This week, Jay and I have a wide-ranging discussion on some of the week’s top compliance related stories. We discuss:

  1. The Kokesh case at the US Supreme Court is significant for SEC enforcement of the FCPA around profit disgorgement. For what it means to the compliance practitioner, see Tom’s piece in the FCPA Compliance & Ethics Blog. For a legal review of the decision, see Miller & Chevalier client alert authored by Saskia Zandieh. Marc Bohn considered the case in the FCPA Blog. Marc and I discuss the case on the FCPA Compliance Report, Episode 332.
  2. Trevor McFadden to leave the DOJ for federal bench. See article by Matt Kelly in Radical Compliance. Hui Chen’s contract not to be renewed, her position is posted for job applicants. Apply for the position here. Andrew Weissman leaves as head of the Fraud Section to go Special Prosecutor’s staff.
  3. Former PetroTiger General Counsel Gregory Weismann is banned from SEC practice. See article in the FCPA Blog.
  4. Matthew Stephenson considers what a Wal-Mart settlement might look like. See his article in the Global Anti-Corruption Blog.
  5. The federal judge who sentenced Samuel Mebiame, the bag man for Och-Ziff; criticized the DOJ for its lack of prosecution of any individuals from the company. See article by Sam Rubenfeld in WSJ Risk and Compliance Report.
  6. Jay previews his weekend report.
  7. Tom continues to talk about the release of his new book 2016 – The Year in Corporate FCPA Enforcement. For more information and to purchase, click here.

 

Jay Rosen can be reached:

Mobile (310) 729-6746

Toll Free (866)-201-0903

JRosen@affiliatedmonitors.com

Tom Fox can be reached:

Phone: 832-744-0264

Email: tfox@tfoxlaw.com

In the case of Kokesh v. SEC, the US Supreme Court held the profit disgorgements operate as a penalty under the Securities and Exchange Act of 1934, as amended. As such “any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.” The position of the Securities and Exchange Commission (SEC) at the Supreme Court and in all other matters involving this issue was that profit disgorgement were not punitive, hence not a penalty but rather remedial in nature so the SEC could clawback all monies generated as a result of the illegal action.

The decision, authored by Justice Sotomayor, was a 9-0 opinion which in the rarified world of Supreme Court decisions is about as clear a message as one can get. The Court first determined that profit disgorgement met the definition of a “penalty” under two basis, “First, whether a sanction represents a penalty turns in part on “whether the wrong sought to be redressed is a wrong to the public, or a wrong to the individual.” Second, a pecuniary sanction operates as a penalty if it is sought “for the purpose of punishment, and to deter others from offending in like manner” rather than to compensate victims.” [citations omitted] Thus, if a statute provided a compensatory remedy for a private wrong, it should not be characterized as penalty.

For additional thoughts from Marc, see his piece on the FCPA Blog.

For additional thoughts from myself, see my piece on the FCPA Compliance and Ethics Blog.

In the case of Kokesh v. SEC, the US Supreme Court held the profit disgorgements operate as a penalty under the Securities and Exchange Act of 1934, as amended. As such “any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.” The position of the Securities and Exchange Commission (SEC) at the Supreme Court and in all other matters involving this issue was that profit disgorgement were not punitive, hence not a penalty but rather remedial in nature so the SEC could clawback all monies generated as a result of the illegal action.

The decision, authored by Justice Sotomayor, was a 9-0 opinion which in the rarified world of Supreme Court decisions is about as clear a message as one can get. The Court first determined that profit disgorgement met the definition of a “penalty” under two basis, “First, whether a sanction represents a penalty turns in part on “whether the wrong sought to be redressed is a wrong to the public, or a wrong to the individual.” Second, a pecuniary sanction operates as a penalty if it is sought “for the purpose of punishment, and to deter others from offending in like manner” rather than to compensate victims.” [citations omitted] Thus, if a statute provided a compensatory remedy for a private wrong, it should not be characterized as penalty.

Under this definition, profit disgorgement is a penalty for three reasons. First, “SEC disgorgement is imposed by the courts as a consequence for violating public laws, i.e., a violation committed against the United States rather than an aggrieved individual. Second, SEC disgorgement is imposed for punitive purposes. Sanctions imposed for the purpose of deterring infractions of public laws are inherently punitive because “deterrence [is] not [a] legitimate non-punitive governmental objectiv[e].” [citations omitted] Finally, when a defendant “is made to pay a non-compensatory sanction to the government as a consequence of a legal violation, the payment operates as a penalty.”

