SEC Enforcement Trends: Focus on the FCPA

Jordan Thomas -
This is the first in an ongoing series of posts focusing on current trends in SEC enforcement actions, and how those trends impact current and potential whistleblowers. We’ve chosen to highlight actions brought under the Foreign Corrupt Practices Act (“FCPA”) first, because the FCPA continues to be a top priority for the Enforcement Division and, in the words of Enforcement head Andrew Ceresney, represents “increasingly fertile ground for Dodd-Frank whistleblowing.”

Enacted in 1977, the FCPA is one of the government’s most powerful tools against public corruption, both in the U.S. and abroad. The FCPA seeks to prevent corruption into two interconnected ways: first, it broadly prohibits bribery of any foreign official acting in his or her official capacity to influence a decision of that official, or to obtain an improper advantage, in order to obtain or retain business. Second, it requires companies to maintain accurate books and records of financial transactions and establish meaningful internal controls over the company’s assets –  making it easier for authorities to detect possible fraud or corruption. Critically, the Act’s anti-bribery provisions are not applicable solely to U.S.-based companies, but instead reach any “issuer,” meaning a company that lists either its stock or American Depository Receipts (“ADRs”) on a national securities exchange in the U.S. or is otherwise required to file reports with the SEC. Likewise, in the case of such issuers, the corrupt conduct need not take place inside the U.S. to give rise to an FCPA violation: instead, it most often takes place in foreign jurisdictions, making the FCPA global in scope. (More details regarding the legal requirements of the FCPA are available in the SEC and DOJ’s excellent FCPA Resource Guide).

The SEC, which enforces civil violations of the FCPA, has made the Act a centerpiece of its enforcement efforts, bringing scores of cases combatting bribery in a huge range of countries from Uzbekistan to Indonesia to Iraq. The majority of these enforcement actions are now handled by a specialized FCPA unit, which has recovered more than $1 billion in sanctions since its launch in 2010 (more information about these cases can be found in our SEC Sanctions database). These victories have included a massive $350 million settlement with German-based Siemens AG (which also agreed to pay more than $1 billion to other U.S. and German regulators), a $250 million settlement with oilfield services company Weatherford International (which was shared with other agencies); and a $29 million settlement with pharmaceutical giant Eli Lilly.

While the SEC’s FCPA unit has already racked up a long string of achievements, we believe that the SEC Whistleblower Program has the potential to dramatically enhance the SEC’s FCPA enforcement program – a view that appears to be shared by the SEC itself. According to Ceresney, agency received 149 whistleblower tips in fiscal year 2013, and expects that number to grow going forward. These whistleblower tips are likely to be particularly helpful to the SEC in the context of the FCPA, since bribes occurring in foreign countries – which are often routed through intermediaries or otherwise disguised – can be exceedingly difficult for a U.S. regulator to detect without whistleblowing help. Even some private companies – which stand to benefit if they self-report FCPA violations and/or cooperate with the SEC – are now recognizing the value of internal whistleblowing and encouraging their employees to come forward with information.  The SEC Whistleblower Program is likely to be particularly helpful in generating actionable intelligence about foreign bribery because its rules do not require the whistleblower to be a U.S. citizen to collect a monetary award: instead, whistleblowing tips can now come from every corner of the world.  Our hope is that whistleblowers both in the U.S. and abroad will mobilize to fight public corruption, making companies more cautious about engaging in bribery in the first place.

Ethics at Work: 2013 Survey Finds Positive Trends; Some Troubling Findings

Jordan Thomas -
Last month, the Ethics Resource Center (ERC) released its biennial National Business Ethics Survey (NBES). I was honored to serve on the NBES Advisory Panel this year, particularly given its reputation as a definitive barometer of workplace ethics. As we’ve seen in prior years, the survey shows some very positive trends as well as causes for real concern and further attention.

The good news is significant. Workplace misconduct is at an historic low, at 41%—down from 45% in 2011 and from the record high of 55% in 2007. The NBES also found that only 9% of employees felt pressure to compromise their standards, down from 13% in 2011. This is an excellent trend and one that must continue, even as the economy shows signs of improvement and temptations for personal gain may increase.

