Department of JusticeLate last week, the Department of Justice (DOJ) issued a Foreign Corrupt Practices Act (FCPA) Opinion 20-1, its first such opinion in almost six years.  In the Opinion, the DOJ advised a U.S.-based investment advisor that the DOJ did not intend to take any enforcement action related to the payment of certain fees to a foreign investment bank indirectly owned by a foreign government.  Unfortunately, the Opinion offers little insight into DOJ’s FCPA enforcement priorities.

The facts outlined in the Opinion are relatively straightforward.   A multinational firm headquartered in the United States (the “Requestor”) received assistance from a subsidiary (the “Country B Office”) of a foreign investment bank indirectly owned by a foreign government related to a purchase of assets from a different subsidiary (the “Country A Office”) of the same bank.  The Country B Office requested fees in the amount of $237,500, which was equal to 0.5% of the purchased assets, to compensate for the assistance it provided on the Requestor’s behalf.

In stating that it did not intend to commence an enforcement action, the DOJ referenced the following factors:  (1) the payment was to a foreign government instrumentality, namely the Country B Office, and not a specific individual or foreign official; (2) there was no evidence that the payment was intended to corruptly influence a foreign official; (3) the Requestor received specific, legitimate services from the Country B Office, and (4) the fees were commercially reasonable and commensurate with the services provided.  The Opinion did not provide detailed information regarding the entities involved, the services provided, or any further clarity into the issues presented.

Perhaps the biggest takeaway is the lack of insight the Opinion provided.  It was issued as part of the DOJ’s Opinion Procedure Release, a scarcely used procedure that allows companies subject to the FCPA to obtain an opinion from the DOJ regarding whether certain specified, prospective, not hypothetical, conduct conforms with the DOJ’s FCPA enforcement policy.  Prior to this current release,  the last opinion release occurred in November 2014, which concluded a run of roughly only two releases per year for the prior 20 years.

There are several reasons why the Opinion Procedure Release is rarely used.  For one, the length of time for an opinion to be issued can be considerable.  In the instant case, the Opinion was issued about nine months after the initial request was submitted, and included several supplemental information requests.  In addition, even with the use of pseudonyms, companies may be hesitant to request opinions given the public nature of the advice and the fact that they are consulting a prosecutorial body about the legitimacy of a transaction. Finally, the opinion process does not give comfort to companies that they will never be prosecuted.  Should other facts come to light that were not provided to the government before the opinion was issued, the DOJ is free to prosecute.  This is a risk most companies choose not to take.

The Opinion comes on the heels of the DOJ’s release of an updated version of its Resource Guide to the FCPA, which may suggest a continued effort by the DOJ to keep the FCPA unit visible during the coronavirus pandemic. International travel has stalled and FCPA investigations have most certainly languished.  However, the DOJ could have relaunched its use of the opinions process with a more significant analysis that would have made a greater splash with FCPA practitioners.  The six-year dry spell without opinions and the issuance of this generic analysis likely signals that the FCPA opinions procedure will continue to remain largely dormant.

 

moneyThis is the question recently asked by Gene Levoff, a former attorney at a large technology firm traded on the NASDAQ stock exchange. The indictment against Mr. Levoff charges him with securities fraud and alleges that between 2011 and 2016, Mr. Levoff used material non-public information to trade securities before his employer’s securities commission filings were made public. According to the indictment, Mr. Levoff realized profits of $227,000 and avoided losses of $377,000.

Mr. Levoff moved to dismiss the charges against him, arguing that because there is no statute that explicitly criminalizes insider trading, the indictment must be dismissed. The District of New Jersey trial court, predictably, denied Mr. Levoff’s motion this week, finding that it was a “classical” case of insider trading, whereby a person uses “manipulative or deceptive device” to engage in securities trading. 15 U.S.C. § 78j. A manipulative or deceptive device, in turn, is defined by SEC regulation to include “the purchase or sale of a security . . . on the basis of nonpublic information about that security.” 17 C.F.R. §240.10b5-1(a). Because the indictment alleged that Mr. Levoff relied on material, non-public information in making his trades, the case is open and shut, as the saying goes.

But should it be?

There is little doubt that the district court reached the proper result using the existing case law. Taking a step back, however, there is reason to question the validity of the government’s position. Mr. Levoff was charged with securities fraud, but who was defrauded? It can’t be the purchaser of the securities—that person received exactly that for which he bargained: a share of securities. See, e.g., United States v. Frost, 125 F.3d 346, 362 (6th Cir. 1997) (reversing mail fraud conviction where seller failed to disclose conflict of interest, but buyer still received the fruits of the bargain). Moreover, the sale of securities, unlike most other commercial transactions, may not even have an identifiable buyer and seller; it may be very difficult, if not impossible, to identify the person that actually purchased Mr. Levoff’s shares. The reverse situation, where the insider is a buyer of securities rather than a seller, is even more difficult to defend as a fraud because the seller has already made the decision to sell and if the shares are not sold to the insider, they would be sold to someone else, perhaps at a lower price.

