Grand Central Station, Mary Jo White and the End of No-Admission Settlements in SEC Cases?

Last week we celebrated one of the world’s great urban architectural marvels, the London Underground. This week we celebrate one a little closer to home. This week is the 100^th anniversary of Grand Central Station. In an article this week in the New York Times, (NYT), entitled “Looking Out on the Grand Central, and Looking Back on Saving It”, reporter Clyde Haberman interviewed Kent L. Barwick, former Executive Director of the Municipal Art Society, who was instrumental in the fight to save the Station in the 1970s. I knew about the legal fight that the City of New York had put up after its designation of the venerable landmark had been overturned by a state judge. This landmark case went all the way to the US Supreme Court and ended with a victory for the City of New York and the establishment of the right of a municipality to protect the public environment and its history by historic designation. What I did not know about this process was that one of its most active supporters was Jacqueline Kennedy Onassis, who supported the cause with time, money and effort. It was a classic effort of several processes moving forward on several fronts at once which led to this important legal decision and one of the most compelling journeys in landmark preservation.

This article came to mind when I read another article in the NYT, entitled “Make Them Pay (and Confess)” by reporter Gretchen Morgenson, about President Obama’s nomination of Mary Jo White to head the Securities and Exchange Commission (SEC). Morgenson used the nomination of White to argue that the SEC has not been aggressive enough in its prosecution of financial wrongdoing during the first four years of the Obama Administration. She believes that the no-admission settlement is merely a “slap on the wrist” for companies who are guilty of securities violations involving fraud. I believe that this would include Foreign Corrupt Practices Act (FCPA) violations.

One of the techniques that she argues should be used more often and would have greater impact is requiring companies to admit to facts in settlement agreements. As most compliance practitioners know, the SEC has, in the past, allowed companies to settle without admitting or denying the findings which are the basis for the enforcement actions. Generally the SEC has supported this position arguing that by doing so this helps it “avoid costly, time-consuming litigation that would tax already-stretched resources.” In addition to time-consuming trials, there is always the possibility that the SEC could lose at trial. Further, by having quicker settlements, more victims would be getting restitution faster.

But Morgenson argues that a no-admission settlement does not really qualify as a punishment. In addition to having no precedential value going forward, because there are no facts admitted, she maintains that even the financial penalties are meaningless. This is because ultimately the fines and penalties are paid by the shareholders or the company’s insurance carrier. Such situations are “not much of a deterrent.”

Morgenson points out that Preet Bharara, the United States Attorney for the Southern District of New York, who was hired by Mrs. White when she ran the office, “has made it a priority to require admissions from defendants in civil fraud cases” brought by his office. Bharara has stated that “Such admissions are a way to hold defendants accountable, as well as being an important part of the public record.” By public record, Bharara means that plaintiffs can then use those admissions in shareholder derivative actions against corporations in tag along law suits. Do you think that the plaintiffs’ bar will be salivating over that prospect?

Morgenson discussed several reasons for the reluctance of the SEC to require such admissions of fact. The first and foremost is that you have to be ready, willing and able to go to trial. Bharara handles this in the Southern District with the following comment, “We’re not in the business of bluffing. When people know you’re not bluffing, they come to the table.” However, the SEC itself may not have this same attitude. Morgenson notes that “It won’t be easy to change the mind-set at the S.E.C. from one that regularly allows defendants to avoid culpability.” Other federal agencies such as the Federal Trade Commission also allow corporations to settle civil enforcement actions while not admitting to any facts.

Morgenson acknowledges that it will not be easy for the SEC to change its philosophy. Further, defendants will probably fight this change tooth and nail because they know that the cost of any settlement will increase exponentially if they make such admissions. The aforementioned plaintiffs’ bar will be waiting to jump on any corporations which make such settlements. Morgenson quotes William F. Gavin, Secretary of the commonwealth of Massachusetts and its securities regulator, who admitted that negotiating admissions of liability is challenging due to the fact that the cost of settlements will go up. His response, “Well, that’s kind of the idea – you did something wrong, you should be liable. You’re not going to change practices or behavior if there’s no penalty associated with it.”

Federal judges have also begun to question the use of SEC no-admission settlements. There is the quite well known example of Judge Rakoff and his initial rejection of the Citigroup settlement. A couple of other federal judges also initially rejected no-admission settlements but did so on the grounds that there was not enough evidence to enforce an injunction if there was a breach of the settlement by the defendant. Their concerns were addressed and they all eventually signed off on the SEC settlements. Now, however, Judge Richard Leon has rejected a SEC settlement with IBM, for FCPA books and records violations, as Judge Leon wanted IBM to report to the SEC if it sustained a FCPA violation going forward. IBM, with the SEC standing at its side on this point, said that to do so would be “too burdensome.” Judge Leon has set a hearing date of February 4, 2013 for IBM to present evidence of how they plan to collect the data to show that it is too burdensome. If IBM cannot do so, Judge Leon may well not approve the no-admission settlement.

