Corporate Investigations and White Collar Defense - July 2016

by Manatt, Phelps & Phillips, LLP
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Manatt, Phelps & Phillips, LLP

In This Issue:

  • “Official Acts”—What They Are… and Are Not
  • Supreme Court Clarifies the Extraterritorial Reach of RICO
  • Spotlight on the False Claims Act
  • Focus on the FCPA: Self-Disclosure + Cooperation = Declinations and NPAs Edition
  • White Collar Enforcement Roundup—Financial Crimes Edition
  • Keeping an Eye Out—Updates and Briefly Noted

“Official Acts”—What They Are… and Are Not

Why it matters: On June 27, 2016, the Supreme Court decided McDonnell v. U.S., holding that, for purposes of the federal public corruption statutes, an “official act” consists of a concrete decision or action taken with respect to a proceeding pending before a court, agency or committee, and that merely setting up a meeting, talking to another official or organizing an event are not, by themselves, enough to qualify. The opinion sets the stage for a possible dismissal by the trial court of the convictions against former Virginia governor Robert F. McDonnell if the evidentiary record below fails to sustain a finding that his actions constituted “official acts” in light of the Court’s ruling.

Detailed discussion: On June 27, 2016, the Supreme Court decided McDonnell v. U.S., holding that an “official act” for purposes of the federal bribery, Hobbs Act and “honest services” statutes consists of a concrete decision or action taken with respect to any proceeding pending (or that by law may be brought) before a court, agency or committee (or other “formal exercise of governmental power”), and that merely setting up a meeting, talking to another official or organizing an event are not, in and of themselves, enough to qualify.

To briefly review the facts, former Virginia governor Robert F. McDonnell (McDonnell) was convicted and sentenced to 24 months in prison on eleven counts of public corruption under the federal bribery statute (18 U.S.C. § 201), the Hobbs Act (18 U.S.C. § 1951) and the federal “honest services” statute (18 U.S.C. § 1346) for “gifts” he and his wife accepted from a Virginia businessman (e.g., lavish vacations, golf outings, expensive watches and clothes, “sweetheart” loans, etc.). These gifts were allegedly in exchange for McDonnell using the governor’s office and his official position and influence to benefit the businessman’s tobacco-derived dietary supplement business, including arranging meetings for the businessman with state officials, hosting receptions for him at the Governor’s Mansion and placing calls to state university and government officials regarding research studies for the supplement so as to hasten FDA approval. The Fourth Circuit affirmed the district court’s conviction on July 10, 2015 (McDonnell’s wife was also convicted for public corruption and sentenced to 12 months in prison, although her case is presently on hold at the Fourth Circuit pending resolution of her husband’s case).

The Supreme Court granted certiorari and heard oral argument on April 27, 2016 (we covered the oral argument in our June 6, 2016 newsletter). Much of the discussion focused on the issue of what constitutes an “official act” under the federal public corruption statutes because, in order to convict McDonnell under those statutes, the government had to prove that he committed “official acts” in exchange for bribes. The operative definition of “official act” for purposes of the lower court proceedings can be found in Section 201(a)(3) of the federal bribery statute, which defines an “official act” as “any decision or action on any question, matter, cause, suit, proceeding or controversy, which may at any time be pending, or which may by law be brought before any public official, in such official’s official capacity, or in such official’s place of trust or profit.”

In a unanimous decision written by Chief Justice John Roberts, the Court held that, under Section 201(a)(3):

[A]n “official act” is a decision or action on a “question, matter, cause, suit, proceeding or controversy.” The “question, matter, cause, suit, proceeding or controversy” must involve a formal exercise of governmental power that is similar in nature to a lawsuit before a court, a determination before an agency, or a hearing before a committee. It must also be something specific and focused that is “pending” or “may by law be brought” before a public official. To qualify as an “official act,” the public official must make a decision or take an action on that “question, matter, cause, suit, proceeding or controversy,” or agree to do so. That decision or action may include using his official position to exert pressure on another official to perform an “official act,” or to advise another official, knowing or intending that such advice will form the basis for an “official act” by another official. Setting up a meeting, talking to another official, or organizing an event (or agreeing to do so)—without more—does not fit that definition of “official act.”

In reaching this holding, the Court pointed out that the text of Section 201(a)(3) sets forth two requirements for an “official act” and analyzed each one in turn: “First, the Government must identify a ‘question, matter, cause, suit, proceeding or controversy’ that ‘may at any time be pending’ or ‘may by law be brought’ before a public official. Second, the Government must prove that the public official made a decision or took an action ‘on’ that question, matter, cause, suit, proceeding, or controversy, or agreed to do so.” The question presented by this case, according to the Court, was “whether arranging a meeting, contacting another official, or hosting an event—without more” falls under either of these categories.

Looking to the first requirement, the Court rejected the Government’s argument that Congress intended an “official act” to broadly encompass “nearly any activity by a public official” from “workaday functions, such as the typical call, meeting, or event, to the broadest issues the government confronts, such as fostering economic development.” The Court opted instead for a more “bounded” interpretation, concluding after parsing the text of the statute and looking to Supreme Court precedent and constitutional arguments raised by McDonnell that “the terms ‘question, matter, cause, suit, proceeding or controversy’ do not sweep so broadly.”

The Court explained that “[a]lthough it may be difficult to define the precise reach of those terms, it seems clear that a typical meeting, telephone call, or event arranged by a public official does not qualify as a ‘cause, suit, proceeding or controversy.’ ” Nor did the Court believe that they fell under the category of a “question” or “matter,” concluding that “a ‘question’ or ‘matter’ must be similar in nature to a ‘cause, suit, proceeding or controversy.’ Because a typical meeting, call, or event arranged by a public official is not similar to a lawsuit before a court, a determination before an agency, or a hearing before a committee, it does not qualify as a ‘question’ or ‘matter’ under §201(a)(3).”

