (here) by Dr. Patrick Conroy (here) and Dr. Graeme Hunter (here) – both of Nera Economic Consulting.  The authors note that “to date there has been little consideration of the true benefit of the bribe” but “with fines in the hundreds of millions of dollars and increasing enforcement, it is necessary to clearly understand what effect a bribe had on profits and to carefully establish what the but-for profits would have been without the bribe.” The authors note that “while a bribe may have led to very high gains, the but-for profits could have been high (and the gain from the bribe low) if the bribe would have little effect on the probability of winning the work or if alternative projects were similarly profitable.”

As noted by the FCPA Blog (here), the combined SEC disgorgement (and pre-judgement interest amount) in the Pfizer / Wyeth settlements was approximately $45 million.

However, does anyone truly believe that the only reason Chinese doctors prescribed Pfizer products was because under the “point programs” the physician would receive a tea set?  Does anyone truly believe that the only reason Czech doctors prescribed Pfizer products was because the company sponsored educational weekend took place at an Austrian ski resort?  Does anyone truly believe that the only reason Pakistani doctors offered Wyeth nutritional products to new mothers was because the company provided office equipment to the physicians?  Numerous other examples could also be cited in connection with the enforcement action, be I trust you get the point.

Given the above referenced SEC charges, the enforcement action also again raises the issue of “no-charged bribery disgorgement” which was the focus of this prior post that highlighted an FCPA Update by Debevoise & Plimpton (the author group included Paul Berger (here) a former Associate Director of the SEC Division of Enforcement).

A Gray Cloud That Lasted 8 Years

The FCPA Blog recently highlighted here the FCPA’s long shadow and asked “how long should the DOJ and SEC keep self reporting companies on the hook?” I share the concern that FCPA scrutiny, and the gray cloud it represents as hanging over a company, simply lasts too long.  In many cases, the gray cloud lasts between 2-4 years from the point of first disclosure to the point of an enforcement action.  In certain cases the gray cloud hangs over a company for a longer period of time.  Pfizer is one such example.  As noted in the resolution documents, Pfizer voluntarily disclosed various conduct giving rise to the enforcement action in 2004.  Thus the gray cloud lasted approximately 8 years.

Briefing Complete In Jackson – Ruehlen Challenge

This previous post asked whether the SEC would be put to its burden of proof in the Mark Jackson and James Ruehlen FCPA enforcement action.  The answer was yes as the defendants filed a motion to dismiss the SEC’s complaint as highlighted in this previous post.  The SEC filed an opposition brief that is highlighted in this previous post.  Last Friday, Jackson & Ruehlen filed separate reply briefs (see here and here).

In summary, Jackson’s counsel (lead by David Krakoff, BuckleySandler – here) argues as follows (internal citations omitted).

“Plaintiff Securities and Exchange Commission’s [opposition brief] side-steps the issues presented as well as Supreme Court precedent. Rather than address the deficiencies in its Complaint … the SEC ignores them and assumes it is not required to plead actual facts. Rather than properly plead the elements of a Foreign Corrupt Practices Act (“FCPA”) violation, the SEC claims it would simply be too difficult to identify, in any way, the other necessary party in an alleged bribery scheme—the foreign official who received or was to receive alleged bribes, or what acts that specific foreign official took.

But viewed under proper pleading standards, the SEC’s Complaint remains deficient and must be dismissed. The Complaint is nothing more than a series of conclusions about what Jackson “knew” or “believed,” without the necessary foundation of facts suggesting that Jackson did “know” or “believe” what the SEC asserts. Such conclusions are not “well-pleaded” facts which must be accepted by the Court as true for the purpose of a motion to dismiss. The few well-pleaded facts do not rise to the level of a plausible entitlement to relief, and indeed are equally consistent with a legally permissible explanation of Jackson’s conduct, which requires the Complaint to be dismissed. And many of the claims are barred by the statute of limitations.

The SEC has had years to investigate this case, using the full force of its investigatory power. It is not too much to ask, now that it has filed suit, for the SEC to plead actual facts.”

In summary, Ruehlen’s counsel (lead by Joseph Warin, Gibson Dunn – here) argues as follows (internal citations omitted)

“Despite investigating this case for many years, the SEC concedes in its Opposition that the Complaint does not allege the basic facts of an FCPA claim:

• It does not identify any Nigerian official—by name or even by position—to whom bribes were paid, authorized, or intended.

