SEC Reports Enforcement Results for 2016

As we wind down the calendar year, the Securities and Exchange Commission has already reported its enforcement results for the fiscal year that ended September 30.

In case you missed it, here’s the press release. Naturally, there’s some self-patting on the back, but if the past predicts the future, the agency is looking to file cases. Its numbers have climbed steadily over the last dozen years, and it continues to ramp up its use of big-data analytics and the whistleblower program, which it launched in 2011.

Here are some highlights from 2016.

  • The agency filed a total of 868 cases, which was a new single-year high.
  • It filed a record number of cases involving investment companies or advisers and a record number under the Foreign Corrupt Practices Act.
  • It obtained over $4 billion in judgments and orders, which matched the haul from each of the last two years.
  • It awarded more money to whistleblowers ($57 million) than in all prior years combined.

The SEC Wants You to Self-Report

At a conference in November, the SEC’s Director of Enforcement, Andrew Ceresney, announced that, from now on, you must self-report violations of the Foreign Corrupt Practices Act if you want the Enforcement Division to recommend a non-prosecution or deferred-prosecution agreement. Even then, Mr. Ceresney warned, you may not get an NPA or DPA, but the Division won’t even consider it if you fail to self-report. To self-report, in other words, is now a necessary, threshold condition to negotiating an NPA or DPA.

On the heels of that announcement, last month, one company that had self-reported its FCPA violations was able to resolve civil and criminal charges on relatively favorable terms.

First, the company settled the civil SEC investigation that commenced after it reported that two of its subsidiaries were making improper payments to foreign officials to win business. The improper payments included non-business-related travel, gifts, and entertainment that totaled $1.5 million over five years. To settle the case, the company agreed to cease and desist from further violations and to surrender $14 million in profits.

Next, the company settled the parallel, criminal investigation by entering into an NPA with the Justice Department. The three-year NPA requires the company to pay $15 million in fines, improve its compliance program, and report on its progress to the government.

Finally, one of the company’s employees earned a three-year DPA of his own based on his substantial cooperation during the SEC investigation. It was the Commission’s first DPA with an individual in an FCPA case.

To be clear, self-reporting has long been a factor in the Commission’s framework for evaluating cooperation by people or businesses. Generally, the SEC will credit your cooperation based on how much you helped, how important the case was, how culpable you were personally, and how much of a threat you continue to pose.

But going forward, self-reporting appears to carry significantly more weight with the agency, at least in FCPA cases.

 

When They Bribe On Your Behalf

If you compete for business overseas or across the border, take note of these best practices for using third-party brokers, vendors, or consultants to help you. You may not know what they’re up to over there, but that can land you in some hot water.

As we’ve written before, the threat of prosecution under the Foreign Corrupt Practices Act is real, and the reality is you or your business may be liable for a consultant’s corrupt practices even if you didn’t know about them. While these authors speak to automotive companies in particular, they offer sound advice for any transnational business, large or small.

So watch out for the following signs, among others, that your consultant is greasing someone’s palm to win you business.

  • It charges excessive commissions
  • It offers unreasonably large discounts
  • It describes its consulting services in vague terms
  • It is related or closely tied to government officials
  • It requests payments to offshore bank accounts

And if you spot these red flags, or even if you don’t, you should proactively take the following steps, among others, to minimize the risk of misunderstandings.

  • Investigate the third party and its principals
  • Conduct background checks of its personnel as necessary
  • Require the party to conduct FCPA training and to certify that it’s been done
  • Work with counsel to assess your potential risks and design compliance programs

The SEC Dodd-Frank Whistleblower Program

Speaking of whistleblowers, the Securities and Exchange Commission just published its annual report to Congress on its own program that it launched in 2011.

And overall, it seems to be on the upswing.

The SEC’s program authorizes monetary awards for volunteering original information that results in a successful enforcement action, including sanctions that exceed $1 million. It doesn’t matter whether you help open a successful investigation or close an existing one more efficiently or favorably.

If you fit the bill, you get ten to thirty percent of whatever the agency collects, and the percentage will vary with the facts and circumstances of the case. Factors that can raise your percentage include the value of your information, the overall assistance you provide, the public interests at stake, and whether you tried to report the matter internally (and suffered retaliation for it) before going to the government. Factors that can lower your percentage include your own unclean hands, if any, whether you delayed unreasonably in reporting the matter, and whether you interfered with your company’s internal compliance program (if any).

