courthouse and moneyOn March 5, 2021, the U.S. Securities and Exchange Commission filed a civil enforcement action in the United States District Court for the Southern District of New York against AT&T, Inc. and three executives alleging a series of Regulation FD violations dating back to 2016.  We previously wrote about Regulation FD in connection with an SEC investigation of Eastman Kodak, Co.’s announcement that it would receive a $765 million loan from the U.S. International Development Finance Corp. to develop and manufacture generic drug ingredients. AT&T now faces allegations that it intentionally shared material non-public information with analysts in order to alter their earnings’ estimates.

Regulation FD is now a seldom-used enforcement tool but was once an SEC favorite in enforcement actions through the early 2000s. The rule prohibits issuers, or persons acting on their behalf, from disclosing material non-public information to certain third parties without disclosing that same information to the general public. The rule was adopted in response to SEC findings that issuers used selective disclosure of material non-public information to reveal earnings and other financial data that would hopefully impact analysts’ and other sell-side firms’ expectations, resulting in those recipients profiting by front-running corporate earnings announcements. The rule was designed to prevent this kind of selective disclosure, which the SEC found was often provided to larger institutional shareholders, and level the playing field between individual and institutional investors.[1]

According to the SEC’s complaint, AT&T suffered an unanticipated decline in its first quarter 2016 smartphone sales. In an effort to avoid missing analysts’ consensus revenue estimate, the SEC alleged that AT&T investor relations executives had a series of one-on-one phone calls with equity analysts from at least 20 different sell-side firms during which they disclosed the lackluster sales figures. According to the SEC, these calls were designed to alter analysts’ expectations such that AT&T would avoid missing the consensus estimate for a third consecutive quarter. The SEC alleges that the disclosures were material and not shared with the general public.

The filing of a civil enforcement action against a blue-chip issuer like AT&T is striking. Since 2010, the SEC has brought very few enforcement actions against issuers for Regulation FD violations and even fewer have been pursued in federal court. The most recent enforcement action before AT&T was a 2019 administrative proceeding against TherapeuticsMD, Inc. There, TherapeuticsMD agreed to pay a modest fine without admitting or denying the SEC’s findings.

Whether the enforcement action against AT&T, or the investigation of Kodak, is a signal that the SEC will be dusting off Regulation FD and taking a more active approach in the future remains to be seen. It was absent from the Division of Examinations’ 2021 Examination Priorities report,[2] but one can assume that Regulation FD compliance remains an important consideration for the SEC.

Issuers and investment professionals alike should take heed and re-visit their compliance programs and ensure they address Regulation FD. For issuers, this means implementing internal information controls to ensure that material non-public information is identified and appropriately disclosed to the general public consistent with the timing requirements of Regulation FD – either simultaneously for intentional selective disclosures or “promptly” if the selective disclosure was unintentional. The SEC’s complaint against AT&T alleges an intentional selective disclosure without any simultaneous public disclosure.

Issuers should also maintain external information controls. This is generally achieved by marking draft press releases or earnings announcements with “embargo” language that indicates it must not be shared or disseminated and anyone possessing it must not trade in the issuer’s securities. Issuers may also enter into non-disclosure agreements or agreements not to trade with investment professionals that generally preclude the investment professional from disclosing information or trading based on information it receives prior to the issuer’s public announcement. These types of agreements are vital to avoiding a Regulation FD violation, as the rule includes a safe harbor for issuers that obtain express agreements that selectively disclosed information will not be further disclosed or used to trade.

Investment professionals, including analysts, broker-dealers, and investment advisors, should be mindful of the information they receive from issuers, how they receive it, and what they do with it. If material non-public information is conveyed, it may expose the recipient to insider trading liability if they buy or sell securities or disclose the information to another party that buys or sells securities. Therefore, investment professionals should be trained to identify whether any information received is material non-public information and should take steps to independently assess any information received from issuers. Investment firm compliance officers should also maintain records of any restrictions on the disclosure or use of non-public information provided by issuers.

[1] Final Rule: Selective Disclosure and Insider Trading, Exchange Act Rel. No. 43154, 65 Fed. Reg. 51, 721 (Aug. 15, 2000) (https://www.sec.gov/rules/final/33-7881.htm).

[2] Securities and Exchange Commission – Division of Examinations, “2021 Examination Priorities” (Mar. 3, 2021) (https://www.sec.gov/files/2021-exam-priorities.pdf).

columnsCan you be prosecuted twice for the same crime?  The question seems simple and, given the plain language of the Fifth Amendment (no person shall “be subject for the same offence to be twice put in jeopardy of life or limb”), seems like the answer should be a simple “no.”   Indeed, recent news that charges brought by the New York County District Attorney against Paul Manafort, the former chairman of the Trump presidential campaign, were dismissed on double jeopardy grounds appears to buttress that simple answer.  The real answer, however, is far more complex.

The prohibition on double jeopardy is a cornerstone of the American criminal justice system, memorialized in the Bill of Rights and dating back even earlier to the common law.  According to the U.S. Supreme Court, “[t]he underlying idea, one that is deeply ingrained in at least the Anglo-American system of jurisprudence, is that the State with all its resources and power should not be allowed to make repeated attempts to convict an individual for an alleged offense, thereby subjecting him to embarrassment, expense and ordeal and compelling him to live in a continuing state of anxiety and insecurity, as well as enhancing the possibility that even though innocent he may be found guilty.”[1]

Although the rule is well-established, its application often raises complex questions about constitutional law and federalism.  One such complexity arises when a person is charged separately by state and federal prosecutors for the same criminal conduct.  The Fifth Amendment prohibits successive prosecutions for the same “offence,” but not necessarily for the same conduct.  An “offence” is defined by a law, and a law is defined by a sovereign.  If there are two sovereigns, there are two laws, and therefore two “offences.”  In other words, “a crime under one sovereign’s laws is not ‘the same offence’ as a crime under the laws of another sovereign.”  This is the “dual sovereignty” doctrine, which, as the U.S. Supreme Court reaffirmed most recently in Gamble v. United States (2019), allows “a State to prosecute a defendant under state law even if the Federal Government has prosecuted him for the same conduct under a federal statute.”