Although insider trading has long been considered unlawful, it does reflect a troubling trend by the government in criminal cases to divorce words from their common law meaning in an effort to expand the scope of the law. The Supreme Court, in a series of decisions over the past several terms, has begun to reign in the overreach with respect to bribery and corruption prosecutions, but in other parts of the law, no end appears in sight. At common law, a fraud would require a materially false statement, made with the intent to deceive, reliance, and damages. Insider trading meets none of these criteria, yet it is still prosecuted as a species of securities fraud. Even under the definition of securities fraud in Title 15, it is difficult to classify insider trading as a “manipulative or deceptive device,” since no person was being misled or deceived by any false information and receives precisely the benefit of the bargain.

It seems safe to say that few courts will dismiss charges against employees charged with insider trading, and this may be the correct result given the long history of insider trading prosecutions. We should, however, continue to be aware of and guard against further creep of criminal law into areas that may involve reprehensible, but not necessarily illegal conduct.

courthouse and moneyOn Tuesday July 28, Eastman Kodak, Co. in conjunction with the Trump Administration publicly announced that Kodak would receive a $765 million loan for purposes of manufacturing generic drug ingredients. Just a few days later, Senator Elizabeth Warren (D-Mass.) penned a letter to Securities and Exchange Commission Chairman Jay Clayton demanding an investigation into the timing of Kodak’s announcement, suspicious trading activity that preceded announcement, and the timing of certain trades by Kodak executives and options awards. And now Kodak faces an SEC investigation that will focus directly on how it went about disclosing the government loan.

Public companies announce market moving information all the time and rarely face the ire of public officials or the scrutiny of an SEC investigation. This begs the question – what happened with Kodak and what can other issuers learn from it?

According to Kodak’s official statements, the shift in focus to drug ingredient manufacturing coupled with the government loan had been in negotiations for several months prior to the announcement. During that time, Kodak executives made several purchases of Kodak securities pursuant to company insider trading plans. While this is not unusual in itself, Kodak will now face serious scrutiny because of the manner in which the loan was subsequently disclosed to the public.

Like most public companies, Kodak prepared press releases touting the loan and distributed them to various media outlets prior to the public announcement. But, critically, Kodak did not include so-called “embargo” language that restricted dissemination or use of the information until Kodak itself made a public announcement. Several news outlets in the Rochester, New York area – where Kodak is headquartered – published the information on July 27, including through Twitter and television broadcasts. In response, Kodak apparently requested the publications be removed but took no other action. Kodak shares traded aggressively on July 27, reaching trading volumes nearly eight times the yearly average.

SEC Regulation FD permits public companies to disseminate material non-public information prior to a public announcement to certain individuals, such as analysts or the press, where it is not reasonably likely the recipient will trade based on the information. To accomplish these “selective disclosures,” issuers typically include restrictive embargo language prohibiting early distribution of the information and obtain assurances that no trading will occur prior to the full public disclosure.

In situations like Kodak’s, where the embargoed information is inadvertently or improperly disclosed prior to a public announcement, Rule 100 of Regulation FD requires an issuer to take immediate action to make a full public disclosure if it knows or is reckless in not knowing about the premature disclosure. Failure to do so can invite regulatory investigations, enforcement actions, and substantial penalties.

Issuers can learn a great deal from the Kodak disclosures. First, it should serve as a general reminder that selective disclosure of material non-public information must be carefully vetted before it goes out the door. There is no excuse for not including appropriate embargo language or failing to obtain assurances, consistent with Regulation FD, that a recipient will not trade based on the information. And, on the back end, issuers should have a program in place to move rapidly where non-intentional disclosure, like Kodak’s, occurs.

Moreover, issuers should carefully approach any disclosure of information concerning their involvement in government initiatives and ensure that their insider trading policies properly limit access to such information before it is made public. This concern is even more acute amid the global pandemic, which has seen governments around the world undertake extraordinary measures to avoid economic disaster, stimulate growth, and identify a vaccine for COVID-19. Issuers may be involved in negotiations to develop vaccines or vaccine components, to obtain funding to build out domestic manufacturing, or to partner with government agencies for other purposes. Any of these can represent substantial value to the issuer in the form of funding, reputational gains, or future earning potential and, in turn, likely constitute material non-public information.

Issuers should also consider how its possession of such information may impact other aspects of their insider trading policies. Regularly scheduled trading periods for company insiders may need to be altered and plans to provide stock-based compensation might need to be delayed.