• It does not identify any duty that was breached or any law that was violated by the unknown Nigerian official recipient(s).

• It does not state what the unknown Nigerian officials did in exchange for the bribes or how those actions were intended to assist Noble in   obtaining or retaining business.

These structural flaws cannot be cured through discovery.

First, without alleging the identity of the officials, facts describing their duties and obligations under Nigerian law, and facts showing how Mr. Ruehlen allegedly intended to corrupt them, the SEC’s conclusory claims only raise the “sheer possibility that the defendant has acted unlawfully,” which is insufficient to state a claim.

Second, because the plain language of the FCPA permits payments to foreign officials in order to secure routine governmental actions, the Complaint only alleges conduct that is “not only compatible with, but indeed [is] more likely explained by, lawful . . . behavior.”

Third, the Complaint does not meet the standards of notice pleading under Federal Rule of Civil Procedure 8. Mr. Ruehlen is left to guess who was allegedly bribed, the scope of that person’s authority, and whether that person violated any Nigerian law. He must also guess which Noble record he allegedly falsified and which control he allegedly evaded. Accordingly, the Complaint does not provide Mr. Ruehlen the requisite “fair notice of what the . . . claim is and the grounds upon which it rests,” rendering it impossible for him to answer the Complaint, seek discovery, or prepare his defense.

The briefing is complete and the lines have been drawn.

The Jackson & Ruehlen challenge is a significant event in terms of the SEC’s FCPA enforcement program.  Rarely is the SEC put to its burden of proof in FCPA enforcement actions.  As noted in this prior post, the last time the SEC was put to its burden, in a similar case concerning conduct outside the context of foreign government procurement, the SEC lost.  In addition, as noted in prior posts (here and here) the government (DOJ and SEC) have an overall losing record when put to its burden of proof in cases concerning conduct outside the context of foreign government procurement.

SEC Files Opposition Brief To Jackson and Ruehlen’s Motion To Dismiss

This previous post discussed the February 2012 SEC FCPA enforcement action against Mark Jackson (former Noble Corporation CEO) and James Ruehlen (current Director and Division Manager of Noble’s subsidiary in Nigeria).  The enforcement action is based on the same core set of facts alleged in the 2010 Noble Corporation enforcement action (see here for the prior post).  The February 2012 post noted that unlike the vast majority of FCPA defendants (corporate and individual) charged in an SEC enforcement action, Jackson and Ruehlen appeared poised to launch a defense.

This previous post discussed Jackson’s and Ruehlen’s May 2012 motion to dismiss and noted the significance of the event in terms of the SEC’s FCPA enforcement program as the SEC is rarely put to its burden of proof in FCPA enforcement actions.  To my knowledge, the Jackson and Ruehlen enforcement action represents 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.

Last Friday the SEC filed its opposition to the motion to dismiss (here) and in summary fashion the SEC’s opposition brief states as follows.

“The Complaint charges defendants Jackson and Ruehlen, a former and current senior officer of Noble Corporation (“Noble”), respectively, with multiple violations of the anti-bribery and accounting provisions of the Foreign Corrupt Practices Act (“FCPA”), 15 U.S.C. § 78dd-1, and other violations of the federal securities laws. Noble, an international oil drilling company, used for years an intermediary “customs agent” to pay bribes to government officials of the Nigerian Customs Service and other Nigerian government officials. Jackson and Ruehlen were intimately involved in arranging, approving, falsely booking, and concealing Noble’s bribe payments to foreign officials. Together, the defendants participated in paying hundreds of thousands of dollars in bribes to improperly obtain approximately eight illegitimate duty exemptions, known as temporary import permits (“TIPs”), and twenty-two TIP extensions. These TIPs and extensions were obtained illicitly so that Noble’s oil rigs offshore in Nigeria could continue to operate under lucrative drilling contracts. Jackson approved the payments and concealed the payments from Noble’s audit committee and auditors. Ruehlen prepared false documents as to the movement of the rigs, sought approval for the payments from Jackson and others at Noble, and processed and paid the bribe money to the intermediary customs agent.