Given the continued vitality of the dual sovereignty doctrine reflected in Gamble, why were the charges against Paul Manafort in New York dismissed on double jeopardy grounds?  The answer lies in the structure of our federal system.  While the Fifth Amendment does not prohibit a state from prosecuting a person who already was convicted under federal law, it also does not require states to permit such prosecutions.  A state may provide greater protection than the federal Constitution; thus, a state can bar double jeopardy in cases where the Constitution would not.  New York is one state that affords broader double jeopardy protections than the Fifth Amendment guarantees.  As the trial court wrote at the outset of its double jeopardy analysis in the Manafort case, “this is not a case in which defendant’s constitutional rights are at issue.”

Under the relevant New York statute, “[a] person may not be twice prosecuted for the same offense,” which includes separate prosecutions “for the same act or criminal transaction.”  N.Y. C.P.L. § 40.20.  In other words, the New York statute prohibits successive prosecution for the same conduct, which is broader than the term “offence” in the Fifth Amendment, as interpreted by the U.S. Supreme Court.  Prosecutors in the Manafort case conceded that the federal charges against him were based on “the same act or criminal transaction” as the state charges, but they argued that a statutory exception applied because “[e]ach of the offenses as defined contains an element which is not an element of the other, and the statutory provisions defining such offenses are designed to prevent very different kinds of harm or evil.”  N.Y. C.P.L. § 40.20(2)(b).  Mr. Manafort had been prosecuted for federal bank fraud, and New York prosecutors pursued charges for residential mortgage fraud.  The New York trial court held that “the harm or evil the federal bank fraud and the state residential mortgage fraud statutes were aimed at combating are the same” (preventing fraud and promoting economic stability), or at least “not of a very different kind.”  Thus, the trial court dismissed the indictment.  The Appellate Division, First Department, affirmed the trial court’s order, observing that it was “undisputed that the federal charges of which defendant has already been convicted involve the same fraud, against the same victims, as is charged in his New York indictment.”  The New York Court of Appeals declined to hear the Manhattan DA’s appeal earlier this month.

Mr. Manafort is fortunate that the charges were brought against him in New York.  If he had been indicted in a different state without a double jeopardy prohibition as broad as New York’s, the Fifth Amendment would not have protected him.  So, in this instance, the answer to the simple question asked at the outset was far from simple, but it was still “no.”

Post-script:  In October 2019, New York Governor Andrew Cuomo signed a bill into law amending the double jeopardy statute to close what he called an “egregious loophole” by providing that “a separate or subsequent prosecution of an offense is not barred” if that person was granted a presidential pardon and had been employed on the president’s staff or campaign, related to the president, or the president was aided by the pardon or obtained a benefit from the conduct underlying the pardoned offense.  See N.Y. C.P.L. § 40.51.  This amendment was aimed at President Trump and his associates and family members, but it was passed too late to apply in Mr. Manafort’s case.

[1] Green v. United States, 355 U.S. 184 (1957).

GeorgiaWhile many of us were focused on the second impeachment of former President Trump, news broke that the Fulton County District Attorney has initiated a criminal investigation into the multiple contacts by Trump and others in the aftermath of the Georgia Presidential election.  This post is an update to our previous analysis of Donald Trump’s potential post-Presidential criminal consequences in Georgia.

On Wednesday, February 10, the New York Times reported that Fulton County District Attorney Fani Willis sent a letter to multiple Georgia state officials notifying them that Willis had “opened an investigation into attempts to influence the administration of the 2020 Georgia General Election”:

“This investigation includes, but is not limited to, potential violations of Georgia law prohibiting the solicitation of election fraud, the making of false statements to state and local governmental bodies, conspiracy, racketeering, violation of oath of office and any involvement in violence or threats related to the election’s administration.”

An anonymous Georgia official told the New York Times that the inquiry will encompass multiple contacts with the state, including Mr. Trump’s calls to Governor Kemp and Secretary of State Raffensperger, as well as “the events surrounding the abrupt resignation” of Byung J. Pak.

On Friday, February 12, the Washington Post reported that the investigation will also “scrutinize” Senator Lindsey Graham’s November 13 phone call to Raffensperger.

According to Willis’s letter, the District Attorney’s office anticipates that it will “begin requesting grand jury subpoenas as necessary” in March.

Recent Developments and Emerging Risks2020 was a unique year in the world of white-collar criminal investigations and prosecutions. In this two-session presentation, Thompson Hine’s compliance and white-collar team will review the enforcement risks created by the global pandemic and discuss what we expect to happen as the new administration begins to implement its enforcement priorities. We will also identify current compliance challenges and provide practical solutions for businesses that are in the process of adjusting to the enforcement realities of 2021.

Visit our events page to register.

columnsEarlier this year, various news outlets reported that then-President-Elect Joe Biden intended to nominate D.C. Circuit Chief Judge Merrick Garland as Attorney General. Judge Garland obviously authored numerous opinions during his years on the D.C. Circuit, but before Judge Garland was Judge Garland, he held various capacities in public and private practice including, notably, serving as a United States Attorney in Washington, D.C. During Judge Garland’s tenure at the Department of Justice (“DOJ”), he gathered experience in investigations and prosecutions of criminal matters. Studying the cases he handled as a prosecutor and reviewed as a Circuit Judge provides guidance on how he will direct the DOJ and which investigations he will prioritize in the years he will serve.

Judge Garland’s Experiences

Long-Term Investigations

When acting as a U.S. Attorney, Garland led the investigation of corrections officers in D.C.-area jails. The investigation culminated in indictments in United States v. Richardson et al., Crim. Nos. 92-117 through 92-126 (D.D.C. 1992). While the docket in each case is sealed, Judge Garland’s Senate Confirmation Questionnaire, a form he completed in preparation for his hearing on his nomination to the Supreme Court, discloses some public information about the investigation.

The investigation was detailed; it involved the use of undercover agents, wiretaps, confidential informants, and audiotaped and photographed sting operations. The confidential informants even included incarcerated individuals. Code-named “Operation Inside Track,” the investigation lasted from 1991 to 1992. By the end of the investigation, Judge Garland acquired enough evidence to indict ten corrections officers and one civilian for smuggling narcotics into D.C. jails. It appears most of the defendants agreed the evidence was sufficient to convict them. All but one pled guilty based on the evidence collected by Judge Garland’s investigation.

