FCPA Compliance and Ethics Blog

June 14, 2012

MLB Standings, the Luxury Tax and FCPA Investigation Costs

The baseball season is nearly 40% complete and there are already several surprises. At least in the National League (NL) two of the biggest surprises are that the Washington Nationals are leading the NL East while the five time division champions Philadelphia Phillies are trailing the field in last place. Last week I was lucky enough to attend games at both teams’ home parks. The Nationals fans were fired up throughout and the Phillies had a matinee performance sell-out. Jim Crane, are you listening? Nothing puts fans in the seats like a winning team.

I thought about the collation between the amount of money spent on each team and their respective standings. Interestingly, I found that the Phillies have the second highest payroll in Major League Baseball (MLB) at just over $174MM, while the Nationals have the 20th highest at just over $81MM. The sad sack Houston Astros come in at 28 out of 30 with a total payroll spend of $60MM. Additionally, they are also the 28th worst team in MLB. Coincidence? Jim Crane, are you listening? To win you have to spend money, not just buy the team and then immediately cave in to MLB by agreeing to go to the American League (AL) West.

I thought about these overall team costs whilst reading a recent article by Jaclyn Jaeger in the Compliance Week Magazine, entitled “High Cost of Conducting Full FCPA Investigations”. In her article, Jaeger reported the costs of some very large and ongoing Foreign Corrupt Practices Act (FCPA) investigations, which are reflected in the FCPA Investigation Cost Box Score below, remember at this point we do not know what the Wal-Mart investigative costs are to-date.

Company Length of Investigation Reported Costs
Weatherford 2009 to date $123MM
News Corp July 2011 to date $191MM
Avon 2008 to date $247MM

While noting that not all FCPA investigations have such exorbitant investigative costs, Jaeger quoted “the costliest FCPA investigations are the ones that grab the headlines.” One way to hold down such costs is defining the scope. Attorney Claudius Sokenu was quoted as stating “The important question at the outset of the investigation is scope, because that drives the costs.” However, even if you can define the scope, one of the main reasons for these high investigative costs in a FCPA investigation is the dreaded question “where else?” If your company has had a complete failure of internal controls to allow a FCPA violation in one geographic region, the Department of Justice (DOJ) may want to inquire if it is a systemic problem worldwide. In other words, not mission creep but mission explosion. In addition to a systemic failure of internal controls, it may be that an employee caught paying bribes in one country, who previously worked in another country, may have engaged in similar conduct in his prior postings, meaning you will need to investigate those countries as well. Another red flag that could indicate the “where else” question is if an employee alleged to have engaged in bribery manages a regional office which overseas operations in several countries. This could require an investigation into countries other than the one which may have been the subject of the original investigation.

To understand how this question of “where else” can play out one need only look at the current Wal-Mart internal investigation. In an article in the Wednesday, June 13 Wall Street Journal (WSJ), entitled “Wal-Mart Review Includes India, South Africa”, reporter Shelly Banjo wrote about the expanding Wal-Mart internal FCPA investigation. The allegations originally arose from the company’s operations in Mexico. After the New York Times (NYT) broke the story, Wal-Mart instituted an internal investigation of its Mexico subsidiary and the investigation quickly spread to Wal-Mart’s operations in Brazil and China. This expansion increased again with Banjo’s report that Wal-Mart’s counsel has recommended the internal investigation further expand to include Wal-Mart’s operations in South Africa and India. Soon there may not be much of the globe where Wal-Mart operates which is not under investigation.

So what are some of the ways to hold down investigative costs? One sure way is to not self-disclose and face the “where else” question. Jaeger noted that “sometimes it could be just a matter of promptly implementing remedial measures and revising and enhancing compliance policies and procedures.” Jaeger quoted Sokenu who stated “Only in rare circumstances would I recommend to a client that self-disclosure is the way to go, because no good deed goes unpunished.” Sokenu went on to list some of the factors which he would consider when recommending self-disclosure to the DOJ and Securities and Exchange Commission (SEC).

  • Awareness of a potential whistleblower reporting an incident to the government because “You want to go to government before that whistleblower does.”
  • The conduct in question is “systemic and involves senior management-such as the chief executive, chief financial officer, general counsel or heads of business units.”
  • The incident requires a disclosure which is “required under securities laws anyway.”
  • That the company’s auditors “will not sign off on filings with the Securities and Exchange Commission.”

I have heard Mike Volkov provide a similar list of issues when he discusses the factors you should consider when making a decision to self-disclose. It is certainly not one to be taken lightly. However, Jaeger’s article provides some key elements to consider when evaluating whether to self-disclose a potential FCPA investigation.

