The Gun Sting Case Defeats and What it means For FCPA Enforcement? Absolutely Nothing!

In a stunning rebuke of the Department of Justice’s (DOJ) trial strategy, all defendants in the second group of Gun Sting defendants walked out of the federal courthouse, still free. Two defendants were acquitted and the remaining three defendants were granted a mistrial. One defendant was dismissed at the close of the prosecution’s case in December as was the DOJ’s Foreign Corrupt Practices Act (FCPA) conspiracy count against all defendants. So, as the FCPA Professor noted, the DOJ is 0-10 in trial prosecutions in its Gun Sting case. However, that stark number does not tell the full picture of what is going on in enforcement of the FCPA.

First and foremost, not all of the Gun Sting defendants have been acquitted or even been granted mistrials, three defendants, Haim Geri, Daniel Alvarez and Jonathan Spiller all pled guilty. A fourth defendant, Richard Bistrong, reported by the FCPA Blog to be “the key intermediary between the FBI and the shot-show defendants”, pled guilty to one count of conspiracy to violate the FCPA and other statutes in 2010. So to imply the DOJ is zero in obtaining guilty verdicts and pleas for all defendants in its Gun Sting case is not precisely correct.

The defeats in the Gun Sting trials, coupled with the overturning of the guilty verdict in the Lindsey Manufacturing case and the O’Shea acquittal, have lead many commentators to make one of two arguments: (1) the DOJ is getting is comeuppance for ‘aggressive’ prosecution of the FCPA; and (2) coupled with the claim that the FCPA hurts US competitiveness overseas, it is the end of FCPA enforcement as we know it. Both positions are far wide of the mark. So what does the DOJ record for the two Gun Sting trials mean for FCPA enforcement? Absolutely nothing! As reported by the FCPA Blog, in 2011 15 companies settled FCPA enforcement actions by paying a total of $508.6 million in fines and penalties. Although this is a drop from both the number of companies which resolved FCPA enforcement actions and aggregate amount of fines and penalties paid over the previous year, this number is still significant. One need only take a look at the reported ongoing FCPA investigations to see that there is still significant enforcement occurring. As to the ‘aggressive’ DOJ enforcement, remember these enforcement actions against companies are made largely through self-disclosure. If the DOJ does not believe that there is a sufficient basis to bring an enforcement action, it will decline to prosecute the company.

What can be portended by the defeats at trial? First the whole notion that the Lindsey Manufacturing company defendants were somehow acquitted or over-zealously prosecuted is just plain wrong. They were found guilty and this guilty verdict was thrown out due to prosecutorial misconduct. As to O’Shea, it appears that the trial judge concluded that the government simply did not have enough evidence to get it to a jury. While it appears that the O’Shea case should not have gone to trial, the government at least put enough evidence forward to get to trial.

Such was not the case in the Gun Sting trials, where it appears the jury both (a) did not think the defendants were guilty, or (b) leaned so heavily towards acquittal that no unanimous decision could be made. It is still not clear why the government failed so miserably with the juries in the Gun Sting trials. It may be that people do not understand why the government would set up an apparently legitimate business transaction and then overlay a corruption case on it. After all, everyone understands that any business dealing involving illegal narcotics is illegal from the get-go. It does not matter if bribery and corruption are involved, the entire transaction is illegal. It may be the jurors did not feel the same about an underlying transaction which was clearly legal; here the sale of armaments to a foreign government, something the US government does on a routine basis.

It may also be the jury simply did not believe or even like the government’s star co-operating witness, Richard Bistrong. As reported by the FCPA Professor, Bistrong pled guilty long before any of the 2010 arrests in the Gun Sting case. He pled guilty back in 2009 which means that at least some of the time he was working undercover for the government, he had already pled guilty. This fact may have persuaded the jury in the Gun Sting trials that his testimony did not support the illegal conduct that the government claimed it supported. Or as asked by the FCPA Professor, in a post entitled “Will Bistrong’s Plea Impact The Africa Sting Cases?”, “What impact will Bistrong’s plea have in the Africa [Gun] Sting case – particularly the defendants’ expected entrapment defense?” It may have been quite a bit.

