Old Way New WayToday, I end my exploration of recent Foreign Corrupt Practices Act (FCPA) enforcement actions (and one UK Bribery Act enforcement issue), which have occurred since the enactment of the Department of Justice (DOJ) Pilot Program in April. These three enforcement actions, which resulted in the companies receiving a Declination to Prosecute from the DOJ. Proving once again that I am never gonna give you up, never gonna let you down; I want to look a these Declinations to see what information they can provide to the compliance practitioner to assist them in guiding their own response should their company find itself embroiled in a FCPA investigation and attendant enforcement action.

The enforcement actions involved Nortek Corporation (Nortek), Akamai Technologies, Inc. (Akamai), and Johnson Controls, Inc. (JCI). Nortek and Akamai received Non-prosecution Agreements (NPAs) from the Securities and Exchange Commission (SEC) and Declinations to Prosecute (Declinations) from the DOJ. JCI received a civil Cease and Desist Order from the SEC and Declination from the DOJ. One other matter was resolved with the DOJ via a NPA, that being Analogic Corporation. I will discuss this matter separately below. 

The Declination Letters

The letters issued by the DOJ did not provide a plethora of detail. The Akamai and Nortek Declination letters were identical with the exception of the different corporate names. In relevant part they stated, “we have reached this conclusion … based on a number of factors, including but not limited to the fact that Nortek’s internal audit function identified the misconduct, Nortek’s prompt voluntary self-disclosure, the thorough investigation undertaken by the Company, its fulsome cooperation in this matter (including by identifying all individuals involved in or responsible for the misconduct and by providing all facts relating to that misconduct to the Department) and its agreement to continue to cooperate in any ongoing investigations of individuals, the steps that the Company has taken to enhance its compliance program and its internal accounting controls, the Company’s full remediation”. It went on to add that the company had agreed to profit disgorgement.

The JCI letter, stated, “We have reached this decision based on a number of factors, including but not limited to: the voluntary self-disclosure of the matter by JCI; the thorough investigation undertaken by the Company; the Company’s full cooperation in this matter (including its provision of all known relevant facts about the individuals involved in or responsible for the misconduct) and its agreement to continue to cooperate in any ongoing investigations of individuals; the steps that the Company has taken and continues to take to enhance its compliance program and its internal accounting controls; the Company’s full remediation”. As with the Nortek and Akamai the JCI letter also noted the company had agreed to disgorge its profits.

About the only difference I can ascertain in the letters is that Nortek and Akamai provide “fulsome” cooperation, and JCI provided “full” cooperation. Yet, the overall point of these Declinations seems to be the cooperation was very substantial.

Contrast the triple declination language with the NPA, which Analogic received, specifically noted the company’s lack of full cooperation. It stated, “the Company did not receive full cooperation credit because, in the view of the Offices, the Company’s cooperation subsequent to its self-disclosure did not include disclosure of all relevant facts that it learned during the course of its internal investigation; specifically, the Company did not disclose information that was known to the Company and Analogic about the identities of a number of the state-owned entity end-users of the Company’s products, and about certain statements given by employees in the course of the internal investigation;”

Box Score Summary of Declinations 

Pilot Program

Factor

Self-Disclosure Cooperation During Investigation Remediation Profit Disgorgement
Akamai Yes – before completing internal investigation 1. Sharing investigation;

2. Identify and present relevant documents;

3. Timely updates;

4. Updates on remedial measures;

5. Translating documents; and

6. Making witnesses available

1. Termination of culpable employees;

2. Revision of internal audit testing and protocol;

3. Strengthening of policies;

4. Creation of Compliance Committee;

5. Institution of mandatory compliance training; and

6. Modify auditing schedule to risk based approach

Yes
Nortek Yes 1. Sharing investigation

2. Timely updates

3. Segregation and organization of documents

4. Translation of documents

5. Making witnesses available

6. Conducting Risk Assessment

1. Due diligence program for 3rd parties;

2. Strengthen compliance policies;

3. Enhance compliance function, name CCO;

4. Institution of mandatory compliance training; and

5. Enhance travel and expense controls in China

 

Yes
JCI Yes – one month after it received a second anonymous complaint 1. Real time updates, interview summaries and all requested documents;

2. Yates binders including hot docs, interview summaries, chronologies and emails;

3. Preservation of evidence.

1. Termination of culpable employees;

2. Suspension of culpable 3rd parties;

3. Incorporation of culpable China office into existing corp structure;

4. Enhanced integrity testing and auditing, including random audits; and

5 Random testing of transactions

Yes

 

 

All parties admitted to facts, which could have formed the basis of a criminal FCPA enforcement action brought by the DOJ, yet they all received Declinations. While it would certainly have been more helpful to have a full release of information by the DOJ, to assist the compliance practitioner in understanding the totality of the facts considered, these three Declinations may well mark a new starting point in criminal FCPA enforcement going forward. Since at least 2014, with the Parker Drilling and Hewlett-Packard FCPA enforcement actions, the DOJ has provided significant credit to companies who thoroughly cooperated and provided extensive remediation during the pendency of their enforcement actions. With the Pilot Program implementation, these shifts are now official DOJ policy.