The Court next looked to the second requirement that the public official makes or agrees to make a decision, or takes or agrees to take an action, “on” the question, matter, cause, suit, proceeding, or controversy from the first inquiry. The Court acknowledged that the Fourth Circuit had identified three specific focused and concrete “questions” or “matters” that qualified under the first requirement of Section 201(a)(3) because they involved “a formal exercise of governmental power that is similar in nature to a lawsuit, administrative determination, or hearing,” including the question of whether state officials and University of Virginia researchers would initiate a study of the businessman’s nicotine supplement in order to hasten FDA approval. The Court stated, however, that “hosting an event, meeting with other officials, or speaking with interested parties is not, standing alone, a ‘decision or action’ within the meaning of §201(a)(3), even if the event, meeting, or speech is related to a pending question or matter. Instead, something more is required: §201(a)(3) specifies that the public official must make a decision or take an action on that question or matter, or agree to do so.” (Emphasis in original.) Citing specifically to the contact with the University of Virginia researchers and other government officials, the Court said that “[s]imply expressing support for the research study at a meeting, event, or call—or sending a subordinate to such a meeting, event, or call—similarly does not qualify as a decision or action on the study, as long as the public official does not intend to exert pressure on another official or provide advice, knowing or intending such advice to form the basis for an ‘official act.’ Otherwise, if every action somehow related to the research study were an ‘official act,’ the requirement that the public official make a decision or take an action on that study, or agree to do so, would be meaningless.”

Further, the Court agreed with McDonnell that “the Government’s expansive interpretation of ‘official act’ would raise significant constitutional concerns,” citing to specific issues of due process, vagueness and federalism (McDonnell’s actions were not a crime under the Virginia public corruption statute). The Court acknowledged that the federal bribery statute prohibits quid pro quo corruption, i.e., the exchange of a thing of value for an “official act”; however, the Court said that, under the Government’s expansive view, “nearly anything a public official accepts—from a campaign contribution to lunch—counts as a quid; and nearly anything a public official does—from arranging a meeting to inviting a guest to an event— counts as a quo.” This raised substantial concerns for the Court because:

[C]onscientious public officials arrange meetings for constituents, contact other officials on their behalf, and include them in events all the time. The basic compact underlying representative government assumes that public officials will hear from their constituents and act appropriately on their concerns—whether it is the union official worried about a plant closing or the homeowners who wonder why it took five days to restore power to their neighborhood after a storm. The Government’s position could cast a pall of potential prosecution over these relationships if the union had given a campaign contribution in the past or the homeowners invited the official to join them on their annual outing to the ballgame. Officials might wonder whether they could respond to even the most commonplace requests for assistance, and citizens with legitimate concerns might shrink from participating in democratic discourse.

(Emphasis in original.)

Finding that “[b]ecause the jury was not correctly instructed on the meaning of ‘official act,’ it may have convicted Governor McDonnell for conduct that is not unlawful,” the Court vacated McConnell’s convictions and remanded the case back to the district court to see whether, in light of the Court’s opinion, the evidentiary record supports a new trial or whether dismissal is in order. The Court concluded:

There is no doubt that this case is distasteful; it may be worse than that. But our concern is not with tawdry tales of Ferraris, Rolexes, and ball gowns. It is instead with the broader legal implications of the Government’s boundless interpretation of the federal bribery statute. A more limited interpretation of the term “official act” leaves ample room for prosecuting corruption, while comporting with the text of the statute and the precedent of this Court.

See here to read the Supreme Court’s 6/27/16 opinion in McDonnell v. U.S.

Supreme Court Clarifies the Extraterritorial Reach of RICO

Why it matters: On June 20, 2016, the Supreme Court decided RJR Nabisco, Inc. v. The European Community, in which the Court clarified the extraterritorial scope of the Racketeer Influenced and Corrupt Organizations Act (RICO) and held that RICO can, under certain circumstances detailed in the opinion, apply to conduct that occurs outside of the United States. As with the Foreign Corrupt Practices Act, the decision bolsters the ability of federal prosecutors to pursue cases based on foreign misconduct under RICO’s criminal provisions. However, the decision also limits the ability of private RICO plaintiffs—such as the European Community in this case—to pursue their civil RICO claims if they can’t prove a domestic (U.S.) injury.

Detailed discussion: On June 20, 2016, the Supreme Court decided RJR Nabisco, Inc. v. The European Community, in which the Court clarified the extraterritorial scope of the Racketeer Influenced and Corrupt Organizations Act (RICO, found at 18 U.S.C. Section 1961 et seq.). The Court reversed and remanded the Second Circuit and held that a violation of RICO can be based on a pattern of racketeering that includes predicate offenses committed abroad, so long as each of those offenses violates a predicate statute that is itself extraterritorial. However, the Court limited its holding with respect to RICO plaintiffs bringing a private civil right of action (as opposed to the government bringing a criminal prosecution), finding that such private plaintiffs must allege and prove a domestic (U.S.) injury.