As your company’s compliance officer, what should you make of all this? My take is that you had better double down on your compliance program because I believe that the DOJ will refocus its efforts where it will have the most success, with enforcement actions against corporations. Why do I say this? First of all, there is the self-disclosure issue noted above which is now compounded by the Dodd-Frank Whistleblower provision. Second is the new norm of industry sweeps, and remember these started long before Johnson & Johnson who agreed, as part of its DPA, to turn in its competitors for alleged FCPA violations. Also name one company which will go to trial? The answer is easy because it’s none, nada, zilch and zero. After Arthur Anderson, no public US Company will go to trial in a FCPA case and risk a guilty verdict. Lindsey Manufacturing and the individual defendants went to trial because they were the company and the company was them.

So what is my take on the effect on ongoing FCPA enforcement of the failure of the DOJ to convict any of the Gun Sting defendants at trial? Once again, Absolutely nothing!

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, 2012

USING THE INTERNET TO YOUR COMPANY’S ADVANTAGE IN DEFENDING AGAINST A WHISTLEBLOWER ACTION

Ed. Note-today we have an interesting post from frequent guest Michelle Sherman. 

The wide dissemination of news on the Internet through “new media” online sites such as the Huffington Post, well recognized blogs like the Drudge Report, or social media sites such as Twitter is changing how we get our news today.  The Internet is also making it harder for someone to be the first and original source for allegations of corporate malfeasance that can be the basis for a whistleblower or false claims action.  In other words, businesses who are defending themselves against a whistleblower or qui tam (false claims) plaintiff (collectively, “whistleblower”) should exhaustively search the Internet for evidence showing that the whistleblower is not the “original source” of the information.

1.  Section 922 Of The Dodd-Frank Wall Street Reform And Consumer Protection Act.

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act provides that the Securities and Exchange Commission (“SEC”) shall pay awards to eligible whistleblowers who voluntarily provide the SEC with original information that leads to a successful enforcement action yielding monetary sanctions of over $1 million. Whistleblowers can recover from 10 to 30 percent of the total monetary sanctions collected in the SEC’s action or any related action, so there is a real financial incentive for someone to report suspected wrongdoing.  Section 922 of Dodd-Frank also added Section 21F to the Securities Exchange Act of 1934, and Section 21F reflects these incentives to whistleblowers.

According to the SEC’s May 25, 2011 press release, Section 922 defines original information as information that “must be based upon the whistleblower’s independent knowledge or independent analysis, not already known to the Commission and not derived exclusively from certain public sources” such as the news media.

Because the public policy behind whistleblower statutes is to reward the reporting of alleged wrongdoing that may otherwise go undetected, the statutes do not allow for bounty rewards to plaintiffs who are not the original source of the information.

Thus, a whistleblower, who provides information that is already known and discoverable through a blog post, Twitter or other social network activity, may have trouble satisfying an essential element to recovering the mandatory award under Section 922.

2.  The False Claims Act And The Public Disclosure Bar.

Similarly, the False Claims Act includes a public disclosure bar which provides that courts shall dismiss qui tam suits when the relevant information has already entered the public domain through certain channels, including the news media, unless the action is being brought by the Attorney General or by a person who is the original source of the information.  31 U.S.C. § 3730(e)(4)(A).  Section 3730(e)(4)(A) also allows the government to stop dismissal of the action by opposing the dismissal.

The public disclosure bar was added by Congress to the False Claims Act “in an effort to strike a balance between encouraging private persons to root out fraud and stifling parasitic lawsuits.” Graham County Soil and Water Conservation District v. United States ex rel. Wilson, 559 U.S. __, 130 S. Ct. 1396 (2010).

Recent amendments to the False Claims Act left unchanged the defense that information available in the news media cannot form the basis for a qui tam plaintiff being able to maintain his action.

3.  Why The Public Disclosure Bar Should Include Activity On The Internet Including Blogs, Online News, And Social Network Sites Such As Twitter.