One other point unrelated to the Pilot Program discussion is the length of time that the Akamai and Nortek matters were concluded. It was less than 18 months for both. This short time frame for a resolution is certainly a welcome development and shows that if a company comes forward quickly, is efficient in its investigation and proactive in its remediation, it can benefit with lower overall investigation and remediation costs as well.

All of the above are most welcome for any compliance practitioner. The DOJ Pilot Program has come out of the box with some solid wins for the companies involved, the DOJ and the greater compliance community. If this pattern continues, it will allow the DOJ to focus its resources in driving home the message that it is doing compliance that will not only work to keep a company out of trouble but will also get a company out of trouble.

 

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, 2016

7K0A0075I continue my review of the Johnson Controls, Inc. (JCI) Foreign Corrupt Practices Act (FCPA) enforcement action today by focusing on the Department of Justice’s (DOJ’s) Declination to Prosecute. Yesterday, I considered the underlying facts reported to review what lessons could be applied by a compliance practitioner to a corporate anti-corruption compliance program. Today, I want to consider the information available on the actions by JCI, beginning with the self-disclosure, which led to the DOJ to grant a Declination.

The commentary on the DOJ Declination has ranged from the FCPA Professor, who argued there was no viable cause of action against JCI for the illegal conduct of its subsidiary, China Marine, and hence the Declination was without substance; to Mike Volkov who called the declination a ‘head scratcher’ and noted “there appears to be plenty of justification to stretch here in this case when you basically have a recidivist continuing to violate the law”, in arguing there were potential criminal charges to pursue. I want to consider the matter from the angle of the new DOJ Pilot Program and see what, if anything, might be gleaned from that perspective.

One of the difficulties in evaluating any Declination is the paucity of facts available to the compliance practitioner to evaluate. In the JCI case we have the Securities and Exchange Commission (SEC) resolution via a Cease and Desist Order (Order) that lays out the facts relevant to that enforcement action. However, this Order is the product of negotiations between the SEC and JCI. This means the company can seek to keep out facts, which would point to criminal liability, reputational damage, embarrassing senior executives or a plethora of other issues the company does not want in the public domain. There is no way to know if the facts laid out in the Order are all the facts in the case that were known to the DOJ or even disclosed to the DOJ so to base an argument on this underlying premise puts you on wobbly ground. The foregoing is one of the reasons I have argued for my information to be made public around Declinations so that compliance practitioners might understand the full underlying facts.

Yet, even if one took the facts presented in the Order as only facts of this matter, there is information that could lead one to reasonably conclude that criminal charges could be considered under the FCPA. The Accounting Provisions, both Books and Records and Internal Controls, are generally thought to be civil side requirements only. However the statute does make violations of the Accounting Provisions under the following:

(4) No criminal liability shall be imposed for failing to comply with the requirements of paragraph (2) of this subsection except as pro­vided in paragraph (5) of this subsection.

(5) No person shall knowingly circumvent or knowingly fail to imple­ment a system of internal accounting controls or knowingly falsify any book, record, or account described in paragraph (2).

Paragraph 2 refers to the Internal Controls requirements of the FCPA. This means someone must knowingly falsify such records or fail to implement a system of internal controls. The facts laid out in the Order would appear to provide at least an argument that this threshold was met. JCI’s internal controls were so poor that the company “did not understand some of the highly customized transactions at China Marine or the projects involving the sham vendors.” Additionally someone at the corporate office had to certify the financial statements were true and correct and who ever did could also have violated the FCPA. Volkov noted the DOJ could “stretch” to bring criminal charges but either through the argument of conscious avoidance or simply on the facts laid out in the Order, I find an argument for criminal liability plausible. Of course, these arguments do not convict JCI of criminal violation of the FCPA, only a trier of fact can do so, yet they make clear that there are credible arguments which could be pursued which makes a Declination an appropriate mechanism for the DOJ to use, in its discretion.

