FCPA Compliance and Ethics Blog

November 19, 2014

Chamber of Commerce: Corporations Form the Cornerstone of FCPA Compliance

CornerstoneRecently one of the most unlikely sources for praise of the Foreign Corrupt Practices Act (FCPA) came out to inform us all that corporations are the cornerstone of FCPA compliance and enforcement. You may be surprised to find out that it came from the US Chamber of Commerce. It did not come in the form of Congressional testimony in praise of the FCPA but in the Chamber’s Amicus Curie filing in a case currently being considered by the Texas Supreme Court. Regardless of the forum, the praise was just as strong and hopefully just as lasting.

The Texas Supreme Court recently held oral arguments in the appeal of Shell v. Writt. Unusually for a state supreme court case, it touches on the FCPA. The issue before the Court is whether Shell’s internal FCPA investigation is absolutely privileged from a defamation claim by persons named in the report as having violated the FCPA. Being as this is Texas, with a state supreme court just to the right of Attila the Hun, it is easy to determine what the outcome of the case will be, the company will win.

Procedurally, Writt, the plaintiff claiming defamation from Shell’s report of its internal investigation that it provided to the Department of Justice (DOJ), lost at the trial court on summary judgment. The trial court found that Shell had an absolute privilege because the report was turned over to a government agency investigating the matter. The court of appeals reversed this decision holding that because the internal investigation was voluntary, not mandatory, that only a conditional privilege existed and sent the matter back to the trial court for further proceedings. Shell appealed this court of appeals decision to the Texas Supreme Court.

Interestingly, the US Chamber of Commerce filed an amicus brief in the appeal to the Texas Supreme Court, supporting Shell. In its brief, the Chamber came out with full guns blazing in support of the FCPA and for full internal investigations and self-disclosure by companies. At the start of its brief, the Chamber comes out four square in support of the FCPA stating, “Since 1977, and especially over the last decade, the Foreign Corrupt Practices Act (“FCPA”) has played a very significant role in the federal regulation of multinational corporations. By punishing bribery and other illicit influence of foreign officials by U.S. companies, the statute seeks to improve the integrity of American businesses, promote market efficiency, and maintain the reputation of American democracy abroad.”

The Chamber noted the importance of the FCPA to both the US government and to US businesses. It stated, “Over the past decade, the FCPA has taken on renewed importance for both the U.S. government and American businesses.” As to the importance that the US government places on FCPA enforcement, the Chamber cited to the following, “DOJ officials have publicly stated that “enforcement of the FCPA is second only to fighting terrorism in terms of priority.”” Lastly, because of this focus, “FCPA compliance is now a main focus of concern for U.S. businesses.” Moreover, US companies are now ““light years ahead of where [they were] circa the mid-to-late 1990s,” with companies “implementing more rigorous and sophisticated compliance protocols,” including thorough internal investigations and candid self reporting.”

The Chamber did not stop there with its high praise of the FCPA and the importance of the FCPA and its enforcement for US businesses. The Chamber next turned to US businesses role in FCPA enforcement and compliance when it said, “the government has always relied upon businesses to cooperate with investigations and self-report any potential violations by corporate employees. “Federal enforcement authorities have consistently encouraged, if not as a practical matter demanded, that as to the FCPA companies voluntarily conduct internal investigations, disclose potential violations and cooperate with government investigations.” With their vast resources, individualized focus, and access to documents and witnesses, “companies are actually much better positioned to gather more information more quickly overseas than the Justice Department or the SEC.”” Perhaps channeling some of the criticisms of the recent General Motors (GM) and FIFA investigations, the Chamber recognizes that more than simply results must be shared with the DOJ when it stated, “The government requires that corporations provide not just information on violations that they are certain of, but rather any “relevant information and evidence,” as well as identification of “relevant actors inside and outside the company.””

The money line from the Chamber’s brief is the following, “Corporate cooperation, internal investigation, and self-reporting thus form the cornerstone of FCPA compliance and enforcement.” It could not be clearer from this statement the importance that a robust internal investigation protocol, coupled with self-disclosure bring to FCPA compliance. The FCPA Guidance states, “once an allegation is made, companies should have in place an efficient, reliable, and properly funded process for investigating the allegation and documenting the company’s response, including any disciplinary or remediation measures taken. Companies will want to consider taking “lessons learned” from any reported violations and the outcome of any resulting investigation to update their internal controls and compliance program and focus future training on such issues, as appropriate.”

Thus internal investigations coupled with self-reporting provide both companies and the US government towards the same goal; greater compliance with the FCPA because the Chamber recognizes that the FPCA plays a vital role in international business and corruption prevention and prosecution. The Chamber even cites, favorably, the Congressional logic for the enactment of the FCPA by stating, “Congress determined that such practices tarnish the image of American democracy abroad, impair confidence in American businesses, hamper the efficiency of the market, anger the citizens of otherwise friendly foreign nations, and, put simply, are “morally repugnant” and “bad business.”” Finally, the Chamber acknowledges the importance of the FCPA for both US and international investors; both in the US and for companies abroad by concluding, “The FCPA is a valuable statute that helps to reduce corruption and to reinforce public and investor confidence in the markets here and abroad.”

This brief lays out one of the strongest articulations of the power of the FCPA. I did not expect the Chamber to come out so forcefully in favor of what that many business types continually bemoan. The Chamber’s recognition that FCPA compliance and enforcement are cornerstones of the protection of US businesses; US business interests and investor confidence across the globe is a welcome addition to the FCPA dialogue.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

November 18, 2014

FIFA and Good-Faith Investigations

CautionYou know things are getting bad when the Wall Street Journal (WSJ) questions a business’ moral authority. Things certainly cannot be much better when the regulators begin nosing around your own self-indulgence. What happens when you realize all of a sudden that all those actions you have taken may actually fall under the jurisdiction of both the United Kingdom and the United States and their respective anti-corruption laws, the UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA)? It turns out all of this may have come through for our friends at Fédération Internationale de Football Association (FIFA).

Last week FIFA announced that it had considered the investigation into allegations of corruption into the awarding of the 2018 World Cup tournament to Russia and the 2022 World Cup tournament to Qatar and found, as reported in the Financial Times (FT) by Roger Blitz in an article entitled “Fifa thrown into fresh turmoil over Qatar World Cup corruption claims”, that “any improper behaviour in the bidding process for the tournament was “of very limited scope.”” This conclusion was made by a FIFA appointed former judge, “Hans-Joachim Eckert, who is chairman of the adjudicatory chamber of Fifa’s ethics committee.” Eckert had reviewed a 350-page report by investigator Michael J. Garcia, who is a former US prosecutor now practicing law in New York. Eckert released a 42 page “summary study” of the Garcia report, which he claimed supported his decision.

Unfortunately for FIFA and Eckert, Blitz reported in another FT article, entitled “Garcia and Eckert set for showdown over Fifa report”, that “Mr Eckert’s summary was disowned within hours of its publication by Mr Garcia, who claimed it misrepresented his findings. He has protested to Fifa’s appeals committee.” Garcia’s statement “has blown apart Fifa’s attempt to bring to a close nearly three years of allegations of unethical behaviour and has left Mr Eckert under increasing pressure to publish the Garcia investigation.” This action by FIFA led Reinhard Rauball, president of the German football league (DFL), to say, “Europe would have to consider breaking away from Fifa unless the Garcia investigation was published in full.”

All of this came after the summary itself noted that documents and evidence surrounding the Russian bid were lost because the computers on which they were stored had been destroyed. Garcia was not even able to speak with all the relevant witness in the Qatar bid as well. Even with this lack of full investigation, Garcia issues a statement which said that Eckert’s summary contained “numerous and materially incomplete and erroneous representations of the facts and conclusions detailed in the investigatory chamber’s report.”