Of the costs reported so far only Avon is north of the New York Yankees annual payroll of $197MM but News Corp is closing in quickly. Wal-Mart has not released its costs for its investigation, as yet, but it may well exceed both Avon and News Corp. In MLB, there is luxury tax put on the aggregate payroll of a team to the extent that it exceeds a predetermined guideline level set by the league. For 2011 the MLB cap is $178MM so only one team currently pays this luxury tax (the Yankees with a payroll of $197MM). Now how about the investigative fees paid by companies for failing to have an effective FCPA compliance program?

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

June 13, 2012

Factors for a NPA for an Individual in a SEC Enforcement Action

I have previously written about what conduct can help your company if it is under an investigation by the Department of Justice (DOJ) for Foreign Corrupt Practices Act (FCPA) violations. The key seems to be “extra-ordinary cooperation.” Today we will take a look at a recent Securities and Exchange Commission (SEC) matter where an individual received a Non-Prosecution Agreement (NPA). In an article in the June issue of the Compliance Week Magazine, entitled “How Individuals Win Non-Prosecution Agreements”, author Jaclyn Jaeger wrote about the recent NPA reached with an individual, as opposed to a corporate defendant. Jaeger called this a “first-of-a-kind case” due to the fact that it is the first time an individual has been given a NPA by the SEC. The case referenced by Jaeger involved an “un-named former senior executive of the institutional money management firm AXA Rosenberg.” Although the matter did not involve any alleged violations of the FCPA, the NPA is certainly instructive for considering how to resolve a SEC action under the FCPA if you are caught up in an individual enforcement action.

In January 2010, the SEC released its Enforcement Cooperation Initiative. Under this Initiative, the SEC established a series of incentives for individuals and companies to assist the SEC in ongoing investigations and during the pendency of enforcement actions. As a part of this Initiative, the SEC released a Cooperation Policy Statement which described four factors that the SEC would consider to “determine whether, how much, and in what manner to credit cooperation.” The four factors were: (1) how much assistance the individual provides; (2) the importance of the underlying matter; (3) the SEC’s interest in holding the individual accountable; and (4) the prior background of the cooperating individual.” The SEC provided the following commentary on each of the four factors.

Assistance provided. Under this factor, Jaeger noted that the individual in question had offered his voluntary cooperation to the SEC at the outset of the investigation. She noted that his “intimate knowledge” of certain quantitative measures the firm used was important to the SEC’s investigation. This voluntary cooperation was provided by the individual to the SEC “without conditions” which the SEC believed enhanced his credibility.

Importance of the underlying matter. The SEC viewed the investigation and enforcement matter as significant because “it was the first ever arising from errors in a computer-based, quantitative investment model”. His cooperation led to the recovery of “big dollars for victims” due to two separate enforcement actions the SEC brought.

Interest in holding the individual accountable. The SEC believed that the individual played a limited role in the events surrounding the violation but also noted that while still an employee, he had advocated that the error which led to the enforcement action be disclosed to the company President. The SEC noted that the individual’s cooperation “maximized the SEC’s law enforcement interests by facilitating the quick and successful resolution of its enforcement action”.

The Executive’s profile. The individual was not “an associated person of a regulated entity, a fiduciary for other individuals or entities regarding financial matters, or an officer or director of any company.” Further, he did not have any black marks in the way of prior disciplinary actions on his record. Lastly, after the investigation was concluded, he resigned from AXA Rosenberg.

In her article, Jaeger spoke to some industry experts regarding the effect of this NPA. All people interviewed emphasized the fact specific nature of the resolution. The two key factors which may differentiate this resolution from others, the first being the role this person had in the violation. Jaeger quoted Tom Gorman who said that “Whether you get no prosecution or just diminished sanctions will really be a function of the individual’s role in the underlying conduct”. The second factor, I believe, is that the individual in question is no longer working in the industry and therefore he is no longer in a position to commit future violations of federal securities laws.

Jaeger contracted the AXA Rosenberg matter with another case involving John Cinderey, which showed “a good look at each end of the spectrum” of enforcement. In the Cinderery matter, he received credit for his “substantial assistance” in a SEC investigation but, at the end of the day, Cinderery was named as a defendant in the SEC’s enforcement action against United Commercial Bank. Although the SEC extracted no fine against Cinderey for his role in misleading the bank’s auditors regarding the risks the bank faced in certain outstanding loans, it was noted that he did pay a fine related to action brought by the Federal Deposit Insurance Corporation (FDIC). Cinderery did agree to a permanent injunction proffered by the SEC.

Jaeger quoted Keith Miller for the proposition that the key takeaway for companies and individuals in SEC enforcement actions should be “setting the tone with the staff at the onset of any investigation is very important, because the foundation for how the SEC is going to view and treat you later. However, Tom Gorman emphasized that it is the individual’s involvement in the underlying wrongful conduct which will be very important. While credit and a diminished penalty are possible, he does not believe that the SEC will “give them a pass if they’re one of the major players” in the fraud or violation.

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

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