What led the DOJ to exercise its discretion in issuing the Declination? We can find some guidance from the four requirements under the Pilot Program. First, that there be self-disclosure, which was present in this matter. The Order stated that the company self-disclosed within one month after receiving a second anonymous whistleblower compliance. Second is cooperation during the investigation. The Order stated JCI provided “thorough, complete and timely cooperation” which consisted of the following:

  • JCI promptly and routinely provided the staff with the results of its investigation as it progressed, and provided all supporting documentation requested.
  • JCI provided factual chronologies, hot document binders, and interview summaries, as well as English translations of numerous documents and emails.
  • JCI made employees available for interviews.
  • JCI provided “real time” downloads of employee interviews and made other foreign employees available for interview.
  • When the company caught a Chinese employee shredding documents, it quickly secured the office to preserve evidence.
  • JCI’s cooperation assisted the staff’s investigation.
  • JCI’s timely self-report as well as the thorough productions allowed the staff to initiate and complete its investigation quickly.

The next requirement under the Pilot Program is for extensive remediation during the pendency of the investigation. Here the Order laid out some of the steps taken by JCI, including:

  • JCI terminated or separated sixteen employees implicated in or associated with the illegal scheme and placed all suspect vendors on a do-not-use/do-not-pay list.
  • JCI has closed down its China Marine offices and moved all remaining China Marine employees, none of whom perform a sales or procurement function, into existing offices.
  • JCI enhanced its integrity testing and internal audits to reevaluate vendor onboarding for all JCI business worldwide.
  • JCI implemented random site audits to ensure the delivery of goods on purchase orders.

The final requirement under the Pilot Program is that the company disgorges profits it received from its ill-gotten gain. The Order said, “From 2007 to 2013, JCI obtained a benefit of $11.8 million as a result of over $4.9 million in improper payments made to or through approximately eleven problematic vendors for the purpose of foreign and commercial bribery, and embezzlement.” This corresponds to the amount paid as disgorgement.

For any Chief Compliance Officer (CCO) or compliance practitioner reviewing the JCI enforcement action, it does not matter whether you believe JCI committed criminal acts or not. The reality is that the DOJ is once again laying out conduct it will consider to award the lowest sanction possible, a Declination. There have now been three given since the announcement of the Pilot Program in April. You should study each of these and if you find yourself in a FCPA investigation, use each Declination as a roadmap for your actions during the pendency of the investigation.

 

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, 2016

Mirror SceneI continue my Marx Brothers’ themed week by today looking at what I and many others believe to be their most cherished routine: the Mirror Scene. Danny Leigh, in his article in the Financial Times (FT), entitled “Souped-up comedy”, wrote, “The set-up is deathlessly simple. Fredonia’s President, Groucho in nightgown and cap finds Harpo, a spy from neighboring Sylvania, in his bedroom. They chase each other down some stairs and face off in front of each other, dressed identically. Harpo, the spy and intruder pretends to be Groucho’s reflection, and the two brothers spend the next three minutes locked in a mad dance of mimicry. The result is flawless, the kind of ecstatic comedy in which the world outside the cinema simply falls away. Variations on the skit had been performed by others before but the brothers raised it to undreamt absurdist heights, claiming it for ever as their own.” So you have Pinky (Harpo), dressed as Firefly (Groucho), pretending to be Firefly’s reflection in a missing mirror, matching his every move—including absurd ones that begin out of sight—to near perfection. In one particularly surreal moment, the two men swap positions, and thus the idea of which is a reflection of the other. The scene is absolutely silent until Chicolini (Chico), also disguised as Firefly, enters the scene and collides with both of them and sound resumes.

Although its appearance in Duck Soup is the best-known instance, the concept of the mirror scene did not originate in this film. Max Linder included it in Seven Years Bad Luck (1921), where a man’s servants have accidentally broken a mirror and attempt to hide the fact by imitating his actions in the mirror’s frame. Charlie Chaplin used a similar joke in The Floorwalker (1916), though it didn’t involve a mirror. This scene has been recreated many times from entertainment as diverse as Bugs Bunny cartoons, to the televisions series Gilligan’s Island and even in a The X-Files episode. Harpo himself did a reprise of this scene, dressed in his usual costume, with Lucille Ball also donning the fright wig and trench coat, in the I Love Lucy episode “Lucy and Harpo Marx”.

I find it to be absurdist comedy at its ultimate height. To this day, I almost cry I laugh so hard when I see that scene. While you may not find it quite as funny as I did, most probably one thing you will also not find funny is an ongoing debate in both academia and in legal circles involving a question on corporate governance as reported in the New York Times (NYT) in the Dealbook column by Andrew Ross Sorkin, in an article entitled “An Unusual Boardroom Battle, in Academia”. The question staggered elections of corporate board members or whether the entire slate of Board members be elected, up or down, each year.