What does all of this mean for FIFA? Certainly if the head of the German football league says that the European soccer federations may have to pull out of the organization because it is so corrupt that portends poorly. In another article in the FT, entitled “Brussels launches sliding tackle against Fifa”, Alex Barker reported “The EU’s top sports official is urging Fifa to come clean with findings from its corruption investigation, in a warning that signals a Brussels rethink over the commercial freedoms enjoyed by football’s scandal-tarnished governing body. In a direct swipe at Fifa’s attempt to clear Russia and Qatar to run the next two World Cups, Tibor Navracsics, the EU commissioner for sports, has called for full publication of a graft report into the 2010 bidding process to “remove doubts” about its findings. While Sepp Blatter’s Fifa is an unregulated Swiss body independent from government, its lucrative business activities in the European market are subject to rules overseen by EU regulators, including sales of television rights.”

What about any criminal issues? A quick Google search reveals that FIFA has offices in both the US and the UK. Given the very broad jurisdiction of the FCPA and perhaps the UK Bribery Act, it does not seem too far a stretch for either the Department of Justice (DOJ), the FBI, the UK Serious Fraud Office (SFO) or even the Overseas anti-corruption unit of the London police might want to open an investigation. Indeed CNN reported that the FBI is investigating FIFA at this time, saying “Investigators are moving ahead with their probe, which could result in charges against senior FIFA officials, the U.S. law enforcement officials said.”

For the compliance practitioner there are a couple of important lesson in all of this. First and foremost, in your internal investigations, you need to provide access of both documents and witnesses to your counsel. If you do not that alone may certainly compromise your investigation. This point was recently re-emphasized in the ongoing General Motors (GM) scandal over its ignition switch problems. It turns out that over two months prior to the public announcement the company had ordered over 500,000 new switches from its supplier. According to Hilary Stout and Bill Vlasic, writing in the New York Times (NYT) in an article entitled “G.M. Ordered a Half-Million Replacement Switches 2 Months Before Recall”, the order was placed after an internal company committee met. But no records of the meeting were provided to company’s outside counsel investigating this matter, Anton R. Valukas. Interestingly Valukas released a statement which the article quoted, ““To my knowledge, G.M. provided me access to all information in its possession related to G.M. inquiries regarding various repair options and part availability as G.M. considered potential fixes for the ignition switch in the event that a recall would occur,” the statement said.” That is lawyer-speak for I looked at what they showed me.

Hiding or not providing access to internal or outside counsel can be a recipe for disaster with the DOJ. The reason is the same as it is a disaster for FIFA in Europe. There is no trust left for the organization. Ask any ex-DOJer and they will tell you that it is all about credibility when you self-disclose to the DOJ or when you are in negotiations with the DOJ over a potential FCPA penalty. I regularly hear Stephen Martin and Mike Volkov say precisely that when they talk about their experiences from working for the US government. If you do not allow your investigators access to all relevant documents and those witnesses under your control, the DOJ will most probably not consider the results of your investigation valid. The DOJ may not even consider your exertions worthy of a good-faith effort.

One thing is also very relevant for the compliance practitioner. If your outside counsel disavows him or herself from the company’s interpretation of it going forward, you are in big trouble. Even the WSJ, in its Op-Ed piece said, “FIFA’s moral failure stands out.”

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

November 5, 2014

A Royal Fan Responds: Russ Berland on the SEC Financial Report for FY 2014

Russ Berland

Ed. Note-today we have a guest post from KC Royals fan and Stinson Leonard Street partner Russ Berland. 

As a Kansas City Royals fan, I would like to use this opportunity to congratulate the Royals on a great season and say to them, “Ya done good.”  Despite losing an extremely close seventh World Series game to a very able and talented San Francisco Giants team, which included a pitcher whose name and face will one day be memorialized in Cooperstown, this year has been a banner, or should I say, a pennant year for the boys in blue.

The SEC likewise would like to take a moment to be congratulated on their banner year in their annual enforcement preview of their Agency Financial Report.  So here goes … The SEC wants us to know that they are using creative means to find misconduct on their own and go after it, to hold people and corporations accountable,  and to pay and protect whistleblowers.  On October 16, the SEC put out its official preview of its upcoming Agency Financial Report for FY 2014.  The SEC’s fiscal year ends September 30, so this spans every enforcement action the SEC has taken since October 1, 2013.  The report has four major themes:

  1. The SEC is enforcing the law against people, not just companies. It takes people to commit misconduct on behalf of companies so those same people should be held accountable.  And if the SEC is counting on you to watch over companies and transactions you better take it seriously.  The SEC does and they will hold you accountable.  The preview made this point in showcasing its major enforcement actions against Fifth Third Bancorp and its former CFO, Diamond Foods Inc. and its former CEO and CFO, World Capital Market and its founder, and many, many others.  The most poignant example was the enforcement action against the Chairman of the Audit Committee of AgFeed Industries, Inc.  The SEC alleges that Ivan Gothner, the chairman of AgFeed’s audit committee received information that AgFeed’s Chinese operations were conducting accounting fraud and instead of taking a fellow director’s advice to “hire professional investigators guided by outside legal counsel,” he directed internal resources to assess the situation.  When that resulted in late and inadequate information, the SEC charged him “with violating or aiding and abetting violations of the anti-fraud, reporting, books and records, and internal controls provisions of the federal securities laws” and ” with making false statements to AgFeed’s outside auditors.”  Andrew Ceresney, Director of the SEC’s Division of Enforcement, called this “a cautionary tale of what happens when an audit committee chair fails to perform his gatekeeper function in the face of massive red flags.”
  2. Corporations must admit their actions. Last year, the SEC Chairman, Mary Jo White, announced that more companies must admit their wrongdoing in settlements.  The SEC’s Admissions Policy states that the companies may be required to admit their wrongdoing when there is “(1) misconduct that harmed large numbers of investors, or placed investors or the market at risk of potentially serious harm, (2) egregious intentional misconduct, or (3) when the defendant engaged in unlawful obstruction of the commission’s investigative processes.”  Now, the Preview adds two more categories to those required to make admissions: “[4] where an admission can send a particularly important message to the markets, or [5] where the wrongdoer poses a particular future threat to investors or the markets.”  For example, in the settlement with ConvergEx for misrepresenting its commissions to brokerage customers, ConvergEx was required to admit the facts stated by the SEC and admit that it had violated Securities Laws.  In one interesting twist, Wells Fargo Advisors LLC was forced to admit its wrongdoing when one of its brokers traded on non-public information about the sale of Burger King to a private equity firm. The “wrongdoing” that Wells Fargo Advisors admitted encompassed inadequate policies, inadequate coordination among internal groups tasked with policing insider trading and the compliance officer who should have spotted the insider trading missing it. This is an interesting view of what constitutes “egregious intentional misconduct.” The message seems to be that in order to settle a matter with the SEC without admitting or denying facts or legal conclusions, the defendant will need to prove they do not fit in one of the five listed categories.  It’s possible that the SEC forced Wells Fargo Advisors to admit it’s wrongdoing because it delayed production of relevant documents or because one of the documents that they turned over had been altered by the compliance officer herself.  Or perhaps they are sending “a particularly important message” to compliance officers that they need to be vigilant in doing their jobs.
  3. Whistleblowing Pays.  In FY2014, the SEC paid $35 million to 9 whistleblowers.  One of them received $30 million by him or herself.   Because the SEC rules protect the identity of whistleblowers, we don’t know who got paid.  But the SEC whistleblowing process has multiple stages, which include bringing original information or an original analysis of existing information to the SEC, having the SEC pursue that information leading to a prosecution, and successfully prosecuting or settling that matter with a recovery of over $1 million.  This takes  a long time from beginning to end.  Dodd Frank was passed in 2010.  The first REAL money ($14 million) was paid last year.  And now someone is getting $30 million.  The pipeline took a while to fill, but it is reaching a full state and we can probably expect to see a lot more whistleblower payments in the next few years.
  4. If you don’t come to us, we’ll find you. The SEC is using more and more data analytics on financial and trading activity to find wrongdoers.   According to the SEC, ” innovative use of data and analytical tools contributed to a very strong year for enforcement marked by cases that spanned the securities industry.”   Right now, they are telling us that they are using those techniques to look at filing deficiencies, hedge fund returns, and insider trading.  But we can anticipate they are looking at more than just those categories and we should expect to see more and more use of these techniques over broader areas in the coming years.  And, the SEC is telling us that they are also currently implementing and developing “next generation tools” to review market and other data for suspicious activity.