First, a brief recap of the relevant facts in this long-running 16-year-old case: The European Community and 26 of its member states (collectively, the EC) filed suit in 2000 against RJR Nabisco, Inc. and related entities (collectively, RJR) under RICO, alleging that RJR participated in a global money-laundering scheme in association with various organized crime groups pursuant to which drug traffickers smuggled narcotics into Europe and sold them for euros that—through transactions involving black-market money brokers, cigarette importers, and wholesalers—were used to pay for large shipments of RJR cigarettes into Europe. The EC’s complaint alleged that RJR violated RICO by engaging in a pattern of racketeering activity that included numerous predicate acts of money laundering, material support to foreign terrorist organizations and wire fraud, to name a few. The Eastern District of New York judge granted RJR’s motion to dismiss on the grounds that RICO does not apply either to racketeering activity occurring outside the United States or to foreign enterprises. The Second Circuit reinstated the EC’s claims in 2014, concluding that RICO did apply extraterritorially to the same extent as the predicate acts of racketeering that underlie the alleged RICO violation, and that certain predicate acts alleged in the case expressly applied extraterritorially. The Second Circuit further held, in a supplemental opinion issued after denying rehearing the first time, that a private plaintiff such as the EC doesn’t have to show a domestic (U.S.) injury in order to bring a RICO civil right of action and is permitted to recover for a foreign injury caused by the violation of a predicate statute that applies extraterritorially (the Second Circuit later denied rehearing en banc). RJR filed a petition for writ of certiorari with the Supreme Court, which agreed to review the question presented of “[w]hether, or to what extent, the Racketeer Influenced and Corrupt Organizations Act (‘RICO’) applies extraterritorially.”

Numerous opinions, dissents and partial joinders among the Justices reflected a lack of consensus but ultimately translated to (1) a unanimous holding by the Court that RICO can apply to conduct that occurs outside the United States to the extent that the predicate acts alleged in a particular case themselves apply extraterritorially; and (2) a majority holding by the Court that private RICO plaintiffs (which the EC was found to be in this case) bringing a civil right of action must allege and prove that they have been injured domestically (i.e., in the U.S.). The first holding was considered a win for the EC, but the second holding was a loss for the EC that ultimately determined the outcome of the case: because the EC’s domestic injury RICO claims had been waived and dismissed with prejudice at the district court level and its sole remaining RICO claims alleged foreign injury, the Court ruled they must be dismissed.

First unanimous holding: The Court held that “[a] violation of §1962 may be based on a pattern of racketeering that includes predicate offenses committed abroad, provided that each of those offenses violates a predicate statute that is itself extraterritorial.”

The Court began its analysis by reviewing at length the law of extraterritoriality and the principle of “the presumption against extraterritoriality” (i.e., “[a]bsent clearly expressed congressional intent to the contrary, federal laws will be construed to have only domestic application”) as interpreted by the courts. With these “guiding principles in mind,” the Court found that, in this case, the presumption against extraterritoriality with respect to RICO “has been rebutted—but only with respect to certain applications of the statute.” The Court said that the “most obvious textual clue” to such rebuttal is that “RICO defines racketeering activity to include a number of predicates that plainly apply to at least some foreign conduct … includ[ing] the prohibition against engaging in monetary transactions in criminally derived property, which expressly applies, when ‘the defendant is a United States person,’ to offenses that ‘tak[e] place outside the United States.’ ” The Court went on to state that:

We agree with the Second Circuit that Congress’s incorporation of these (and other) extraterritorial predicates into RICO gives a clear, affirmative indication that §1962 applies to foreign racketeering activity—but only to the extent that the predicates alleged in a particular case themselves apply extraterritorially. Put another way, a pattern of racketeering activity may include or consist of offenses committed abroad in violation of a predicate statute for which the presumption against extraterritoriality has been overcome.

The Court emphasized the important limitation that “foreign conduct must violate ‘a predicate statute that manifests an unmistakable congressional intent to apply extraterritorially,’ ” and, with specific reference to RICO, the Court pointed out that analysis will have to be made on a case-by-case basis because “[a]lthough a number of RICO predicates have extraterritorial effect, many do not. The inclusion of some extraterritorial predicates does not mean that all RICO predicates extend to foreign conduct.” (Emphasis in original.)

Last, the Court rejected RJR’s argument that, even if RICO may apply to foreign racketeering, the statute does not apply to foreign enterprises, stating that, “based on RICO’s text and context, … Congress intended the prohibitions in [the RICO statute] to apply extraterritorially in tandem with the underlying predicates, without regard to the locus of the enterprise.” The Court cautioned, however, that “[a]lthough we find that RICO imposes no domestic enterprise requirement, this does not mean that every foreign enterprise will qualify.” The Court said that the foreign enterprise “must engage in, or affect in some significant way, commerce directly involving the United States—e.g., commerce between the United States and a foreign country. Enterprises whose activities lack that anchor to U.S. commerce cannot sustain a RICO violation.”

Second majority holding: The Court held that “Section 1964(c) [RICO’s private civil right of action] requires a civil RICO plaintiff to allege and prove a domestic injury to business or property and does not allow recovery for foreign injuries.”

The Court explained that “[i]rrespective of any extraterritorial application of §1962, we conclude that §1964(c) does not overcome the presumption against extraterritoriality.” The lack of a clear indication of legislative intent, as well as issues of foreign sovereignty (e.g., the need to protect against individuals from one country bringing civil suits in other countries solely to take advantage of more generous laws), appeared to govern the Court’s reasoning here:

Allowing recovery for foreign injuries in a civil RICO action, including treble damages, presents … danger of international friction.... This is not to say that friction would necessarily result in every case, or that Congress would violate international law by permitting such suits. It is to say only that there is a potential for international controversy that militates against recognizing foreign-injury claims without clear direction from Congress. Although “a risk of conflict between the American statute and a foreign law” is not a prerequisite for applying the presumption against extraterritoriality…, where such a risk is evident, the need to enforce the presumption is at its apex.