On the side of full Board, up or down voting is Professor Lucian A. Bebchuk, a Harvard Law School professor who has long researched corporate governance issues and has been an outspoken advocate for increased democracy in corporate America’s boardrooms and his group, the Harvard’s Shareholder Rights Project. Professor Bebchuk believes staggered election of Board members “silences shareholders, entrenches management and makes it less likely that suitors or activists will emerge, depressing valuations.”

On the other side of the dispute are Daniel M. Gallagher, a member of the Securities and Exchange Commission (SEC), and Joseph A. Grundfest, a professor at Stanford Law School and a former SEC commissioner, who co-authored a paper entitled “Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors.” The paper is in opposition to Bebchuk’s position. Sorkin observed that “Mr. Gallagher and Mr. Grundfest suggest that companies are dropping their staggered board structures — and shareholders are voting to eliminate them — based, in part, on faulty research by Harvard’s Shareholder Rights Project. Worse.” But here is the kicker and what moves this rather arcane academic debate into the realm of the absurd. “They suggest, Mr. Bebchuk’s project committed fraud by not fully disclosing the extent of contradictory research, which they say is a “material omission” by S.E.C. standards.” Yes sports fans, a sitting SEC commissioner suggested in writing that Harvard had engaged in a securities law violation.

As Sorkin noted, “there’s the fundamental issue of whether a sitting member of the S.E.C. should be writing such an incendiary paper in the first place.” Sorkin quoted an email comment made by Professor Robert J. Jackson Jr., from Columbia Law School. Jackson wrote to Sorkin in an email “All should agree that it is wildly inappropriate for a sitting S.E.C. commissioner to issue a law review paper accusing a private party of violating federal securities law without any investigation or due process of any kind. This is a striking, and as far as I know unprecedented, departure from longstanding S.E.C. practice.” Jackson went on to say “Imagine if a sitting S.E.C. commissioner wrote a law review article accusing Goldman Sachs of violating federal law without any S.E.C. investigation of the matter — Goldman and their counsel would quite rightly be outraged.”

Near the end of his article, Sorkin stated, “There are many opposing views on the paper. But here’s one way to think about it: It was a bad precedent for Mr. Gallagher to involve himself in a paper that raises the possibility of fraud in the field he regulates without the due process of a legal complaint. Mr. Grundfest could have written this provocative paper on his own, though it might not have attracted the same amount of attention within the industry.”

I would ask you to imagine if any of the Department of Justice (DOJ) attorneys who work in the Foreign Corrupt Practices Act (FCPA) area were to write an article, law review or other, that said not only is an entity’s position on interpretation of the FCPA wrong, its interpretation in practice is a FCPA violation. Do you think such corporation or entity would feel like they would get a fair shake from such prosecutors? Think any bias might exist going forward? While I have been one of the loudest advocates for the DOJ making more information on its FCPA declinations more public, SEC Commissioner Gallagher’s paper, demonstrates a very good reason for the DOJ not making any such information public: i.e. due process and fairness. Just as bad facts can certainly lead to bad law, this action by a sitting SEC Commissioner to even imply that an entity violated US Securities Laws in an article is not a road that we want to begin to go down.

For a clip of the famous Mirror Scene, click here.

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, 2015

Russ Berland

Ed. Note-today we have a guest post from KC Royals fan and Stinson Leonard Street partner Russ Berland. 

As a Kansas City Royals fan, I would like to use this opportunity to congratulate the Royals on a great season and say to them, “Ya done good.”  Despite losing an extremely close seventh World Series game to a very able and talented San Francisco Giants team, which included a pitcher whose name and face will one day be memorialized in Cooperstown, this year has been a banner, or should I say, a pennant year for the boys in blue.

The SEC likewise would like to take a moment to be congratulated on their banner year in their annual enforcement preview of their Agency Financial Report.  So here goes … The SEC wants us to know that they are using creative means to find misconduct on their own and go after it, to hold people and corporations accountable,  and to pay and protect whistleblowers.  On October 16, the SEC put out its official preview of its upcoming Agency Financial Report for FY 2014.  The SEC’s fiscal year ends September 30, so this spans every enforcement action the SEC has taken since October 1, 2013.  The report has four major themes:

