On April 22, the U.S. Securities and Exchange Commission (SEC) announced its first non-prosecution agreement (NPA) with a company in a matter involving alleged violations of the U.S. Foreign Corrupt Practices Act (FCPA). [1] The SEC entered into the agreement with Ralph Lauren Corporation (Lauren), resolving allegations that Lauren violated the FCPA when its Argentine subsidiary allegedly paid bribes to government and customs officials to improperly secure the importation of Lauren’s products into Argentina. The NPA in this case resulted from Lauren’s prompt self-reporting and extensive cooperation. Prior to the Lauren NPA, the SEC seemed to provide limited credit to public companies for cooperation in FCPA investigations.
Time will tell whether the Lauren NPA is a harbinger of a new approach.

…continue reading: SEC Announces First Non-Prosecution Agreement in an FCPA Matter

Cross-border mergers and acquisitions can provide tremendous business opportunities for companies looking to expand globally. Reduced labor and operational costs, new technology and vast new markets for existing products are just some of the benefits companies look to take advantage of when considering entering new geographical areas. However, in analyzing cross-border deals M&A professionals must be conversant with the risk factors associated with the vigorous and cooperative anti-corruption efforts being taken by regulators around the world. While these anti-corruption efforts are increasingly legislated through many jurisdictions, the most significant attention remains focused on the efforts undertaken by the United States in this area.

…continue reading: Cross Border Mergers & Acquisitions: Anti-Corruption Issues

In the past two weeks, Judges Richard J. Sullivan and Shira A. Scheindlin of the United States District Court for the Southern District of New York separately issued important rulings in civil Foreign Corrupt Practices Act (“FCPA”) cases against foreign executives of non-U.S.-based companies whose stock is traded on a U.S. stock exchange. Their rulings reached opposite results on the issue of the court’s exercise of personal jurisdiction over foreign executives who are alleged to have violated the FCPA. One or both of these rulings could provide the Second Circuit with a rare opportunity to clarify the FCPA’s jurisdictional reach in the context of purely foreign bribery schemes.

SEC v. Straub, __ F. Supp. 2d __, No. 11 Civ. 9645 (RJS) (Feb. 8, 2013) (Sullivan, J.)

In December 2011, the Securities and Exchange Commission (“SEC”) brought a civil enforcement action against three senior executives of a Hungarian telecommunications company, Magyar Telekom, who allegedly bribed government and political party officials in Macedonia and Montenegro in 2005 and 2006 to win business and shut out competition in the telecommunications industry. The SEC alleges that these executives used sham “consultancy” and “marketing” contracts to pay approximately €4.875 million to Macedonian officials and €7.35 million to Montenegrin officials. The three executives then allegedly caused the bribes to be falsely recorded in Magyar’s books and records, which were consolidated into the books and records of its parent company, Deutsche Telekom AG. Both Magyar and Deutsche Telekom were publicly traded through American Depository Receipts (“ADRs”) on the New York Stock Exchange (“NYSE”). The defendants allegedly made false certifications to Magyar’s auditors, who in turn provided unqualified audit opinions that accompanied the filing of Magyar’s annual reports with the SEC. There was no allegation that any of the negotiations or meetings regarding this scheme occurred within the United States, that the payment of bribes occurred through banks located in the United States, or that the foreign defendants otherwise ever traveled to the United States in furtherance of the bribery scheme.

…continue reading: Court Issues FCPA Rulings Regarding Foreign Business Executives

Anyone watching white collar and regulatory enforcement developments unfold during 2012 knows that the government’s appetite for bringing huge cases against major companies, including massive fines, extensive remedial undertakings, and extended monitorships, has continued unabated. It is, admittedly, a gloomy picture, and most commentators (and law firms) have tended to outdo each other in stressing the storm clouds and challenges.