The Court noted that, as the answer will not always be self-evident, factual disputes may arise as to whether an injury is “foreign” or “domestic” that a court will have to resolve. The Court said, however, that it need not reach such a determination in the case before it because the EC, found to be a private civil RICO plaintiff, had waived its damages for domestic injuries in the district court proceedings, and the judge had subsequently dismissed those claims with prejudice. The Court therefore concluded that, as the EC’s remaining RICO claims rested entirely on foreign injuries, those claims must be dismissed. The Court reversed the Second Circuit and remanded to the district court for further proceedings consistent with the Court’s opinion.

See here to read the Supreme Court’s 6/20/16 opinion in RJR Nabisco, Inc. v. The European Community.

Spotlight on the False Claims Act

Why it matters: The major False Claims Act (FCA) news of late was the U.S. Supreme Court’s landmark decision on June 16, 2016 in the implied certification case Universal Health Services v. U.S. ex rel. Escobar (see our special alert here). In other recent news, Acting Associate Attorney General Bill Baer spoke at the ABA’s annual FCA conference about how the DOJ’s renewed emphasis on individual accountability (as set forth in the “Yates Memo,” covered in another special alert here) specifically informs how the DOJ presently handles FCA cases. In addition, there were two significant FCA announcements in the healthcare field: First, the DOJ announced a settlement with two pharmaceutical companies on charges they violated the FCA by making misleading statements about the effectiveness of their lung cancer drug; and second, the DOJ announced that it had intervened in a qui tam lawsuit against a California hospital group alleging improper and unnecessary admissions from the hospitals’ emergency rooms. We cover it all for you here.

Detailed discussion: Read on for a recap of the recent FCA activity:

Escobar and implied certification: By far the biggest FCA news in June 2016 was the Supreme Court’s June 16, 2016 decision in Universal Health Services v. U.S. ex rel. Escobar, which held that the implied false certification theory can be a basis for FCA liability in certain circumstances. See here to read our detailed coverage of the decision. In addition, Manatt invites you to download and access our on-demand webinar discussing the Escobar decision, entitled “The False Claims Act: Escobar Means More Than You Think.” In this quick-hitting synopsis of the case, Manatt litigation partners Kimo Peluso and Arun Bhoumik delve into the Escobar decision. This 20-minute presentation provides a brief overview of the FCA, the Supreme Court’s holdings in Escobar, its implications for the FCA’s materiality requirement in a broad range of cases and most importantly, the ramifications for defendants asking courts to dismiss FCA cases at the pleading stage. Click here to listen to the webinar recording and download the program materials—at your convenience.

The DOJ, the FCA, and individual accountability: On June 9, 2016, Acting Associate Attorney General Bill Baer spoke on individual accountability at the ABA’s 11th National Institute on Civil False Claims Act and Qui Tam Enforcement in Washington, D.C. Some of the highlights:

  • With reference to the Yates Memo, Baer said “[m]y emphasis today is on those aspects of our approach to individual accountability that have a direct impact on civil matters, particularly those brought under the False Claims Act.”
  • Baer said that holding individuals accountable for wrongdoing in civil cases is just as important as in criminal cases because, in additional to providing a “powerful” deterrent against future misconduct, “[c]ivil wrongs can have damaging consequences, from the significant waste of taxpayer funds, to the loss of jobs, homes and financial security, to consumer overcharges … [and] [i]t makes no sense to have a different system of justice for individuals who engage in white-collar fraud than we do for everyone else.”
  • Baer referenced recent FCA settlements and the DOJ’s recent decision to intervene in a qui tam filed against a California hospital group and its CEO (we cover it below) and said that all actions were taken “by applying the Yates Memorandum.”
  • Baer discussed “how this commitment to individual accountability is playing out in the context of our FCA enforcement efforts,” stating that, at the beginning of any FCA investigation, “our attorneys are instructed to focus on both the company and the individuals who may be responsible for the bad conduct. It does not matter whether the investigation is precipitated by a qui tam complaint or a referral from a law enforcement partner, or whether a relator actually names individuals as defendants in the qui tam action. Our inquiry into individual misconduct now proceeds in tandem with the underlying corporate investigation.”
  • In a “departure from past practice,” Baer said that individuals will now not necessarily be released from FCA liability even if the DOJ settles with the company: “you should not assume we will be amenable to releasing individuals from False Claims Act liability when we settle with the organization. The presumption is flipped in the other direction. Admittedly, this is a departure from past practice, where a settlement would release not only the corporation, but also its individual directors, officers and agents. But it is a change we view as necessary to pursue company officials involved in the wrongdoing.”
  • If a company facing FCA allegations wants cooperation credit in settlement negotiations with the DOJ, in addition to prompt voluntary self-disclosure the company is “expected to disclose all facts relating to the individuals involved in the wrongdoing, no matter where those individuals fall in the corporate hierarchy”; however, “there is nothing—I repeat, there is nothing—in the individual accountability policy that requires companies to waive attorney-client privilege.”

Recent DOJ FCA activity:

  • On June 6, 2016, the DOJ announced that pharmaceutical companies Genentech Inc. and OSI Pharmaceuticals LLC agreed to pay $67 million to resolve FCA allegations relating to their lung cancer drug Tarceva. The DOJ said that the settlement resolved allegations, neither admitted nor denied by the pharmaceutical companies, that they made misleading statements to physicians and other healthcare providers about the effectiveness of the drug Tarceva to treat non-small cell lung cancer which led to the filing of false claims for reimbursement with federal and state Medicaid programs. Of the $67 million settlement amount, the federal government will receive $62.6 million and state Medicaid programs will receive $4.4 million. Qui tam whistleblower (former employee of Genentech) to receive $10 million.
  • On May 25, 2016, the DOJ announced that it had intervened in an FCA qui tam lawsuit against Prime Healthcare Services Inc. (PHS) and its CEO alleging unnecessary inpatient admissions from emergency rooms. The qui tam lawsuit also named 14 PHS California hospitals in the suit and alleged that emergency rooms at PHS facilities improperly admitted patients to the hospitals and submitted false claims to Medicare.