Morgenson clearly wants Mary Jo White to engage in more and greater enforcement of financial fraud cases. She does not speak to FCPA cases specifically so it is not clear on whether her desire would also include FCPA books and records enforcement actions brought by the SEC when there is no criminal case brought by the Department of Justice (DOJ). However, if no-admission enforcement actions are no longer the norm in SEC financial fraud or other securities actions, this will probably also bleed over into FCPA actions. Judge Leon’s challenge to IBM and to the SEC may also portend an increasingly active judiciary which may delve into the substance of any FCPA settlement agreement with the SEC.

So for you New Yorkers out there, or any of you travelling through New York, I would suggest that the next time that you go through Grand Central Station look up with some wonder and awe at one of the true architectural marvels of the city. You may not do so as I did the first time I went through it but still take a few minutes to think that it was headed for the wrecking ball back in the 1970s, scheduled to be replaced by a skyscraper. Morgenson argues that the SEC should become more aggressive in its prosecution of financial fraud and with her prosecutorial background the agency may well be headed that way.

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, 2013

Will the UK Let the Light of Day Shine Into Its Regulatory Process?

Should the regulators process be shrouded in mystery or should there be disclosure into the light of day? That is a question currently before authorities in London. As reported in the Financial Times (FT) column Inside Business, in a piece entitled “UK regulators must judge the right time to go public”, Brooke Masters reported that the UK Financial Services Authority (FSA) cannot provide the public details about a matter under investigation “until its internal decision maker, the Regulatory Decisions Committee, has heard the allegations and the defence of the accused and come down in favour of enforcement action.” There is currently legislation in front of Parliament which would allow a newly constituted financial regulatory agency, the Financial Conduct Authority, to go public with “warning notices” before a case gets to the Regulatory Decisions Committee. Masters cites advocates of this legislation who “say this would make the UK more like the US, where the Securities and Exchange Commission [SEC] can make public charges it has filed with a judge or administrative proceeding.” Apparently representatives of British banking interests are desperately fighting to keep such proceeds secret.

The Con

Master’s presents several arguments why regulatory investigations should remain secret. She quoted Lord Flight who claims that “allegations can blacken reputations and harm innocent investors.” He even pointed an accusatory finger at the head of the state of New York’s Department of Financial Services’ (DFS) Benjamin Lawsky who made allegations that Standard Chartered “hid $250 billion of transactions with Iran in breach of US sanctions, a charge that caused a one-day 16 per cent fall in the bank’s share price.” The bank insisted that they were “blindsided” by the allegations and indeed there were only $14 million in transactions which violated either US or New York state law. Of course we all now know that Standard Chartered also settled with the DFS for $340 million within days of these accusations being made public.

The Pro

Masters cites to un-named British Ministers who argue that “the public deserves to know when government regulators believe a major institution or prominent figure has committed wrongdoing. Further, timely announcements by the FSA or other appropriate regulators would “allow investors to move their money or protect themselves from similar misdeeds.” She poses the question of “Wouldn’t you want to know that a broker was facing charges of selling unsuitable investments before you – or even more pointedly, an elderly relative – gave him money?” Next she notes that “Quick enforcement also helps restore faith in the financial system. It is quite frankly a joke that nearly four years after HBOS failed, we still don’t know whether the FSA thinks anyone there did anything improper.”

Masters concludes her piece with a look at the SEC “Wells Notice” procedure, which is a private warning by the SEC to companies and individuals that the SEC wants to bring a case against them and this document invites the company or individual to respond directly to the SEC. This process allows the party or parties in question to respond or to work out a settlement. Masters believes that “the practice has worked well, especially for investors, who often get an early heads up about potential problems because most public companies disclose when they have received such a notice.” She believes that this interim step would be useful to give companies “a private right of reply before throwing open the doors.” But Masters makes clear her final position by concluding that she does not believe the UK government should “give in to the City’s efforts to keep the disciplinary process shrouded in mystery.” In other words, the light of day should shine into these dark crevices of nefarious activity.

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

Sometimes Bribery is Like a Box of Chocolates

The baseball season is at its traditional half-way mark with the All-Star Game. This season certainly has already shown promise as one of the surprises with both the Washington Nationals and the Pittsburg Pirates is that they have the two best records in the National League (NL). One team that, unfortunately, has not surprised any one is the Houston Astros which has the worst record in baseball yet again. Of course new owner Jim Crane is not taking this lying down as he has spent much time on redesigning the Astros uniforms and publicizing this ‘new look’ for the team. He has also asked the Astros fans if the team should (1) jettison the train which runs when the Astros hit a home run (admittedly not too often as the Astros are also last in the HR ranks) and (2) if the stadium should do away with Tal’s Hill, Minute Maid Park’s most unique topographic feature (other than perhaps the aforementioned train). I am so glad the new owner is working so hard for us fans.