Defendants contend that the Commission has failed to state a claim upon which relief may be granted pursuant to FRCP 12(b)(6). They attack the sufficiency of the Complaint in scattershot fashion, but their arguments distilled to their essence advance six primary arguments for dismissal:

First, the defendants argue that the SEC must allege the “specific identity” of Nigerian officials for whom the defendants authorized the payment of bribes. This line of argument finds no support in the text, legislative history, case law, or purposes of the FCPA. Defendants authorized bribes to foreign officials through intermediaries. The Complaint identifies the officials by country and government agency and alleges defendants’ corrupt intent to improperly influence those officials through the payment of money. Neither the FCPA nor the notice pleading standards of Federal Rule of Civil Procedure 8(a) require anything more. As the language, text, legislative history and policies of the FCPA confirm, a violation of its provisions rests with the intent of the person authorizing the bribes, not with the identity or role of the official targeted for bribery. The name, title or exact position of the official need not be pleaded or proved, as confirmed by decisions under analogous domestic bribery statutes.

Second, the defendants argue that the Complaint fails to allege facts to support the inference that their payments fell outside of the FCPA’s statutory “routine governmental action” (a.k.a. “facilitating payments”) exception. Yet, the SEC is not required to plead preemptively around a statutory exception that a defendant might invoke. For over a century, including in the securities context, the Supreme Court has held that a pleading based on a general provision that defines the elements of a statutory violation need not negate an exception made by proviso or otherwise to those elements. The “facilitating payments” exception fits that rule. Thus, the defendants, not the SEC, must raise the exception’s application in the pleadings and prove its applicability at trial. Moreover, the Complaint satisfies any purported need to “plead around” the exception. The well-pled facts, such as that the bribes were paid to induce foreign officials to falsely certify facts and accept false paperwork, indicate that defendants’ bribes were not “facilitating payments,” i.e., payments authorized to expedite or secure the performance of an ordinarily or commonly performed official act.

Third, Ruehlen claims that the FCPA’s routine government action exception is unconstitutionally vague as applied to him. Claims of this nature have been soundly rejected by the courts, including by the Fifth Circuit. Also, the Complaint abundantly alleges that Ruehlen sought and obtained authorizations to pay bribes that cannot be understood reasonably as anything other than crossing the line of prohibited conduct.

Fourth, the defendants contend that the Complaint does not allege facts giving rise to the inference that they acted “corruptly.” This attack on the Complaint ignores the well-pled facts and misconstrues the law. The legislative history of the FCPA and the decisions in the Fifth Circuit and elsewhere reject defendants’ definition of “corruptly.” Defendants also overlook that states of mind, such as intent and purposes, may be alleged generally. The Complaint alleges defendants’ corrupt intent, and the allegations are supported by ample facts.

Fifth, the defendants seek to dismiss the Complaint as insufficiently pleading alleged securities violations other than bribery. Defendants, for example, argue that the SEC fails to specify the books and records that were falsified and the internal controls that they evaded. Defendants’ line of arguments directed to these issues are, first, largely premised on their attack on the Commission’s bribery claims – an attack that this Court should reject. In addition, the defendants simply ignore the facts actually pled in the Complaint. The allegations set forth in great detail what Jackson and Ruehlen claim not to find in the Complaint, including identifying the books and records falsified and the internal controls evaded or not implemented.

Sixth, the defendants argue that the Complaint is untimely because the applicable statute of limitations permits relief only for conduct occurring five years before the filing of the Complaint on February 24, 2012. Yet buried in footnotes in their briefs, the defendants admit that they signed tolling agreements extending the statute of limitations. The Complaint alleges violative conduct within the limitations period even absent the tolling agreement. What is more, various equitable doctrines would apply to toll the statute. And the statute of limitations does not apply to claims for equitable relief such as injunctions.

Finally, throughout each of their briefs, defendants intermittently challenge facts asserted in the Complaint, advance facts not alleged in the Complaint but purportedly reflected elsewhere, and argue for inferences favorable to them. At the pleadings stage, these arguments are not a proper basis for granting a motion to dismiss and must be rejected. The Commission has stated a claim upon which relief may be granted for each of Claims One through Seven, and defendants’ motions to dismiss should be denied.”