With the exponential growth of the Internet, the meaning of news media has expanded and, thereby, created more opportunities for a company to assert the public disclosure bar.  The definition of “news media” in Wikipedia highlights this broad scope:

“The news media are those elements of the mass media that focus on delivering news to the general public or a target public.  These include print media (newspapers, newsmagazines), broadcast news (radio and television), and more recently the Internet (online newspapers, news blogs, etc.)” (emphasis provided).

The New York Times has also reported on how many stories are being covered online these days instead of through print editions:

“Crucial to the Times’s approach in a time of less print space is City Room, the fourth most popular blog on the NYTimes.com.  It is where The Times dishes breaking news and a creative menu of features, columns and digital novelties.  In City Room, a whole new kind of metro report emerges, with most of its 3,000 plus blog posts a year never surfacing in print.”  Arthur S. Brisbane, New York Times, Covering Its Own Backyard (Oct. 23, 2011).

In Graham County, the Supreme Court specifically cited to the broad scope of the news media component of the public disclosure bar when the Court recognized it includes “a large number of local newspapers and radio stations.”  As we have seen with online news sources such as the Huffington Post, which AOL acquired for $315 million, and which had an estimated 25 million monthly users at the time of the sale, new media can have a far greater reach than a small town local newspaper that is included in the news media category of the public disclosure bar.

WikiLeaks is also a good example of how confidential information was first publicized  through the Internet, and ahead of an alleged whistleblower.  A New York Times article described how much WikiLeaks (and the use of the Internet to dump confidential information) has changed the whole nature of whistle blowing:

“Whistle-blowers in possession of valuable and perhaps incriminating corporate and government information now had a global dead drop on the Web.  Traditional news organizations watched, first out of curiosity and then with competitive avidity, as WikiLeaks began to reveal classified government information that in some instances brought the lie to the official story.”  David Carr, New York Times, “Is This the WikiEnd?” (Nov. 6, 2011).

4. Conclusion.

Consequently, a company is well advised to search the Internet for discussions concerning the allegations that form the basis for a whistleblower’s action.  Industry specific blog sites are a good starting point since they often carry gossip concerning companies in that industry.  Twitter is also a good resource since it has the most real time news updates, and often scoops the mainstream media as we saw with reports of the earthquake in Japan and its aftermath, the United States finding and killing Osama bin Laden (with a local resident live tweeting the storming of the compound), and the political upheaval in Egypt (described as the “Twitter revolution”).  YouTube is also a good resource as evidenced by the video that quickly went viral in which University of California, Davis campus police were seen spraying students with pepper spray.

Michelle Sherman is special counsel at Sheppard Mullin Richter & Hampton where she practices business litigation and consults with businesses on legal and regulatory compliance issues relating to social media and the Internet.  Michelle is the editor and contributing author to the law firm’s Social Media Law Update blog.

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If you are going to be in Houston on December 7, myself, Mike Volkov and the Bribery Act guys, Richard Kovalevsky QC and Barry Vitou will be making their only US appearance this year. Mike and I will review some of the more significant enforcement matters of 2011 and discussion lessons which may be drawn from them. Richard and Barry will discuss the Bribery Act. Best of all the event is free and CLE will be provided. Event details and registration are found at http://events.r20.constantcontact.com/register/event?llr=myqi4pcab&oeidk=a07e55t5re06e78f1e3. I hope you can make it!

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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 BNY Whistleblower – The Dodd-Frank Clock is Running, is Your Company Ready?

The time period that an internal whistleblower must wait before he or she can bring information to the Securities and Exchange Commission (SEC), under the Dodd-Frank Whistleblower provision, is within 120 days after the information has been internally reported to the company. Is your company ready for the speed in which an internal investigation must now be completed? It is not simply that an investigation has begun, which might somehow act to stay or provide a company a safe harbor. The investigation must be completed and a decision made on whether or not to report the results, if a violation of the Foreign Corrupt Practices Act (FCPA) is found, to the SEC. Not a decision ever to be taken lightly.