Ultimately, public companies must always contend with the possession of material non-public information in some form. The question is whether their compliance practices are sufficiently flexible to reasonably and adequately address unique situations or whether they should brace for their Kodak moment.

On July 23, 2020, the U.S. Department of Justice, Antitrust Division (“DOJ”) announced charges against Taro Pharmaceuticals U.S.A., Inc. as part of an ongoing federal antitrust investigation of price fixing, bid rigging, and market allocation in the generic drug market. Taro is the sixth company charged in the investigation, five of which (including Taro) have admitted guilt and agreed to pay criminal penalties in the collective amount of more than $426 million.

Taro—like the other five companies that have admitted guilt—has entered into a deferred prosecution agreement (“DPA”) with DOJ. Under the DPA, Taro has agreed to pay a $205.6 million criminal penalty and cooperate fully with the ongoing investigation. That penalty is even more severe than the $195 million criminal penalty that generic pharmaceutical company Sandoz Inc. agreed to pay in March as part of a DPA to resolve charges arising from the same investigation. At that time, DOJ called the Sandoz fine “the largest for a domestic antitrust case.”

The charges against Taro come several months after DOJ indicted Taro’s former vice president of sales and marketing, Ara Aprahamian, for allegedly conspiring with Taro and others to fix prices, rig bids, and allocate customers (in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1), as well as making false statements to federal agents. Aprahamian, who was the third pharmaceutical executive charged for participation in the generic drug conspiracies, has not admitted wrongdoing and awaits trial.

The ongoing antitrust investigation into the generic drug market appears to be massive, reportedly including more than 16 companies and 300 generic drugs. New charges have been announced every few weeks or so for the past several months. The investigation’s scope matches the scope of the alleged wrongdoing, which one law enforcement official has called the “largest cartel in the history of the United States.” DOJ has been coordinating its investigation with the U.S. Postal Service Office of the Inspector General, the Federal Bureau of Investigation (“FBI”) and U.S. Attorney for the Eastern District of Pennsylvania. In addition, state attorneys general have taken an active role, with 20 of them filing a price-fixing lawsuit in 2016 against six generic drug companies that has since transformed into a large multi-district litigation that includes private class-action plaintiffs as well.

Criminal antitrust charges are likely to continue. Given the reported scope of the investigation and the fact that most companies and individuals charged to date have agreed to cooperate with the Government, they likely are providing evidence of alleged wrongdoing by other industry players. Even generic drug companies that are not direct competitors of the charged companies (i.e., they sell different generic drugs that are not substitutes for the drugs sold by the charged companies) should be aware that the investigation may expand into adjacent product markets. One factor that may assist DOJ in the expansion of the investigation is the potential availability of “amnesty plus” for companies that are ineligible for amnesty in the original investigation (because only the first company qualifies) but are able to cooperate regarding a different drug in an adjacent market. Because of this dynamic, companies that learn of investigations involving competitors should consider engaging counsel to plan for responding to DOJ inquiries and to bolster their antitrust compliance efforts.

moneyThe federal government has been handing out billions of dollars in stimulus money to individuals and companies. These funds have helped businesses survive the COVID-19 pandemic by providing them with low or no-cost liquidity when they are not permitted to operate as they would normally. But stimulus money, like all government money, is a double-edged sword. By applying for and accepting these funds, businesses are subjecting themselves to the specter of liability under the False Claims Act (“FCA”). Companies who never before have done business with the federal government or who never received government funds should be particularly cautious as the FCA carries significant criminal and civil exposure, including up to five years imprisonment, that might not be readily apparent to those companies that previously operated in the non-governmental environment.

The current FCA has a long, complicated history dating back to the Civil War, and it has been amended several times, including following the last financial crisis and resulting recession. The United States Supreme Court also has refined various provisions of the FCA over time. But for our purposes, there are a few aspects of the FCA that are particularly important for recipients of federal stimulus funds.

First, the FCA prohibits both false or fraudulent “claims” or “statements” (submitting an invoice to the federal government for payment that is factually false) and false “certifications” (submitting an invoice for which the amount of payment may correctly match the amount of work the company did for the government, but falsely certifying that the company followed applicable laws and regulations in performing the work).

The FCA, like most fraud-based statutes or crimes, requires proof of fraudulent intent. Specifically, the government must prove that the individual or company acted “knowingly,” or with “deliberate indifference” or “reckless disregard” to the truth. Any false statement must be material to the government.

The FCA encourages whistleblowers–known as “relators”–to present cases to the government. If the government declines to pursue the case after investigating, the relator can still pursue the case “on behalf of” the federal government, with substantial financial incentive to do so in the form of heightened damages.