Friday Roundup

From the campaign stump, Wal-Mart civil suits start to pour in – plus a comment regarding statute of limitations, where should the money go, don’t believe the hype, and for the weekend reading stack.  It’s all here in the Friday roundup.

From The Stump

Zein Obagi (here – a  fiscally conservative Democratic candidate for California’s new 33rd Congressional District) earlier this week posted a letter (here) he sent to U.S. Senator Dianne Feinstein (D-CA).  Titled “Keeping California Companies Competing Abroad Competitive” the letter begins as follows.  “I am writing to ask you to show our party’s understanding of international trade by updating and clarifying the Foreign Corrupt Practices Act.  As you know Senator, both sides of the aisle have put forth efforts to clarify the FCPA, to assist in its enforcement and also keep America competitive with foreign nations’ trade practices.”  In the letter, Obagi states that “California businesses expend enormous resources with insufficient assurances that they will not run afoul of the FCPA.”

Kudos to Obagi for the courage to tackle the politically sensitive issue of reforming the FCPA.  His letter reminds us of an issue lost in the FCPA reform debate – that certain aspects of FCPA reform share bipartisan support.  See here for the transcript of the Senate’s 2010 FCPA hearing (particularly statements from Democratic Senators Amy Klobuchar and Chris Coons) and here for the transcript of the House’s 2011 FCPA hearing (particularly statements from Democrat Representative John Conyers).

Wal-Mart Civil Suits Begin to Pour In

One of my earlier Wal-Mart posts (here) noted that not only will the DOJ and SEC likely be examining the conduct of Wal-Mart executives, but so too will plaintiff law firms representing shareholders who will likely scour Wal-Mart’s SEC filings and other statements to the market in bringing derivative claims alleging breach of fiduciary duty and potential Section 10(b) claims based on material omissions concerning Wal-Mart Mexico.  On this score, shareholders are likely to allege, among other things, that Wal-Mart’s officers and directors demonstrated conscious disregard for fiduciary duties by failing to act diligently in the face of known facts suggesting a duty to act.

Approximately ten days later the civil suits are starting to pour in.  See here (New York Times) and here (Los Angeles Times) for the derivative lawsuit brought by the California State Teachers’ Retirement System, the country’s second-largest public pension fund, the California State Teachers’ Retirement System,  against current and former board members and executives of Wal-Mart Stores Inc., accusing them of using bribery and corruption to gain authorization from Mexican government officials to build new stores.

The complaint (here) generally tracks the New York Times article (see here for a prior summary), but also includes allegations suggesting potential insider trading.  The complaint alleges as follows.  “[T]he trading records of defendants [H. Lee Scott Jr.] and [Eduardo] Castro-Wright show that both of these defendants began selling millions of dollars worth of Wal- Mart shares in the months after The New York Times first contacted the Company regarding possible FCPA infractions by Wal-Mex in December 2011. Scott and Castro-Wright were divesting their shares in Wal-Mart in apparent anticipation of the publication of The New York Times exposé and the corresponding stock drop that would undoubtedly occur, and did occur. On the three trading days after The New York Times’ April 21, 2012 exposé, Wal-Mart stock dropped eight percent, wiping out all of its gains in 2012. Scott and Castro-Wright sold uncharacteristically large amounts of stock while in possession of the materially adverse nonpublic information that the Company was exposed to undisclosed liability for massive FCPA penalties and other contingences relating to the bribes and cover-up …”.

In addition, yesterday Gilman Law LLP announced here a derivative lawsuit filed in the United States District Court for the Western District of Arkansas against Wal-Mart.  According to the release, the “complaint alleges the Directors of Wal-Mart breached their fiduciary duties by violating the Foreign Corrupt Practices Act and engaging in a six-year-long cover-up of a massive bribery scheme concerning Wal-Mart’s expansion in Mexico.”

Wal-Mart Statute of Limitations

In recent days, there has been much talk about the FCPA’s statute of limitations (5 years) and how the limitations period can generally be extended through conspiracy charges.  All correct observations as to a fundamental black-letter law concept.  Except in corporate FCPA inquiries, one can generally toss aside fundamental black-letter law concepts because they simply do not matter.

