Top Menu

Issues To Consider From The Legg Mason Enforcement Action


This previous post went in-depth into the DOJ’s recent Foreign Corrupt Practices Act enforcement action against Legg Mason. This post continues the analysis by highlighting additional issues to consider.

SEC Enforcement Action Is Forthcoming

Given Legg Mason’s recent disclosure (see here for the prior post), it was a bit of a surprise that this week’s enforcement action included only a DOJ component. FCPA enforcement actions against issuers that involve a DOJ and SEC component are almost always announced on the same day.

Yet for some reason, it appears that the i’s were not dotted or the t’s crossed at the SEC. The following statement in the DOJ’s NPA should be viewed as a placeholder for a forthcoming SEC enforcement action.

“The Company agrees to pay a monetary penalty in the amount of $32,625,000.00 to the United States Treasury no later than five business days after the Agreement is fully executed, and to pay $31,617,891.90 in disgorgement of profits no later than one year after the Agreement is fully executed.  […] The Offices will credit any disgorgement paid by the Company to another law enforcement authority in connection with the resolution of this matter, so long as such disgorgement is paid within one year of the execution of this Agreement.” (emphasis added).

Indeed, as noted in this Legg Mason release:

“Legg Mason expects to resolve its case with the U.S. Securities and Exchange Commission for this same matter shortly. […]  The aggregate amount of the financial penalties and other amounts resulting from the settlements with the Department of Justice and the Securities and Exchange Commission is expected to be approximately $71 million.”

From an FCPA statistical standpoint, the bifurcated nature of the Legg Mason enforcement action is unfortunate because here is what is likely going to happen. Those who are sloppy in keeping FCPA enforcement statistics will likely tag on the expected $38 million SEC enforcement action (disgorgement plus prejudgment interest) to the initial $64 million DOJ enforcement action for a total settlement amount of approximately $102 million, when the reality is the aggregate enforcement action is (as stated in Legg Mason’s release) approximately $71 million.

We shall see.

Statute of Limitations Don’t Matter When Companies Roll Over

In case you didn’t notice, the conduct at issue in the Legg Mason enforcement action was old. Really old.

As stated by the DOJ, the problematic conduct occurred between 2004 and 2010. If you are scoring at home, this is between 8 years to 14 years prior to the enforcement action.

Normally, statute of limitations are the remedy the law provides from long-drawn out enforcement, but then again this fundamental legal principle matters little when companies roll over. As stated by the DOJ:

“[Legg Mason] received full credit for its cooperation with the Offices’ investigation, including credit for … entering into agreements tolling relevant statutes of limitations.”

Relevant to the disgorgement amount mentioned in the DOJ enforcement action and no doubt the disgorgement amount in the future SEC enforcement action, approximately one year ago the Supreme Court unanimously held in Kokesh that disgorgement is a penalty and thus disgorgement actions must be commenced within five years of the date the claim accrues. However, as highlighted in this post, Kokesh, not to mention other Supreme Court decisions and other legal principles, only matter to the extent companies under FCPA scrutiny do not roll over and play dead. In short, Kokesh is not going to matter one bit if companies role over and play dead when under FCPA scrutiny. As highlighted in this previous guest post from a former SEC Enforcement Division attorney and DOJ Fraud Section prosecutor, issuers simply need to stop doing this.

Is the Post-Enforcement Action Reporting Truly Necessary?

In the NPA, Legg Mason agreed to report to the DOJ annually during the three year term of the NPA regarding various remediation and implementation of compliance issues.

Yet, is this truly necessary?

Consider the following, in the words of the DOJ:

“[the misconduct] involved only two mid-to-lower level employees of a subsidiary of the Company and was not pervasive throughout the Company; that the employees are no longer employed by the subsidiary and have not been for at least four years; that the Company’s co-conspirator — and not the Company itself— maintained the relationship with the intermediary and was responsible for originating and leading the scheme; that the profits earned by the Company in connection with the corrupt transactions … were less than one-tenth of the profits earned by the Company’s co-conspirator; and that the Company has no history of similar misconduct;

the Company implemented remedial measures, including adding full-time legal and compliance employees, along with a designated anti-corruption officer; initiating internal audit reviews of its policies in this area; enhancing and regularizing employee training, including routine in-person training handled and quarterly external training; and instituting compliance oversight across a broad category of business expenditures.”