Judge Garland’s involvement in Richardson highlights his experience with long-term investigations, as he successfully managed a multi-year investigation involving undercover operatives and even incarcerated confidential informants. This case highlights Judge Garland’s ability to shepherd complex criminal investigations towards trial while collecting significant evidence.

White-Collar Crime

Judge Garland also took cases to trial and defended them on appeal as a U.S. Attorney. For example, Judge Garland prosecuted and convicted John C. Kelley, and successfully argued the ensuing appeal in U.S. v. Kelley, 36 F.3d 1118 (D.C. Cir. 1994).

From January 1987 through August 1990, Kelley served as the Deputy Director of Information Resources Management, and others, for the United States Agency for International Development, or “AID,” all the while leveraging his public office for personal benefit. In August of 1992, Kelley was convicted on six counts including bribery, conspiracy to commit bribery, and conspiracy to obstruct justice through witness tampering and making false statements in connection with his job duties. Judge Garland tried the case, and the jury convicted Kelley.

Kelley appealed to the D.C. Circuit in 1994. Among procedural challenges, Kelley attacked the District Court’s repeated denials of his motions for acquittal, priming the D.C. Circuit to assess the legal sufficiency of the evidence against him. The D.C. Circuit held the record that Judge Garland developed made “abundantly clear” that Kelley “suborned others to obstruct justice,” that Kelley attempted to silence witnesses under Grand Jury subpoenas, and that the sentencing guidelines supported the District Court’s sentence of 43-month imprisonment and three years’ supervised release. Kelley’s convictions were completely affirmed.

Kelley shows Judge Garland’s experience with a subset of white-collar crime involving ethics and public corruption offenses. That experience could be significant as the DOJ considers which offenses to prioritize and could signal an increase in ethics and public corruption offenses. Additionally, Kelley demonstrates Judge Garland’s experience as an accomplished trial and appellate attorney – skills any high-ranking DOJ official should possess.

Conspiracies and Objective Analysis

Judge Garland was famously nominated but not confirmed to the Supreme Court of the United States in 2016. As part of that confirmation process, Judge Garland disclosed a “Top Ten” list of his self-described most “significant” written decisions. Only one of those decisions analyzed criminal law: U.S. v. Gaskins, 690 F.3d 569 (D.C. Cir. 2012).

Gaskins is a narcotics trafficking case which also provides in-depth analysis of the law of conspiracy liability, a frequent subject of indictments in all areas of criminal law. Gaskins was indicted with 20 other defendants for operating a narcotics trafficking and distribution conspiracy spanning from Virginia, through Washington, D.C., and into Maryland. The Government’s theory was that Gaskins was one of the conspiracy’s “business managers.” The Government charged him with conspiracy to distribute and to possess with the intent to distribute certain narcotics, conspiracy to participate in a racketeer influenced corrupt organization, and four counts of using a communication facility to facilitate a drug offense. The Government’s evidence was substantial. It included wiretaps, testimony from cooperating conspirators, visual and video surveillance, and seized evidence resulting from search warrant execution. The jury convicted Gaskins of conspiracy to distribute narcotics, and he was sentenced to 262 months (22 years) in prison.

The D.C. Circuit reversed with Judge Garland writing for the unanimous panel. Judge Garland’s decision begins with foundational principles of conspiracy law: that, to convict a defendant, the Government must prove that the defendant entered into the conspiracy knowingly and that the defendant acted with the specific intent to further the conspiracy’s objectives. Judge Garland observed there was “no affirmative evidence that Gaskins” committed either element of the offense. Judge Garland observed “none [of the conspirators] testified about any connection between Gaskins and a narcotics conspiracy,” “none of th[e] [seized] evidence connected Gaskins to the conspiracy,” and “[n]o [wiretapped] call in which Gaskins participated mentioned drugs or drug transactions at all, in code or otherwise . . . .” Instead, Gaskins’ evidence suggested he worked as a “gofer,” running errands for a licensed private investigator, and his activities were related to that business endeavor, not an illegal objective. Judge Garland held no reasonable juror could convict Gaskins and reversed the conviction.

Gaskins demonstrates Judge Garland’s objective analysis. As a former member of the DOJ, one might expect Judge Garland to give deference to the DOJ’s prosecution of the narcotics conspiracy. That deference was absent from the Gaskins decision. Thus, the Gaskins decision shows us that Judge Garland can call on his objective analytical skills to overcome any perceived subjective biases he may possess.

Predicting Effects on DOJ Tactics and Analyses

Judge Garland’s experiences indicate how the DOJ could spend its investigatory and adversarial resources. President Biden has signaled a “hands off” approach to overseeing the DOJ. Therefore, Judge Garland will have a heavy hand in directing the DOJ’s tactics and analyses.

Starting with investigations, expect Judge Garland to use his experience overseeing long-term investigations, potentially involving undercover work, to investigate and collect evidence of complex crimes. Between Judge Garland’s work on the Kelley and Richardson matters, Judge Garland has significant experience overseeing detailed investigations of complex, and even multi-state conspiracies. We have already seen how the DOJ is currently using long-term undercover operations in the Southern District of Ohio to collect evidence of alleged white-collar offenses. There is no reason to believe Judge Garland will shy away from using these tried-and-true methods of investigation to collect potentially significant evidence against subjects of each investigation. Expect the DOJ to recruit confidential informants and cooperating coconspirators to team up with undercover agents to carry out detailed, potentially multi-year investigations.

The DOJ will continue to prosecute complex and multi-state conspiracies. The Richardson investigation and Kelley decisions show Judge Garland’s experience developing a theory against and prosecuting complex conspiracies. From the other side of the bench, Judge Garland analyzed the Government’s burden to prove the existence of a conspiracy and a citizen’s participation in the conspiracy in Gaskins. Therefore, between the cases highlighted here, Judge Garland has significant experience in conspiracy prosecutions. Expect the DOJ to continue to prosecute these types of cases.