In this treacherous environment, making investments that may help to avoid criminal problems is a wise strategy. We have previously written about the many elements of an effective corporate compliance program, and such programs can materially reduce the risk of a severe and potentially crippling white collar criminal or regulatory enforcement proceeding. In our experience, however, the single most important element of such a program is a searching and well-informed survey, conducted periodically, aimed at identifying potential compliance risks. Nowadays, virtually every well-run corporation has training programs, a code of conduct, and a comprehensive set of compliance policies; the real distinguishing features of the best programs, in our view, are the capacity of a firm to (1) spot intelligently and quickly potential risks inherent in its business and then timely implement appropriate preventive measures before serious problems arise, and (2) respond promptly and appropriately if such a program detects potential wrongdoing.

…continue reading: White Collar and Regulatory Enforcement: Emerging Trends

Last week, the Criminal Division of the Department of Justice and the Enforcement Division of the Securities and Exchange Commission released their long-awaited guidance on the application and enforcement of the U.S. Foreign Corrupt Practices Act. The release—a 120-page “Resource Guide”—confirms that FCPA enforcement remains a central priority of the U.S. government while simultaneously and most importantly identifying the circumstances when the government may decline to pursue an enforcement action. It is available at http://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf.

Compliance Program Guidance

While much of the guidance reaffirms statutory interpretations that practitioners have gathered from published government settlements and opinion releases, it also provides a useful tool for companies seeking to develop FCPA compliance programs that will minimize the risk of enforcement action or severe penalties in the event those systems fail to prevent a violation. Having such a compliance program in place is particularly important given the SEC’s announcement last week that it received more than 3,000 whistleblower complaints in the first year of the new whistleblower program implemented under the Dodd-Frank Act.

The Guide identifies the hallmarks of strong compliance programs generally and addresses the elements of effective FCPA controls, reiterating that there is no “one-size-fits-all” program; an effective FCPA compliance program addresses corruption risks specific to the organization and includes meaningful unique controls to mitigate those risks. Some possible risk-based compliance controls that the Guide suggests are:

…continue reading: DOJ and SEC Issue FCPA Guidance

The first half of 2012 has not seen the series of landmark Supreme Court decisions that were handed down in 2011, but it has been a significant period as lower courts apply these decisions in different areas and in a number of different contexts. And the Supreme Court did decide one case–Credit Suisse Securities (USA) LLC v. Simmonds, 132 S. Ct. 1414 (2012)–relating to the statute of limitations under Section 16 of the Securities and Exchange Act of 1934, and granted review in two other cases–Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds and Comcast Corp. v. Behrend–that are likely to result in watershed rulings on the issue of class certification in securities class actions.

Securities litigation filing trends remain generally steady in the face of these developments, with securities class action filings increasing only slightly in the first half of 2012, and the filings against particular sectors staying roughly similar to last year, with filings against financial industry companies at their lowest level since 2008. One particularly noteworthy development is that not a single securities class action filing thus far in 2012 has named an accounting firm as a defendant, possibly as a result of the Supreme Court’s rejection of aiding and abetting liability under the securities laws, emphatically reinforced last year in Janus Capital Group Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2012) (in which Gibson Dunn represented Janus).

Some of the most significant case law and legislative developments in the first half of 2012 are summarized below.

…continue reading: Mid-Year Securities Litigation Update

In recent months, two district courts have addressed the issue whether employees who claim they were retaliated against for internally reporting violations of the Foreign Corrupt Practices Act can bring a private civil lawsuit against their former employers under the Dodd-Frank anti-retaliation provision. Although both courts decided that the anti-retaliation provision of the Dodd-Frank Act did not apply in these particular cases, the courts disagreed over whether Dodd-Frank whistleblower protections could apply to FCPA whistleblowers who report internally but not to the SEC.

The Whistleblower Provisions

The “anti-retaliation” provision of the Dodd-Frank Act, 15 U.S.C. §78u-6(h)(1)(A) prohibits employers from retaliating against a “whistleblower” for:

• i. providing information to the Securities and Exchange Commission (“SEC” or “Commission”);
• ii. initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or
• iii. making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.) (“SOX”), [certain other securities laws], and any other law, rule, or regulation subject to the jurisdiction of the Commission.