This decision has significant impact on Foreign Corrupt Practices Act (FCPA) enforcement actions brought by the SEC going forward. There have been massive monies paid out by corporations as profit disgorgement back to the government. The FCPA Blog has kept a running tally of the Top Ten Disgorgement Amounts and its most recent list was as follows:

  1. Siemens $350 million in 2008
  2. Teva $236 million in 2016
  3. Och-Ziff $199 million in 2016
  4. KBR $177 million in 2009
  5. VimpelCom $167.5 million in 2016
  6. Alcoa $161 million in 2014
  7. Total S.A. $153 million in 2013
  8. JPMorgan Chase $130.5 million in 2016
  9. Snamprogetti $125 million in 2010
  10. Technip $98 million in 2010

Clearly the numbers can be massive for this type of damage alone. However, what is not known from simply reviewing this list is how much of these damages arose from conduct more than five years before the enforcement action was brought. Moreover, as noted by Kevin LaCroix writing in the D&O Diary, “The Court’s unanimous decision should provide future defendants with greater certainty about the scope of their potential liability and spare them having to litigate issues relating to long-past conduct. The Court’s ruling should also reduce the potential monetary recoveries available to the SEC through its use of disgorgement claims. In some instances, the operation of the statute of limitations could make the availability of the disgorgement remedy entirely unavailable.”

Yet there were other issues raised in the Supreme Court’s opinion which raise issues for a Chief Compliance Officer (CCO), compliance practitioner or counsel advising a company on potential damages from a FCPA violation. Justice Sotomayor disagreed with the SEC’s position that “disgorgement is not punitive but “remedial” in that it “lessen[s] the effects of a violation” by “‘restor[ing] the status quo.’”” Most interestingly, it was due to the fact that the SEC has required disgorgement which “sometimes exceeds the profits gained as a result of the violation.” This is when the SEC obtains disgorgement “without consideration of a defendant’s expenses that reduced the amount of illegal profit.”

The Court went on to explain, a “defendant is entitled to a deduction for all marginal costs incurred in producing the revenues that are subject to disgorgement. Denial of an otherwise appropriate deduction, by making the defendant liable in excess of net gains, results in a punitive sanction that the law of restitution normally attempts to avoid.” In such cases, profit disgorgement did not return the status quo but left the defendant “worse off.”

This last point brings up a couple of additional issues for consideration. The first is the ongoing debate about what, if any, portion of a FCPA fine and penalty is deductible. Miller & Chevalier Chartered, in a client alert entitled “Disgorgements of Profits in FCPA Cases: Deductions for Tax Purposes, discussed a 2016 Internal Revenue Service (IRS) Memorandum regarding the tax deductibility of certain FCPA settlements which included profit disgorgement. The Supreme Court opinion makes clear that profit disgorgement is a penalty damage and not compensatory. Under the IRS position, penalties are not deductible. Kokesh would seem to end the taxpayer position that such damages are deductible.

However, the IRS Memorandum and the Supreme Court decision leave open the question of whether pre-judgment interest assessed on profit disgorgement is deductible. Equally interesting is the questions of a defendants properly deductible business costs in creating the ill-gotten profit which becomes the subject of a disgorgement order. The Supreme Court’s discussion of this issue may give rise to both new scrutiny in the overall amount assigned to disgorgement and if there are no deductions granted by the SEC in its negotiation with a defendant, whether that defendant may seek deductions under the tax code.

Another issue raised by the Kokesh decision is profit disgorgement under the FCPA Pilot Program for companies not subject to the jurisdiction of the SEC. Daniel Patrick Wendt, writing in a FCPA Blog piece entitled “Are those DOJ disgorgements really disgorgement?, raised the issue around two cases from last year, HMT LLC and NCH Corporation, where the parties received Declinations based upon the criteria laid out in the Pilot Program, yet “DOJ and the two companies established a predicate for disgorgement. They agreed to a brief statement of facts indicating each company had violated the FCPA’s anti-bribery provisions and that it had received profits from those violations. This sounds like disgorgement.” In the HMT matter, the declination read, “HMT agrees to disgorge $2,719,412 (the “Disgorgement Amount”), which represents the profit to HMT from the illegally obtained sales in Venezuela and China.” In the NCH matter, the declination read, “NCH agrees to disgorge $335,342 (the “Disgorgement Amount”), which represents the profit to NCH from the illegally obtained sales in China.”

