The U.S. Supreme Court’s recent decision in Kokesh v. SEC imposes a five-year statute of limitations on agency-sought disgorgement in SEC enforcement actions, resolving a Circuit split and definitively categorizing disgorgement as a statutory “penalty” under 28 U.S.C. § 2462. That statute applies a five-year limitations period to any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.”

The Court’s decision now precludes the SEC from seeking disgorgement of ill-gotten gains in enforcement actions where the fraud or misappropriation occurred more than five years before the date on which the SEC files its complaint. Prior to the Court’s decision in Kokesh, the Commission could seek disgorgement judgments for alleged violations occurring many years prior to filing a complaint.

Continue Reading SCOTUS Sets a Clock on Disgorgement in SEC Enforcement Actions

In her year and a half as Assistant Attorney General in charge of the Criminal Division, Leslie R. Caldwell has repeatedly emphasized the importance of a company having a compliance program fine-tuned to its specific risks to prevent fraud and corruption and to best position the company in the event that misconduct nonetheless occurs.

On November 2, 2015, AAG Caldwell spoke extensively on this topic at the SIFMA conference in New York.  She stated that when DOJ prosecutors are considering whether to charge a corporation criminally, they “look closely at whether compliance programs are simply ‘paper programs’ or whether the institution and its culture actually support compliance.  [They] look at pre-existing programs, as well as remedial measures a company took after discovering misconduct – including efforts to implement or improve a compliance program.”

On November 3, the Criminal Division added a resource for evaluating compliance programs with the hiring of Hui Chen as Compliance Counsel for the Fraud Section.  AAG Caldwell addressed this addition in her remarks at the SIFMA conference, noting that DOJ wanted “the benefit of the expertise of someone with significant high-level compliance experience across a variety of industries.”  (Ms. Chen reportedly was head of anti-bribery and corruption at Standard Chartered and an Assistant General Counsel at Pfizer focusing on compliance before that).  In the context of making charging decisions, Compliance Counsel “will help [DOJ] assess a company’s program, as well as test the validity of its claims about its program, such as whether the program truly is thoughtfully designed and sufficiently resourced to address the company’s compliance risks, or essentially window dressing.”  Additionally, Compliance Counsel “will help guide Fraud Section prosecutors when they are seeking remedial compliance measures as part of a resolution with a company.”  The idea is to require an effective program without being unduly burdensome.

AAG Caldwell specifically addressed speculation in the legal community that the hiring of compliance counsel was a precursor to a compliance defense.  She said it is not and that review of a company’s compliance program will remain one of the several factors considered when DOJ considers whether to charge a company.

Originally created by Congress in 1990, the EB-5 program was intended to stimulate the U.S. economy through job creation and capital investment by foreign investors. Under a pilot immigration program first enacted in 1992 and regularly reauthorized since, certain EB-5 visas also are set aside for investors in Regional Centers designated by the United States Citizenship and Immigration Services, based on proposals for promoting economic growth. Unscrupulous parties have on occasion taken advantage of interested parties and perpetrated schemes in this area on people who are understandably keen to take part in this otherwise very beneficial program.

Our colleagues at the EB-5 Matters blog have written an interesting post on one such case in Florida. Check it out here.

 

On October 22, 2015, the U.S. Department of Justice Principal Deputy Assistant Attorney General Benjamin C. Mizer, who oversees DOJ’s Civil Division, spoke at the 16th Pharmaceutical Compliance Congress and Best Practices Forum in Washington, D.C.  In addressing “current law enforcement efforts that may bear on what the future holds,” Mizer led off with the recent memo by Deputy Attorney General Sally Yates on individual accountability. Mizer’s remarks complement those by the Assistant Attorney General in charge of the Criminal Division, Leslie R. Caldwell, last month.  For our previous discussions on the memo and Caldwell’s prior remarks click here and here.

Mizer emphasized a few points from the Yates memo, beginning with the one that has been most discussed: in order to qualify for cooperation credit, a corporation must identify all individuals involved in the wrongdoing and provide all relevant evidence implicating those individuals to the government.  As Mizer bluntly stated, “this means no partial credit for cooperation that doesn’t include information about individuals.”  He also stressed that the requirement applies to not only criminal but civil investigations, including False Claims Act investigations.  Mizer called particular attention to the fact that “in order to qualify for the reduced multiples provision under the False Claims Act, the organization must voluntarily identify any culpable individuals and provide all material facts about those individuals.”