See here to read our coverage of the Supreme Court’s 6/16/16 Escobar decision, entitled “False Claims Act: Supreme Court Decides Implied Certification Case” and here for our webinar entitled “The False Claims Act: Escobar Means More Than You Think.”

See here to read the DOJ’s 6/9/16 press release entitled “Acting Associate Attorney General Bill Baer Delivers Remarks on Individual Accountability at American Bar Association’s 11th National Institute on Civil False Claims Act and Qui Tam Enforcement.”

See here to read the DOJ’s 6/6/16 press release entitled “Pharmaceutical Companies to Pay $67 Million To Resolve False Claims Act Allegations Relating to Tarceva.”

See here to read the DOJ’s 5/25/16 press release entitled “United States Intervenes in False Claims Act Lawsuit Against Prime Healthcare Services Inc. and its CEO Alleging Unnecessary Inpatient Admissions from Emergency Rooms.”

Focus on the FCPA: Self-Disclosure + Cooperation = Declinations and NPAs Edition

Why it matters: The first week of June 2016 saw the first two instances of the DOJ declining, in unrelated cases, to prosecute companies for Foreign Corrupt Practices Act (FCPA) violations since the announcement of the DOJ’s new FCPA Pilot Program on April 5, 2016. The DOJ’s declination letters to the corporations emphasized their voluntary self-disclosure and extensive cooperation “consistent with the FCPA Pilot Program” as the major factor in the declinations. Further, in parallel investigations of the two companies, the SEC announced non-prosecution agreements with them, similarly citing to those corporations’ voluntary self-disclosure and cooperation as the reason why the SEC would not be charging them with FCPA violations. Later that same month, the DOJ and SEC announced settlements in parallel investigations of another company’s foreign subsidiary for FCPA violations in Russia, in which the DOJ cited to the subsidiary’s cooperation with the investigation as a primary factor leading the DOJ to give it a non-prosecution agreement. The message the government wants us to glean from these cases comes through loud and clear: Voluntary self-disclosure and cooperation are key and (hopefully) will be rewarded.

Detailed discussion: Three FCPA resolutions in June 2016 illustrate the government’s renewed emphasis on rewarding self-disclosure and cooperation in FCPA investigations.

DOJ and SEC resolutions with Akamai Technologies, Inc. (Akamai) and Nortek, Inc. (Nortek): These were separate, unrelated FCPA investigations that both happened to involve bribes paid to Chinese officials by foreign subsidiaries, but they will forever be linked in the public’s mind because they represent the first time since the announcement of the DOJ’s new FCPA voluntary disclosure pilot program (“FCPA Pilot Program”—see our coverage of this new program in our April 6, 2016 newsletter alert) that the DOJ declined to prosecute for FCPA violations. The DOJ’s declination letters to Akamai and Nortek were made public following the SEC’s announcement on June 7, 2016 that, in parallel investigations, both companies had been given non-prosecution agreements (NPAs). Both agencies cited to prompt, voluntary self-disclosure and cooperation with the investigations on the part of both companies as the reasons for the NPAs and declinations, respectively.

SEC announcement re NPAs: On June 7, 2016, the SEC announced, “NPAs with two unrelated companies that will forfeit ill-gotten gains connected to bribes paid to Chinese officials by foreign subsidiaries.”

Under the SEC’s NPA with Akamai, a Massachusetts-based internet services provider, the company agreed to pay $652,452 in disgorgement plus $19,433 in interest. According to the SEC’s findings in Akamai’s NPA, the company’s Chinese subsidiary arranged $40,000 in payments in order to induce government-owned entities to purchase more services than they actually needed. The SEC found that employees at the Chinese subsidiary violated Akamai’s written policies by providing improper gift cards, meals, and entertainment to officials at these government-owned entities to build business relationships. Under the SEC’s NPA with Nortek, a Rhode Island-based residential and commercial building products manufacturer, Nortek agreed to pay $291,403 in disgorgement plus $30,655 in interest. According to the SEC’s findings in the NPA, Nortek’s Chinese subsidiary made approximately $290,000 in improper payments and gifts (including cash payments, gift cards, meals, travel, accommodations, and entertainment) to Chinese officials in order to receive preferential treatment, relaxed regulatory oversight, and reduced customs duties, taxes, and fees.

The SEC said that both Akamai and Nortek earned their NPAs by promptly self-disclosing the improper conduct upon becoming aware of it and “extensively” cooperating with the SEC investigations, including, as outlined in their respective NPAs:
(1) reporting the situation to the SEC “on their own initiative” in the early stages of their internal investigations;
(2) sharing detailed findings of their internal investigations and providing timely updates to SEC enforcement staff when new information was uncovered;
(3) providing summaries of witness interviews and voluntarily making witnesses available for interviews, including witnesses located in China;
(4) voluntarily translating documents from Chinese into English;
(5) terminating employees responsible for the misconduct; and
(6) strengthening their anti-corruption policies and conducting extensive mandatory training with employees around the world with a focus on bolstering internal audit procedures and testing protocols.

DOJ declination letters: In its nearly identical declination letters to Nortek and Akamai (which were released by the companies following the SEC’s announcement on June 7), the DOJ cited self-disclosure and cooperation by the companies—“[c]onsistent with the FCPA Pilot Program”—as the reason for declining to prosecute.