So, this Preview of the FY2014 Agency Financial Report suggests that the SEC should not be seen as sitting back and waiting for cases to come to them.  And when companies and people violate Securities Laws, the SEC will work hard to make sure that they each take accountability, either personally through fines and penalties or corporately, through admissions.   Like the Royals, the SEC would like us to know that they have had a banner year.

Berland can be reached at russ.berland@stinsonleonard.com. He was lead investigative counsel for Layne Christensen in its recently concluded FCPA enforcement action by the SEC. In my podcast, the FCPA Compliance and Ethics Report, Episode 104, I interview Berland on how the company was able to receive a declination from the DOJ. The Episode will post Thursday, Nov. 7.

October 15, 2014

Tommy Lewis, Dicky Maegle and the DOJ Call for Individual Prosecutions

Lewis and off the bench tackleTommy Lewis died this week. For those of you uninitiated in college football, Lewis was an Alabama football player who jumped up off the Alabama bench to tackle Rice University halfback Dicky Maegle, who was scampering untouched down the sideline for a touchdown in the 1954 Cotton Bowl. Lewis’ off the bench tackle led to a flag and the referees’ awarding Maegle a 95-yard touchdown on the play. Why did Lewis do it? As reported in his obituary in the Houston Chronicle, Lewis always maintained he was “too full of Alabama”. Maegle, perhaps more charitably, said, “He was a good guy who got caught up in the moment and the excitement.”

I thought about Maegle and Lewis when I was re-reading and considering the recent remarks of Assistant Attorney General for the Criminal Division Leslie R. Caldwell at the recent Ethics and Compliance Officers Association (ECOA) Conference. As Mike Volkov said in his post on Tuesday, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) communicate quite clearly what their enforcement priorities are; one does not have to read tea leaves, it is out there in black and white for all to see and hear. Caldwell’s remarks would seem to follow this observation of Volkov.

Caldwell made clear that the DOJ will prosecute individuals for violations of the Foreign Corrupt Practices Act (FCPA). In her remarks she said, “When criminal misconduct is discovered, a critical factor in the department’s prosecutorial decision making is the extent and nature of the company’s cooperation. The department’s Principles of Federal Prosecution of Business Organizations provides that prosecutors should consider “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.””

Recognizing that “Corporations do not act, but for the actions of individuals” Caldwell then laid down some quite strong prescriptions which compliance practitioners need to be cognizant about. Caldwell stated, “Now let me flesh out the often discussed, but sometimes poorly understood, concept of cooperation. Most companies now understand the benefits of voluntarily disclosing the misconduct before we come asking, and the benefits of conducting an internal investigation and providing facts about the misconduct to the government. But companies all too often tout what they view as strong cooperation, while ignoring that prosecutors specifically consider “the company’s willingness to cooperate in the investigation of its agents.””

She went on to add, “In all but a few cases, an individual or group of individuals is responsible for the corporation’s criminal conduct. The prosecution of culpable individuals – including corporate executives – for their criminal wrongdoing continues to be a high priority for the department. For a company to receive full cooperation credit following a self-report, it must root out the misconduct and identify the individuals responsible, even if they are senior executives.”

Fortunately the DOJ is not asking for undercover corporate sting operations because, as Caldwell explained, “We are not asking that you become surrogate FBI agents or prosecutors, or that you use law enforcement tactics like body wires.  And we do not need to hear you say that executive A violated a particular criminal law. All we are saying is that we expect you to provide us with facts. We will take it from there. But a company that interviews its employees in an effort to whitewash the facts or spread the company’s narrative spin risks receiving any cooperation credit.”

This is about as clear a warning as you can expect to receive. But the difficulty it puts company’s in is in regard to their internal investigations. Last week Joel Schectman, writing in the Wall Street Journal (WSJ) article entitled, “Are Internal Bribery Probes Private?”, explored the issue of whether such investigations are privileged, in the context of a current individual FCPA prosecution. In the matter of Joseph Sigelman, the former Chief Executive Officer (CEO) PetroTiger Ltd. Co., Schectman reported that “Prosecutors say the payments of approximately $333,500 to the wife for “consulting services” was actually a bribe to her husband to win a contract for PetroTiger worth around $39.6 million.”

Some or all of the underlying facts were turned over to the DOJ by PetroTiger’s internal investigation. The Defendant Sigelman wants to obtain copies of whatever PetroTiger turned over to the DOJ, arguing that the company waived any claim of attorney/client privilege “when it divulged the investigation’s findings to third parties, including officials of the United States.” The company has refused to hand over its internal investigation to the defendant based on this claim of attorney/client privilege.

What happens if a company, or its law firm gets the investigation wrong and falsely accuses an individual? Should the company be protected? That is the issue currently before the Texas Supreme Court in a libel case styled, Shell v. Writt. It involves our old friend Panalpina Inc. and its customer Royal Dutch Shell. David Smyth, in a post entitled Texas Court of Appeals Has Put Some FCPA Internal Investigations in an Awkward Spot”, said the DOJ contacted Shell about its dealings with Panalpina. Sometime later, “Shell agreed to conduct an internal investigation into its dealings with Panalpina.” Smyth noted that, “Shell submitted an investigative report that pointed the finger at Writt.  Specifically, Shell said Writt had been involved in illegal conduct in a Shell Nigerian project by recommending that Shell reimburse contractor payments he knew to be bribes and failing to report illegal contractor conduct he was aware of.”

Writt sued Shell for libel and Shell defeated Writt at the trial court on the basis that it had an “absolute privilege to say what it did in its investigative report to the DOJ.”

However, a Texas Court of Appeals reversed the trial court ruling holding that absolute privilege does not apply where a party voluntarily turns over information to a prosecutor before a judicial proceeding is initiated or contemplated. As Smyth explained, “In the court’s view, DOJ was acting purely in a prosecutorial and non-judicial capacity.” Shell has appealed this matter to the Texas Supreme Court, which has accepted the case for review.

There are several difficult issues from the facts of this case. Smyth points to one when he ended his piece, “FCPA investigations these days are a different animal, and probably deserving of different treatment by the courts. As of now, a company conducting an internal FCPA investigation in Texas has to ask, what do we do if one of an investigation reveals one of our employees as a bad actor? Do we say as much in the report we turn over to the government, as the government surely expects? If we do, are we signing on for libel litigation by the employee?” But now Caldwell has made clear that the DOJ expects companies to “identify the individuals responsible, even if they are senior executives”. If you are one of the individuals so identified, are you entitled to know what the accusations against you might be? What if the company’s lawyers got it wrong? Should they have a duty?