But sometimes life is like a box of chocolates, you just never know what you are going to get. I thought about that ‘Gumpism’ in the context of the Lastros when I read the enforcement action, concluded on July 10, with Orthofix, as reported by the FCPA Blog, the Wall Street Journal (WSJ) and others. Orthofix entered into a Deferred Prosecution Agreement (DPA) with the Department of Justice (DOJ) and agreed to pay a $2.22 million penalty. Orthofix also agreed to the entry of a Final Judgment based upon a Compliant for Violations of Federal Securities Laws, filed by the Securities and Exchange Commission (SEC) and the company agreed to pay the SEC $5.2 million, including $4.98 million in disgorgement and $242,000 in prejudgment interest.

The SEC Complaint reveals that the bribery occurred in the company’s Mexican subsidiary, Promeca S.A. de C.V. (Promeca). It involved two separate bribery schemes lasting from 2003 until 2010. Initially the bribery scheme involved the bribery of individual hospital employees, with gifts and cash, in order to secure sales contracts. In 2008, when the Mexican hospital system began a national tender system for the purchase of goods and services, no doubt to help in the fight against fraud, Promeca adjusted their bribery program to simply bribe the tender selection committee. Promeca did this by setting up front companies which were controlled by members of the tender selection committee. Promeca concealed all of the bribery by submitting false invoices for goods and services it never received from these front companies. And no doubt thinking that stupid is as stupid does, it called the bribe payments “chocolates”. The WSJ article quoted Kara Brockmeyer, chief of the SEC Enforcement Division’s Foreign Corrupt Practices Act (FCPA) unit, for the profound Gumpism that “Once bribery has been likened to a box of chocolates, you know a corruptive culture has permeated your business”.

The SEC complaint specified that Orthofix did not have an effective FCPA compliance policy or FCPA-related training. One of the clear reasons is that although the company disseminated some code of ethics and anti-bribery training to Promeca, the materials were only in English, and it was unlikely that Promeca employees understood them as most Promeca employees spoke minimal English. (Note to anyone doing business in Mexico – call Jay Rosen at Merrill Brink and get your compliance program translated into Spanish.)

Further, even though Promeca’s training and promotional expenses, that included the improper payments, were often over budget, Orthofix did very little to investigate or diminish the excessive spending. The upshot for Promeca was also similar to a box of chocolates; it got eaten. Orthofix terminated the Promeca executives that orchestrated the bribery scheme, wound up Promeca’s operations, enhanced its overall FCPA compliance program with mandatory annual FCPA training for all employees and third-party agents, expanded internal audit functions, and implemented other internal control measures.

Was the box of chocolates worth it to Orthofix? The SEC Compliant noted that the company paid out only $317,000 in bribes, which generated $8.7MM in gross revenues and profits to Orthofix of about $4.9MM. Probably in Orthofix’s eyes a pretty good ROI. The problem is that it had to pay out fines and penalties of over $7.4MM plus all investigative costs and the folding up of its Mexican subsidiary. The company is now also under a 3 year DPA.

So what would Forest, Forest Gump, say about now? First he would probably tell that new owner of the Houston Astros, Jim Crane, that a winning team is more important than a new uniform. He would also say that sometimes bribery is like a box of chocolates. It all tastes good at first but you may find that if you are greedy and eat the whole box, it really doesn’t taste or feel so good later on.

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The FCPA Blog and ethiXbase are offering a cool deal to help dispell that summer heat wave by offering readers of the FCPA Blog a free download of the Anti-Corruption Compliance Benchmarking Survey. Normally valued at $295, the survey can be downloaded at no cost for a limited time with email registration here.

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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 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

How the DOJ Looks at Compliance Programs in an Enforcement Action-Part I

Although often discussed in Deferred Prosecution Agreements (DPAs) or Non-Prosecution Agreements (NPAs), most compliance practitioners are not familiar with one of the most important sources of Department of Justice (DOJ) policy regarding the charging of corporations under the Foreign Corrupt Practices Act (FCPA). This source is found in the United States Attorney’s Manual section, entitled “Principles of Federal Prosecution of Business Organizations” (“the Principles”). However, there is an excellent discussion found on this issue in the January 2012 publication of “Complying with the Foreign Corrupt Practices Act: A Practical Primer” (“the Primer”), published by the ABA Criminal Justice Section, Global Anti-Corruption Task Force. The Primer has several authors including Salen Churi, David Finkelstein, Joe Mueller; persons from the University of Chicago School of Law, Dean David Zarfes, Michael Bloom and Sean Kramer; the Microsoft Corporation, including John Frank and Michel Gahard (collectively “the authors”).