Specifically, Akamai’s June 6, 2016 declination letter provided that:

Based upon the information known to the Department at this time, we have closed our inquiry into this matter. Consistent with the FCPA Pilot Program, we have reached this conclusion despite the bribery by an employee of the Company’s subsidiary in China and one of that subsidiary’s channel partners, based on a number of factors, including but not limited to Akamai’s prompt voluntary self-disclosure of the misconduct, the thorough investigation and fulsome cooperation by the Company (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 (including promptly suspending at the start of the investigation the individual involved in the China misconduct who then resigned shortly thereafter, terminating the relationship with the channel partner involved in the misconduct, and disciplining five other employees who should have prevented other violations of the Company’s policies), and the fact that Akamai will be disgorging to the SEC the full amount of disgorgement as determined by the SEC.

The wording of Nortek’s June 3, 2016 declination letter differed only in the recitation of the specific facts leading to the DOJ’s declination:

Based upon the information known to the Department at this time, we have closed our inquiry into this matter. Consistent with the FCPA Pilot Program, we have reached this conclusion despite the bribery by employees of the Company’s subsidiary in China, 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 (including terminating the employment of all five individuals involved in the China misconduct, which included two high-level executives of the China subsidiary), and the fact that Nortek will be disgorging to the SEC the full amount of disgorgement as determined by the SEC.

DOJ and SEC resolutions with Analogic Corporation (Analogic) and its subsidiary BK Medical ApS (BK Medical): The DOJ announced on June 21, 2016 that Analogic’s foreign subsidiary BK Medical, a manufacturer of ultrasound equipment headquartered in Denmark, had entered into an NPA and agreed to pay a $3.4 million criminal penalty to resolve alleged FCPA violations in Russia and other foreign countries. According to the resolution documents, BK Medical admitted to engaging in a scheme with its distributor and others in Russia and at least five other countries to make improper payments to third parties using fictitious invoices and falsely book those third-party payments, thereby causing its parent Analogic, a Massachusetts-based medical device manufacturer, to falsify its books and records as a result of incorporating BK Medical’s financial statements into its own. In addition to paying the criminal penalty, BK Medical’s NPA requires that it continue to cooperate with U.S. and foreign authorities in ongoing investigations and prosecutions, “including of individuals,” and to periodically report to the DOJ on the implementation of an enhanced compliance program.

The DOJ said that it based its decision to give BK Medical an NPA based on a number of factors, including credit for its self-disclosure and remediation (e.g., terminating the officers and employees responsible for the corrupt payments). However, BK Medical only received partial credit for cooperation because “it did not initially disclose certain relevant facts that it learned in the course of its internal investigation.” The DOJ noted that, by the conclusion of the investigation, BK Medical had disclosed all relevant facts known to it, “including information about individuals involved in the FCPA misconduct.”

The SEC also announced on June 21, 2016 that, in its parallel civil investigation, Analogic agreed to pay $7.67 million in civil disgorgement and $3.8 million in prejudgment interest to settle the SEC’s charges that it had violated the FCPA by failing to both keep accurate books and records and maintain adequate internal accounting controls. The SEC said that, in determining the settlement, it had considered Analogic’s self-reporting, remedial acts, and general cooperation with the SEC’s investigation.

FCPA roundup: The following are brief recaps of some of the other recent FCPA matters that caught our eye:

  • On June 16, 2016, the DOJ announced that a second businessman pleaded guilty to FCPA charges in connection with the bribery scheme involving Venezuela’s state-owned and state-controlled energy company, Petroleos de Venezuela S.A. (PDVSA). The DOJ said that Roberto Rincon (Rincon) pleaded guilty to, among other things, one count each of violating and conspiracy to violate the FCPA. Sentencing is scheduled for September 30, 2016. As we reported in our January 2016 newsletter, Rincon was arrested in December 2015 after a grand jury in the Southern District of Texas returned an 18-count indictment against him and Abraham Jose Shiera (Shiera). Shiera pleaded guilty in March 2016 and is set to be sentenced in July 2016.
  • On June 10, 2016, the Louis Berger Group (Berger) and its parent filed a breach of fiduciary lawsuit in New Jersey superior court against a former executive who admitted to FCPA violations in India, Indonesia, Kuwait and Vietnam. In 2015, Berger paid $17.1 million to the DOJ to settle the charges, and has now filed the lawsuit against the former executive because his criminal activity “has cost the business more than $17 million and hurt its reputation.”
  • On June 6, 2016, the DOJ filed a status report in USA v. Biomet Inc. in the District of Columbia alleging that Biomet had breached the DPA it entered into with the DOJ in 2012 in connection with FCPA violations in South America. The status report said that Biomet had breached the DPA “based on the conduct in Mexico and Brazil and based on Biomet’s failure to implement and maintain a compliance program as required by the DPA.” The DOJ said that Biomet is continuing to cooperate and that the DOJ and Biomet have been in ongoing discussions to resolve the breach, which discussions, if successful, will obviate the need for a trial. The DOJ said in the filing that for the time being it is not seeking hearings or other relief.
  • On May 6, 2016, the IRS said that FCPA disgorgement payments are not tax-deductible. The Office of the Chief Counsel of the IRS released an Advice Memorandum that said a disgorgement payment to the SEC in a corporate FCPA enforcement action wasn’t tax-deductible, citing to Section 162(f) of the Tax Code (deductions aren’t allowed “for any fine or similar penalty paid to a government for the violation of any law”).

See here to read the SEC’s 6/7/2016 press release entitled “SEC Announces Two Non-Prosecution Agreements in FCPA Cases.”

See here to read the DOJ’s 6/6/2016 declination letter re Akamai Technologies, Inc.

See here to read the DOJ’s 6/3/2016 declination letter re Nortek, Inc.