Moreover, there are a plethora of procedural protections available to criminal defendants not available to civil defendants or even those who are the subject of internal corporate investigations. Should a Miranda warning now be given during internal corporate investigations? Is the right to remain silent and not self-incriminate oneself available in such an investigation? In paper entitled “Navigating Potential Pitfalls in Conducting Internal Investigations: Upjohn Warnings, “Corporate Miranda,” and Beyond” Craig Margolis and Lindsey Vaala, of the law firm Vinson & Elkins LLP, explored the pitfalls faced by counsel, both in-house and outside investigative, and corporations when an employee admits to wrong doing during an internal investigation, where such conduct is reported to the US Government and the employee is thereafter prosecuted criminally under a law such as the FCPA.

Employees who are subject to being interviewed or otherwise required to cooperate in an internal investigation may find themselves on the sharp horns of a dilemma requiring either (1) cooperating with the internal investigation or (2) losing their jobs for failure to cooperate by providing documents, testimony or other evidence. Many US businesses mandate full employee cooperation with internal investigations or those handled by outside counsel on behalf of a corporation. These requirements can exert a coercive force, “often inducing employees to act contrary to their personal legal interests in favor of candidly disclosing wrongdoing to corporate counsel.”  Moreover, such a corporate policy may permit a company to claim to the US government a spirit of cooperation in the hopes of avoiding prosecution in “addition to increasing the chances of learning meaningful information.”

Where the US Government compels such testimony, through the mechanism of inducing a corporation to coerce its employees into cooperating with an internal investigation, by threatening job loss or other economic penalty, the in-house counsel’s actions may raise Fifth Amendment due process and voluntariness concerns because the underlying compulsion was brought on by a state actor, namely the US Government. Margolis and Vaala note that by utilizing corporate counsel and pressuring corporations to cooperate, the US Government is sometimes able to achieve indirectly what it would not be able to achieve on its own – inducing employees to waive their Fifth Amendment right against self-incrimination and minimizing the effectiveness of defense counsel’s assistance.

All of the above would seem to make clear the need for company’s to get their internal investigations done right. If you are going to receive credit from the DOJ going forward, your investigations must be done thoroughly, in a timely manner and provide to the DOJ the information that Caldwell has laid out that they want. At least currently in Texas, a company has to get it right or risk being sued if they mis-identify a potential criminal actor.

Tommy Lewis and Dicky Maegle? Lewis made a mistake, probably carried away in the heat of the moment. What did Maegle have to say about him on the occasion of his death? “He was very remorseful, and I thought he was sincere. I liked him. We became friends.” Let’s hope your employees still like your company at the end of an internal investigation.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

 

 

September 25, 2014

Come On Get Happy – The Partridge Family and GSK’s Internal Investigation

Partridge Family BusToday we celebrate an anniversary of one of the all-time lows in the American cultural milieu; for on this date in 1970, the television show The Partridge Family appeared on the ABC Television network. Symbiotically created from the ashes of the television show The Monkees and the real-life family pop group The Cowsills; The Partridge Family starred, as its TV-mom, Oscar winning actress Shirley Jones and as her eldest TV son, and teenaged girl heartthrob, her real-life stepson David Cassidy. Proving once again that 1960s and 1970s television really was largely a cultural wasteland, the family romped and sang their way across a never-ending sunny southern California in multi-colored converted school bus. While the episodes themselves were as close to putrid as one can get, they did have better success with their lip-synced music from each episode. One song, I Think I Love You, reached No. 1 on the Billboard Pop Charts that year.

I thought about this strange convergence of history and culture (or perhaps the lack of culture) when considering more lessons learned from the GlaxoSmithKline PLC (GSK) corruption scandal. I was particularly focused on GSK’s response to at least two separate reports from an anonymous whistleblower (brilliantly self-monikered as GSK Whistleblower) of allegations of bribery and corruption going on in the company’s China business unit. One of the clear lessons from the GSK matter is that serious allegations of bribery and corruption require a serious corporate response. Not, as GSK appears to have done, in their best Inspector Clouseau imitation, not being able to find the nose on their face.

Further, and more nefariously, was GSK’s documented treatment of and history with internal whistleblowers. One can certainly remember GSK whistleblower Cheryl Eckard. A 2010 article in The Guardian by Graeme Wearden, entitled “GlaxoSmithKline whistleblower awarded $96m payout”, where he reported that Eckard was fired by the company “after repeatedly complaining to GSK’s management that some drugs made at Cidra were being produced in a non-sterile environment, that the factory’s water system was contaminated with micro-organisms, and that other medicines were being made in the wrong doses.” She later was awarded $96MM as her share of the settlement of a Federal Claims Act whistleblower lawsuit. Eckard was quoted as saying, “It’s difficult to survive this financially, emotionally, you lose all your friends, because all your friends are people you have at work. You really do have to understand that it’s a very difficult process but very well worth it.” So to think that GSK may simply have been SHOCKED, SHOCKED, that allegations of corruption were brought by an internal whistleblower may well be within the realm of accurate.

There would have seemed to have been plenty of evidence to let the company know that something askance was going on in its Chinese operations. The international press was certainly able to make that connection early on in the scandal. An article in the Financial Times (FT), entitled “China accuses GSK of bribery” by Kathrin Hille and John Aglionby, reported “GSK said it had conducted an internal four-month investigation after a tip-off that staff had bribed doctors to issue prescriptions for its drugs. The internal inquiry found no evidence of wrongdoing, it said.” Indeed after the release of information from the Chinese government, GSK said it was the first it had heard of the investigation. In a prepared statement, quoted in the FT, GSK said ““We continuously monitor our businesses to ensure they meet our strict compliance procedures – we have done this in China and found no evidence of bribery or corruption of doctors or government officials.” However, if evidence of such activity is provided we will act swiftly on it.”

Laurie Burkitt, reporting in the Wall Street Journal (WSJ) in an article entitled “China Accuses Glaxo of Bribes”, wrote that “Emails and documents reviewed by the Journal discuss a marketing strategy for Botox that targeted 48 doctors and planned to reward them with either a percentage of the cash value of the prescription or educational credits, based on the number of prescriptions the doctors made. The strategy was called “Vasily,” borrowing its name from Vasily Zaytsev, a noted Russian sniper during World War II, according to a 2013 PowerPoint presentation reviewed by the Journal.” Burkitt reported in her article that “A Glaxo spokesman has said the company probed the Vasily program and “[the] investigation has found that while the proposal didn’t contain anything untoward, the program was never implemented.”” From my experience, if you have a bribery scheme that has its own code name, even if you never implemented that scheme, it probably means that the propensity for such is pervasive throughout the system.

I have often written about the need for a company to have an investigative protocol in place so that it is not making up its process in the face of a crisis. However the GSK matter does not appear to be that situation. It would not have mattered what investigation protocol that GSK followed, it would seem they were determined not to find any evidence of bribery and corruption in their China business unit. So the situation is more likely that GSK should have brought in a competent investigation expert law firm to head up their investigation in the face of this anonymous whistleblower’s allegations.

In an ACC Docket article, entitled “Risks and Rewards of an Independent Investigation”, authors James McGrath and David Hildebrandt discuss the use of specialized outside counsel to lead an independent internal investigation as compliance and ethics best practices. This is based upon the US Sentencing Guidelines, under which a scoring system is utilized to determine what a final sentence should be for a criminal act. Factors taken into account include the type of offense involved and the severity of the said offense, as well as the harm produced. Additional points are either added or subtracted for mitigating factors. One of the mitigating factors can be whether an organization had an effective compliance and ethics program. McGrath and Hildebrandt argue that a company must have a robust internal investigation.