Finally, Judge Garland’s measured analysis could “depoliticize” the DOJ, like President Biden has requested. Gaskins showcases this ability. Notably, the Gaskins case has been cited as an outlier among Judge Garland’s criminal appellate jurisprudence because Judge Garland usually sides with the Government on these types of appeals. However, the Gaskins case demonstrates Judge Garland is unafraid to tell the Government they got a case wrong, or, at least, did not have enough evidence to convict a citizen. That requires a conviction to justice. Additionally, Judge Garland has a reputation as a centrist jurist who rarely dissents and who comes to reasoned conclusions. Expect Judge Garland to implement processes to ensure he succeeds in Biden’s depoliticization of the DOJ.

Predicting Effects on DOJ Areas of Focus

The COVID-19 pandemic and legislation enacted as a result will undoubtedly remain a priority for the DOJ. It is imperative that companies who have taken federal funds take care to keep detailed records of their lawful use of those funds. Corporations and individuals in the healthcare industry should keep scrupulous records evidencing lawful activities. If suspected of a crime, Judge Garland’s DOJ will not be afraid to implement undercover and sting operations to discover evidence of illegal conduct. A subject could be investigated without ever knowing it.

Judge Garland also has experience with ethics-type violations for public employees like in the Kelley case. That experience coupled with President Biden’s heightened ethics pledge suggests it could become an area of focus for the DOJ. Therefore, federal employees should conduct themselves carefully to ensure they are complying with all public ethics laws, rules, and guidelines to avoid investigation.

Finally, Judge Garland has experience prosecuting and reviewing drug offenses as well in the Gaskins case as well as others noted in his Senate Confirmation Questionnaire. Expect the DOJ to maintain its priority to investigate and prosecute these types of offenses and conspiracies.

Admittedly, these predications are just that – predictions. But before Judge Garland accepts any appointment to the Office of the Attorney General, his previous decisions and cases hint at his policies and what we can expect out of the DOJ. We think Judge Garland’s deep investigatory experience with the DOJ will empower the DOJ to undertake these investigations, much like it already has in some Districts, to uncover healthcare, COVID-19, and ethics-related fraud cases in addition to large scale conspiracies and drug offenses.

 

Department of JusticeThe U.S. Department of Justice (DOJ) announced its first civil settlement under the False Claims Act (FCA) against a Paycheck Protection Program (“PPP”)  borrower. This likely marks the beginning of a new trend of civil enforcement cases under the FCA, separate from criminal cases, against PPP recipients. (See prior post here discussing recent criminal prosecutions.) DOJ’s use of the FCA also aligns with an acceleration in these types of cases toward the end of 2020, following a previous lull.

The settlement involved straightforward allegations of fraud by an Internet retail company, SlideBelts, Inc., and its president and CEO, Brigham Taylor. According to the facts in the settlement agreement, Taylor submitted back-to-back applications to several lenders for PPP loans in April 2020 for SlideBelts while the company was in bankruptcy. In the applications, Taylor, on behalf of SlideBelts, answered “no” to the question regarding the company’s solvency. The first lender rejected SlideBelt’s application because it was aware that SlideBelts was in bankruptcy; however, SlideBelts obtained a $350,000 PPP loan from a different lender, by Taylor again falsely certifying that the company was not in bankruptcy proceedings.

At the end of April, SlideBelts filed a motion in the bankruptcy court seeking retroactive approval of the loan but did not inform the court that he failed to disclose SlideBelts’s bankruptcy in the loan applications. The Small Business Administration (SBA), the government agency overseeing the PPP loan program, along with Taylor’s lender, opposed the motion and sought return of the loan funds. Rather than return the loan, SlideBelts asked the court to dismiss the case, stating he intended to refile an application for the PPP loan. The court dismissed the case at the end of June; SlideBelts, however, did not return the funds until over a week later. On January 12, 2021, DOJ announced the settlement with both SlideBelts and Taylor of potential civil claims against them under the FCA and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).

As part of the settlement, DOJ required SlideBelts and Taylor to pay $100,000, with $17,500 coming from Taylor as restitution. On the one hand, this figure is substantial, representing nearly one-third of the amount of the fraudulently obtained loan. On the other, DOJ contended in the settlement agreement that defendants were liable for damages and penalties in the amount of nearly $4.2 million for violations of the FCA and FIRREA. Notably, however, the DOJ obtained this settlement without the filing of a complaint or instituting any formal proceedings. The settlement agreement also makes clear that DOJ’s claims were based at least in part on the interim rules issued by the SBA and April 2020 about PPP loan eligibility – the agreement referenced the provision of a rule that made clear that bankruptcy precludes eligibility for PPP loans.

Several other aspects of the settlement agreement and the case overall are also noteworthy. As noted above, this is the first civil FCA case involving a PPP loan recipient and shows that DOJ will in fact rely on the FCA to pursue PPP fraud, though this case is different from a typical false claim case. The majority of FCA cases are brought by a private qui tam relator – often a whistleblower alleging fraud – with the filing of a sealed complaint. Here, in contrast, the DOJ conducted an investigation with the Office of the Inspector General (OIG) for the SBA. It is unclear from the DOJ press release what spurred the investigation in the first instance, but it may well be that the DOJ and SBA OIG are actively investigating PPP loan recipients.

The SlideBelts settlement shows that, as predicted, DOJ will rely on the civil FCA provisions to pursue PPP fraud in addition to criminal charges. It also shows that, perhaps even more than expected, the DOJ and the SBA OIG will be proactive and aggressive in pursuing FCA claims.

GeorgiaAmid the seemingly endless stream of news that underlies America’s currently tumultuous political climate, you would be forgiven for missing (or simply forgetting) the fact that President Trump may have a serious Georgia problem.  No, we are not merely referring to the results of the recent Presidential and Senate runoff elections, which demonstrated a momentous political shift in favor of the Democratic Party in the historically conservative state.  President Trump’s most pressing Georgia problem is instead that he and his aides potentially face post-Presidential criminal consequences for their attempts to influence the state’s administration of the Presidential election.

A steady drip of news stories has illuminated that President Trump and others made multiple potentially improper contacts with Georgia election officials in the aftermath of the November 3 election.  Before analyzing their potential criminal exposure, let’s review the timeline as established by public reporting:

The Chronology

The first indications of potential outside influence on the Georgia Presidential election results came in mid-November 2020, when reports began circulating that Senator Lindsey Graham of South Carolina, “one of Mr. Trump’s closest allies on Capitol Hill,” had reached out to Georgia Secretary of State Brad Raffensperger and suggested that Raffensperger disqualify certain absentee ballots.