According to the report, since 2011, the Commission has paid over $54 million to 22 whistleblowers, and in the last fiscal year alone, it paid over $37 million to eight of them. One received over $30 million and another received over $3 million.

Who are they? According to the agency, about half are current or former employees of the companies they blow the whistle on. Others include ticked-off investors, industry peers, or personal contacts of the person or company in question. They hail from all fifty states as well as other countries, but most come from California, New York, New Jersey, Florida, and Texas. Many submit their information anonymously through counsel.

What do they report on? It runs the gamut, but often, they report on misstated corporate disclosures and financials; fraud in connection with securities offerings; price manipulation; insider trading; unregistered offerings; or violations of the Foreign Corrupt Practices Act.

Shades of Gray in Rare FCPA Trial

Three weeks ago, in the first criminal trial in three years for violation of America’s foreign bribery law, the Foreign Corrupt Practices Act, the defendant suddenly pleaded guilty to steeply reduced charges in the middle of trial. Although the conviction was immediately touted as a win by the government, you can decide for yourself.

The defendant, an American entrepreneur, was the co-founder and co-CEO of an oil-and-gas services company that operated in Colombia, and supposedly, to win a $45 million contract with the country’s largest oil company, he conspired with two other executives—his co-CEO and the firm’s general counsel—to funnel $333,500 in payments to an employee of the Colombian company. The company was a state-run company, however, which made the employee a “foreign official” for purposes of the FCPA, which prohibits the bribing of foreign officials to win business. See 15 U.S.C. §§ 78dd-1 et seq.

The defendant’s two co-conspirators had already pleaded guilty, and one had just testified against him at trial when a plea deal was reached. The other was slated to do so.

The matter originally came to the government when the company’s board of directors disclosed it voluntarily, but experts contend that the case was underwhelming from the start and that it settled after the testifying co-conspirator gave false testimony on the stand.

Meanwhile, other reports suggest that the defendant was, in fact, set up by the company’s board, which was dominated by Colombian nationals who bristled at his persistent efforts to clean up the company and fired him for it. According to these reports, the company only approached the Justice Department with its voluntary disclosure after the defendant threatened to sue the company for firing him and to reveal that its chairman, the former minister of commerce in Colombia, had demanded $1 million in exchange for actions he took on the company’s behalf while serving in government. According to the defendant, he refused this demand and was terminated within months.

Although the defendant had faced a maximum of twenty years in prison on all charges and was offered ten years before trial, the plea agreement called for a sentence between probation and one year in prison. It also dismissed five of the six counts that the government had brought against him.

At sentencing, the government argued for the year in prison, but the court went the other way, sentencing the defendant to probation instead. Along the way, it expressed frustration with the government’s handling of the case.

The government then publicly declined to prosecute the company itself for just the second time in the FCPA’s history. The purported basis for it was the company’s voluntary disclosure and its cooperation in prosecuting its former officers.

That may be well and good, but if the government just prosecuted an American for pissing off powerful foreign interests—while giving them a pass—then it scored a notch on its belt but left a bad taste in everyone’s mouth.

Beware: The Rising Tide of Anti-Bribery Enforcement Does Not Abate

They say that the Foreign Corrupt Practices Act is among the statutes most feared by companies with foreign operations, and to be sure, if you do business overseas or across the border, you’d better contend with it.

The FCPA, which was enacted in 1977, is America’s—and perhaps the world’s—foremost anti-bribery law aimed at combating corporate corruption abroad. It punishes you for bribing foreign public officials to win business, and it requires your company to maintain adequate books, records, and accounting controls to foster compliance.

The statute provides for criminal prosecution by the Department of Justice as well as civil prosecution by the DOJ or the Securities and Exchange Commission, and in either case, the statute has teeth. The criminal fines and civil monetary penalties can spiral into the millions of dollars per violation, and for individuals, none of it can be indemnified by the corporation. People can go to prison. And businesses can be barred from obtaining government contracts or lose valuable export privileges.

At a conference two weeks ago, leading representatives from the DOJ and the SEC summarized their enforcement efforts in 2013, and they previewed 2014. The highlights?

  • This year was the fifth biggest on record in terms of overall penalties, and counting.
  • DOJ is investigating more than 150 FCPA cases and expects to bring “very significant” cases in 2014.
  • The trend is toward more international cooperation and cross-border enforcement as other countries ramp up their own anti-bribery and corruption regimes.

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