McGrath and Hildebrandt take this analysis a step further in urging that a company, when faced with an issue such as an alleged Foreign Corrupt Practices Act (FCPA) violation, should engage specialized counsel to perform the investigation. There were three reasons for this suggestion. The first is that the Department of Justice (DOJ) would look towards the independence and impartiality of such investigations as one of its factors in favor of declining or deferring enforcement. If in-house counsel were heading up the investigation, the DOJ might well deem the investigative results “less than trustworthy”.

Matthew Goldstein and Barry Meier discussed the need for independence from the company being investigated in an article the New York Times (NYT) about the General Motors (GM) internal investigation entitled “G.M Calls the Lawyers”. They quoted William McLucas, a partner at WilmerHale, who said, “If you are a firm that is generating substantial fees from a prospective corporate client, you may be able to come in and do a bang-up inquiry. But the perception is always going to be there; maybe you pulled your punches because there is a business relationship.” This is because if “companies want credibility with prosecutors and investors, it is generally not wise to use their regular law firms for internal inquiries.” Another expert, Charles Elson, a professor of finance at the University of Delaware who specializes in corporate governance, agreed adding, “I would not have done it because of the optics. Public perception can be affected by using regular outside counsel.””

Adam G. Safwat, a former deputy chief of the fraud section in the Justice Department, said that the key is “Prosecutors expect an internal investigation to be an honest assessment of a company’s misdeeds or faults, “What you want to avoid is doing something that will make the prosecutor question the quality of integrity of the internal investigation.”” Also quoted was Internal Investigations Blog editor, Jim McGrath who said, “A shrewd law firm that gets out in front of scandal can use that to its advantage in negotiating with authorities to lower penalties and sanctions. There is a great incentive to ferret out information so they can spin it.”

The GSK experience in China will inform compliance practitioners for years to come with the company’s plethora of miss-steps. Perhaps one day the company will become as successful as The Partridge Family and they can open their annual meeting with The Partridge Family Theme - Come On Get Happy!

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

July 7, 2014

No Sex Please, We’re British: More from GSK in China

No Sex PleaseThe above is the title of a British television show/play/movie which is a farcical romp about a newlywed couple who mistakenly receive an initial shipment of pornographic pictures, then movies and women, all sent from Sweden to England. The plot turns on their attempts to dispose of the ‘offending materials’ while under the noses of their parents/in-laws, employers and friends. In his review of the show, Christopher Heath said, “No Sex Please, We’re British shows how we stuffy Brits tie ourselves in knots when it comes to this subject. The funny thing is how the cast, led by Ronnie Corbett, handle their predicament and it has to be said, they cope with aplomb. As you might expect, the plot is all about mix-ups, keeping a stiff upper lip, maintaining a veneer of social respectability, not getting found out about something someone hasn’t done and failing miserably.”

I thought about that ubiquitous work of British visual and audio entertainment when the revelations from late June that the GlaxoSmithKline (GSK) PLC corruption scandal all started with a sex tape. In an article in the MailOnline, entitled “How a secret sex tape plunged British drugs giant Glaxo in a £90million bribery probe”, Rebecca Evans reported “A covert sex tape involving a senior executive and his Chinese lover was the trigger for a major investigation into corruption at British drugs giant GlaxoSmith-Kline, it was revealed yesterday. The video of married Mark Reilly and his girlfriend was filmed by secret camera and emailed anonymously to board members of the pharmaceutical firm. It led to an investigation that has rocked the £76billion company – which stands accused of bribing doctors and other health officials in China with £320million of gifts, including sexual favours from prostitutes, to persuade them to prescribe its drugs.”

This sex tape, along with allegations of bribery and corruption, were sent to GSK Board members, including Chief Executive Officer (CEO), Andrew Witty in March 2013 by someone with the email address “GSK Whistleblower”. Evans reported that two additional emails “making serious fraud allegations” were sent as well, one in January and one in May. In an article in the Wall Street Journal (WSJ), entitled “Sex Video Sheds Light in Glaxo China Case”, Laurie Burkitt reported that “The British drug maker regarded the video—apparently shot without the executive’s knowledge—as a breach of security, the person said.” Evans reported that in addition to this security breach, GSK believed the sex tape to be a “threat or blackmail attempt”. One of GSK’s responses was to hire the firm ChinaWhys Co., to investigate the matter. The firm’s principals, former journalist Peter Humphrey and Yu Yingzeng, a naturalized US citizen, were not able to determine who placed the video camera in Reilly’s Shanghai apartment, who shot the video or who sent it to GSK executives. However Evans reported “But a few months after starting to investigate Miss Shi, Mr Humphrey was arrested along with his wife Yu Yingzeng, a US citizen and daughter of one of China’s most eminent atomic weapons scientists. According to the Sunday Times, Mr Humphrey’s arrest and detention in July was at around the same time that China began a police probe into GSK’s alleged bribery.” And, unfortunately for Humphrey and his wife, they were arrested last August for allegedly breaking of Chinese laws relating to information privacy.

In addition to the investigation into the provenance of the sex tape and its sender, GSK had also engaged in an internal investigation into the substantive allegations of bribery brought forward by the “GSK Whistleblower” in emails to the GSK Board in January and May, 2013. As reported by Evans, “The emails laid out a series of sales and marketing practices described as ‘pervasive corruption’.” Unfortunately for the company, GSK “found ‘no specific evidence’ to substantiate the claims. However, the accusations are virtually identical to the charges laid by police against Mr Reilly and 45 other suspects. Last month, Britain’s Serious Fraud Office announced it is to investigate the company’s ‘commercial practices’.”

‘Honey-pots’ and ‘Sparrow-nests’ are well known terms for anyone who has read cold war tales of espionage between the former Soviet Union and the US. However, the Reilly sex-tape and the GSK bribery scandal would seem to be an entirely different can of worms. In an article in Time, entitled “What the GSK Sex Tape Says About Surveillance in China, Hannah Beech wrote that in China, “Surveillance – or the threat of surveillance — is a constant in China. As a journalist, I may be more interesting to the powers that be than some other foreigners here. But other expat friends who’ve been followed, hacked or otherwise tracked in China include diplomats, NGO staff and businesspeople. Also, artists and academics.” Such surveillance includes having “email auto-forwarding mysteriously activated or to be tailed by a black Audi while on assignment in the Chinese countryside.”

For the compliance practitioner the lessons of GSK in China continue to resonate, unfortunately for the negative consequences to GSK and its employees. All of the above articles note that the allegations of bribery and corruption presented to GSK by the “GSK Whistleblower” were also made to Chinese officials, who then began to investigate the company. Andrew Ward, reporting in a Financial Times (FT) entitled “Sex tape adds to murk of GSK China scandal”, said “A separate internal investigation was already under way into the bribery allegations that had first been made by a whistleblower in January.” Unfortunately for GSK, its internal investigation failed to turn up any evidence of bribery and corruption. More unfortunately for the company, “Mr. Reilly, a Briton and long-time GSK executive, was among 46 company employees identified by Chinese police in May as suspects when they handed evidence of “massive and systematic bribery” to prosecutors after a 10-month investigation.”

It does seem incredible at this point that any serious internal investigation could fail to turn up any of the evidence that the Chinese government has been able to develop against GSK. This points to the absolute importance of your internal investigations. Although the GSK investigation was focused in China, the same is true in the US, particularly for a US listed company subject to Dodd-Frank. Further, we must invoke that well-known British author George Orwell for reminding you that in some countries Big Brother really is watching you. And finally, you may not be paranoid as people really may be watching you and filming your most intimate acts.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

June 9, 2014

GSK Faces a Bad Day at Black Rock

Bad Day at Black RockOne of my favorite movies is Bad Day at Black Rock. It is one of the few movies to combine elements of film noir into something approaching a traditional Western. It also attacks directly the prejudice and hate against Japanese-Americans in the immediate aftermath of Pearl Harbor. I thought about that eponymous title when I read a recent article in the Financial Times (FT), entitled “GSK salesmen want ‘bribes’ reimbursed”, by reporters Patti Waldmeir and Andrew Ward.