See here to read the DOJ’s 6/21/16 press release entitled “Analogic Subsidiary Agrees to Pay More than $14 Million to Resolve Foreign Bribery Charges.”

See here to read the SEC’s 6/21/16 press release entitled “SEC Charges Medical Device Manufacturer With FCPA Violations.”

White Collar Enforcement Roundup—Financial Crimes Edition

Why it matters: This month, we look at a sampling of enforcement actions announced in recent weeks by agencies ranging from the DOJ and the SEC on the one hand to the CFTC and FINRA on the other. The actions cover a myriad of financial crimes, including insider trading, LIBOR manipulation and Medicare fraud. Read on for a recap.

Detailed discussion: What do tax evasion, AML violations, stock manipulation schemes (including a rare DPA for an individual), insider trading charges, LIBOR manipulation, and the Medicare Fraud Strike Force have in common? They all figured prominently in recently announced enforcement actions that caught our eye. We’ve sampled them for you here and linked to the relevant press releases if you want more details.

Financial crimes—general:

  • On June 22, 2016, the DOJ announced that a former Credit Suisse banker pleaded guilty to conspiring with U.S. taxpayers and other Swiss bankers to defraud the United States. The DOJ said that the individual pleaded guilty to assisting U.S. taxpayers to conceal foreign accounts and evade U.S. taxes during his employment as a banker working for Credit Suisse AG on its North American desk. He faces a statutory maximum sentence of five years in prison as well as monetary penalties and restitution. See here to read the DOJ’s press release entitled “Former Swiss Banker Pleads Guilty to Conspiring with U.S. Taxpayers and Other Swiss Bankers to Defraud the United States.”
  • On May 18, 2016, the Financial Industry Regulatory Authority (FINRA) announced that it had fined Raymond James & Associates $17 million and sanctioned/fined its former compliance officer for “widespread” AML violations. FINRA said that, due in part to rapid growth, the company failed to put in place adequate AML compliance programs and, as a result, missed numerous “red flags.” The former compliance officer was fined $25,000 and suspended for three months. See here to read the FINRA press release entitled “FINRA Fines Raymond James $17 Million for Systemic Anti-Money Laundering Compliance Failures.”
  • On May 11, 2016, the DOJ announced that the former CEO of Majorca-based Absolute Capital Holdings Ltd. (Absolute Holdings) entered into a deferred prosecution agreement (DPA) with the DOJ pursuant to which he agreed to forfeit $8 million in profits allegedly derived from a fraud scheme conducted by fugitive hedge fund manager Florian Homm (Homm is accused of overseeing a stock manipulation scheme that caused investors to lose approximately $200 million). The DOJ said that primary to its decision to enter into the DPA with the former CEO were the facts that he agreed to voluntarily travel to the U.S. from Dubai (where he resides) to resolve the matter, and was taking full responsibility for the actions alleged in the criminal case in which he was charged with books and records violations under the Investment Advisors Act. The DOJ said that, under the DPA, the former CEO did not admit to any criminal liability or concede knowledge of any allegedly illegal acts by Homm and others at Absolute Capital. The DOJ confirmed that the DPA and payment of the financial penalty resolves the government’s investigation as to the former CEO and provides that it will not pursue him further in the stock manipulation scheme. See here to read the DOJ’s press release entitled “Former CEO of Investment Firm with Main Office in Spain to Pay $8 Million as Part of Agreement to Resolve Criminal Allegations.”

Insider trading:

  • On June 16, 2016, the SEC charged former SAP America software executive and three friends with insider trading. The SEC alleged that the software executive, a former global vice president at SAP America, and three close friends made more than $500,000 in illicit profits based on the executive’s illegal tip about SAP America’s upcoming merger with Concur Technologies. See here to read the SEC’s press release entitled “Software Executive and Three Friends Charged With Insider Trading.”
  • On June 15, 2016, the SEC charged three hedge fund managers and a former government official in a $32 million insider trading scheme: The SEC alleged that two hedge fund managers and their source, a former FDA official, reaped unlawful profits of nearly $32 million for hedge funds investing in healthcare securities by deceptively obtaining confidential information from the FDA regarding the status of FDA approvals for drugs developed by prominent pharmaceutical companies. A third hedge fund manager working at the same investment advisory firm was also charged with falsely inflating assets in portfolios he managed via “asset mismarking,” yielding $6 million in extra fees. See here to read the SEC’s press release entitled “Hedge Fund Managers and Former Government Official Charged in $32 Million Insider Trading Scheme.”

Manipulation of London Interbank Offered Rate (LIBOR) and other bank lending rates:

  • On June 2, 2016, the DOJ announced the indictment of two former Deutsche Bank employees on fraud charges in connection with LIBOR manipulation: The DOJ announced that the bank’s supervisor of the Pool Trading Desk in New York and a derivatives trader in London were indicted for their alleged roles in a “long-running” scheme to manipulate the U.S. Dollar and LIBOR. See here to read the DOJ’s press release entitled “Two Former Deutsche Bank Employees Indicted on Fraud Charges in Connection with Long-Running Manipulation of Libor.”
  • On May 25, 2016, the Commodity Futures Trading Commission (CFTC) ordered Citigroup and its Japanese affiliates to pay $175 million in penalties for attempted Yen LIBOR and Euroyen TIBOR rates. The CFTC also found Citigroup and its Japanese affiliates liable for false reporting of Euroyen TIBOR and USD LIBOR rates. The CFTC reported that this is the third CFTC enforcement action against Citibank for benchmark abuses (FX, ISDAFix, and LIBOR), bringing the total penalties imposed against Citibank and its affiliates to $735 million and requiring extensive remediation on Citibank’s part. See here to read the CFTC’s press release entitled “CFTC Orders Citibank, N.A. and Japanese Affiliates to Pay $175 Million Penalty for Attempted Manipulation of Yen LIBOR and Euroyen TIBOR, and False Reporting of Euroyen TIBOR and U.S. Dollar LIBOR.”