Any business that applied for and received federal funds from the Paycheck Protection Program (“PPP”) is subject to the FCA. A business that applied for a PPP loan made “statements” and “certifications” to the federal government, and it does not matter that the statements may have been made to a private lender. Furthermore, when that business applies for forgiveness of the PPP loan, it is making a “claim” and offering additional “statements” and “certifications.” Each of these is actions is a potential for an FCA violation.

For these reasons, any recipients of federal stimulus funds, including PPP loan borrowers, should do their absolute best to ensure they are following the rules and regulations governing these funds. For those businesses that are for the first time transacting with the federal government, extra care should be taken to learn and understand the contours of the FCA. The DOJ and FBI have made investigating stimulus fraud a priority. They’ll be watching.

Money TrapOn June 30, 2020, the U.S. Attorney’s Office for the Northern District of Ohio filed a criminal complaint charging four Toledo City Councilmembers and a local attorney for their participation in an alleged years-long bribery and extortion scheme. These charges add to a long line of public corruption cases brought by federal prosecutors in Ohio over the last decade, including prosecutions in the Cleveland and Cincinnati areas. In Cleveland, more than 70 government officials and individuals who dealt with the Cuyahoga County government were convicted from 2008 through 2016. More recently, Cincinnati City Councilwoman Tamaya Dennard pleaded guilty to honest services wire fraud.

The Toledo Complaint, which details alleged misconduct by at least one Councilmember dating back to 2013, paints a picture of multiple local officials willing to trade their votes on zoning decisions and other legislation in exchange for payments ranging from $300 to $5,000. Councilmembers Tyrone Riley, Yvonne Harper, Garrick “Gary” Johnson, and Larry Sykes, along with attorney Keith Mitchell, were each charged with violations of 18 U.S.C. § 666(a)(1)(B) (Theft or bribery concerning programs receiving Federal funds) and 18 U.S.C. § 1951 (Interference with commerce by threats or violence), with Harper additionally charged for allegedly violating 18 U.S.C. § 875(d) (Interstate communication of a threat to injure property or reputation).

According to the Complaint, the federal investigation began in March of 2018 and it appears to come straight out of the playbook that DOJ used in Cleveland and Cincinnati.

Federal agents interviewed an individual who had been arrested for living in the U.S. illegally. That individual, referenced as SOURCE 1 in the Complaint, provided information regarding a payment she/he had made to Councilman Riley in 2013 in exchange for Riley’s anticipated support in preventing a competing business from opening near SOURCE 1’s gas station. In May of 2018, under the direction of the FBI, SOURCE 1 re-approached Riley about obtaining his support for a new special use permit. Riley brought a middleman along to a lunch meeting with SOURCE 1 where they discussed the permit. After conferring alone with Riley, the middleman indicated to SOURCE 1 that Riley’s support for the permit would cost $2,000. By December of 2018 the FBI had approached the middleman and secured his/her cooperation as SOURCE 2 in the investigation.

Over the course of the next 18 months SOURCE 1 and SOURCE 2 made or facilitated almost $35,000 in payments to Riley, Johnson, Sykes, Harper, and Mitchell for their anticipated support of a series of zoning decisions, and a legislative moratorium on internet cafes in Toledo. Along the way, Harper pressured SOURCE 1 to make a direct payment of $2,500 to a constituent from her district, after an employee of a business at a building owned by SOURCE 1 used racial slurs when interacting with the constituent.

Each of the five individuals named in the Complaint has been arrested and released on unsecured bond while awaiting trial on the charges. A conviction on both 18 U.S.C. § 666(a)(1)(B) and 18 U.S.C. § 1951 could carry prison sentences of up to 30 years, as well as fines of up to $250,000. Harper could face another two years in prison for her additional charge under 18 U.S.C. § 875(d).

The charges in Toledo came about a month after the U.S. Supreme Court’s decision in the New Jersey Bridgegate case, Kelly v. United States, in which the Court again endorsed a narrow application of federal criminal law to misconduct by public officials. The Supreme Court reiterated that fraudulent schemes by public officials do not necessarily violate federal law unless the aim of the scheme(s) is to obtain money or property. Unlike the public officials in Kelly who apparently were motivated by politics and not money or property, the Toledo Councilmembers’ alleged conduct in accepting bribes and extorting other payments may fit within the category of “fraudulent schemes…for obtaining money or property.” Given that the Supreme Court has narrowly construed federal criminal laws in recent years, however, it remains to be seen whether the Toledo Councilmember defendants will be able to rely upon the more lenient Kelly decision in their cases.

Medical MarijuanaOn July 10, 2020, the Ninth Circuit issued an unusual 2-1 decision affirming a California federal district court’s injunction against the further prosecution of two California marijuana growers, Anthony Pisarski and Sonny Moore. United States v. Pisarski, 2020 U.S. App. LEXIS 21564 (9th Cir. 2020). These defendants had pleaded guilty to federal possession and distribution charges after federal agents found multiple firearms, hundreds of unharvested marijuana plants, over $420,000 in cash, “and a treasure trove of gold and silver bars and coins” at a rural California grow site.