Mizer made two other points following on the Yates memo:  both DOJ’s Criminal and Civil Divisions will focus on individuals from the outset of their investigations and DOJ criminal and civil attorneys “have been directed to cooperate to the fullest extent permitted by law at all stages of an investigation.”  The latter is a point that Caldwell made early in her tenure overseeing the Criminal Division at the Taxpayers Against Fraud Education Fund Conference.  It was at that September 2014 conference that Caldwell announced a new procedure whereby qui tam complaints would be shared by the Civil Division with the Criminal Division as soon as the cases were filed and that attorneys in the Frauds Section of the Criminal Division would immediately review them to determine whether a parallel criminal case should be brought.

The public debate about the Yates memo has centered on whether it really says anything new.  In apparent recognition of this debate, Mizer said the memo was issued “to reinforce the department’s commitment” to pursuing not just corporations but the individuals who caused the misconduct to occur and that it shows the “renewed commitment” to pursuing not just corporations but the culpable individuals. Mizer may be foreshadowing that results of this Criminal/Civil Division cooperation are on the horizon.

On September 22, 2015, the U.S. Department of Justice’s  Assistant Attorney General in charge of the Criminal Division, Leslie R. Caldwell, spoke at the Global Investigations Review Conference in New York, addressing the recent memo by Deputy Attorney Sally Yates on individual accountability.  Her comments provided a straightforward approach to how the Yates memo could play out in practice.

As recently reported in our Health Law & Policy Matters blog, a central tenet of the Yates memo is that in order to qualify for cooperation credit, a corporation must identify all individuals involved in the wrongdoing and provide all relevant evidence implicating those individuals to the government.  AAG Caldwell explained “This means that companies seeking cooperation credit must affirmatively work to identify and discover relevant information about culpable individuals through independent, thorough investigations.  Companies cannot just disclose facts relating to general corporate misconduct and withhold facts about the responsible individuals.  And internal investigations cannot end with a conclusion  of corporate liability, while stopping short of identifying those who committed the criminal conduct.“

Expanding upon DAG Yates’ remarks last week at NYU Law School, AAG Caldwell stated “We recognize, however, that a company cannot provide what it does not have.  And we understand that some investigations – despite their thoroughness – will not bear fruit.  Where a company truly is unable to identify the culpable individuals following an appropriately tailored and thorough investigation, but provides the government with the relevant facts and otherwise assists us in obtaining evidence, the company will be eligible for cooperation credit.  We will make efforts to credit, not penalize, diligent investigations.  On the flip side, we will carefully scrutinize and test a company’s claims that it could not identify or uncover evidence regarding the culpable individuals, particularly if we are able to do so ourselves.”  AAG Caldwell also explicitly recognized that DOJ can sometimes obtain evidence that a corporation cannot.

To the extent that practitioners read the Yates memo as erecting an impossible hurdle to cooperation credit, AGG Caldwell’s remarks indicate that each case will be evaluated on its facts.  AAG Caldwell made at least one other point worth noting:  the Yates memo does not change existing DOJ policy regarding the attorney client privilege and work product protection.  Prosecutors will not be seeking corporate waiver of these protections.

By Heidi Lawson and Jacquelyn Burke

As was recently reported in the New York Times and elsewhere, the Justice Department issued new policies last week that place individual executives as the focus of their prosecution efforts, and encourage companies to cooperate in building a case against those individuals. The New York Times specifically noted that: (1) allegedly responsible individuals will be the focus of investigations at the outset; and (2) in settlement negotiations, companies will not be able to obtain credit for cooperating with the government unless they identify employees and turn over evidence against them.  This announcement appears to be the start of a larger agenda hinted at by newly minted Attorney General Loretta Lynch, who has promised to focus on white-collar crime. The Times article can be found here.

Of course, the scope and impact of this initiative will become clearer as it is implemented.  However, it should serve as a stark reminder to executives that their interests are not always aligned with those of their company, and that they should closely examine the insurance coverage dedicated to their defense and indemnity of government investigations and other lawsuits.  Continue Reading What Questions Executives Should Be Asking About Their D&O Insurance Following The New DOJ Policies Issued Last Week

The U.S. Department of Justice, through the Assistant Attorney General in charge of its Criminal Division, spoke forcefully on Tuesday regarding “the role of criminal law enforcement in prosecuting conduct that may also be subject to regulatory enforcement.”   Speaking at a conference at New York University, AAG Leslie R. Caldwell discussed the sometimes “critical need” for criminal prosecution even where there are civil and regulatory options, noting that individuals may receive prison sentences and companies may suffer collateral consequences that are “the only just punishment” for the conduct at issue and that serve to deter others.  Recognizing that there are different kinds of breaches, she spoke of calibrating the penalty to the nature of the breach and the entity’s history and culture.   AAG Caldwell also stated that  DOJ’s Criminal Division, unlike other authorities, requires entities to admit their misconduct when resolving a criminal matter by a Non-Prosecution Agreement, a Deferred Prosecution Agreement, or a guilty plea.  She addressed the Criminal Division’s power – and resolve – when it suspects or finds non-compliance with an NPA or a DPA, stating,

“And let me be clear:  the Criminal Division will not hesitate to tear up a DPA or NPA and file criminal charges, where such action is appropriate and proportional to the breach.”