The Principles themselves recognize that while prosecutors are to apply “the same factors in determining whether to charge a corporation as they do with respect to individuals” such as evidence, likelihood of trial success, deterrent to others similarly situated and others factors, the prosecution of corporations is different than prosecuting individuals. The Primer notes that the Principles state “that prosecutors have a duty to protect economic and capital market, to protect those compete in those markets through lawful means and to generally protect the American public from corporate misconduct.”  To assist prosecutors in making these determinations, the Principles provide a list of factors which must be considered in any decision on whether or not to bring charges or enter into DPAs or NPAs with companies. They are:

• The nature and seriousness of the offense, including the risk of harm to the public and any policies governing the prosecution of corporations for specific types of crimes;
• The pervasiveness of wrongdoing within the corporation, including managerial complicity;
• The organization’s history of similar misconduct;
• The corporation’s disclosure of wrongdoing and willingness to cooperate;
• The existence and effectiveness of the corporation’s compliance program;
• The corporation’s remedial actions, including efforts to implement or improve effective compliance programs, to replace management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with government agencies;
• The harmful collateral consequences of charges or agreements, including those to investors and the public;
• The adequacy of personal prosecution as opposed to organizational prosecution; and
• The adequacy of non-criminal remedies.

In addition to these specific guidelines, the Principles “indicate that compliance programs are specifically relevant to the DOJ’s evaluation of four general contexts: (1) the pervasiveness of wrongdoing within the corporate; (2) the history of a corporation’s conduct; (3) whether a corporation should be eligible for a reduced sanction because of voluntary disclosures; and (4) whether a corporation has taken significant remedial actions to deter future violations.” The Principles also require a prosecutor to “independently consider the sufficiency of a company’s compliance program.” The Primer further discussed these four general contexts plus the requirement for an independent consideration of a company’s compliance program.

Pervasiveness of Wrongdoing

The Primer initially notes that a company should not be held liable for isolated or small numbers of FCPA violations by company employees particularly if the company has a “robust compliance program in place.” Pervasiveness will be determined on a case-by-case basis and is a fact intensive analysis. However, one of the clearest pronouncements is that corporate management is responsible for “a corporate culture in which criminal conduct is either discouraged or tacitly encouraged”. In other words, tone at the top does matter. The Primer relates that “in evaluating pervasiveness, compliance programs are relevant in determining when any wrongdoing can be fairly attributed to the actions of a corporate management and the culture it has fostered.”

History of Conduct

The history of a wrongful conduct is relevant in how the DOJ may well resolve a case. This means that your company had better have a written compliance program in place but such written program should not simply be a paper program, present as window dressing in case the DOJ comes knocking. This is the document, document and document part that I continually write and speak about. Not only must you document your actions and decisions but you must be able to call up such documentation in a reasonable time frame. Further, if the company has a history of misconduct it may well be construed by the DOJ as “probative of a corporate culture” which condones, if not actively encourages, violations of the FCPA.

Voluntary Disclosures

Voluntary disclosures and compliance programs converge in the DOJ’s analysis because, as the Primer denotes the DOJ desires that company’s “conduct internal investigations and to disclose …relevant facts to the appropriate authorities.” Recognizing that under Dodd-Frank, or other legislation, a disclosure could come to the DOJ via another mechanism, it is still important to understand that a prosecutor “may consider a corporation’s timely and voluntary disclosure in evaluating the adequacy of the corporation’s compliance program and its management’s commitment to the compliance program.”

Remedial Actions

The Primer reports that the DOJ assesses several factors when looking at a corporation’s response to a FCPA violation. The Primer lists these factors as the following:

• Has the corporation “appropriately disciplined the wrongdoers, even if they are at the highest level of seniority?;
• Is the company focused on ‘the integrity and credibility of its remedial and disciplinary measures” rather than the protection of the wrongdoers?;
• Has the corporation paid restitution in advance of a court order, most particularly under the restitution has the corporation accepted responsibility for its actions?; and
• Whether the corporation “quickly recognized the flaws in its compliance program and has made efforts to improve the program?”

These four factors seem to boil down into two areas: (1) did the company take “meaningful” steps to ensure the conduct does not occur again; and (2) did the company take responsibility for its own actions?

Tomorrow we will take a look at how a prosecutor might analyze a company’s compliance program and also review the US Sentences Guidelines related to FCPA compliance.

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