Then, on December 5, news broke that President Trump had called Georgia Governor Brian Kemp to “urge him to persuade the state legislature to overturn President-elect Joe Biden’s victory in the state and… to order an audit of absentee ballot signatures.”  Kemp had indicated publicly, before and after the call, that he lacked the power to order such a move but did request that Secretary of State Raffensperger conduct an audit.

In fact, Raffensperger did launch an audit of certain absentee ballots in Cobb County which, on December 29, resulted in a determination that there was no fraud.  We now know, however, that President Trump and others made several additional contacts with Georgia officials while that audit and other election-related investigations were pending.

On December 22, the President’s Chief of Staff, Mark Meadows, made a “surprise visit” to Cobb County to observe the audit and to “ask questions about the process.”  Meadows was not allowed to enter the room where the audit was being performed.

The next day, December 23, President Trump called Georgia’s election investigations chief, reportedly asking that individual – who remains undisclosed – to “find the fraud” and indicating that they would be “a national hero” if they did so.

Next, on January 3, President Trump called Secretary of State Raffensperger directly to ask that he “find” the 11,780 votes that would be necessary to surpass Joe Biden’s electoral lead.  The Washington Post subsequently published the recording and a transcript of the call in which “[President] Trump alternatively berated Raffensperger, tried to flatter him, begged him to act and threatened him with vague criminal consequences… at one point warning that Raffensperger was taking a ‘big risk.’”   President Trump also implored: “Fellas, I need 11,000 votes. Give me a break.”  Trump requested that Raffensperger’s General Counsel sit down with one of Trump’s attorneys to go over Trump’s allegations, and the General Counsel agreed.  President Trump also appeared critical of U.S. Attorney for the Northern District of Georgia Byung J. Pak, referring to “your never-Trumper U.S. attorney there.”

U.S. Attorney Pak resigned abruptly on January 4, 2021, the day after the call between Trump and Raffensperger was reported.  Recent reporting from the Wall Street Journal alleges that a senior Justice Department official, at the behest of the White House, had called Pak and pressured him to resign because “he wasn’t doing enough to investigate the president’s unproven claims of election fraud.”

The Applicable Legal Framework

The ever-growing list of contacts with Georgia by President Trump and those loyal to him has sparked a now-familiar debate: will President Trump face any criminal consequences for his actions?  There are at least three federal statutes and several state statutes which could be applicable to the reported conduct.

First, the Hatch Act – 5 U.S.C. §§ 7323 et seq. – prohibits government employees from using “official authority” to affect a federal election.  While the Hatch Act specifically exempts the President and Vice President from the civil provisions of the Act, the criminal provisions remain applicable to President Trump.  Specifically, 18 U.S.C. § 595 provides for up to one year imprisonment for anyone who “uses his official authority for the purpose of interfering with, or affecting, the nomination or the election of any candidate for the office of President, Vice President, Presidential elector, Member of the Senate, Member of the House of Representatives, Delegate from the District of Columbia, or Resident Commissioner.”

Second, 52 U.S.C. § 20511(2) prohibits any person from “knowingly and willfully” depriving, defrauding, or attempting to deprive or defraud the residents of a State of a fair and impartially conducted election process.”  According to the Department of Justice, this statute is notable because “[u]nlike other ballot fraud laws… the focus of this provision is not on any single type of fraud, but rather on the result of the false information: that is, whether the ballot generated through false information was defective and void under state law.”  Some commentators have noted, however, that prosecuting President Trump under this statute could be difficult, notwithstanding the recording and transcript of his January 3 call with Raffensperger, because it would require that the President knew he was urging Raffensperger to fraudulently change the vote.

Third, 18 U.S.C. § 241 makes it illegal to participate in a conspiracy against people exercising their civil rights.  As a conspiracy claim, this charge would require “two or more persons” to “conspire to injure, oppress, threaten, or intimidate” any person in the free exercise or enjoyment of their civil rights. Although more substantial evidence obviously would be needed to prosecute under this statute, federal prosecutors might begin an investigation because a conspiracy to dilute ballots lawfully submitted by Georgia voters might be inferred from the chronology of Senator Graham’s call to Raffensperger, Chief of Staff Meadows’ surprise visit to Cobb County, and the senior DOJ official’s call to U.S. Attorney Pak.

Finally, Georgia state law – GA Code § 21-2-604 – provides for three years-imprisonment when a person causes someone else to take part in election fraud by soliciting, requesting, or commanding another person to engage in such conduct.  Prosecutors might argue that President Trump solicited or attempted to coerce Raffensperger or other election officials to violate potentially several Georgia election statutes,[1] thereby violating § 21-2-604.  Fulton County District Attorney Fani Willis has already indicated that her office will investigate the issue.  There are also several general criminal statutes in Georgia, such as criminal attempt,[2] criminal solicitation,[3] conspiracy to commit a crime,[4] which could conceivably be in play if supported by evidence gathered in District Attorney Willis’ investigation.

Conclusion

Predicting potential criminal consequences for President Trump has become a favored pastime for many over the past four years.  The authors of this blog post do not wish to add to this now-time-honored tradition by speculating about the relative strength or likelihood of any such charges.  Suffice it to say that, at this point, Georgia may now have a lead over New York and Washington, D.C., in the presidential prosecution sweepstakes.

[1] For example, GA Code § 2-562 establishes that it is a felony to insert any fraudulent entry on or in, or to alter or intentionally destroy a ballot in connection with an election.  Similarly, GA Code § 2-499 requires the Georgia Secretary of State to file an official tabulation of votes and to submit an official certification of all votes cast to the Governor.

[2] GA Code § 16-4-1 (“A person commits the offense of criminal attempt when, with intent to commit a specific crime, he performs any act which constitutes a substantial step toward the commission of that crime.”)

[3] GA Code § 16-4-7 (“A person commits the offense of criminal solicitation when, with intent that another person engage in conduct constituting a felony, he solicits, requests, commands, importunes, or otherwise attempts to cause the other person to engage in such conduct.”)