Medical Marijuana Appropriations Rider

Despite pleading guilty in 2012, the defendants argued that the government was precluded from proceeding with their sentencing by the terms of the 2015 Consolidated and Further Continuing Appropriations Act (“Appropriations Act”). The Appropriations Act contained a rider that prohibited the Department of Justice from using funds made available thereunder in a manner that prevents “States from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” Essentially, the rider bars the Justice Department from using any congressionally allocated funds to prevent the lawful exercise of rights granted under state medical marijuana statutes. The rider has been renewed every year since 2015.

The Defendants’ McIntosh Hearing in the District Court

In United States v. McIntosh, 833 F.3d 1163 (9th Cir. 2016), the Ninth Circuit held that the Appropriations Act riders precluded federal marijuana-related prosecutions against persons acting pursuant to state marijuana laws. Even though Pisarski and Moore had pleaded guilty and were convicted prior to the initial Appropriations Act rider, they argued that, under McIntosh, the rider precluded the government from pursuing their subsequent sentencing because their marijuana growing operations were in strict compliance with California’s medical marijuana statutes. Those statutes allow growers to sell marijuana to certain qualified patients, caregivers, and collectives of qualified patients so long as the sales are not part of a “profit-making enterprise.”

The federal prosecutors argued that the weapons, large sums of cash, and precious metals found at the defendants’ grow site were “suspicious” and that, as described in guidance issued by the California Attorney General, they were indicia of the defendants’ profit-making motive. Therefore, argued the government, the defendants were not in strict compliance with California’s medical marijuana statutes.

The district court disagreed, explaining that the presence of guns, money, and silver and gold at the defendants’ grow site was “equally consistent with the operation of a rural, cash-intensive enterprise as it was with an unlawful marijuana operation.” The district court further found that the evidence presented at the McIntosh hearing showed that the defendants were planning to limit their sales to qualified medical marijuana collectives and only sought reimbursement of costs in return. In enjoining the government from spending any money in furtherance of the defendants’ sentencing, the district court further noted that there was no evidence that the defendants had made impermissible marijuana sales in the past.

The Ninth Circuit’s Decision

In the Ninth Circuit appeal, the majority saw the defendants’ strict compliance with the California medical marijuana statutes as a purely factual matter. As such, it gave great deference to the district court’s findings of fact at the McIntosh hearing and affirmed the injunction because the government had failed to establish that the district court’s decision was clearly erroneous.

The dissenter argued that the district court misapplied California’s medical marijuana statutes and that the case accordingly deserved de novo review. The dissenter took particular issue with the fact that the record demonstrated that some of the potential customers were “unidentified patients and collectives” for whom no evidence had been produced establishing their qualified status under California’s medical marijuana statutes.

Nonetheless, the majority seemed to be persuaded by the district court’s finding that the defendants had not even harvested any marijuana plants at the time of their arrest and, therefore, “any potential marijuana sale was sufficiently far into the future that, by the time of such sale, the defendants would have had ample time to ensure every aspect of it complied with [California’s medical marijuana statutes].”

The government may seek rehearing, rehearing en banc, and even Supreme Court review of the panel’s decision. But if it does not, or if the panel’s decision is not overturned, the import of this result is unmistakable – the Appropriations Act riders can be used to create insuperable obstacles to federal marijuana prosecutions in the numerous states where medical marijuana production and sales are legal.

courthouseOn July 2, 2020, a federal judge sitting in Manhattan sentenced disgraced entrepreneur Telemaque Lavidas to a year and a day in prison for insider trading. In addition to the prison term, the judge sentenced Lavidas to three years of supervised release including community service, restitution, and fines, which together could exceed $200,000. Lavidas’s conviction arose from passing secrets that he learned from his father, who sat on Ariad’s Board of Directors, to a stock broker friend about Ariad Pharmaceuticals.

Lavidas’s conviction is nothing new to the insider trading world—it is illegal for a person who possesses a company’s material non-public information either to directly trade securities on the information or “tip” the information to a secondary source who then trades securities based on the tipped information. But the COVID pandemic has heightened insider trading risks. COVID-19 has impacted supply chains, companies, and individuals worldwide. The coronavirus pandemic has also caused historic market volatility and a steady stream of potentially market-moving announcements by companies, leading to opportunities for insider trading and market manipulation. With fast-changing business conditions that can create material non-public information and significant swings in share prices, the value of inside information has rarely been higher.

