Does Legal Authority Even Matter In FCPA Enforcement?

As highlighted in yesterday’s post, the 11th Circuit recently concluded in SEC v. Graham – in direct conflict with the government’s assertion in the FCPA Guidance – that disgorgement is subject to a five-year statute of limitations.

Graham of course should matter to FCPA enforcement.

However, the reality is that Graham will likely not matter because legal elements, legal exceptions, legal defenses, and other general legal principles often only directly matter to the extent an adversarial proceeding takes place and a litigant is forced to prove things consistent with the applicable burden of proof.

Indeed, in the FCPA context the SEC has never been put to its burden of proof by an issuer.

Since first being used in an FCPA enforcement action in 2004 (see this article for a discussion), disgorgement has become a predominate component of SEC corporate FCPA enforcement actions.

As highlighted in this 2015 SEC FCPA Year in Review post:

• in 2015, 51% of SEC FCPA settlement amounts consisted of disgorgement and prejudgment interest;
• in 2014, 99% of SEC FCPA settlement amounts consisted of disgorgement and prejudgment interest;
• in 2013, 98% of SEC FCPA settlement amounts consisted of disgorgement and prejudgment interest;
• in 2012, 86% of SEC FCPA settlement amounts consisted of disgorgement and prejudgment interest;
• in 2011, 94% of SEC FCPA settlement amounts consisted of disgorgement and prejudgment interest; and
• in 2010, 96% of SEC FCPA settlement amounts consisted of disgorgement and prejudgment interest.

Couple the above disgorgement figures with the fact that many corporate FCPA enforcement actions concern conduct that is often beyond the five-year statute of limitations period (see here for examples), and the obvious question in light of SEC v. Graham is whether the decision will matter in FCPA enforcement actions?

Graham of course should matter.

However, the reality is that Graham will likely not matter because legal elements, legal exceptions, legal defenses, and other general legal principles often only directly matter to the extent an adversarial proceeding takes place and a litigant is forced to prove things consistent with the applicable burden of proof. In the FCPA context, the SEC has never been put to its burden of proof by an issuer.

As highlighted several other times on these pages, statute of limitations seem not to matter in corporate FCPA enforcement actions because one of the first things a company under FCPA scrutiny often does to demonstrate cooperation is agree to toll the statute of limitations or waive any statute of limitations defense. For instance, see this recent disclosure from Newmont Mining.

The headline question – does legal authority even matter in FCPA enforcement – can be asked in a number of ways both specific to the FCPA and otherwise.

• Does it even matter that the FCPA’s anti-bribery provisions have a corrupt intent element which Congress explained as follows. “The word ‘corruptly’ connotes an evil motive or purpose”?

• Does it even matter that the FCPA’s anti-bribery provisions have an obtain or retain business element that Congress intended as a limiting factor to only capture a narrow range of payments involving foreign government procurement or influencing foreign government legislation or regulations?

• Does it even matter that in FCPA enforcement actions outside the context of foreign government procurement that the government has an overall losing record when put to its burden of proof? (See this article for a description of those cases).

• Does it even matter that in U.S. v. Kay (the only FCPA enforcement action outside the context of foreign government procurement that the government won) that the 5th Circuit stated:

“There are bound to be circumstances in which such a cost reduction does nothing other than increase the profitability of an already-profitable venture or ensure profitability of some start-up venture. Indeed, if the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting is obtaining or retaining business would be unnecessary, and thus surplusage—a conclusion that we are forbidden to reach.”

• Against the backdrop of numerous FCPA enforcement actions based on securing licenses, permits, certifications and the like, does it even matter that Congress specifically stated that the anti-bribery provisions would not “reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must of necessity be performed in any event.”?

• Does it even matter that in U.S. v. Jackson (the only judicial decision construing the facilitating payments exception) that the court held (contrary to the SEC’s position) that the government “must bear the burden of negating the facilitating payments exception” and that the “exception is best understood as a threshold requirement to pleading that a defendant acted ‘corruptly.'”?

• Does it even matter that Congress intended, and the FCPA explicitly states, that the books and records and internal controls provisions are qualified by concepts of reasonableness and good faith?

• Does it even matter that the FCPA defines “reasonable assurance” and “reasonable detail” as used in the books and records and internal controls provisions to mean “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”?

• Does it even matter that in SEC v. Worldwide Coin (the only judicial decision that directly addresses the substance of the FCPA’s books and records and internal controls provisions) that the court stated:

“The definition of accounting controls does comprehend reasonable, but not absolute, assurances that the objectives expressed in it will be accomplished by the system. The concept of ‘reasonable assurances’ contained in [the internal control provisions] recognizes that the costs of internal controls should not exceed the benefits expected to be derived. It does not appear that either the SEC or Congress, which adopted the SEC’s recommendations, intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs. It appears that Congress was fully cognizant of the cost-effective considerations which confront companies as they consider the institution of accounting controls and of the subjective elements which may lead reasonable individuals to arrive at different conclusions. Congress has demanded only that judgment be exercised in applying the standard of reasonableness. […] It is also true that the internal accounting controls provisions contemplate the financial principle of proportionality—what is material to a small company is not necessarily material to a large company.”

The “does it even matter” question can also be asked regarding other general legal authority relevant to FCPA enforcement.

• Does it even matter that the Supreme Court in Gabelli v. SEC rejected the SEC’s argument about statute of limitations and held that statute of limitations are even more important in a government enforcement action compared to a case brought by a private plaintiff?

• Does it even matter that the Supreme Court in Southern Union Co. v. U.S. held that any fact that substantially increases a criminal defendant’s fine amount must be provable to a jury beyond a reasonable doubt?

• Does it even matter that the Supreme Court – most recently in McCutcheon v. FEC– stated that “ingratiation and access are not corruption.”?

• Does it even matter that the Supreme Court in Daimler v. Bauman rejected an agency theory that has seemingly served as the basis for several corporate FCPA enforcement actions?

In short, does legal authority even matter in FCPA enforcement or is FCPA enforcement largely a game of risk aversion.