Wendt contrasted the position of the Department of Justice (DOJ) which held any payment under the Pilot Program was punitive in nature, with that of the SEC which held disgorgement was compensatory and therefore subject to deductibility. This distinction may now be gone with the dicta and companies may now seek deductions from disgorgements whether assessed by the DOJ or SEC.

Regardless of the Kokesh decision’s impact on IRS or DOJ rules on deductions, the case makes clear that conduct which occurs more than five years prior to the date the matter is brought cannot be the subject of profit disgorgement. This decision strengthens the hand of companies in their negotiations with the SEC and DOJ. It could also lead to a change the calculus around the decision to self disclose.

I put up a podcast with Marc Bohn, Counsel at Miller & Chevalier where we go into detail on the Kokesh decision. You can listen it by clicking 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, 2017

This episode is the first of a two-part series of podcasts dedicated to the first 100 days of the Trump administration as it related to compliance. Today we have Jonathan Armstrong and Jay Rosen. Next week Matt Kelly and Mike Volkov.

  1. Jonathan Armstrong leads a discussion of the Trump administrations devolution of Privacy Shield, GDPR and what they mean for American companies doing business in the UK and EU. He discusses the key differences in the DOJ’s Evaluation of Corporate Compliance Programs in an FCPA analysis and under the Bribery Act, differences in the EU approach to conflict minerals and under the Trump Administration and concludes by giving us his thoughts on what Brexit means for compliance.

For the Cordery Compliance client alerts see the following:

EU conflicts minerals compliance legislation 

DOJ Evaluation of Corporate Compliance: how does it compare to UK Bribery Act 2010?

BREXIT Glossary

  1. Jay Rosen considers what companies the intersection of business and politics under the Trump administration, the business response he has observed to Trump administrations steps and miss-steps, the comments made by DOJ representatives at Q1 conferences and the vibe of compliance conference attendees.

For Jay’s posts see the following:

 Still in the Enforcement Business and Evaluation of Corporate Compliance Programs

“It Was the Best of Times, It was the Worst of Times,” or “Ignorance is Strength”

 For Matt Kelly’s posts see the following:

Compliance in the Trump Era: More Markers Placed

Trump Administration Whacks Telco Firm for $892 Million

Drone Industry Pan Trump’s Regulatory

Trump Risk Disclosures Start Rolling In

First SEC Whistleblower Award of Trump Era

Sessions Dodges, Weaves, Promises on FCPA

For Mike Volkov’s posts see the following:

Yates, AG Sessions and Individual Criminal Prosecutions

New E-Book — Moving the Goalposts: The Justice Department Redefines Effective Compliance

FCPA Remediation Focus on Supervisory Personnel

FPCA Pilot Program Motors On

For Tom Fox’s posts see the following:

The Trump Administration-Kaos is Bad for Business

The Trump Administration-Failures in Leadership and Management

The Trump Administration-Preparing for a Catastrophe

The Trump Administration-the Business Response

DOJ Enforcement of the FCPA and the International Fight against Corruption in the Trump Administration

The members of the Everything Compliance panel include:

  • Jay Rosen– Jay is Vice President, Business Development Corporate Monitoring at Affiliated Monitors. Rosen can be reached at JRosen@affiliatedmonitors.com
  • Mike Volkov – One of the top FCPA commentators and practitioners around and the Chief Executive Officer of The Volkov Law Group, LLC. Volkov can be reached at mvolkov@volkovlawgroup.com.
  • Matt Kelly – Founder and CEO of Radical Compliance, is the former Editor of Compliance Week. Kelly can be reached at mkelly@radicalcompliance.com
  • Jonathan Armstrong – Rounding out the panel is our UK colleague, who is an experienced lawyer with Cordery in London. Armstrong can be reached at armstrong@corderycompliance.com

In addition to prolific writing about compliance another area I committed to as the Compliance Evangelist is to speak about compliance in a variety of forums. In May, I have several speaking events and a webinar which I am excited to relate to you today.