Take, for example, Company A’s hostile takeover of another company, Company B. Company A publicly announces the takeover and later halts the takeover to batten down the hatches and weather the COVID-19 storm. Before the initial announcement of the takeover, the insider trading danger lay in what Company A’s insiders knew about the announcement’s effect on the price of Company B’s stock. Mere days after Company A announces the takeover, Company B’s stock price increases dramatically. An insider at Company A who bought Company B shares (or tipped someone who then bought shares) before the announcement could have landed a nice windfall if he had sold at the peak.  This danger also was present before the public announcement that Company A would abandon the bid because someone with non-public knowledge could have sold Company B stock before it dipped or tipped someone to do so, maximizing a potential profit before Company B’s stock plummeted.

The danger, therefore, is clear: insiders with material, non-public, COVID-related information who either trade securities or tip (even unwittingly) friends or family members who then trade on it. Insider trading is not new, but what is new is the danger of leaking fast-changing COVID-related non-public information. For insiders at public companies, even casually sharing their company’s approach to COVID-related business challenges can be viewed as revealing material non-public information. Insiders must take extra care with any material non-public information, not share it with outsiders, and observe trading windows in their companies. Likewise, tippees’ conduct can pose liability risks to unwitting tippers, even if the tipper never trades.

The best approach for those in companies who are being buffeted by the COVID pandemic is the same as that for dealing with the pandemic itself: be safe and take precautions and take care of your friends and family. For insiders, trade only during open windows. For those with exposure to insiders, trade only on public information.

The danger here is real. Lavidas has been detained since his October arrest and received credit for time served in his sentencing and will be released in the Fall. The tipped broker, who allegedly resides in Greece, has been charged (though not extradited); Lavidas’s father has escaped prosecution to date.

WhistlblowerWhether attributable to the pandemic effect of remote work, layoffs and furloughs, or the slew of recent substantial awards, the SEC’s whistleblower tip line is lighting up with greater frequency. Companies are understandably focused on the panoply of challenges to their businesses posed by the pandemic and its economic impacts, but they ignore heightened whistleblower risks at their peril.

Since April 1 of this year, the SEC has announced five large awards in rapid-fire succession totaling $104 million, bringing the total awarded since the beginning of this fiscal year in October 2019 to more than $114 million. This total includes an award of $50 million announced on June 4, which is the largest award to a single individual under the agency’s whistleblower program. The amount awarded so far in this fiscal year is more than the SEC has distributed in any full year.

The whistleblower program, created under the Dodd-Frank Act, authorizes bounties to be paid to individuals who provide original information that leads to successful enforcement actions that result in monetary sanctions of over $1 million. Since the program’s inception in 2011, the SEC has awarded more than $500 million to 83 individuals. Individuals who receive awards and the companies on which they “blow the whistle” are not disclosed and remain confidential. Announcements of awards, including multiple orders in which the Claims Review Staff declined to make awards to those who believed they were entitled to one, are available on the SEC’s whistleblower website.

The rate of tips coming into the SEC has soared. According to co-director of the Enforcement Division, Steven Peikin, in the first two months since remote work arrangements began spreading across the country in mid-March, the Commission received approximately 4,000 tips—35% more than it received in the same period last year. Lawyers close to the program speculate that as employees work away from the prying eyes and ears of their colleagues or have been furloughed or laid off, the reluctance to risk being ostracized or to just step forward may be easing. Another possibility is that the publicity about large awards has provided an incentive for employees to come forward to the SEC. Finally, because (according to co-director Peikin) many of the tips are COVID-19-related, it may be that there has been an uptick in the kind of conduct that employees believe is unlawful or inappropriate. The SEC’s Office of the Whistleblower is still getting tips in traditional areas such as accounting fraud, insider trading, money laundering and other types of alleged securities law violations.

So, what should companies do about this heightened risk? The answer is that they should make sure that the policies and procedures they have in place to encourage employees to report internally are well known within the company and that when concerns are raised internally, they are responded to and acted upon. The SEC’s April 16 report about the $27 million award announced that day stated that the whistleblower had repeatedly tried to get management’s attention about his or her concerns before going to the SEC. Pronouncements by SEC Enforcement Division senior leadership this year make clear that companies will not be able to use the COVID-19 crisis as an excuse for misconduct or for failing to follow compliance policies or failing to commit adequate resources to compliance.

Of course, with travel restrictions currently in place at many companies, conducting meaningful internal investigations of internal complaints poses particular challenges for companies with multiple sites, especially those with international operations. Several of the recent Whistleblower Program awards have had international dimensions, and with foreign governments regulating business openings and engaging in stimulus programs, the risks of bribery are likely heightened. Internal reports of serious misconduct should generally be investigated with careful document collection and in-person interviews, which may be challenging to undertake in the current environment.