I have not been one of the corporate doomsayers in regards to the Dodd-Frank Whistleblower provisions. I generally believe that most employees do not want to report to the SEC or that they will run to the SEC to claim some far off chance at a bounty. I feel that most people take pride in their company and want it to succeed. (Of course if you fire an internal whistle-blower for blowing the whistle and then claim they were incompetent all along, well hell hath no fury like…) However, I may have to modify some of these views after reading an article in the Wednesday edition of the Wall Street Journal, entitled “Secret Informant Surfaces in BNY Currency Probe” by Carrick Mollenkamp.

In this article, Mollenkamp reported on informant Grant Wilson who, while working at Bank of New York Mellon Corp., (BNY), gathered information against his employer and provided documents to a whistleblower legal group, who then filed whistle-blower lawsuits against BNY. These lawsuits were later taken over or were used as the basis for other lawsuits filed by several states Attorneys General. Wilson’s input “culminated with the filing last week of separate civil lawsuits by the Justice Department in federal court…”

However, Wilson was no ordinary whistleblower. He was specifically recruited to be the insider and to provide such information by one Harry Markopolos, who was himself scorned by the SEC multiple times regarding his attempts to blow the whistle on Bernie Madoff to the SEC. (Think the SEC will not take him seriously the next time?) While the facts and circumstances of the various claims against BNY are very different from FCPA compliance, it does present a new twist on whistleblowing, that a person can be recruited in order to bring a civil claim. The Department of Justice (DOJ) has used confidential informants in white collar cases for some time.

However, Markopolos worked on the BNY case for several years and recruited Wilson 2 years before this last round of lawsuits were filed. The original lawsuits did not name Wilson as the whistleblower or ‘Relator’ in legal parlance. They were filed under the name of a Delaware partnership named “FX Analytics” to “provide anonymity for Wilson”. Further, the lawsuits were sealed. All total, the suits seek $2bn in from the bank and the whistleblower group can seek a share “of as much as 25% of the recovery”.

The old example of a whistleblower was generally thought to be of a disgruntled employee who had inside information or an employee who brought information to management and was terminated for their efforts. The BNY case provides a concrete example of a new type of whistleblower. Here you had an effort, for literally years, with recruitment of an employee with intimate knowledge of a company’s operations to provide ‘insider-information’. Could such an example be brought to other types of whistleblower actions and reports?

So does the BNY matter relate to Dodd-Frank Whistleblowers? It may be that such private efforts come from the civil side of the Bar, rather than direct reports to the DOJ. If your company does not perform an investigation within 120 days or more importantly, if the company does not report to the SEC within 120 days and the whistleblower does, the whistleblower can receive retroactive credit back to the original date of internal reporting. This may well be something of monetary value to a whistleblower’s group like the one which filed the lawsuit against BNY. Also, and more ominously suggested by the BNY matter, an aggressive plaintiff’s lawyer could claim that such failure get the investigation completed might be an indication of lost evidence, spoliation or simply that the company had a lack of commitment to compliance that it could not or would not dedicate the resources necessary to comply with the FCPA. The failure to report might be further evidence of nefarious intent.

So what can a company do in response? The first thing might be to determine 120 days from each internal whistleblower complaint that comes in and diary that date. The Compliance Department or Legal Department needs to respond very, very quickly to any allegations. In an article by Paul Koepp, entitled “Whistle-Blower Cases May Jump with New SEC Rules BIG Bounties”, he interviewed Russ Berland and Brian O’Bleness, of the law firm of Stinson Morrison Hecker LLP which has set up a Whistle-Blower Investigation and Response Team. Their response team is designed to bring in outside professional resources, to supplement those a company might (or might not) have available in-house, to meet these time sensitive deadlines under Dodd-Frank. This is a step beyond what Jim McGrath writes about regarding the need to bring specialized investigative counsel in to handle a matter. Your company needs specialized counsel and a response team ready to go. Stinson Morrison’s creation of such a team may well fill that need.

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, 2011