Against this backdrop, is post-enforcement action reporting truly necessary or yet another example of a government required transfer of shareholder wealth to FCPA Inc. (see here a prior post including additional posts embedded therein).

Beyond the Requirements of the FCPA

In the NPA, Legg Masson agreed to the following:

“In order to address any deficiencies in its internal accounting controls, policies, and procedures, the Company represents that it has undertaken, and will continue to undertake in the future, in a manner consistent with all of its obligations under this Agreement, a review of its existing internal accounting controls, policies, and procedures regarding compliance with the FCPA and other applicable anti-corruption laws. Where necessary and appropriate, the Company agrees to adopt a new compliance program, or to modify its existing programs, including internal controls, compliance policies, and procedures in order to ensure that the Company maintains: (a) an effective system of internal accounting controls designed to ensure the making and keeping of fair and accurate books, records, and accounts; and (b) a rigorous anti-corruption compliance program that incorporates relevant internal accounting controls, as well as policies and procedures designed to effectively detect and deter violations of the FCPA and other applicable anti-corruption laws.”

Does Legg Mason realize that it just agreed to standards beyond the requirements of the FCPA?

The FCPA specifically states that issuers shall:

make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and

devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that certain financial objectives are met.

The FCPA then defines  “reasonable assurances” and “reasonable detail” to “mean such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”

Foreign Official Notable

Among the foreign official allegations in the enforcement action was the following:

“Although Libyan Official 1 did not hold a formal title within the Libyan government, Libyan Official 1 possessed and used a Libyan diplomatic passport and conducted high-profile foreign and domestic affairs for, and on behalf of, the Libyan government. Libyan Official 1 made administrative and investment decisions for the LIA, including through proxies. Libyan Official 1 was a “foreign official” within the meaning of the FCPA.”

If that sounds familiar, then A+ for you because the Och-Ziff enforcement action included the same foreign official. (See here for the prior post).

Stay Ahead of the Curve

Once reason I hope you read FCPA Professor is to stay ahead of the curve and anticipate issues before they actually happen. If you read this 2014 FCPA Professor post, the recent Libya-related enforcement actions will come as no surprise.

Separately, what the prior post highlighted is that with certain FCPA enforcement actions the U.S. government bears some responsibility. Specifically, as noted in the prior post, in 2004 the U.S. government lifted various sanctions against Libya after Moammar Kadafi agreed to abandon a nuclear weapons program.  The White House encouraged “Libya’s reintegration with the global market” and a White House statement read:  “U.S. companies will be able to buy or invest in Libyan oil and products. U.S. commercial banks and other financial service providers will be able to participate in and support these transactions.

Whether its leading trade missions, providing export financing or provide support through diplomatic channels, in certain instances the U.S. government encourages companies (for foreign policy and other strategic interests) to go to the edge of the cliff.  As the passage of time occasionally shows, when the footing on the cliff becomes a bit loose, and the market participants fall over the edge, other segments of the U.S. government then launch a criminal inquiry seeking to discover why.

As I told a Foreign Policy reporter back in 2014 in connection with the Libya inquiries.

“There is an irony of course in the U.S. government encouraging companies to do business in certain countries because it serves U.S. interests.  Then when the company does business in that country and encounters business conditions that the U.S. government no doubt knew it was going to encounter, the company then becomes the subject of a U.S. law enforcement inquiry.”

As so it goes.

Elevate Your FCPA Research

There are several subject matter tags in this post. However, only subscribers to FCPA Professor's premium search feature can see and use them in research. Efficient and cost-effective FCPA research is just a click away.

Elevate Your Research

Powered by WordPress. Designed by WooThemes