Among the many challenges companies face in this new era is maintaining a strong commitment to compliance by making sure their policies and procedures are up to date based on best practices in the present reality. As always, prompt attention to internal reports or complaints about misconduct or fraud is a must in order to address misconduct promptly and convey to employees that the culture of compliance at the company remains strong.

 

FCPAThe Department of Justice (DOJ) just released an updated version of its Resource Guide to the Foreign Corrupt Practices Act. While the new version does not announce any groundbreaking changes, it now includes updates and references to recently issued policies, such as the DOJ’s Corporate Enforcement Policy, Evaluation of Corporate Compliance Programs, and the Corporate Monitorship Policy. The updated guidance was released with little fanfare on Friday night, July 3, 2020, as the Criminal Division at Main Justice was undergoing a change in leadership. The Guide is largely the same document and limited to a discussion of the FCPA, but it nonetheless is a useful tool for practitioners seeking to understand the government’s corporate charging policies generally. The Resource Guide is lengthy, at almost 200 pages, and the new revisions do not lengthen it further. The DOJ has mostly restructured sections and added more recent cases for discussion but largely left the Guide intact. Nevertheless, certain revisions to the Resource Guide merit emphasis and are highlighted below.

The Aftermath of Hoskins

The DOJ is careful in this guidance to characterize the reach of criminal co-conspirator and aiding and abetting liability as a result of a recent, well-publicized Second Circuit decision that limited the DOJ’s ability to pursue foreign nationals who participate in a bribery scheme.  In United States v. Hoskins, 902 F.3d 69 (2d Cir. 2018), the Second Circuit held that a foreign national who was not otherwise covered by the specifically enumerated categories in the FCPA, could not be prosecuted using co-conspirator or aiding and abetting liability. The Court held that the government could proceed on the theory that Hoskins was an “agent” of a “domestic concern” which required the government to prove that Hoskins, who was a foreign national working for a foreign subsidiary, participated in a bribe scheme and took direction from the U.S. subsidiary. The government ultimately persuaded a jury to convict Hoskins on various charges, although post-verdict, the district court acquitted Hoskins on the foreign bribery counts because there was insufficient evidence of “agency.” With these setbacks, the DOJ is now limited in pursuing its expansive view of co-conspirator liability under the FCPA, at least in the Second Circuit.

The DOJ says as much in the Guide, acknowledging the opinion and its application in the Second Circuit, but also noting that a district court in the Seventh Circuit disagreed with the holding and concluded that precedent in the Seventh Circuit would dictate that defendants could be criminally liable for violations of the anti-bribery provisions of the FCPA as co-conspirators or aiders and abettors, even if they did not fall under one of the enumerated categories of liability in the statute. United States v. Firtash, 392 F. Supp. 3d 872, 889 (N.D. Ill. 2019). Although the DOJ cites Firtash, presumably to make the point that the law is not settled, it has cautiously revised the Guide, deleting broad language in its description of the breath of the anti-bribery provisions. Previously, the DOJ stated that a foreign national who attended a meeting in the United States would be subject to the FCPA, as well as co-conspirators or aiders and abettors, “regardless of whether the foreign national or company itself takes any action in the United States.” (Emphasis added.) That reference is deleted. Similarly, in an example in the same section, the DOJ also deleted language indicating that a company and an intermediary working on behalf of an “issuer” would be liable if they had never taken action in the territory of the United States, both as co-conspirators and for substantive violations of the anti-bribery provisions, because the violations were “reasonably foreseeable” and in furtherance of the conspiracy. (Emphasis added.) Although the DOJ will continue to try to limit the applicability of Hoskins in other circuits, it appears to be taking a more restrained approach and pulling back on previously broad assertions of conspiracy liability under the FCPA. In practice, the court-imposed limitation may not mean much because DOJ has many other ways of charging defendants, including the use of money-laundering and various fraud statutes.

Defining a State-Owned or State-Controlled Entity

Before any kind of judicial guidance, practitioners were forced into their own fact-based analysis as to what constituted an “instrumentality” of the state when determining whether a target entity was a state-owned or -controlled company under the FCPA. This analysis was, and is, critical for in-house compliance personnel in determining whether their company’s interactions with employees of these entities were “foreign government officials.” A few years ago, the Eleventh Circuit issued a well-reasoned opinion that will greatly assist in this analysis. United States v. Esquenazi, 752 F.3d 912 (11th Cir. 2014) set forth factors that determined whether a Haitian telecommunications company was a state-owned or controlled company under the control of the Haitian government. The reasoning of the Circuit, including the applicable factors to analyze that question, have now been incorporated into the DOJ’s Guide.   The factors in determining whether the government controls an entity include: (1) the government’s formal designation of the entity; (2) whether the government has a majority interest in the entity; (3) the government’s ability to hire and fire principals of the entity; (4) the extent to which the entity’s profits go directly into the government’s fiscal accounts, and if the government has or will fund the entity when it is operating at a loss; and (5) the length of time these factors have existed.