Sure, Wal-Mart (or any other company subject to FCPA scrutiny) can talk about statute of limitations around conference room tables behind closed doors in Washington D.C., but to truly challenge the DOJ on this issue (as all others) first requires that the company be criminally indicated, something few corporate leaders are willing to let happen.  Cooperation is the name of the game in corporate FCPA inquiries and to assert statute of limitations issues is not cooperating.  Given the “carrots” and “sticks” relevant to resolving FCPA enforcement actions (to learn more about these “carrots” and “sticks” please read ”The Facade of FCPA Enforcement” – here), one of first steps during a corporate disclosure of FCPA issues (one that Wal-Mart made in December 2011) is to enter into a tolling agreement or to waive any statute of limitations defenses.

As evidence, dig into the details of most FCPA enforcement actions and one quickly discovers that the conduct at issue is old – in some cases very old.  The 2012 Biomet enforcement action (see here for the prior post) concerns conduct going back to 2000; the 2012 Smith & Nephew enforcement action (see here for the prior post) concerns conduct going back to 1998; and the 2012 Marubeni enforcement action (see here for the prior post) concerns conduct going back to 1995 (17 years ago) with the last act alleged occurring in 2004.

For a similar post on fundamental black letter law concepts in FCPA enforcement actions, see this prior post “Does DOJ Expect FCPA Counsel to Roll Over and Play Dead?”

Don’t Believe the Hype

Writing at the Huffington Post (here), Professor Brandon Garrett (here – University of Virginia School of Law) says “Don’t Believe the Hype on Corporate Bribery.”  Professor Garrett notes that “at first, foreign bribery prosecutions may seem big and brash and the farthest thing from a wrist-slap” but he cautions that many FCPA enforcement actions “can be smaller than they appear.”

I frequently am put in the “the DOJ is too aggressive in enforcing the FCPA” camp and in many respects that is true.  However, I have also frequently stated (see here for my Facade of FCPA Enforcement article, here for my Senate testimony and here and here for prior posts as to the same Siemens and BizJet enforcement actions Professor Garrett references) that in egregious instances of corporate bribery that legitimately satisfy the elements of an FCPA anti-bribery violation involving high-level executives and/or board participation the DOJ’s aggressive rhetoric does not match the reality of the enforcement action.

See this prior post for discussion of Professor Garrett’s article “Globalized Corporate Prosecutions.”

Where Should the Money Go

This prior post discussed the recent letter by Socio-Economic Rights and Accountability Project (“SERAP”) (a non-governmental civil society organization in Nigeria) 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.”

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.

Recently the SEC responded to the letter (see here).  The SEC thanked SERAP for its ‘thoughtful submission” and stated that it will “give appropriate consideration” to its suggestions while also noting as follows.  “Although the macro effects of corruption can be ascribed generally, the framework of our securities laws requires a proximate connection to the harm caused by a particular violation.  The question of identifying investors or other parties that suffer cognizable harm in connection with the securities law violation(s) at issue in a given enforcement matter is driven by the facts and circumstances of that particular case.”

For more, including my views, see here from Trustlaw.

Others are also thinking about the issue of where FCPA enforcement proceeds should go.  In this draft paper titled “Reforming the Foreign Corrupt Practices Act to Reduce Rent Seeking and Better Deter Transnational Bribery,” Matthew Turk argues as follows: “(1) the SEC should cease retaining profits disgorged by corporate defendants; (2) disgorgements should be transferred to the Host country where the bribe took place, conditional on the Host government’s cooperation with the FCPA investigation; and (3) if cooperation is not forthcoming, disgorgement proceeds should be transferred to the OECD Working Group, an international organization designed to facilitate the enforcement of an important anti-bribery treaty.”  According to Turk, “Reforming disgorgement practices in the manner suggested here would not constitute a legalistic attempt to ratchet the total level of anti-corruption enforcement up or down in a particular direction. Instead it would re-allocate the proceeds from FCPA enforcement on a global scale so as to properly align the incentives of the parties involved and provide greater access to the information required for effective enforcement.”

Weekend Reading Stack

I recommend this recent Q&A in Metropolitan Counsel with Homer Moyer (Miller & Chevalier) a “Dean” of the FCPA.  Might as well make it a Homer Moyer weekend – see here for a prior Q&A post on this site with Moyer.

