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

In a recent speech at the Securities Enforcement Forum, SEC Commissioner Luis Aguilar called for, among other things, increased enforcement activity against individuals, with more frequent use of Officer and Director bars, monitoring of recidivists through post-enforcement monitoring mechanisms such as access to phone and bank records and income tax returns, and passage of the SEC Penalties Act, which would allow the SEC to impose significantly harsher monetary penalties on individuals and institutions. We certainly understand the desire to rethink the SEC’s enforcement priorities, particularly in light of recent criticism of the agency. But we are concerned that this speech reflects an unwarranted blurring of the line that should separate the role of criminal prosecutors from that of the SEC.

The SEC is an independent regulatory agency whose mission has long been understood to be protecting investors and fashioning appropriate remedial action in the public interest — through deterrence of future wrongdoing and improvement of business conduct. When violations of the federal securities laws reflect willful conduct warranting punishment for wrongdoers, prosecutors should — and do — play the central role in seeking criminal prosecution. The SEC, by contrast, is not charged with enforcing criminal laws and its enforcement attorneys are not prosecutors.

…continue reading: SEC’s Role in Enforcing the Federal Securities Laws

The last ten years have seen a continuous increase in white collar criminal and regulatory enforcement activity. 2011 was no exception, and we expect the trend to continue in 2012.

While not an entirely new phenomenon, the world of white collar and regulatory enforcement appears more politicized than ever. Corporations facing investigations in 2012 can expect extensive press scrutiny, serial leaks about the investigation, and, on occasion, parallel involvement of Congress and others at any stage of the matter. The credit a company can expect to receive for providing cooperation seems ever more uncertain, especially in cases receiving a high level of public focus, notwithstanding government protestations that cooperation will be rewarded. And, it is likely to get harder going forward to shepherd corporate resolutions of these kinds of cases through this politicized landscape. There is no simple solution to these challenges. But, as we discuss below, it remains critical for companies responding to multipronged investigations to keep clear lines of communication open with government investigators, to address questions candidly and with integrity, to correct identified problems promptly, and to build upon and strengthen investments made before the inquiry began in establishing a culture of compliance.

…continue reading: White Collar and Regulatory Enforcement

On November 15, 2011, the SEC announced a settlement in which it “clawed back” incentive based compensation from a former CEO who was not accused of any wrongdoing.  The result, however, may send mixed signals.  On the one hand, the SEC’s ability to achieve this result in a no-fault clawback case may very well encourage the SEC staff to continue to enforce this remedy, even in cases where the CEO or CFO has no personal responsibility for misconduct.  On the other hand, the settlement of $2.8 million was less than the $4 million that the SEC originally sought to recover from the former CEO.

The case, SEC v. Jenkins, No. CV 09-1510, involved Maynard L. Jenkins, the former CEO of CSK Auto Corporation.  Although civil and criminal charges were brought against four other CSK Auto executives, the SEC did not charge Jenkins with any wrongdoing in connection with the accounting fraud that occurred at CSK.  Nevertheless, relying on Section 304 of Sarbanes-Oxley, the SEC filed a complaint seeking to claw back $4 million of incentive compensation that Jenkins received during the period of the fraud.  Jenkins moved to dismiss the complaint, but that motion was denied in June 2010.  (See our memo, “Sarbanes-Oxley Clawback Developments”, June 16, 2010.)

…continue reading: Another SEC Clawback Settlement

Recently, the SEC adopted controversial new rules that create significant financial incentives for whistleblower employees to report suspected securities law violations directly to the SEC, potentially circumventing company compliance programs in the process. Under the new rules, which were adopted pursuant to Section 922 of the Dodd-Frank Act, the SEC will pay awards to whistleblowers who voluntarily provide the SEC with original information about a violation of securities laws that leads to a successful enforcement action brought by the SEC and that results in monetary sanctions exceeding $1 million.

The size of potential bounty payments may range from 10% to up to 30% of the total monetary sanctions collected in successful SEC and related actions. In some cases, this could result in multimillion dollar cash payments to whistleblowers. The final rules set forth the SEC’s methodology for determining awards, with specified factors weighing in favor of an increase in the reward size and others weighing in favor of a reduction in the reward size. In addition, the rules provide that various persons will not be eligible for whistleblower payments, including compliance and internal audit personnel, but an exception is provided for such personnel if they believe disclosure “may prevent substantial injury to the financial interest or property” of the company or investors, and at least 120 days have elapsed since the whistleblower reported the information internally at the company or became aware of information that was already known to the company.