You know it is going to be a bad day when your employees line up to testify against your company in an ongoing investigation for bribery and corruption. But those rainy day sighs can go up to the Bad Day at Black Rock level when these same employees publicly announce that the company they work for owes them for the creation of fraudulent invoices used by a business unit to fund bribery and corruption which violates not only the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act but also domestic Chinese anti-corruption laws. This happened to the UK pharmaceutical giant GlaxoSmithKline PLC (GSK) last month when it was announced that certain current employees in its China operation were petitioning the company to reimburse them for bribes they were ordered to pay by their superiors.

In their article, Waldmeir and Ward wrote “the UK pharmaceutical company at the centre of a Chinese corruption scandal, is facing protests from junior employees who say the company is refusing to reimburse them for bribes they were ordered to pay by their superiors.” While my initial thought was that these Chinese employees had quite a bit of ‘cheek’ in raising this claim, the more I read into the story, the more I think it may portend serious problems for GSK in any attempt to defend the company going forward. Waldmeir and Ward reported “some Chinese sales staff are complaining that GSK has denied bonuses, threatened dismissal or refused to reimburse them for bribes they say were sanctioned by their superiors to boost the company’s drug sales. In some cases, managers instructed them to purchase fake receipts that were used to cover up bribes paid in cash or gifts to doctors and hospitals, according to salesmen interviewed by the Financial Times.”

The article went on to highlight just how some of these fake invoices, used to gain funds from the corporate headquarters to facilitate bribery and corruption, were generated. “In some instances, managers disguised their involvement by using their personal email address to instruct staff to pay bribes and by ordering junior staff to claim on their personal expense accounts – even if the bribe was actually paid out by the manager – according to these people.” Last March, a group of current GSK employees sent a letter to the company that said, in part, ““All the expenses were approved by the company,” the group wrote in a letter to management. “The expenses were paid with our own money, and although the receipts were not compliant, it was our managers who told us to buy the fake receipts,” said one former GSK salesman.”

The article quoted that GSK said, “We have zero tolerance for unethical or illegal behaviour and anyone who conducts such behaviour has no place in our company. We believe the vast majority of our employees uphold our values and we welcome employees speaking up if they have concerns.” Talk about a ‘Speak Up’ culture at your company. Probably not exactly what the company had in mind when it invited employees to raise their concerns.

However, as damning as this is, and it would certainly appear to be quite damning, was the following revelation, which was also reported by Waldmeir and Ward, regarding witness prep during GSK’s internal investigation. They wrote, “Some staff were warned not to implicate their supervisors, according to a former salesman: “Our manager approached each person before they were questioned and asked them not to mention his name. He even prepared a story for them to tell the investigator.””

Dissecting all of the above, it would appear that GSK has several real problems on several fronts from this article. The first is that there appears to have been clear China business unit management participation in the bribery and corruption scheme. While it is still not clear whether the corporate home office was involved in the scheme, simply knew of it or choose to bury its collective head in the sand as to what was going on in China, if your in-country business unit management is involved, it is not too many steps to the corporate home office. Conversely, the question might be that if this fraud against the corporate home office was so open and obvious, why did the corporate office not detect it going forward?

Yet the real issue for the corporate office may be the information about employees being coached to hide evidence during the investigation. If such activity was limited to the ‘managers’ in the Chinese business units only, what does it say about a corporate office, which allows such witness intimidation? Think that is an investigation best practice? However, if the corporate office was involved in any way in such witness intimidation, it will bode extremely poorly in the eyes of the Chinese regulators, the UK Serious Fraud Office (SFO), which has opened an investigation into the GSK matter and probably the US Department of Justice (DOJ) as well, since GSK is still subject to the Corporate Integrity Agreement (CIA) it signed back in July of 2012; when it pled guilty and paid $3 billion to resolve fraud allegations and failure to report safety data in what the DOJ called the “largest health care fraud settlement in U.S. history” according to its press release. Think witness tampering or hiding of evidence might garner the attention of the DOJ for a company already under the equivalent of a Deferred Prosecution Agreement (DPA)?

In addition to all of the above conduct, it will be interesting to see the effect of this ongoing investigation on the stock value of GSK. In a Wall Street Journal (WSJ) article, entitled “FCPA Hits Companies Harder if they Committed Fraud”, Sam Rubenfeld reported “A study of U.S. Foreign Corrupt Practices Act enforcement issued by the Searle Civil Justice Institute, a research division of The Law & Economics Center at George Mason University School of Law found that public companies lost an average of 2.9% of market capitalization as a result of an investigation. But, the study found, the number masks an important distinction: Companies charged with bribery only suffered an initial 1.5% loss, while those charged with bribery and financial fraud saw a initial drop of 16.3% in market cap.” It will be interesting to see the effect the apparent fraudulent activities of GSK’s China employees will have on not only the overall penalty assessed against GSK but if there is any attendant drop in shareholder value.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

 

© Thomas R. Fox, 2014

May 22, 2014

On the Oregon Trail and Expectations in an Investigation Protocol

Oregon TrailOn this day in 1843, a massive wagon train, made up of 1,000 settlers and 1,000 head of cattle, set off down the Oregon Trail from Independence, Missouri. Known as the “Great Emigration,” the expedition came two years after the first modest party of settlers made the long, overland journey to Oregon. The Great Immigration followed the Sante Fe Trail for some 40 miles and then turned northwest to the Platte River, which it followed along its northern route to Fort Laramie, Wyoming. From there, it traveled on to the Rocky Mountains, which it passed through by way of the broad, level South Pass that led to the basin of the Colorado River. The travelers then went southwest to Fort Bridger, northwest across a divide to Fort Hall on the Snake River, and on to Fort Boise, where they gained supplies for the difficult journey over the Blue Mountains and into Oregon. The Great Emigration finally arrived in October of that year and the participants had completed the 2,000-mile journey from Independence in five months.

This week at Compliance Week 2014, I moderated a panel entitled Investigations Gone Global, Not Haywire. One of the panelists, Stephen Donovan, Chief Ethics and Compliance Officer, International Paper Company, said that one of his key reasons for setting out an investigation protocol was more than simply having a plan or guideline in place so that there would be consistency in investigations. The other key reason was to set expectations for all persons who might be involved in the investigation. The participants in the Great Emigration had a route to follow but that was about it. When it came to expectations, I think there were very little except hardship and the hope for a better future.

I think that one of the key lessons to be drawn from the ongoing Wal-Mart Foreign Corrupt Practices Act (FCPA) matter is that back in the 2006 time frame, when the corporate office was made aware of allegations of bribery and corruption regarding its Mexican subsidiary, the corporate office either did not have an investigation protocol in place, or perhaps even worse, it had one and disregarded it when the allegations bubbled up to Bentonville. But if the expectations had been set up beforehand, perhaps there would have been action taken to resolve the matter during that time frame and not later.

I have heard Jackie Trevino, Senior Manager, Corporate Compliance at Fluor Corporation, present the Fluor investigation protocol which consists of the following five steps (1) Opening and Categorizing the Case; (2) Planning the Investigation; (3) Executing the Investigation Plan; (4) Determining Appropriate Follow-Up; and (5) Closing the Case. I recognize that if a case of significant bribery or corruption is uncovered that there may be more or additional steps that you may need to take. However if you follow this basic protocol, you should be able to work through most investigations, in a clear, concise and cost effective manner. Furthermore, you should have a report at the end of the day which can stand up to later scrutiny if a regulator comes looking. Finally, you will be able to document, document, and document, not only the steps you took but why and the outcome obtained. But, as Donovan noted, it also sets the expectations of all involved.