In addition, factors determining whether the entity is performing a function that is essentially a governmental function include: (1) whether the entity has a monopoly over the function it seeks to carry out; (2) whether the government subsidizes the entity’s costs in providing the service; (3) whether the entity provides services to the public at large in the foreign country; and (4) whether the public and the government of the foreign country generally perceive the entity to be performing a governmental function. This second part of the analysis is also important. It is not enough for counsel to analyze whether the entity is state-owned or controlled, but counsel must also evaluate whether the pertinent function it performs has enough government characteristics to be considered a governmental action.

While the analysis in Esquenazi has already been used by FCPA practitioners, it is helpful that the DOJ adopted these factors in its new guidance to further assist outside counsel, as well as companies training their compliance staff. Moreover, the recent cases prosecuted and cited in the DOJ guidance fit squarely within that analysis. In determining whether a company was a state-owned entity in various cases, the DOJ cites factors such as the receipt of special tax advantages, the appointment of management or board members by government officials, the installation of political appointees as managers, or a government’s large ownership stake and veto power over major expenditures.

In adopting the Eleventh Circuit’s analysis and illustrating it with recent cases, the revised Resource Guide provides greater clarity in defining what companies or entities are “instrumentalities” and, as a consequence, who would be a “foreign government official” under the FCPA.

A Parent Company’s Liability for the Actions of Its Subsidiaries

The revised Resource Guide reiterates the government’s position that a parent may be liable for its subsidiary’s conduct under traditional agency principles. While there has been recent discussion about how far the government would take this concept, the outgoing AAG of DOJ’s Criminal Division has assured practitioners that the DOJ does not intend to hold parent companies liable for subsidiaries merely because of corporate ownership, but instead would evaluate each case on its own facts. AAG Benczkowski’s Remarks at ACI’s 36th Conference on the Foreign Corrupt Practices Act, December 4, 2019. The result in Hoskins shows that the government needs a strong showing of control and direction to establish agency in a criminal case.

The revised Resource Guide acknowledges that the government will evaluate the control exercised over the subsidiary, including the parent’s knowledge and direction of the subsidiary’s actions. While the guidance states that “if an agency relationship exists between a parent and a subsidiary, the parent is liable for the bribery committed by the subsidiary’s employees,” that statement is too broad and should be read along with other parts of the guidance and recent remarks by the outgoing AAG. Viewing DOJ ’s guidance in its entirety, the following questions need to be asked in evaluating parental liability: Did an agency relationship exist between the parent and subsidiary? Did the parent have knowledge of, or direct, the actions of the subsidiary generally and related to the specific transactions in question? Did the subsidiary act within the scope of authority conferred by the parent? The revised Guide is clear that DOJ will not be deterred by the formalities of the corporate structure but will focus on a fact-based inquiry into the parent’s conduct in conferring authority and providing direction to its subsidiaries, particularly with respect to the misconduct at issue.

A Nod to Internal Controls

With the emphasis the government has placed on compliance, companies are often asked detailed and specific questions about the state of their financial controls. The government notes in the revised Resource Guide that a compliance program and internal controls are not the same, but both contain a number of components that overlap and should be monitored. When reviewing internal controls, the Guide directs companies to take into account the risks of its business, including the type of products and services it provides, how products and services get to market, the nature of the company’s work force, the degree of regulation, the extent of government interaction, and the degree to which it has business in high risk countries. While these factors are not new, the government’s increasing focus on financial compliance should prompt companies to continue to integrate their compliance and audit functions.

Conclusion

The revised FCPA Resource Guide did not tackle some of the very important issues facing companies today. The Guide notes that the DOJ has coordinated resolutions with foreign governments in ten cases and the SEC has coordinated in five cases which demonstrates that the government is attempting to avoid “piling on” by imposing duplicative penalties. But for multinational companies that often face years of investigation by multiple foreign governments after the DOJ and SEC settle their cases, these statistics are not promising. Foreign authorities can be more disorganized, lack resources, or may not be bound by any statute of limitations. All of these factors can cause unacceptable delays in negotiating separate foreign resolutions and can result in duplicative penalties imposed long after the misconduct occurred. Moreover, data privacy and cyber security concerns for employee and proprietary data are top priorities for companies operating in multiple, high risk regions or in countries with a track record of trade secret theft. Moving data across borders to satisfy U.S. government requests can be problematic under these conditions, but the Resource Guide does not give guidance on these issues. Perhaps in the next set of revisions, the DOJ and SEC will give greater thought as to how companies can meet these challenges when they seek to cooperate in a government investigation.