Judge Blasts SEC’s Lack of Dilligence

Dig into the details of most FCPA enforcement actions and one quickly discovers that the conduct at issue is old – in some cases very old.

The February 2011 enforcement action against Tyson Foods for instance related to conduct between 2004 and 2006. See here for the SEC’s complaint.

The January 2011 enforcement action against Maxwell Technologies alleged conduct going back to 2002. See here for the SEC’s complaint.

The December 2010 enforcement action against Alcatel-Lucent alleged conduct going back to 2001. See here for the SEC’s complaint.

The June/July 2010 Bonny Island bribery enforcement actions alleged conduct going back to 1995. See here for the SEC’s complaint against Technip for instance.

The FCPA does not have a specific statute of limitations, rather the “catch-all” provisions in 18 USC 3282 (for criminal actions) and 28 USC 2462 (for civil actions) apply.

Cooperation is often the name of the game in FCPA enforcement inquiries and, because of that, tolling agreements are frequently agreed to. Thus, discussing a fundamental black-letter law concept like statute of limitations in the FCPA context seems foolish.

But imagine a world (a world that perhaps is slowly developing – see here for instance) in which individuals and companies in FCPA enforcement actions do mount legal defenses based on black-letter legal principles such as statute of limitations.

In that world, it is likely one would see judicial opinions like the recent opinion from U.S. District Court Judge Jane Boyle (N.D. Tex.) in SEC v. Microtune, Inc. et al (see here for the opinion).

The relevant facts are as follows.

In June 2008, the SEC filed an enforcement action against Microtune and two of its former executives alleging a fraudulent stock-option backdating scheme between 2000 and mid-2003. As noted in the opinion, the “crux” of the limitations defense “was that most of the acts forming the basis of the SEC’s case occured between 2001 and mid-2003.”

The precise issue before the court was “whether the doctrine of fraudulent concealment, relied on by the SEC, operate[d] to toll the running of the five-year limitations period under the facts of the case.” The SEC argued that it was entitled to judgment as a matter of law on the limitations defense “because the ‘discovery rule’ and certain equitable tolling principles including ‘fraudulent concealment’ and the ‘continuing violations doctrine’ applied and salvaged claims that would otherwise be barred by the five-year statute of limitations.” The court had previously rejected the SEC’s “discovery rule” and “continuing violations doctrine” claims, and focused on the SEC’s “fraudulent concealment” theory for tolling the statute of limitations.

The court noted that in order for the SEC to prevail on its “fraudulent concealment” claim, it had to show that it “acted diligently once [the SEC] had inquiry notice, i.e., once [the SEC] knew of or should have known of the facts giving rise to [its] claim.” The court held that there was “no genuine issue of material fact as to whether the SEC acted diligently nor as to whether the SEC discovered the alleged wrongdoing within the limitations period.”

As noted in the opinion, “when asked about the SEC’s diligence” counsel for the SEC explained as follows: “we, often for resource reasons, wait until the company does its own investigation before we complete ours.” [In July 2006, Microtune announced it was commencing an internal review as to the alleged practices].

Judge Boyle was not persuaded and stated as follows. “While perhaps an understandable method of allocating Commission resources, such justification does not excuse the SEC’s apparent inactivity from mid-2004 to mid-2006, when further investigation would have uncovered the full extent of Microtune’s backdating and would have allowed the SEC to bring a complaint against Microtune much earlier than 2008.”

Accordingly, the judge dismissed all claims against the defendants falling outside of the five year limitations period – except those saved as a result of tolling agreements reached in 2007 and 2008.

See here for an article about the ruling from Shannon Green at Corporate Counsel.

Ask any FCPA practitioner and, in a candid moment, they will tell you that SEC FCPA inquiries often unnecessarily drag on for many years, including long stretches of complete inactivity, unreturned phone calls, and other delays due to SEC resource issues – including turnover of SEC attorneys assigned to the case.

Again, because cooperation tends to be the name of the game in FCPA inquiries and because tolling agreements are frequently agreed to, the SEC’s lack of diligence in an FCPA matter is generally not a relevant issue.

However, every once in a while it is interesting to think of what would happen if FCPA enforcement largely took place in the context of an adversarial system.

The recent Microtune decision would seem to provide a glimpse.

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