…continue reading: FCPA Whistleblower Lawsuits Under the Dodd-Frank Anti-Retaliation Provision

Trends in the Number of Settlements

The SEC’s promise to hold more individuals accountable was realized in 1H12 in a 20% jump in the number of SEC settlements with individuals. The SEC settled 286 cases with individuals in the first half of this year, putting it on pace for 572 settlements in FY12, which would be the most since 2005. This marks a shift from the end of fiscal 2011, when we reported that the SEC’s promise to hold more individuals accountable was borne out in the value, but not in the number, of settlements with individuals.

Total SEC settlements are also up, but the increase is entirely explained by the rise in settlements with individuals. The SEC settled with 379 defendants in 1H12, putting it on pace for 758 settlements in FY12. This would constitute a 13% increase from the SEC’s 670 settlements in 2011 and would constitute the most annual settlements since 2005. The pace of settlements with companies is down slightly, with 93 settlements, consistent with an annual pace of 186, as compared with 196 in FY11.

The increase in individual settlements is driven primarily by allegations relating to insider trading. The increase from 63 insider trading settlements in FY11 to an annualized number of 120 projected for FY12 accounts for over half of the observed increase in settlements in 2012. The SEC also increased its settlement activity with individuals in matters relating to Ponzi schemes. Settlements with individuals relating to public company misstatements rose to an annualized pace of 78 settlements, up from a low of 60 in 2011, but still well below the 91 settlements in 2010.

…continue reading: SEC Settlement Trends

In Semi-Tough: A Short History of Compliance and Ethics Program Law, presented at a May 2012 RAND Symposium on Corporate Culture and Ethical Leadership Under the Federal Sentencing Guidelines: What Should Boards, Management and Policymakers Do Now, I explore the legacy of the Federal Sentencing Guidelines for Organizations (“FSGO”) with respect to compliance and ethics (“C&E”) programs.

Since the advent of the FSGO in November 1991, the legal drivers for corporations to implement strong C&E programs have seemed to be ever on the increase, at least in the U.S. Indeed, the past few years alone have seen:

• Rigorous enforcement, to an unprecedented extent, of the Foreign Corruption Practices Act (“FCPA”) – a law which, because of its internal controls provisions, strongly encourages companies to have effective C&E programs.
• The imposition, also to an extent never before seen, of very large federal criminal fines, including but by no means limited to those meted out in FCPA cases.
• The initiation of a significant number of “Caremark” claims alleging failures by directors to oversee sufficiently their respective companies’ C&E programs.
• Revisions in 2010 to the FSGO to encourage independent C&E officer functions.
• Numerous other subject-matter-specific legal developments including (but by no means limited to) those regarding government contracting and energy utilities.

…continue reading: A Growing Divide Between Compliance Have’s and Have-Not’s

In recent enforcement actions, fund advisers have run afoul of U.S. regulatory authorities. In a case involving the U.S. Foreign Corrupt Practices Act (“FCPA”), an individual, but not the company, was charged. On the other hand, in a proceeding before the Office of Foreign Assets Control (“OFAC”), a U.S. company was penalized for the action of its non-U.S. agent. Both cases offer lessons for compliance personnel.

1. FCPA: Lessons from Morgan Stanley’s “Rogue” Employee

Former Morgan Stanley employee Gareth Peterson reached a settlement with the U.S. Securities and Exchange Commission (“SEC”) that will permanently bar him from the securities industry, as well as require disgorgement of more than $3 million in cash and real estate the SEC alleges was obtained via violations of the FCPA. [1] In addition to these civil penalties, Peterson will appear for criminal sentencing in June. [2] Peterson may be sentenced to up to five years in prison and ordered to pay up to $250,000, in addition to the civil penalties already paid.

The complaint against Peterson alleges that Peterson made corrupt payments to a Chinese official to secure business for Morgan Stanley’s real estate fund. In what the SEC described as “cross[ing] the line twice,” Peterson then secured part of the investment for himself — so that he could profit personally from the corrupt payment to the Chinese official. [3]

…continue reading: U.S. Regulators Penalize Fund Advisers