[4] GA Code § 16-4-8 (“A person commits the offense of conspiracy to commit a crime when he together with one or more persons conspires to commit any crime and any one or more of such persons does any overt act to effect the object of the conspiracy.”)

handshakeAlthough the Department of Justice’s Antitrust Division has recently been in the news for the civil complaints that it has filed against several large technology companies, during 2020 it has quietly continued to ramp up civil and criminal antitrust enforcement in the labor market by targeting companies that agree on employees’ wages or not to hire each other’s employees.

The Department of Justice and Federal Trade Commission issued Antitrust Guidance for Human Resource Professionals in October 2016, which explicitly stated that naked no-poach agreements are a per se illegal violation of the antitrust laws and warned that wage-fixing and no-poach agreements between competitors made or continued after that date could face criminal prosecution. Although both DOJ and FTC subsequently brought civil actions, including recent actions by the FTC related to no-poach clauses in acquisition agreements, it was not until January 2021 that DOJ brought its first criminal no-poach indictment.  That case was itself filed on the heels of DOJ’s first wage-fixing criminal case, which was indicted in December 2020.  Although several years have passed since DOJ issued its antirust HR guidance, it now appears that the Antitrust Division has anticompetitive labor practices squarely in its sights.

What are no-poach or no-hire agreements?

A no-poach agreement (sometimes called a no-hire or non-solicit agreement) is a written or oral agreement with another company not to compete for each other’s employees, such as by agreeing not to solicit or hire another company’s employees. A wage-fixing agreement, in contrast, is an agreement with another company regarding the level of compensation paid to employees or contractors, either at a specific level or within a certain range.  So-called “naked” no-poach agreements are agreements that are not reasonably ancillary to a separate, legitimate business agreement amongst the companies.

Where are no-poach agreements found?

No-poach and non-solicitation agreements can arise under a variety of circumstances but often arise in the context of corporate transactions. They may be found in a clause in an underlying acquisition agreement or a standalone agreement that is ancillary to the main transaction agreement. No-poach agreements can also occur pursuant to agreements between a manufacturer and distributor, franchisor and franchisee, licensor and licensee, or among parties to a joint venture.

What does the legal landscape look like now for no-poach agreements?

DOJ pursuit of no-poach agreements

In 2018, in a first-of-its-kind settlement, the Department of Justice filed a civil suit and simultaneous settlement against Knorr-Bremse AG and Westinghouse Air Brake Technologies Corp., alleging that these companies, along with a third company, engaged in a six-year conspiracy in which they agreed not to hire each other’s employees. Along with the settlement, the Antitrust Division has taken the unusual step of filing a competitive impact statement that detailed the government’s position that naked no-poach agreements are per se unlawful. The terms of the settlement included a seven-year injunction, a requirement to appoint an antitrust compliance officer, placement of advertisements in industry publications about the settlement, and a requirement that each company notify all its U.S. employees of the settlement and the companies’ obligations thereunder.

Since then, DOJ has filed civil enforcement actions along with statements of interest in numerous private no-hire cases to express its view that such agreements are per se illegal horizontal allocations of the labor market under the antitrust laws. See, e.g., Statement of Interest of the United States, In re Railway Industry Employee No-Poach Antitrust Litig., 2:18mc00798 (W.D. Pa. Feb. 8, 2019) (rail industry employees); Corrected Statement of Interest of the United States, Harris v. CJ Star, LLC, 2:18-cv-00247 (E.D. Wash. Mar. 8, 2019) (fast food franchise employees); Statement of Interest of the United States, Seaman, et al. v. Duke University, et al., 15-cv-00462 (M.D.N.C. March 7, 2019) (medical school faculty members).

Although these cases all sought only civil penalties, DOJ has continued to emphasize that it views naked no-hire agreements as criminal conduct. In an interview with The Wall Street Journal. in January 2020, Assistant Attorney General Makan Delrahim, the chief of the Justice Department’s antitrust section, said that the Antitrust Division expected to bring its first criminal case accusing employers of colluding not to hire each other’s workers in the first half of 2020. Perhaps delayed by the COVID-19 pandemic, the Justice Department indicted its first criminal wage-fixing case in December 2020 and its first criminal no-poach case in January 2021.

In the wage-fixing indictment, United States v. Jindal, No. 4:20-CR-00358 (E.D. Tex. Dec. 9, 2020), the defendant was the owner of a physical therapy staffing company that employed physical therapists (PTs) and physical therapist assistants (PTAs) to provide in-home care to patients. The physical therapy staffing companies in the region competed with each other to hire or contract with PTs and PTAs, who decided which companies to work for based on pay, among other factors. The government claims that the defendant entered into a conspiracy with other owners of physical therapy staffing companies to exchange non-public information about rates paid to PTs and PTAs and to implement rate decreases for wages paid to PTs and PTAs in their employ.

The indictment points out that the cost of home health care, including physical therapy, is often covered by Medicare, the federal health care program providing benefits to persons who are over 65 or disabled. The government’s discussion of Medicare reimbursement in the context of the wage-fixing indictment is noteworthy because it was not directly relevant to the facts of that case. Tellingly, however, the day after the indictment was filed, the Eastern District of Texas, where the wage-fixing case was indicted, announced that it was joining the Procurement Collusion Strike Force, which is a partnership between the Department of Justice, multiple U.S. Attorneys’ offices around the country, and nearly 30 member agencies. The strike force is tasked with anti-competitive activity in connection with public procurement, so it possible that many early wage-fixing or no-poach criminal cases will involve Medicare, Medicaid, defense, or other government spending.

Thereafter, on January 5, 2021, a federal grand jury in the Northern District of Texas returned an indictment alleging a criminal antitrust violation relating to an agreement between three companies to not solicit senior-level employees of the other companies. Although the indictment alleged that agreement prohibited only proactive solicitation of employees, as opposed to an unqualified agreement not to hire, the indictment nonetheless alleges that this type of agreement is per se unlawful under the antitrust laws.