…continue reading: SEC Adopts New Rules to Encourage Whistleblowers

The SEC recently announced its first use of a deferred prosecution agreement, one of the initiatives announced in January 2010 (and discussed in our previous memo here) to encourage greater cooperation in enforcement investigations.  See SEC Press Release.  The announcement of this agreement with Tenaris S.A. follows the agency’s first non-prosecution agreement in December 2010 with Carter’s Inc. (and discussed in our previous memo here).

Tenaris, a manufacturer of steel pipe products, is incorporated in Luxemburg and has American Depository Receipts listed on the New York Stock Exchange.  Tenaris allegedly bribed Uzbekistan government officials in bidding for government pipeline contracts, and made almost $5 million in profits from the contracts.  A world-wide internal investigation triggered by other matters and conducted by outside counsel revealed Foreign Corrupt Practices Act violations in Uzbekistan.  The company self-reported to the SEC and the Department of Justice, cooperated with the government and undertook extensive remediation efforts.

…continue reading: The SEC’s First Deferred Prosecution Agreement

The SEC recently announced a settled enforcement action in which it obtained a “clawback” of prior compensation and stock sale profits from a CEO pursuant to Sarbanes-Oxley Section 304.  SEC v. McCarthy, No. 1:11-CV-667-CAP (N.D. Ga. March 3, 2011).  This case marks the second time the SEC has obtained this type of relief without alleging that the CEO in question personally engaged in any wrongdoing.  See our prior memos concerning Section 304 clawbacks dated June 16, 2010 ["Sarbanes-Oxley Clawback Developments"] and July 24, 2009 ["SEC Pursues Unprecedented Sarbanes-Oxley Clawback"].

Section 304 requires a CEO or CFO to return incentive-based compensation to an issuer when a financial restatement occurs “as a result of misconduct. . . .”  The SEC’s position is that the issuer’s “misconduct” alone is a sufficient predicate for this relief, and that it need not establish any personal misconduct by the CEO or CFO.  The SEC’s position is supported by the one federal district court decision that has been rendered on this issue.  SEC v. Jenkins, 718 F. Supp. 2d 1070 (D. Ariz. 2010).

…continue reading: SEC Claws Back Again

On March 1, 2011, the U.S. Supreme Court ruled in Federal Communications Commission v. AT&T Inc. that Freedom of Information Act Exemption 7(C) – which exempts from required public disclosure information “compiled for law enforcement purposes” the disclosure of which “could reasonably be expected to constitute an unwarranted invasion of personal privacy” – could not be invoked to protect against disclosure of records produced to an agency on the grounds that disclosure would constitute an unwarranted invasion of personal privacy of a corporation.

…continue reading: Supreme Court Holds Corporations Don’t Have Privacy Interest Assertable Under FOIA

The SEC yesterday announced its first use of a non-prosecution agreement, one of the new investigative tools that the agency unveiled nearly a year ago. The SEC simultaneously filed an enforcement action against a former sales executive of Carter’s, Inc. See SEC v. Elles, Civ. Action No. 1:10-CV-4118 (N.D. Ga.). The Commission did not bring any enforcement action against the company.

At first blush, this appears to be the sort of case in which the SEC historically would likely have brought charges against a public company. According to the complaint, the executive granted and concealed substantial unauthorized discounts to the company’s largest customer. By misrepresenting the facts and creating false documents, the executive allegedly caused the company to delay recognizing these discounts until later periods, thereby inflating the company’s reported earnings in the earlier periods. When the company discovered the scheme, it conducted an internal investigation, self-reported the matter to the SEC and ultimately restated its financial statements covering a five-year period.

…continue reading: The SEC’s First Non-Prosecution Agreement

The SEC recently released its proposed rules implementing the whistleblower program established under Section 922 of the Dodd-Frank Act.  The proposed rules do not go far enough to avoid undermining corporate compliance systems.  We summarize our key observations in this memo, and a more detailed discussion of the proposal and the issues it presents is attached.

To be eligible for a bounty, a whistleblower must supply “original information” which the SEC has not otherwise already obtained.  This creates an incentive to race in to the SEC to stake the first claim, rather than report up through established corporate compliance channels.  The rules would allow a whistleblower’s report to the SEC to relate back to the date of the same person’s earlier internal corporate report, as long as the whistleblower contacts the SEC within 90 days of reporting internally.  While this provision would allow for internal reporting, it would do nothing to encourage it.  We propose that internal reporting should be a prerequisite to an SEC whistleblower report, absent extraordinary circumstances, and that up to 120 days should be permitted for the internal review to proceed.

…continue reading: New SEC Whistleblower Rules Fall Short