Culture is a powerful antidote. The NBES findings suggest that the dip in misconduct may reflect a greater corporate emphasis on ethics through training, communications and other measures. The percentage of companies with “strong” or “strong-leaning” ethical cultures increased to 66% in 2013, compared with 60% in 2011; 81% of respondent companies provided ethics training, up from 74% in 2011; and two-thirds of companies included ethical conduct as a performance measure in employee evaluations, up from 60% in 2011. Underscoring the importance of transparency and open communication, nearly three out of four companies communicated internally about disciplinary actions when wrongdoing occurs.

Unfortunately, the news isn’t all good. We were particularly troubled that 60% of corporate misconduct is committed by managers, from the supervisory level up to top management; nearly a quarter of observed misdeeds involved senior managers; and 26% of respondents indicated that misconduct is ongoing within their organization (i.e. not a one-time act).

We continue to have serious concerns about retaliation and its ability to silence truthtellers. Among those who observed misconduct in 2013, 63% reported what they saw, a decline from 65% in 2011. For the second straight survey, more than one in five workers who reported misconduct said they experienced retaliation. This is unacceptable. High retaliation rates discourage reporting and make it harder for organizations to identify and eliminate bad behavior. These numbers need to change for real ethical progress to occur. Good ethics is good business.  Shareholders and the public-at-large deserve credible reform, which can only come when corporate leadership builds an engaged culture committed to integrity.

SEC Brings New Charges Against SAC Analyst, Highlighting Risks to Employees

Jordan Thomas -
On Thursday, the SEC announced another set of insider trading charges against an employee of CR Intrinsic, an affiliate of the now-infamous hedge fund advisor SAC Capital Advisors. According to the SEC complaint, CR Intrinsic analyst Ronald A. Dennis received multiple non-public tips about Dell, Inc. and Foundry Networks, Inc. from a friend, which he then passed along to two portfolio managers. The portfolio managers immediately placed trades based on this inside information, allowing CR Intrinsic to reap millions in improper gains and avoid significant losses. Pursuant to a settlement with the SEC, Dennis has been barred from working in the securities industry and forced to pay $200,000 in penalties (to learn more about insider trading violations and the penalties associated with them, please visit our Securities Law Primer).

While the SEC’s case against SAC founder Steve A. Cohen, and the criminal charges against SAC itself, have garnered far more attention than the case against Dennis, this case represents a wake-up call to employees that they may be subject to liability even if they are not headline-grabbing senior employees or the masterminds of a fraudulent scheme: as an analyst, Dennis was a relatively low-level employee with no direct trading authority, and many steps removed from Cohen or other SAC leaders. His case underscores that such employees face stark choices if their corporate culture encourages law-breaking: they can either “go along” with that culture and face liability, or take a stand by refusing to participate in illegal activity, leaving the entity, and/or blowing the whistle either internally or externally. Too often, employees chose the former route, either because it represents the “path of least resistance” or because there are financial incentives to engage in or condone wrongdoing. Our hope is that the advent of the SEC Whistleblower Program will help balance the playing field between these options by creating a financial incentive to do the right thing. It may be too late for Dennis, but it’s not too late for other employees in a similar position.

The SEC’s New Policy on Admissions: What Does It Mean for Whistleblowers?

Jordan Thomas -

When SEC Chair Mary Jo White took the reins of the agency last year, one of her first and most highly publicized initiatives was to re-examine the SEC’s policy on “no-admit, no-deny” settlements, meaning settlements in which the defendant neither admits nor denies liability for the alleged securities violations.  Prior to Chair White’s tenure, the vast majority of SEC enforcement actions were resolved on this basis, leaving some courts and commentators concerned that wrong-doers were evading public accountability for their actions. In a speech to the Council of Institutional Investors on September 26, 2013, Chair White announced that, in certain cases, the SEC would no longer allow such “no-admit, no deny” settlements, but would instead demand admissions of wrongdoing.  As Chair White explained, the “candidates” for such cases include:


  • Cases where a large number of investors have been harmed or the conduct was otherwise egregious.
  • Cases where the conduct posed a significant risk to the market or investors.
  • Cases where admissions would aid investors deciding whether to deal with a particular party in the future.
  • Cases where reciting unambiguous facts would send an important message to the market about a particular case.