FTC pursues no-poach and noncompete claims after merger review

DOJ is not the only agency concerned with the anticompetitive effects of no-poach agreements. The FTC issued an administrative complaint in January 2020 challenging a consummated May 2018 acquisition not reportable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) by Axon Enterprise, Inc. of its competitor VieVu, LLC. Before the acquisition, the two companies competed to provide body-worn camera systems to large, metropolitan police departments across the United States. The complaint challenges the acquisition, alleging that the acquisition reduced competition in an already concentrated market and VieVu’s parent company, Safariland LLC, entered into ancillary anticompetitive non-compete and non-solicitation agreements with Axon when Axon acquired the VieVu body-worn camera division, which substantially lessened competition. Among other things, Axon and Safariland agreed “not to hire or solicit any of [the other’s] employees, or encourage any employees to leave [the other], or hire certain former employees of [the other], except pursuant to a general solicitation” for a period of 10 years. The FTC claims these non-solicitation provisions “eliminate a form of competition to attract skilled labor and deny employees and former employees … access to better job opportunities” as well as restrict worker mobility and deprive workers of competitive information that they could use to negotiate better employment terms. Although Safariland and Axon agreed to rescind the provisions the FTC alleged were anticompetitive within weeks of the complaint being filed, the FTC pursued the action. Safariland entered into a consent agreement in June 2020 requiring it to submit any agreements with Axon that restrict competition between the two companies to the FTC for review and prior approval and to comply with certain antitrust compliance and reporting requirements. Axon is challenging the proceedings on the merits and constitutional grounds and recently sought and obtained a stay of the October 2020 administrative trial.

This enforcement action follows a blog post in which the FTC provided guidance on the use of such restrictions in mergers and acquisitions. The FTC challenge, along with changes in reporting instructions under the HSR Act that require filers to submit all noncompete agreements between the parties of a reportable transaction, shows that acquisition agreements are ripe for scrutiny by antitrust authorities. The Axon enforcement action underscores the need for companies evaluating mergers and acquisitions to carefully consider the need, scope and duration of ancillary no-poach or non-solicitation provisions in transaction agreements, whether the transaction is reportable under the HSR Act or not.

State attorneys general step in

Even more than DOJ and FTC, several state attorneys general have become crusaders against no-poach agreements, particularly the attorney general of Washington state. While the Justice Department takes a reasonably nuanced view of which no-poach agreements should be subject to per se treatment, the Washington attorney general’s office feels itself unencumbered by such fine distinctions:  instead, it takes the view that all no-poach agreements are unlawful in Washington, characterizing DOJ’s case-by-case approach as “somewhat misguided.” Although Washington has focused on franchise systems thus far, there is no indication that its analysis is limited to the franchise context. Notably, the state will not resolve any investigation unless no-poach clauses are removed from contracts nationwide, not just in Washington.

The attorney general’s views have not been tested in court, but since Washington began investigation of no-poach clauses in 2017, it has entered into settlement agreements with over 200 companies (representing nearly 200,000 locations) to end no-poach clauses nationwide. Although the Washington attorney general may be the most fervent enforcer, he is not alone amongst the state attorneys general: in 2018, a coalition of 10 states (including New York and California) and the District of Columbia sent a letter to eight leading fast-food franchisors that requested documents and information relating to the companies’ practices involving no-poach agreements. In 2019, a coalition of 13 attorneys general entered into a multi-state settlement with three companies that ended the use of no-poach clauses contained in franchise agreements.

Private no-poach litigation

In addition to DOJ and FTC pursuit of no-poach agreements, private litigants have brought Sherman Act claims alleging that agreements between competitors not to solicit or hire each other’s employees are per se violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. Some courts have denied motions to dismiss, noting that discovery is needed to determine whether per se, quick look or rule of reason analysis should apply to a given case. See, e.g., In re Papa John’s Employee & Franchisee Employee Antitrust Litig., 2019 WL 5386484 (W.D. Ky. Oct. 21, 2019) (denying restaurant franchisor’s motion to dismiss and declining to require plaintiffs to allege a relevant product or geographic market as direct evidence of anticompetitive effects in terms of suppressed wages and decreased job mobility was sufficient to plead a claim that could be unlawful under a per se, quick look or rule of reason analysis); In re Ry. Indus. Emple. No-Poach Antitrust Litig., 395 F. Supp. 3d 464, 481 (W.D. Pa. 2019) (denying motion to dismiss antitrust claim where plaintiffs alleged a naked no-poach agreement between competitors because such agreements are per se unlawful); Hunter v. Booz Allen Hamilton, Inc., 418 F. Supp. 3d 214, 223 (S.D. Ohio 2019) (denying defendants’ motion to dismiss suit brought by employees of three defense contractors challenging no-poach agreements under all three modes of antitrust analysis without deciding which mode should apply). Given the possibility that such claims will survive a motion to dismiss and proceed to discovery, any no-poach or no-hire provisions should be analyzed to assess the risk of civil litigation or agency enforcement.

Practice Tips for No-Poach Clauses

No-poach agreements can serve to protect legitimate business interests, but they also can serve as a restraint on the ability of employees to compete in the labor market for jobs and wages. A company considering using a no-poach clause in an agreement should consult with antitrust counsel to ensure it is in accordance with federal and state antitrust laws.

To survive antitrust scrutiny, a no-poach agreement must be reasonably ancillary or necessary to achieve an otherwise legitimate business interest such as a merger, asset purchase, joint venture or other type of combination or collaboration, and narrowly tailored to achieve that interest. The restriction must be closely related to the purpose of the underlying agreement and limited in scope and duration. Parties to the restrictive clause should consider what they are trying to protect, why the protection is needed, the scope of protection actually needed and be able to articulate how the restriction accomplishes the benefits of the transaction. The specific facts and circumstances surrounding the transaction and the restrictive clause will be key determinants of enforceability and whether such a clause survives antitrust scrutiny.

National DefenseThe recently passed defense authorization act, known as the NDAA, included amendments to the Securities Exchange Act of 1934 (the “Exchange Act”)—having nothing to do with national defense. Section 6501 of the NDAA enhances the SEC’s ability to obtain disgorgement in the wake of two recent Supreme Court cases, Kokesh v. SEC, 137 S. Ct 1635 (2017) and Liu v. SEC, 140 S. Ct. 1936 (2020), that curtailed the SEC’s ability to obtain that remedy.