Medicare fraud: On June 22, 2016, the DOJ announced charges against 301 individuals for approximately $900 million in false billings to federal and state Medicare programs. The DOJ said that the “national healthcare fraud takedown” was the largest in Medicare Fraud Strike Force history. See here to read the DOJ’s press release entitled “National Health Care Fraud Takedown Results in Charges against 301 Individuals for Approximately $900 Million in False Billing.”

Keeping an Eye Out—Updates and Briefly Noted

Updates

  • June 9, 2016—the New York State Court of Appeals rejected the expansion of the common interest rule in Ambac Assurance v. Countrywide: The Court held that the common interest exception to the attorney-client privilege is limited to situations where shared information relates to the parties’ legal interest in pending or threatened litigation. The Court overturned the lower court’s decision, which had expanded the common interest rule to include shared information in merger situations. We reported on the oral argument before the Court of Appeals in our June 6, 2016 Newsletter under “NY Court Reviews Expansion of Common Interest Rule.”
  • Circuits continue to reject challenges to the constitutionality of SEC “in-house” administrative proceedings:
    1. On June 21, 2016, the Eleventh Circuit reversed two separate Northern District of Georgia cases, Hill v. SEC and Gray Financial Group, Inc. v. SEC, respectively, which had been consolidated on appeal, and ruled that, before plaintiffs can bring a constitutional challenge to the SEC’s administrative proceedings in the courts, they must first exhaust their remedies before the SEC. The decision reversed an injunction granted by a Northern District of Georgia judge, saying that the judge “erred in exercising jurisdiction.” In addition, on June 1, 2016, the Second Circuit affirmed the S.D.N.Y. in Tilton v. SEC and dismissed Tilton’s lawsuit on lack of jurisdiction and exhaustion of remedies grounds, holding that she must first complete SEC administrative proceedings before seeking redress in the courts. We last discussed the Tilton, Hill and Gray Financial cases in our October 2015 newsletter under “ ‘Wherefore Art Thou, Due Process?’ Part III.”
    2. On June 25, 2016, the Supreme Court denied cert in Pierce v. SEC, another case challenging the constitutionality of SEC administrative proceedings. This follows the Court’s denial of cert in Bebo v. SEC in March 2016.
  • June 9, 2016—SEC announced that it had awarded $17 million under its Whistleblower Program: The SEC said that the whistleblower award was being made to a former company employee “whose detailed tip substantially advanced the agency’s investigation and ultimate enforcement action.” The award is the second largest since the inception of the SEC’s Whistleblower Program in 2011 (the first being an award of $30 million in 2014) and brings the total amount paid out under the program to $85 million to 32 whistleblowers. Follow-up to the story in our May 6, 2016 newsletter under “Still Whistling While You Work—Whistleblower Programs Update.”

Briefly Noted

  • June 17, 2016—an ex-Warner Chilcott executive was acquitted by a jury of charges that he participated in a scheme to bribe doctors in violation of the Anti-Kickback statute: After less than a day of deliberations, the Wall Street Journal reported that a federal jury in Boston acquitted the former executive of the single charge that he violated the Anti-Kickback statute by participating in a “sweeping” scheme to bribe doctors with pricey meals, travel and speaking fees in order to induce them into writing Warner Chilcott prescriptions.

Rulemaking:

  • May 26, 2016—The International Organization for Standardization (ISO) announced that it is close to finalizing ISO 37001, which would establish an international standard for “anti-bribery management systems”: The ISO, a voluntary international standard-setting body composed of representatives from various national standards organizations, said that ISO 37001 was developed to help companies establish, operate, and improve their anti-bribery compliance program by outlining the anticorruption controls considered to be “international good practice[s]” for preventing, detecting, deterring, and remediating corruption risks.
  • April 18, 2016—the Department of Health and Human Services adopted new guidelines for holding individuals accountable for healthcare fraud by excluding them from federal programs such as Medicare: Such “debarments,” in effect, will keep affected individuals from working in the healthcare industry. The new guidelines use a risk continuum and four major categories to evaluate individuals: (1) nature and circumstances of the conduct (conduct is considered high-risk if it has the potential to harm someone, causes a financial loss to a federal program, occurs as part of a pattern of wrongdoing, is continual or repeated, occurs over a long period of time, or carries a criminal sanction); (2) leadership role (if an individual led or planned the wrongdoing, or if someone with managerial control of an entity led it, this indicates higher risk); (3) history of prior fraudulent conduct; and (4) conduct during an investigation. Higher-risk conduct includes if a person took steps to obstruct or impede wrongdoing or failed to comply with a subpoena. The policy also says that the absence of a compliance program incorporating the U.S. Sentencing Commission Guidelines’ seven elements of an effective compliance program indicates higher risk.

Talks about town:

  • On June 23, 2016, Assistant Attorney General Leslie R. Caldwell spoke at the International AntiCounterfeiting Coalition Inc. and Underwriters Laboratories Latin America Regional Brand Protection Summit in Miami, Florida.
  • On June 6, 2016, Assistant Attorney General Caldwell spoke at the CCIPS-CSIS Cybercrime Symposium 2016: Cooperation and Electronic Evidence Gathering Across Borders in Washington, D.C.
  • On May 12, 2016, Assistant Attorney General Caldwell spoke at the Securities Enforcement Forum West Conference in San Francisco.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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