Ed King died last week. If you are a real rock and roller you may recognize his name as a part of the three-axe triumvirate from the first three Lynyrd Skynyrd albums. While he originally joined the band as a bassist, he later switched over to full guitar, which, for a short three-year period, provided all axe-heads with some of the most stunning triple guitar work ever recorded. However King foreshadowed his work with Skynyrd by co-writing one of the great psychedelia songs of all time Incense and Peppermint while with the Strawberry Alarm Clock. It is one of my all-time favorite rock songs, just ahead of Free Bird. A Rolling Stone online obituary, quoted Guitarist Gary Rossington, the lone original member of the Lynyrd Skynyrd who tours today, “I’ve just found out about Ed’s passing and I’m shocked and saddened,” he said. “Ed was our brother, and a great songwriter and guitar player. I know he will be reunited with the rest of the boys in Rock and Roll Heaven.” So crank it up to 11 and listen to both Incense and Peppermint and Free Bird. It introduces our discussion of the Legg Mason enforcement action.

King’s back story of starting with the great psychedelic band Strawberry Alarm Clock and then moving to the Southern rockers Lynyrd Skynyrd, informs today’s blog post on the Legg Mason, Inc. (LM) Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) enforcement action. This is the companion action to the Non-Prosecution Agreement (NPA) entered into with the Department of Justice (DOJ) this past June. LM resolved its SEC enforcement action via a Cease and Desist Order (Order). The conduct at issue related to one of LM’s former asset management subsidiaries Permal Group Ltd., (“Permal”), which partnered with Société Générale S.A., (“Société Générale”) to solicit business from state-owned financial institutions in Libya (“Libyan Financial Institutions”). In connection with this effort, bribes were paid through a Libyan middle-man to obtain investments from Libyan Financial Institutions.

While there was no evidence presented of direct LM involvement, the Order detailed a series of actions by Permal whose representatives directly engaged in bribery and corruption. As a “former management asset subsidiary” of LM, LM was responsible under the FCPA for its actions, which was based on three areas.

First, “Legg Mason failed in a timely manner to devise and maintain an adequate system of internal accounting controls with respect to the Company’s widespread use of introducing brokers and other intermediaries in emerging markets, including Libya. The controls in place during the relevant period were minimal and deficient.” Second, LM’s “internal accounting controls were not reasonably sufficient with respect to the Company’s use of, and payments to, intermediaries. Legg Mason did not timely institute appropriate risk-based due diligence and compliance requirements pertaining to the retention and oversight of such agents and business partners.” Finally, “Legg Mason did not take adequate steps to identify or mitigate the risks of bribery and corruption in making use of middlemen such as the Libyan Intermediary.”

Unlike Société Générale which did not receive cooperation credit from the DOJ, the SEC acknowledged LM’s cooperation with the SEC, stating, “Legg Mason provided to the Commission staff throughout the investigation. Legg Mason’s cooperation included summarizing the findings of its internal investigation, making foreign-based employees available to the Commission staff including providing for their travel to the United States for interviews, and providing timely factual summaries of witness interviews and other information developed in the course of its internal investigation. Legg Mason’s cooperation assisted the Commission in collecting information that might not have been otherwise available to the staff.” LM also engaged in extensive remediation including, “replacing the employees involved in the violation, increasing the number of professionals focused on the company’s compliance efforts including establishing a new anti-corruption officer position, and enhancing its internal accounting controls to prevent and detect the type of misconduct”.

Yet perhaps the most interesting insight from the enforcement action was the DOJ’s new “Piling On” policy in action. Under the NPA, it stated LM “agrees to pay a monetary penalty in the amount of $32,625,000.00 to the United States Treasury no later than five business days after the Agreement is fully executed, and to pay $31,617,891.90” in profit disgorgement. The SEC Order specified that it was not imposing a civil fine “based upon the imposition of a $32 million criminal fine by the DOJ.” Further, the profit disgorgement in the SEC Order of $27.6 million, coupled with prejudgment interest of $6.9 million was offset by the profit disgorgement payment to the DOJ. As Dick Cassin, writing in the FCPA Blog, noted, “After applying the credit for $31.6 million as set out in the June 4 NPA, Legg Mason will pay the SEC $2.4 million for the resolution.”

Now with the SEC concluding its FCPA enforcement action with LM, we can see the full scope of the new FCPA Corporate Enforcement Policy and “piling on” policy at work. Obviously, LM obtained a superior result from the DOJ with its NPA. Due to its extensive cooperation and extensive remediation, it received a 25% discount off the low end of the US Sentencing Guidelines bottom range. LM also benefited from the “piling on” policy as it received full credit for the profits disgorged to the DOJ under the SEC Order.

The DOJ has now put in this component of the new FCPA Corporate Enforcement Policy. The SEC has now honored the DOJ’s “piling on” policy into an enforcement action. We previously saw the presumption of a declination come to fruition in the Dun & Bradstreet Inc. (D&B) declination. The LM enforcement action provides solid information for every compliance practitioner to use in setting up compliance programs to prevent, detect and remediate. It also gives companies a clear incentive to step up and follow the new policy. Now imagine if LM had self-disclosed the matter, what level of sanction would they have received?

All of this leads to the unmistakable conclusion that FCPA regulators, both the SEC and DOJ, have provided solid incentives for companies to come in and self-disclose, cooperate and remediate. When you add the factors present in the D&B declination, you see this is precisely the certainty that companies want to have when making the decision to self-disclose and cooperate. These tangible and meaningful incentives will continue to drive more and greater compliance initiatives going forward.

Ed King Set List-all from YouTube

Incense and Peppermint

Free Bird

Sweet Home Alabama

Simple Man

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2018

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