Briefly, Section 6501 made the following amendments to the Exchange Act:

  • Gave the SEC statutory authority to pursue disgorgement in federal court.
  • Extended the statute of limitations for scienter-based securities law violations from five to ten years.
  • Provided for a tolling of the statute of limitations period for any disgorgement claim brought against a person outside of the United States.

Kokesh and Liu 

Despite a lack of express statutory authority, federal courts regularly ordered defendants in SEC enforcement actions to disgorge their ill-gotten gains, relying on their power to order equitable relief ancillary to an injunction.

Such orders finally gained Supreme Court scrutiny in 2017 in Kokesh. In that case, the Court held that disgorgement was a “penalty” and, as such, was subject to a five-year statute of limitations.  The Court expressly left open the question of whether the SEC and the courts had the authority to seek and impose disgorgement.  In 2019, the Supreme Court teed up that question by granting certiorari in Liu. The Liu Court agreed with the SEC that courts could impose disgorgement pursuant to their power to order “equitable relief” under Section 21(d) of the Exchange Act, but imposed limits on how the amount of disgorgement could be calculated.  The Justices held that disgorgement orders must be tethered “to a wrongdoer’s net unlawful profits,” meaning that legitimate expenses should be deducted in the calculation of a disgorgement amount. The Court also imposed limits on joint and several liability in the disgorgement context and required that disgorged amounts be returned to victims rather than to the U.S. Treasury.

The Exchange Act Amendments under Section 6501 of the NDAA

Following Kokesh, the SEC lobbied Congress to overturn that decision with legislation. While not fully overturning Kokesh, Section 6501 of the NDAA goes a long way toward meeting the SEC’s goal. It enhances the SEC’s enforcement powers in several ways:

  • It provides express statutory authority for the SEC to seek, and for federal courts to order, disgorgement.  No longer does the SEC have to rely on a court’s general authority to order equitable relief.
  • It doubles the length of the statute of limitations for the SEC to bring enforcement actions under statutes where scienter is an element of the violation. Thus, the SEC now has ten years in which to charge violations of the fraud provisions of section 10(b) of the Exchange Act and section 17(a)(1) of the Securities Act of 1933. Section 6501 of the NDAA also permits the SEC to bring a claim of disgorgement “not later than 10 years after the latest violation that gives rise to the action.”
  • Alleged violators who are not in the U.S. may have to wait even longer to clear the limitations period. Section 6501 provides for tolling of the limitations period for any disgorgement claim where “the person against which the action or claim, as applicable, is brought is outside the United States.”

Implications

The Section 6501 amendments augment the SEC’s authority to obtain disgorgement, most notably for the most serious, scienter-based securities law violations. They also expand the SEC’s ability to seek and obtain disgorgement of ill-gotten gains obtained farther back in time. As a practical matter, the amendments will enable the Commission to leverage higher settlements from enforcement defendants. The amendments did not, however, address the limitations on disgorgement calculations that the Supreme Court prescribed in Liu, since in drafting the amendments Congress appears to have sought to distinguish between “disgorgement” and “civil money penalties.” Also left untouched by Section 6501 were Liu’s limitations on joint and several liability and its requirement that disgorged funds be used to compensate victims. Thus, defendants and those negotiating resolutions with the SEC still can argue, based on Liu, that disgorgement is limited to gross ill-gotten gains offset by legitimate expenses.

 

Facebook LikeIf it seems like 2020 was the year when everyone was talking about antitrust on their socially distant Zoom calls, that is because government antitrust lawyers have been busy. Just before the year began, the Department of Justice announced the formation of the Procurement Collusion Strike Force and, in January 2020, the Antitrust Division rolled out its new vertical merger guidelines. In the criminal realm, courts issued three antitrust fines at or above the $100 million statutory maximum, and the past year also saw the first-ever criminal antitrust indictment for wage fixing, which was brought in the Eastern District of Texas against the owner of a physical therapy staffing company.

Against this backdrop, the Department of Justice and the Federal Trade Commission have filed lawsuits asserting that pretty much the entire Internet is an antitrust violation, and they are seeking to break up the company that is probably the home page on your Internet browser. In addition, a bi-partisan group of state attorneys general filed their own antitrust lawsuit against tech companies, and then another subset of states filed yet another Internet antitrust lawsuit.

Not to be outdone, Congress also got in on the antitrust action. On December 8, 2020, Congress passed the Criminal Antitrust Anti-Retaliation Act of 2019, which was later signed into law. The statute, which took more than a year to be enacted, prohibits any employer from retaliating against an employee, agent, or contractor who reports a potential criminal antitrust violation to the federal government or an internal company supervisor. The statute also explicitly excludes from protection any person who planned and initiated an antitrust violation, attempted to obstruct an antitrust investigation by the Department of Justice, or engaged in another violation of the law in connection with an antitrust violation. The Anti-Retaliation Act provides that an aggrieved individual is entitled to “all relief necessary to make [him] whole,” which includes reinstatement, back pay with interest, and special damages, which includes litigation costs, expert witness fees, and attorneys’ fees.

Unlike some of the other antitrust developments in 2020, the passage of the Criminal Antitrust Anti-Retaliation Act requires some immediate action. First, a company’s whistleblower and compliance policies should be updated to ensure that no adverse action is taken against an employee who reports an antitrust violation. Because the protections of the law apply only to those whistleblowers who report criminal conduct, this effectively limits a whistleblower’s protection to complaints relating to price or wage fixing, bid rigging, output agreements, market or customer allocations, or naked no-poach agreements. Second, those individuals in a company’s compliance department or who are responsible for whistleblower reports must be educated on the antitrust laws in order to ensure the proper controls and procedures are followed once a report is received. Because a protected whistleblower claim will necessarily involve a report of a criminal antitrust violation, procedures should be implemented to ensure that the legal department is involved from the beginning of the process in order to ensure that a proper investigation is performed and the attorney-client privilege is protected.

We’re all waiting to see what 2021 will bring to the world of antitrust. More tech lawsuits? A chorus of criminal no-poaching cases? Increased antitrust prosecutions in government procurement? If 2020 is any indication, in-house counsel and compliance departments should keep their seatbelts fastened and prepare for another bumpy ride.