In addition to the strong message that DOJ will ultimately bring a criminal prosecution if it believes an entity has committed a worthy breach of an NPA or a DPA, AAG Caldwell’s remarks serve as a reminder that there are steps that can be taken to avoid such a consequence.  If an entity is under an NPA or DPA, rigorous adherence to its terms are, of course, required.  More importantly to the vast number of entities that are not laboring under such agreements, proactively conducting risk assessments and fine-tuning compliance policies, procedures and training should be done at least annually and whenever changing circumstances make it advisable.

 

In December 2014, the Organization for Cooperation and Economic Development (“OECD”) published its first-ever foreign bribery report, the most comprehensive study of foreign bribery cases around the globe that has ever been conducted. The OECD report compiled and evaluated data from all 41 signatory countries to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, between February 1999, when the OECD convention entered into force, and June 2014. The data covered 467 foreign bribery cases against 164 entities and 263 individuals.

Continue Reading Lessons from the OECD Foreign Bribery Report

On February 24, 2015, Goodyear Tire & Rubber Co. agreed to pay more than $16 million to settle charges that two of its subsidiaries allegedly paid $3.2 million in bribes that generated $14,122,535 in illicit profits.  The SEC alleged that Goodyear’s Kenyan subsidiary, Treadsetters Tyres Ltd., and its Angolan subsidiary, Trentyre Angola Lda., routinely bribed officials, government-owned entities, and employees of private companies to obtain sales, and wrote them off as legitimate business expenses in Goodyear’s books and records, in violation of the U.S. Foreign Corrupt Practices Act (“FCPA”).  According to the SEC, Goodyear’s “lax compliance controls” allowed subsidiaries to engage in an undetected bribery scheme hidden in Goodyear’s books for years.

This settlement demonstrates that thorough, risk-based FCPA due diligence during the M&A process is critical to protecting parent companies from any improper activity on the part of their target companies.  After acquiring majority ownership over Treadsetters in 2006, the subsidiary continued to be managed by its founders and general manager.  From 2007 through 2011, Treadsetters’ management regularly authorized and paid bribes; a practice that “appears to have been in place prior to Goodyear’s acquisition of Treadsetters.”

Companies are liable under the FCPA for the actions of their subsidiaries, and parent companies inherit liability for the past (and continuing) corrupt activities of their target companies.  In the Goodyear case, two local companies in Kenya and Angola (ranked, respectively, 145 and 161 out of 175 countries in Transparency International’s 2014 Corruption Perception Index), allegedly continued to bribe to win business for years after Goodyear acquired them.

Risk-based FCPA due diligence during the M&A process is critical because, if a parent company learns of improper activity before the deal is signed, the parent company can require the target company to remediate prior to acquisition, reevaluate the target company’s value in light of any potential FCPA penalties or forced closure of revenue streams due to corrupt contracts, or back out of the deal entirely.  If, in a worst-case scenario, despite thorough risk-based due diligence, the parent company learns of the target company’s corrupt activity after the deal signed, the SEC and DOJ have stated that the due diligence will be “taken into account when evaluating any potential enforcement action.”

The Goodyear case also highlights the importance of having – and enforcing – a robust anti-corruption compliance program which includes adequate internal controls.  Goodyear quickly launched an internal investigation following a tip received via its ethics hotline and an employee’s report.  It voluntarily disclosed the results of its investigation to the SEC, which lauded Goodyear for its cooperation and remediation, including cutting its ties with the allegedly corrupt subsidiaries.  Following the trend of other recent SEC FCPA actions, including Ralph Lauren’s and Johnson & Johnson’s recent declination and settlement, the SEC rewarded Goodyear for its self-disclosure and cooperation with a lighter fine.

Written by Brian P. Keane

In a groundbreaking decision, the United States Court of Appeals for the Second Circuit has reversed the 2013 insider trading convictions of Todd Newman and Anthony Chiasson. The decision in United States v. Newman, No. 13-1837 (2d Cir. Dec. 10, 2014), significantly raises the bar for the government’s burden of proof in “remote tippee” insider trading cases. The investment community (as well as government prosecutors) have been eagerly awaiting this decision since oral arguments were heard by the Second Circuit in April 2014. Nearly eight months later, the decision handed down has dealt a severe blow to the government’s efforts to push the envelope in prosecuting individuals who trade on inside information but have one or more “layers” between them and the “insider” who initially disclosed the tip (the “tipper”).  To read more, click here.