Earlier today [Wednesday, December 10, 2014], the Second Circuit Court of Appeals issued an important decision overturning the insider trading convictions of two portfolio managers while clarifying what the government must prove to establish so-called “tippee liability.” United States v. Newman, et al., Nos. 13-1837-cr, 13-1917-cr (2d Cir. Dec. 10, 2014). The Court’s decision leaves undisturbed the well-established principles that a corporate insider is criminally liable when the government proves he breached fiduciary duties owed to the company’s shareholders by trading while in possession of material, non-public information, and that such a corporate insider can also be held liable if he discloses confidential corporate information to an outsider in exchange for a “personal benefit.”
Posts Tagged ‘Wayne Carlin’
Last year, in our annual survey (discussed on the Forum here) of the white collar and regulatory enforcement landscape, we noted that the trend toward ever more aggressive prosecutions reflected a “gloomy picture” for large companies facing such investigations. Our assessment remains the same, as the pattern of imposing massive fines and extracting huge financial settlements from companies continued unabated in 2013. For example, on November 17, 2013, DOJ announced that it had reached a $13 billion settlement with JPMorgan to resolve claims arising out of the marketing and sale of residential mortgage-backed securities—the largest settlement with a single entity in American history. Johnson & Johnson agreed to pay more than $2.2 billion to resolve criminal and civil investigations into off-label drug marketing and the payment of kickbacks to doctors and pharmacists. Deutsche Bank agreed to pay $1.9 billion to settle claims by the Federal Housing Finance Agency that it made misleading disclosures about mortgage-backed securities sold to Fannie Mae and Freddie Mac. SAC Capital entered a guilty plea to insider trading charges and was subjected to a $1.8 billion financial penalty—the largest insider trading penalty in history. And in the fourth largest FCPA case ever, French oil company Total S.A. agreed to pay $398 million in penalties and disgorgement for bribing an Iranian official. Not to be outdone, the SEC announced that it had recovered a record $3.4 billion in monetary sanctions in the 2013 fiscal year.
SEC Commissioner Luis Aguilar recently spoke against a policy statement concerning corporate penalties that was issued in 2006 by the then-sitting Commissioners. The 2006 statement emphasized two principal considerations: (1) did the corporation receive a benefit from the misconduct; and (2) will a penalty recompense or further harm injured shareholders? Commissioner Aguilar characterized the 2006 statement as “fatally flawed” and noted approvingly that SEC Chair Mary Jo White recently noted that it is not a binding policy. Commissioner Aguilar argued that considering whether there was a benefit to the corporation distracts a penalty analysis from its proper focus—namely, the nature of the misconduct. While the nature of any misconduct is always a relevant and important consideration in determining the appropriate penalty, the statute authorizing penalties does make it relevant to consider whether the corporation received a benefit.
As we have noted before, the Commission’s civil penalty authority is limited by statutory language. The statute provides for three tiers of penalties in escalating amounts. In a time when corporate penalties in the tens or even hundreds of millions of dollars are criticized as inadequate or worse, it can be easy to lose sight of the fact that the maximum corporate penalty under the statute is currently $775,000 per violation. While the “per violation” language is where creative SEC math can sometimes come into play, as we have noted, some federal judges in litigated cases have followed a more measured approach. See our memo, SEC Penalties: Getting Tougher, and Remembering Some History, from October 17, 2013.
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.
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.
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.
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.)
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.
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.
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).