Since September, the SEC has made it clear that it intends to put these new guidelines into practice, and has already announced several major settlements that include admissions of wrongdoing, including a $2.5 million settlement with Scottrade for failing to provide accurate trading data to the SEC and a massive $196 million settlement with Credit Suisse for providing investment advisory and brokerage services in the U.S. without registering with the SEC.

So, what does the SEC’s new focus on obtaining admissions mean for current and potential SEC whistleblowers?  While this policy initiative is new, it’s likely that the SEC will seek admissions in at least some enforcement actions that arise as a result of whistleblower tips; in those cases, it is likely to take longer for the SEC and the defendant(s) to reach a settlement, meaning that it will also take longer for the whistleblower(s) to receive any potential monetary award.  In some cases, defendants may opt to take their chances at trial rather than accept an admission of wrongdoing and the collateral consequences that might flow from such admissions, such as an increased risk of liability in private shareholder suits.  While the SEC has a strong trial track record – victories in over 75% of the agency’s cases in each of the last three years – litigation also can extend the time it takes to resolve cases and grant any related whistleblower awards.

Nonetheless, it’s important for potential whistleblowers to recognize that, even with the SEC’s heightened emphasis on admissions, it remains likely that a significant majority of SEC cases, including those involving whistleblowers, will continue to be resolved on a no-admit, no-deny basis.  And, as both the Scottrade and Credit Suisse matters reflect, the SEC can and will successfully settle major cases even where it does demand an admission of wrongdoing.  Thus, the policy change should not deter potential SEC whistleblowers from coming forward.  It does, however, send a vital message to both the public and potential wrongdoers that the SEC is willing to demand accountability from defendants, even where it requires a tough fight.  In our view, a tougher, stronger SEC is better for whistleblowers, and for the investors whom whistleblowers seek to protect.

New Reports Suggest the SEC is Cracking Down on Confidentiality Agreements

Jordan Thomas -
In our practice as counsel for SEC whistleblowers, one of the troubling practices we frequently see on the part of companies is the use of confidentiality agreements that purport to prevent employees or former employees from sharing any information – including information about potential violations of law – with any outside parties, including the SEC and other law enforcement agencies.

In an important development for current and potential whistleblowers, recent reports suggest the SEC and courts are getting tough on companies who seek to use such agreements to dissuade employees from reporting securities violations or other illegal conduct to the government. According to the Washington Post, the SEC has opened an investigation into Kellogg Brown & Root (“KBR”), a former subsidiary of Halliburton, to determine whether KBR broke SEC rules by requiring employees involved in an internal investigation into an alleged military-contract fraud to sign “confidentiality statements.” These confidentiality statements gave KBR the right to fire employees who revealed information about the alleged fraud, including to government authorities.

While the SEC has neither confirmed nor denied the existence of a KBR investigation (pursuant to law, all pending SEC investigations are confidential and non-public), this report is a strong sign that the SEC is deeply concerned about confidentiality agreements that seek to limit whistleblowing rights. The SEC Whistleblower Program Rules – in particular, Rule 21F-17(a) – already make it clear that “no person may take any action to impede an individual from communicating directly with the [SEC] about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…” (1) In other words, while it may be acceptable for a company to require its employees to sign some form of confidentiality agreement to protect trade secrets or other sensitive information from disclosure, such agreements cannot be used to prevent – or to try to prevent – employees from participating in the SEC Whistleblower Program. The KBR matter reflects that the SEC takes this rule seriously and is willing to take a stand against companies who seek to thwart potential whistleblowers.

Likewise, a court presiding over a separate False Claims Act case related to the same alleged fraud by KBR issued a decision finding that the confidentiality statements, as well as other materials related to KBR’s internal investigation, were not protected by the attorney-client privilege or work-product doctrine because the purpose of the investigation was not to obtain legal advice or to prepare for litigation – sending yet another message to companies that confidentiality agreements do not provide an easy cover for corporate fraud.

