Last week, the SEC released this document titled “Division of Enforcement Approach to Forum Selection in Contested Actions.”
In Foreign Corrupt Practices Act history, one can count the number of “contested” SEC FCPA enforcement actions on one hand, but the recent document is nevertheless an interesting read as it sets forth the SEC’s approach in determining whether an action proceeds as a civil action in federal court or an SEC administrative proceeding.
According to the document:
“There is no rigid formula dictating the choice of forum. The Division considers a number of factors when evaluating the choice of forum and its recommendation depends on the specific facts and circumstances of the case. Not all factors will apply in every case and, in any particular case, some factors may deserve more weight than others, or more weight than they might in another case. Indeed, in some circumstances, a single factor may be sufficiently important to lead to a decision to recommend a particular forum. While the list of potentially relevant considerations set out below is not (and could not be) exhaustive, the Division may in its discretion consider any or all of the factors in assessing whether to recommend that a contested case be brought in the administrative forum or in federal district court.”
- The document then sets forth the following factors;
- The availability of the desired claims, legal theories, and forms of relief in each forum;
- Whether any charged party is a registered entity or an individual associated with a registered entity;
- The cost‐, resource‐, and time‐effectiveness of litigation in each forum;
- Fair, consistent, and effective resolution of securities law issues and matters.
Under the last factors, the document states:
“If a contested matter is likely to raise unsettled and complex legal issues under the federal securities laws, or interpretation of the Commission’s rules, consideration should be given to whether, in light of the Commission’s expertise concerning those matters, obtaining a Commission decision on such issues, subject to appellate review in the federal courts, may facilitate development of the law.”
This statement is beyond concerning.
Unsettled and complex legal issues are deserving of an independent judiciary, not the SEC’s own administrative law judges. Contrary to the SEC’s assertion, the above preference does not facilitate the development of law, it hinders the development of law.
Speaking of SEC administrative actions, no surprise here – the SEC wins a very high percentage of its cases when brought before its own administrative law judges. According to this recent Wall Street Journal article:
“An analysis by The Wall Street Journal of hundreds of decisions shows how much of a home-court advantage the SEC enjoys when it sends cases to its own judges rather than federal courts. That is a practice the agency increasingly follows, the Journal has found.
The SEC won against 90% of defendants before its own judges in contested cases from October 2010 through March of this year, according to the Journal analysis. That was markedly higher than the 69% success the agency obtained against defendants in federal court over the same period, based on SEC data.”
As highlighted in prior posts (see here for instance), the predominate method by which the SEC has brought FCPA enforcement actions over the past few years have been through its own administrative process. This is against the backdrop of the SEC never prevailing in an FCPA enforcement action when put to its ultimate burden of proof. (See here).
In this recent speech, SEC Chair Mary Jo White talks about the SEC’s whistleblower program:
“There have always been mixed feelings about whistleblowers and many companies tolerate, at best, their existence because the law requires it. I would urge that, especially in the post-financial crisis era when regulators and right-minded companies are searching for new, more aggressive ways to improve corporate culture and compliance, it is past time to stop wringing our hands about whistleblowers. They provide an invaluable public service, and they should be supported. And, we at the SEC increasingly see ourselves as the whistleblower’s advocate.
It has been nearly four years since the SEC implemented its whistleblower program. While still evolving and improving, we have enough experience now to take a hard look at how the program is working and what we have learned. Overall, I am here to say that the program is a success – and we will work hard at the SEC to build on that success.
The volume of tips has been greater and of higher quality than expected when the program was first adopted. We have seen enough to know that whistleblowers increase our efficiency and conserve our scarce resources. Importantly, internal compliance programs at companies also remain vibrant and effective ways to detect and report wrongdoing. But despite the success of our program, the decision to come forward, especially in the face of internal pressure, is not an easy one.
The ambivalence about whistleblowers can indeed sometimes manifest itself in an unlawful response by a corporate employer and we are very focused at the SEC on cracking down on such misconduct. We want whistleblowers – and their employers – to know that employees are free to come forward without fear of reprisals. In 2014, we brought our first retaliation case and, this month, our first case involving the use of a confidentiality agreement that can impede whistleblowers from communicating with us. This latter case has generated some controversy, which I will address shortly. But, first, let’s look a bit closer at the four-year track record of the program.”
A portion of White’s speech also focused on “supporting internal compliance” and she stated:
“Let me say a bit more about company compliance programs. When the Commission was considering its whistleblower rules, concerns were raised about undermining companies’ internal compliance programs. Some commenters urged that internal reporting be made a pre-condition to a whistleblower award. That was not done, but the final whistleblower rules established a framework to incentivize employees to report internally first. A whistleblower’s participation in internal compliance systems is thus a factor that will generally increase an award, whereas interference with those systems will surely decrease an award. And, a whistleblower who internally reports, and at the same time or within 120 days reports to the Commission, will receive credit for any information the company subsequently self-reports to the SEC.
All indications are that internal compliance functions are as strong as ever – if not stronger – and that insiders continue to report possible violations internally first. Although there is no requirement under our rules that the whistleblower be a current or former employee, several of the individuals who have received awards were, in fact, company insiders. Notably, of these, over 80% first raised their concerns internally to their supervisors or compliance personnel before reporting to the Commission.
Many in-house lawyers, compliance professionals, and law firms representing companies have told us that since the implementation of our program, companies have taken fresh looks at their internal compliance functions and made enhancements to further encourage their employees to view internal reporting as an effective means to address potential wrongdoing without fear of reprisal or retaliation. That is a very good thing, and, so far, we believe that the whistleblower program has achieved the right balance between the need of companies to be given an opportunity to address possible violations of law and the SEC’s law enforcement interests.”
In conclusion, White stated:
“The bottom line is that is that responsible companies with strong compliance cultures and programs should not fear bona fide whistleblowers, but embrace them as a constructive part of the process to expose the wrongdoing that can harm a company and its reputation. Gone are the days when corporate wrongdoing can be pushed into the dark corners of an organization. Fraudsters rarely act alone, unobserved and, these days, the employee who sees or is asked to make the questionable accounting entry or to distribute the false offering materials may refuse to do it or just decide that they are better off telling the SEC. Better yet, either there are no questionable accounting entries or false offering materials to be reported in the first place or companies themselves self-report the unlawful conduct to the SEC.”
If SEC enforcement is an area of interest, you will want to check out this recent article in Securities Regulation Journal about Stanley Sporkin.
Among Sporkin’s other notable accomplishments, he was the Director of Enforcement at the SEC in the mid-1970’s when the so-called foreign corporate payments problem arose and he championed what would become the FCPA’s books and records and internal controls provisions.
Many have called Sporkin the “father of the FCPA” – a label I have always found curious given that Sporkin and his enforcement division were opposed to the FCPA’s anti-bribery provisions and wanted no part in enforcing those provisions.
To learn more about this, see “The Story of the Foreign Corrupt Practices Act.”