On Tuesday May 16th I will be joined by Jonathan Marks, a partner at Marcum LLC to present a conference on Operationalizing Compliance. The schedule is Registration and Continental Breakfast : 7:45 am – 8:15 am and the Program: 8:15 am – 4:00 pm. Highlights include:

  • What are the leading practices of an operationalized compliance program;
  • Why internal controls are the compliance practitioners best friend;
  • How you can use transaction monitoring to not only make your compliance program more robust but as a self-funding mechanism;
  • The new global anti-corruption enforcement paradigm;
  • Internal investigations and;
  • Negotiating with the government.

You will be able to walk away from the Operationalization Class with a clear understanding of how to operationalize a compliance program; an overview of international corruption initiatives and how they all relate to FCPA compliance, if it applies to you; how to deal with third parties, from initial introduction through contracting and managing the relationship, internal investigations, negotiating with the government, and trends in compliance. You will also learn about the importance of internal controls and how to meet the strict liability burden present around this requirement of FCPA compliance.

The Venue will be:

Marcum LLC

1600 Market Street

Philadelphia , PA  19103

Best of all, the event is complimentary. For registration and additional details, click here.


On May 18, I will be joined by Ben Locwin,   PhD, MBA, MS, President, Healthcare Science Advisors for a session on Pharmaceutical compliance issues and risk management at the CPhl North America, which will also be held in Philadelphia. If you are in pharma this is the conference for you. 

This session is centered directly on the diametrically-opposed viewpoints of strategic drug pricing. How are prices set? How should they be set? What’s the balance between capitalism, good economics, corporate interests, and altruism? Do these paradigms apply to both established and emerging markets? What are the legal frameworks surrounding these decisions? What are the ethical debates underpinning these decisions? What are the legal ramifications of approaching it incorrectly?

Legal and Policy Strategies for Drug Companies in Today’s Global Market
I. Drug pricing:
i. How is it set?
ii. Is it set accurately?
iii. Is it set appropriately?
iv. What do those even mean?

II. Why does levothyroxine matter? Reimbursement.
i. What’s happening with reimbursement in 2017?
ii. What does a new presidential administration mean for drug prices?

III. The Heinz Dilemma
i. Separating ethics and morals from business, enterprise, and economics

IV. Interactive Exercise
Develop regionally-specific pricing models to create a visual worldwide market that encourages competition, growth, and sustainability.

For Registration and Information, click here.


From May 22-24, I will be participating in Compliance Week 2017. I am chairing a panel with two of my favorite folks in compliance; Ren McEachern from the FBI and the recently retired Head of the Security and Exchange Commission’s FCPA Unit, Kara Brockmeyer. Our session will be a celebration, entitled, “Happy Birthday FCPA! A Toast to the Next 40”

Session Description:

The FCPA was enacted back in 1977, but its real time to shine has been over the last decade. There is no denying its impact on anti-corruption laws around the globe or the headline-making status due to increased enforcement in the United States. In this session we’ll discuss what companies need to know about the FCPA moving forward, including the impacts of increased cross-border law enforcement cooperation, the importance of third party risk management, and industry’s increasingly sophisticated understanding of what an effective anti-corruption compliance program should be.

Readers of this blog can receive a discount of $300, by entering discount code CW17TOMFOX for the payment page. For more information and registration details, click here.


Finally if you are not going to be in Philadelphia or Washington in May or your travel budget is light for the month, I  will be participating in a Compliance Week webinar, on Operationalizing Your Compliance Program, with Patrick Taylor of Oversight Systems on May 4.  As you are well aware, the Justice Department has mandated that companies operationalize compliance within the organization to drive effectiveness. Review and analysis of corporate data is one way to do so. Reviewing gifts, travel and entertainment expense data can benefit compliance, accounts payable and sales functions, just to name a few. How can a compliance professional develop and implement such a plan? In this webinar you will take away:

  • An understanding of the types of data each company owns;
  • Why operationalization of compliance is an imperative;
  • How to cut across silos to increase operationalization; and
  • How to partner with other corporate functions.

For more details and registration, click here.