Hopefully, these developments will cause companies to think twice before trying to use confidentiality agreements to limit employees’ ability to report misconduct. As Congress has already recognized through its implementation of Dodd-Frank, a company’s interest in confidentiality does not trump the public’s interest in detecting, preventing and punishing fraud.
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1   The narrow exceptions to this rule involve instances in which the information in the whistleblower complaint was obtained through or as a result of communications covered by the attorney-client privilege.  For more information on the circumstances in which legally privileged information can form the basis of a whistleblower complaint, please see our Corporate Attorneys as Whistleblowers webinar.

The SEC's Charges Against Former Dewey Executives: Securities Violations in Unexpected Places

Jordan Thomas -
Like many in the legal community, we've been closely following the ongoing saga of Dewey & LeBoeuf LLP- the once venerable international law firm that was forced to declare bankruptcy in May 2012 amid accusations of financial mismanagement.  On Thursday, the SEC and the New York County District Attorney's office brought respective civil and criminal charges against members of Dewey's senior management, alleging that its former Chairman, CFO and others engaged in accounting fraud in an attempt to forestall the firm's eventual collapse.  The SEC's complaint includes dramatic evidence of this alleged fraud, including emails in which certain defendants describe their conduct as "cook[ing] the books," and express hope that their auditors will continue to be "clueless".

While the SEC has brought numerous actions against lawyers who facilitate frauds perpetrated by their clients, it's unusual for a law firm's own accounting to be the subject of an SEC suit.  But, as the Dewey matter vividly reflects, securities violations are not the sole purview of public corporations, stock brokers and hedge fund managers.  Instead, given the expansive definition of a security under the Securities Act of 1933 and other securities laws, securities violations can arise in a huge range of businesses, including those which, like Dewey, are or were privately-held.  In Dewey's case, the alleged securities violations occurred, giving the SEC jurisdiction, when Dewey raised desperately-needed cash through a public bond offering.  According to the SEC, the private placement memorandum ("PPM") for the bond offering contained numerous misrepresentations, including doctored financial statements and false descriptions of the firm's accounting policies.  Thus, Dewey's apparent accounting shenanigans not only harmed its partners and employees – the majority of whom appear to have been ignorant of the long-running fraud – but also bond investors who relied on the PPM and related documents.

For potential whistleblowers and their counsel, one key take-away of the Dewey matter is that individuals with information regarding a possible fraud should not automatically assume that their information falls outside the scope of the SEC Whistleblower Program simply because it doesn’t involve a public corporation; instead, the relevant question for potential whistleblowers should be whether the wrongdoing has some connection to a security, whether it is a traditional security like a stock or bond, or a less traditional security like an investment contract, security-based swap or an interest in oil and gas rights. (For an overview of possible securities violations please see our Securities Law Primer).  As our securities markets continue to grow more complex and expansive, it is likely that securities violations – and whistleblower complaints –will continue to arise in unexpected places.

National Law Journal Names Labaton Sucharow Top Plaintiffs Firm for the Ninth Straight Year

Jordan Thomas -
I am proud to report that, for the 9th year in a row, Labaton Sucharow has been named to The National Law Journal’s Plaintiffs' Hot List. Among other things, The National Law Journal reported on our recent successes in a class action against Schering-Plough Corp., which recovered $473 million for investors, and in a securities case on behalf of multiple Ohio retirement systems and the Ohio attorney general's office, which recovered more than $1 billion in settlements. It is once again a great honor to be included in this list of accomplished and innovative law practices. Building on the firm’s market-leading securities litigation platform, our Whistleblower Representation Practice leverages a world-class in-house team of investigators, financial analysts, and forensic accountants with federal and state law enforcement experience to provide unparalleled representation for whistleblowers. Together, we are committed to ensuring that companies play by the rules and investors are protected. To read more about Labaton Sucharow and The National Law Journal Plaintiffs’ Hot List see here.