  1. The SEC is enforcing the law against people, not just companies. It takes people to commit misconduct on behalf of companies so those same people should be held accountable.  And if the SEC is counting on you to watch over companies and transactions you better take it seriously.  The SEC does and they will hold you accountable.  The preview made this point in showcasing its major enforcement actions against Fifth Third Bancorp and its former CFO, Diamond Foods Inc. and its former CEO and CFO, World Capital Market and its founder, and many, many others.  The most poignant example was the enforcement action against the Chairman of the Audit Committee of AgFeed Industries, Inc.  The SEC alleges that Ivan Gothner, the chairman of AgFeed’s audit committee received information that AgFeed’s Chinese operations were conducting accounting fraud and instead of taking a fellow director’s advice to “hire professional investigators guided by outside legal counsel,” he directed internal resources to assess the situation.  When that resulted in late and inadequate information, the SEC charged him “with violating or aiding and abetting violations of the anti-fraud, reporting, books and records, and internal controls provisions of the federal securities laws” and ” with making false statements to AgFeed’s outside auditors.”  Andrew Ceresney, Director of the SEC’s Division of Enforcement, called this “a cautionary tale of what happens when an audit committee chair fails to perform his gatekeeper function in the face of massive red flags.”
  2. Corporations must admit their actions. Last year, the SEC Chairman, Mary Jo White, announced that more companies must admit their wrongdoing in settlements.  The SEC’s Admissions Policy states that the companies may be required to admit their wrongdoing when there is “(1) misconduct that harmed large numbers of investors, or placed investors or the market at risk of potentially serious harm, (2) egregious intentional misconduct, or (3) when the defendant engaged in unlawful obstruction of the commission’s investigative processes.”  Now, the Preview adds two more categories to those required to make admissions: “[4] where an admission can send a particularly important message to the markets, or [5] where the wrongdoer poses a particular future threat to investors or the markets.”  For example, in the settlement with ConvergEx for misrepresenting its commissions to brokerage customers, ConvergEx was required to admit the facts stated by the SEC and admit that it had violated Securities Laws.  In one interesting twist, Wells Fargo Advisors LLC was forced to admit its wrongdoing when one of its brokers traded on non-public information about the sale of Burger King to a private equity firm. The “wrongdoing” that Wells Fargo Advisors admitted encompassed inadequate policies, inadequate coordination among internal groups tasked with policing insider trading and the compliance officer who should have spotted the insider trading missing it. This is an interesting view of what constitutes “egregious intentional misconduct.” The message seems to be that in order to settle a matter with the SEC without admitting or denying facts or legal conclusions, the defendant will need to prove they do not fit in one of the five listed categories.  It’s possible that the SEC forced Wells Fargo Advisors to admit it’s wrongdoing because it delayed production of relevant documents or because one of the documents that they turned over had been altered by the compliance officer herself.  Or perhaps they are sending “a particularly important message” to compliance officers that they need to be vigilant in doing their jobs.
  3. Whistleblowing Pays.  In FY2014, the SEC paid $35 million to 9 whistleblowers.  One of them received $30 million by him or herself.   Because the SEC rules protect the identity of whistleblowers, we don’t know who got paid.  But the SEC whistleblowing process has multiple stages, which include bringing original information or an original analysis of existing information to the SEC, having the SEC pursue that information leading to a prosecution, and successfully prosecuting or settling that matter with a recovery of over $1 million.  This takes  a long time from beginning to end.  Dodd Frank was passed in 2010.  The first REAL money ($14 million) was paid last year.  And now someone is getting $30 million.  The pipeline took a while to fill, but it is reaching a full state and we can probably expect to see a lot more whistleblower payments in the next few years.
  4. If you don’t come to us, we’ll find you. The SEC is using more and more data analytics on financial and trading activity to find wrongdoers.   According to the SEC, ” innovative use of data and analytical tools contributed to a very strong year for enforcement marked by cases that spanned the securities industry.”   Right now, they are telling us that they are using those techniques to look at filing deficiencies, hedge fund returns, and insider trading.  But we can anticipate they are looking at more than just those categories and we should expect to see more and more use of these techniques over broader areas in the coming years.  And, the SEC is telling us that they are also currently implementing and developing “next generation tools” to review market and other data for suspicious activity.

So, this Preview of the FY2014 Agency Financial Report suggests that the SEC should not be seen as sitting back and waiting for cases to come to them.  And when companies and people violate Securities Laws, the SEC will work hard to make sure that they each take accountability, either personally through fines and penalties or corporately, through admissions.   Like the Royals, the SEC would like us to know that they have had a banner year.

Berland can be reached at russ.berland@stinsonleonard.com. He was lead investigative counsel for Layne Christensen in its recently concluded FCPA enforcement action by the SEC. In my podcast, the FCPA Compliance and Ethics Report, Episode 104, I interview Berland on how the company was able to receive a declination from the DOJ. The Episode will post Thursday, Nov. 7.