Step 1: Opening and Categorizing the Case. Under this first step, you should categorize the ethics and compliance violation. You should notify the relevant individuals, including those on your investigation team and any senior management members under your notification protocols. After notification, you should assemble your investigation team for preliminary meetings and assessments. Step 1 should be accomplished in one to three days after the allegation comes into compliance, either through your reporting structure or other means.

Step 2: Planning the Investigation. After assembling your investigation team, you should determine the required investigation tasks. These would include document review and interviews. If hard drives need to be copied or documents put on hold or sequestered in any way, or relationships need to be analyzed through relationship software programs or key word search programs, this should also be planned out at this time. These tasks should be integrated into a written investigation or work plan so that the entire process going forward is documented. Also if there is a variation from the written investigation plan, such variation should be documented and an explanation provided as to why there was such a variation. Lastly, if international travel is involved this should also be considered and planned for as part of this step. Step 2 should be accomplished within another one to three days.

Step 3: Executing the Investigation Plan. During the course of this step the investigation should be completed. I would urge that the interviews not be effected until all documents are reviewed and ready for use in said interviews. Care should be taken to ensure that an appropriate Upjohn warning is issued and that the interviewee clearly understands that whoever is performing the interview represents the company and not the person being interviewed, whether they are the target of the investigation or not. The appropriate steps should also be taken to preserve the attorney-client privilege and attorney work product assertions. Step 3 should be accomplished within one to two weeks.

Step 4: Determining Appropriate Follow-Up. At this step the preliminary investigation should be completed and you are ready to move into the final phases. In some investigations, it is relatively easy to determine when the work is essentially complete. For example, if the allegation is both specific and narrow, and the investigation reveals a compelling and benign explanation for the conduct alleged, then the investigation typically is complete and you are ready to convene the investigation team and the relevant business unit representatives. This group would decide on the appropriate disciplinary steps or other actions to take. Step 4 should be completed in one day to one week.

It must be cautioned that at this step, if there are findings of specific or discrete allegations of corruption and bribery, a decision must be made as how to handle such findings going forward.

Step 5: Closing the Case. Under this final step, you should communicate the investigation results to the stakeholders and the case report should be completed. Everything done in the above steps should be documented and stored, either electronically or in hard copy form together. Step 5 should be completed in one day to one week.

With the growing number of reports to the Securities and Exchange Commission (SEC) Whistleblower program under Dodd-Frank, companies are under increasing pressure to get up and running quickly on any claim of bribery and corruption that is brought forward. By using an investigation protocol, you will have a ready-made process in place to start from. If your company does not have such a protocol I would suggest that you tailor this process to fit the needs of your company. It will help set the expectations of everyone involved.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

 

March 18, 2014

When to Bring in Investigative Counsel and Why

InvestigationsWhen should you bring in a true outsider to handle an internal investigation? What about specialized investigative counsel? Jim McGrath, who often writes about the need for specialized investigative counsel, has also pointed out on several occasions that having an independent eye on things is also a plus. However, rarely do we see both questions played out so publicly as is currently going on in the General Motors (G.M.) recall investigation. Indeed, Matthew Goldstein and Barry Meier discussed these  questions in Sunday New York Times (NYT) Business Section article by, entitled “G.M Calls the Lawyers”.

For those of you not familiar with G.M.’s problems, McGrath also wrote about them in his Internal Investigations Blog, in a post entitled “What Did GM Know and When Did They Know It?” McGrath describes the current issues as “the revelation that General Motors is the target of probes by Congress and by the National Highway Transportation Safety Administration over its handling of ignition switch defects in at least six of its popular automobiles. Failures in these switches may have resulted in as many as thirteen deaths and seemingly point to quality control failures at the automaker.” Others have estimated the death totals much higher for this defect. And, as McGrath notes, the key question is ‘what did GM know and when did they know it’?

Interestingly G.M. has hired two law firms to handle the investigation. One is King & Spalding, which handled much of the product liability litigation over the alleged defect and the second is Jenner & Block. In the NYT article, a prominent plaintiff’s lawyer, Lance Cooper, who fought GM and King & Spalding on this product liability litigation noted the obvious when he said, “They are part of the story.” By this he meant that “King & Spalding’s switch from a fierce defender of G.M. to a potential inquisitor into the company’s actions may also pose a conflict. For one, some of the firm’s lawyers may have to ask their own colleagues if they advised G.M. about whether to recall the vehicles at the time the Melton case was settled.”

More importantly for G.M., the retention of “outside counsel in these cases is part investigation, part public-relations gambit and part legal strategy. In most cases, the goal isn’t to publicly flog a company or its top executives, but rather to limit damage to an institution’s reputation or to contain the financial harm to shareholders of a publicly traded company. And it does so under the protection of the attorney-client privilege. From the point of view of the company, a well-done internal investigation can shape the accepted story of what happened — and produce findings that allow the company to negotiate for lower penalties from prosecutors or regulators down the road.” But, more importantly, to “achieve those ends, the law firms conducting the investigations must be viewed as forthright and uncompromised. In this respect, some critics have already questioned G.M.’s choices.”

The NYT quoted another lawyer, William McLucas, a partner at WilmerHale, who said, “If you are a firm that is generating substantial fees from a prospective corporate client, you may be able to come in and do a bang-up inquiry. But the perception is always going to be there; maybe you pulled your punches because there is a business relationship.” This is because if “companies want credibility with prosecutors and investors, it is generally not wise to use their regular law firms for internal inquiries.” Another expert, Charles Elson, a professor of finance at the University of Delaware who specializes in corporate governance, agreed, adding, “I would not have done it because of the optics. Public perception can be affected by using regular outside counsel.””

Adam G. Safwat, a former deputy chief of the fraud section in the Justice Department, said that the key is “Prosecutors expect an internal investigation to be an honest assessment of a company’s misdeeds or faults, “What you want to avoid is doing something that will make the prosecutor question the quality of integrity of the internal investigation.”” The aforementioned Jim McGrath was also interviewed for the article. He said, “A shrewd law firm that gets out in front of scandal can use that to its advantage in negotiating with authorities to lower penalties and sanctions. There is a great incentive to ferret out information so they can spin it.”

All of these concerns are equally valid in the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act investigation context. But they are layered upon the Fair Process Doctrine. This is because procedural fairness is one of the things that will bring credibility to your Compliance Program. This Doctrine generally recognizes that there are fair procedures, not arbitrary ones, in a process involving rights. Considerable research has shown that people are more willing to accept negative, unfavorable, and non-preferred outcomes when they are arrived at through processes and procedures that are perceived as fair. Adhering to the Fair Process Doctrine in your Compliance Program is critical for you, as a compliance specialist or for your Compliance Department, to have credibility with the rest of the workforce.

In internal investigations, if your employees do not believe that the investigation is fair and impartial, then it is not fair and impartial. Further, those involved must have confidence that any internal investigation is treated seriously and objectively. I have recently written about several aspects of internal investigations, in order to emphasize how to handle internal whistleblower complaints in light of the Dodd-Frank implications. One of the key reasons that employees will go outside of a company’s internal hotline process is because they do not believe that the process will be fair.

This fairness has several components. One would be the use of outside counsel, rather than in-house counsel to handle the investigation. Moreover, if a company uses a regular firm, it may be that other outside counsel should be brought in, particularly if the regular outside counsel has created or implemented key components that are being investigated. Further, if the company’s regular outside counsel has a large amount of business with the company, then that law firm may have a very vested interest in maintaining the status quo. Lastly, the investigation may require a level of specialization that in-house or regular outside counsel does not possess.