Global Anti-Corruption Survey: “Corruption is Alive and Well”

Jordan Thomas -
Financial advisory firm AlixPartners has just released the findings of its annual survey that takes the pulse of general counsel, compliance officers and other senior executives on a range of anti-corruption and compliance issues. Against the backdrop of significant FCPA cases brought by the SEC and DOJ in 2013, and the fact that the SEC received 149 tips from whistleblowers involving potential FCPA violations, the survey findings are a great disappointment, but no great surprise. Corruption concerns are business concerns: A full 30% of respondents reported that they had ceased doing business with certain partners because of concerns relating to corruption and 15% of respondents’ companies have backed away from acquisitions because of possible corruption at the target company. There were predictable regional hotspots, with Africa, Russia and the Middle East identified as posing significant corruption risk.

In a positive light, the survey found that compliance programs are in place and seemingly effective in most of the companies surveyed. Particularly effective mitigation strategies include internal audits, employee training and oversight of books and records. Compliance is, of course, top-down and 73% of survey respondents noted that involvement by audit committees and boards reduces risk.

Perhaps most concerning was the “perception gap” among respondents. While US companies perceived greater risk in various markets and also greater success with aggressive compliance efforts, some jurisdictions – including those in emerging markets where we expect to see greater commercial activity in an increasingly global marketplace – downplayed the instance and severity of corruption risk.

The key takeaways are consistent with other surveys, our own Wall Street Survey among them: Misconduct continues to thrive and in an age of whistleblowers, strong compliance procedures and a commitment to ethical engagement are a company’s best insurance policy. 

A Supreme Court Win for Whistleblowers

Jordan Thomas -
The Supreme Court gave corporate whistleblowers a significant victory today in a crucial decision that will help ensure that whistleblowers employed by contractors of public companies, such as accounting firms, law firms and consulting firms, are protected from unlawful retaliation. The case, Lawson v. FRM LLC, available at http://www.supremecourt.gov/opinions/13pdf/12-3_4f57.pdf, specifically involved the anti-retaliation provisions of the Sarbanes-Oxley Act of 2002, often referred to as SOX, which make it illegal for an employer to fire, harass, demote or otherwise retaliate against an employee who reports fraud involving a public company, or certain other companies that are required to make public filings with the SEC. The Court held that these vital protections extend not only to employees of the public company itself, but also to employees of private companies that serve as contractors for public companies.

While the anti-retaliation provisions of SOX are separate from those provided under the SEC Whistleblower Program rules and the Dodd-Frank law – which include their own robust remedies for whistleblowers who face retaliation from their employers – the Lawson decision is significant for current and potential SEC whistleblowers in many ways.

First, it helps ensure that an SEC whistleblower who is an employee of a public company contractor will have a full arsenal of legal protection if he or she is retaliated against for reporting possible securities violations involving public companies. The protections available under SOX are particularly important if an SEC whistleblower is retaliated against after he or she internally reports possible misconduct, but before blowing the whistle to the SEC, because courts have reached conflicting conclusions about whether Dodd-Frank and the SEC rules cover retaliation for internal reporting. Whistleblowers covered by SOX, on the other hand, need not have reported externally to receive employment-related protections. For this and other reasons, many of our SEC whistleblower clients who pursue retaliation claims against their employers decide, in consultation with their employment counsel, to bring both SOX and Dodd-Frank retaliation claims, and Lawson gives more whistleblowers the opportunity to leverage this strategy.

Second, the decision is a strong acknowledgment by the Court of the importance of whistleblowers, and the fact that outside contractors, including accountants, auditors, consultants, lawyers, and investment advisers, are often in the best (and sometimes only) position to detect, report and stop  corporate fraud. Rejecting efforts to narrow the definition of a “whistleblower,” the Court instead emphasized that the Congressional goal of “protecting investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws” cannot be effectively realized if “gatekeeper” whistleblowers like outside accountants and consultants are not protected. The Court’s common-sense approach, and recognition of the critical role of whistleblowers in securities enforcement, bodes well for future whistleblower cases that are likely to come before the Court in the years ahead.

Wall Street in Crisis: A Perfect Storm Looming

Jordan Thomas -

Labaton Sucharow's U.S. Financial Services Industry survey results were released today. The survey confidentially polled financial professionals on corporate ethics, wrongdoing in the workplace and the role of financial regulators in policing the marketplace. The results suggest that the financial services industry faces a serious and growing ethical crisis.

To learn more, download the survey and the infographic.