Living in Houston, this all played out in disastrous results during the Enron scandal. Near the end of Enron’s run, its regular outside counsel, Vinson & Elkins, investigated questionable accounting practices at Enron. As the NYT article noted, “The firm’s investigation is viewed as an utter failure or a corporate whitewash. The review essentially gave Enron a clean bill of health just months before it collapsed in one of the biggest accounting frauds of all time. In 2006, the law firm paid $30 million to Enron’s bankruptcy estate to resolve claims that its actions had contributed to the energy company’s demise.”

All of this means, your company needs to get it right in the hiring of outside counsel to handle an investigation. As McGrath wrote at the end of his blog, “the Jenner and King people will have to make like Howard Baker and ask what the president – or other ranking person with reporting authority to NHTSA – knew and when they knew it. Because the cover-up is usually worse than the underlying wrong and this one could cost GM $35 million and its reputation.” The NYT article ended with the following, “The best internal investigations are the ones that don’t receive much media attention. A company deals with a problem quickly, and if there’s something to report to authorities, the company tends to be treated leniently for its forthrightness.” Amen.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

February 19, 2014

Welcome to the Hotel California: FCPA Enforcement

Hotel CaliforniaThis past weekend I saw The Eagles on their ‘History of The Eagles Tour. It truly was that, a complete musical history of the group, from the beginning in 1971 up until now. They played for well over 3 hours and it was fantastic. The Eagles were at their peak in the 70’s when I was at my peak as a rock and roller, both in high school and college, so the concert was a very memorable experience. In one interesting twist they did not allow videos to be taken of the concert with cell phones or any other types of recordings. Of course the concert ended with song Hotel California and its iconic line “You can check out but you can never leave.”

I thought about that final line and how true it was in the late 70s and how true it is now in the world of international anti-corruption enforcement when I read a front page article in Sunday’s New York Times (NYT), entitled “Eavesdropping Ensnared American Law Firm”, and an blog post by the FCPA Professor, entitled “FCPA Lawyers Would Be Wise to Review Recent Third Circuit Decision”.

We know from the American Spectator article, “Rise of the Surveillance State”, by James Bovard about the National Security Agency (NSA) program ‘Echelon’, which he described as “a spy satellite system run by the National Security Agency along with the United Kingdom, Australia, New Zealand, and Canada. Echelon reportedly scans millions of phone calls, e-mail messages, and faxes each hour, searching for key words.” Further, Bovard stated, “A February report by the European Union alleged that Echelon has been used for economic espionage. Former CIA Director James Woolsey told a German newspaper in early March that Echelon collects “economic intelligence.”” One example Woolsey gave was espionage aimed at discovering when foreign companies are paying bribes to obtain contracts that might otherwise go to American companies. Woolsey elaborated on his views in a March 17, 2001 Wall Street Journal (WSJ) Op-Ed piece, justifying Echelon spying on foreign companies because some foreigners do not obey the Foreign Corrupt Practices Act (FCPA).

After the NYT article, we know that US law firms can also fall under surveillance. The firm of Mayer Brown was monitored by the NSA’s Australian counterpart, the Australian Signals Directorate (ASD), regarding work the law firm was doing for the government of Indonesia in trade disputes with the US. It is of no consequence that it was the Australians doing the spying as under the “Five Eyes Alliance”, Australia is one of five countries the US shares intel with and agrees not to spy on. While most Americans would understand the need to place those dealing with terrorists under surveillance, the need to monitor US law firms giving legal advice in a legal trade dispute seems one or two steps past the safety of the US homeland. While only mentioned in the article, I also wonder about the effect of this surveillance on the attorney-client privilege, the basic reason that clients come to lawyers, for confidential legal advice. If you know that you are susceptible to espionage, why would a client ever trust the confidentiality of your communications or even that they are confidential to start with. Moreover, if you know you are subject to surveillance, is the privilege destroyed if a country does so and passes the information along to the US?

Equally unsettling as the revelations in the NYT article is the FCPA Professor’s report on a Third Circuit, Court of Appeals decision, entitled “In Re: Grand Jury Subpoena”. In this matter, an attorney was consulted on an international transaction, which was described as follows: “In April 2008, Client approached Attorney to discuss issues he was having with the project. Client explained that he planned on paying Banker in order to ensure that the project progressed swiftly, as Banker was threatening to slow down the approval process. Attorney did some preliminary research, found the FCPA, and asked Client whether the Bank was a government entity and whether Banker was a government official. Although Attorney could not ascertain given his limited research whether the planned action was legal or illegal, he advised Client not to make the payment. Despite this advice, Client insisted that his proposed payment did not violate the FCPA, and informed Attorney that he would go ahead with the payment. Attorney gave Client a copy of the FCPA. After this communication, Attorney and Client ended their relationship.” The opinion stated that the Client made a payment to the banker’s sister.

In other words, the client came for legal advice regarding an international transaction, the attorney advised against the transaction in question but the client did so against the advice of his attorney and the attorney thereafter terminated the relationship. There was no evidence the lawyer advised the client how to violate the FCPA or in any way helped the client ‘get around’ the law.

The attorney-client privilege is not sacrosanct. There are some limited exceptions to it and one of those is the ‘crime-fraud exception’ which the Court of Appeals explained is, “To circumvent [the attorney-client] privilege under the crime-fraud exception, the party seeking to overcome the privilege . . . must make a prima facie showing that (1) the client was committing or intending to commit a fraud or crime, and (2) the attorney-client communications were in furtherance of that alleged crime or fraud.” (All citations omitted) But, in this case, there was no evidence presented that the attorney involved gave advice that was in the furtherance of a crime but only that “The communication between Attorney and Client was brief, and consisted mainly of informing Client on the applicable law and advising that he not make the payment. However, we believe that the questions posed by Attorney to Client and the information that Client could gain from those questions are sufficient for us to conclude that the District Court did not abuse its discretion in determining that the advice was used in furtherance of a crime or fraud.”

What were the questions posed by the client or put another way, what was the legal advice sought by the client? The Court stated, the “questions about whether or not the Bank was a governmental entity and whether Banker was a government official would have informed Client that the governmental connection was key to violating the FCPA. This would lead logically to the idea of routing the payment through Banker’s sister, who was not connected to the Bank, in order to avoid the reaches of the FCPA or detection of the violation. Of course, it is impossible to know what Client thought or how he processed the information gained from Attorney. But the District Court did not abuse its discretion in determining that Client “could easily have used [the advice] to shape the contours of conduct intended to escape the reaches of the law.””

What does the spying on a US law firm and this court decision invalidating the attorney-client privilege mean for FCPA enforcement? I think that it means if you find yourself in the position of having violated the FCPA; your company now has an even greater incentive to self-disclose. If you are a non-US based company subject to the FCPA, the NSA is watching you. Further, if you are a non-US company, which seeks legal advice, you are now on notice that US laws firm are being spied on. Lastly, if you have violated the FCPA and seek legal advice; it may well come to pass that the lawyer whose advice you sought, can be compelled to testify about those conversations. So in the words of The Eagles, if you engage in conduct that arguably violated the FCPA, you can check out but you can never leave.

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If you will be in Dallas this coming Thursday, February 20, I hope that you will join myself and fellow FCPA Blog Contributor Marc Bohn at the Corporate Compliance Summit on 2014 FCPA Concerns You Cannot Afford to Ignore. The event is complimentary and is sponsored by The Network. You can check it out and register by clicking here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

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