This is the third in a series of posts where we will explore critical elements of a successful compliance program. In February, the Department of Justice’s Fraud Section offered a new perspective on what the government expects in an anti-corruption compliance program, in the form of a series of questions that companies should be prepared to answer about their program. The guidance offers companies a roadmap for building or assessing their compliance program. In this series, we will explore recent and past guidance on key compliance topics, as well as key takeaways for companies of all sizes.
Policies and Procedures are the cornerstone of a compliance program. While traditional sources of guidance, such as the DOJ and SEC FCPA Resource Guide and DPAs themselves, lay out the government’s fundamental expectations with regard to policies and procedures, the Fraud Section’s new guidance goes deeper, reflecting an approach that will assess not only the existence but also the design and integration of policies and procedures.
The most basic expectation with regard to policies and procedures is that companies will have a code of conduct prohibiting violations of the FCPA and the law’s foreign counterparts. Additionally, companies should have policies and procedures covering, among other things, gifts, travel & entertainment, expenses, political and charitable contributions, and payments to third parties. Finally, traditional sources of guidance make clear that companies should also have a set of finance and accounting internal controls reasonably designed to ensure the maintenance of fair and accurate books and records.
This is the second in a series of posts where we will explore critical elements of a successful compliance program. In February, the Department of Justice’s Fraud Section offered a new perspective on what the government expects in an anti-corruption compliance program, in the form of a series of questions that companies should be prepared to answer about their program. The guidance offers companies a roadmap for building or assessing their compliance program. In this series, we will explore recent and past guidance on key compliance topics, as well as key takeaways for companies of all sizes.
It would be a mistake for companies to dismiss the Fraud Section’s recent guidance, which one high-level DOJ official suggested may be used more broadly by DOJ’s Criminal Division, as business as usual. It is not just more of the same. The guidance does more than merely flesh-out existing direction; it operationalizes compliance. Consider two examples from the guidance’s “Autonomy and Resources” section:
- Empowerment – Have there been specific instances where compliance raised concerns or objections in the area in which the wrongdoing occurred? How has the company responded to such compliance concerns? Have there been specific transactions or deals that were stopped, modified, or more closely examined as a result of compliance concerns?
- Compliance Role – Was compliance involved in training and decisions relevant to the misconduct? Did the compliance or relevant control functions (e.g., Legal, Finance, or Audit) ever raise a concern in the area where the misconduct occurred?
This is the first in a series of posts where we will explore critical elements of a successful compliance program. In February, the Department of Justice’s Fraud Section offered a new perspective on what the government expects in an anti-corruption compliance program, in the form of a series of questions that companies should be prepared to answer about their program. The guidance offers companies a roadmap for building or assessing their compliance program. In this series, we will explore recent and past guidance on key compliance topics, as well as key takeaways for companies of all sizes.
A commitment from high-level management is typically the first compliance component discussed in government guidance and Deferred Prosecution Agreements. Commonly referred to as “Tone at the Top,” this critical concept has previously been described in vague, generic ways. See, for example, this excerpt from Attachment C of DOJ’s recent DPA with Embraer S.A., which is identical to language in many other agreements:
“The Company will ensure that its directors and senior management provide strong, explicit, and visible support and commitment to its corporate policy against violations of the anti-corruption laws and its compliance code.”
Without fanfare or forewarning, the US Department of Justice released new anti-corruption compliance guidance on February 8, 2017. The eight page document provides rare insight into the government’s evaluation of corporate compliance programs. Companies designing compliance programs, conducting internal investigations, or facing a bribery or books and records-related government inquiry can now look to the appropriately titled “Evaluation of Corporate Compliance Programs” for a hint at the types of questions they should be prepared to answer.
As emphasized in the Department of Justice and Security and Exchange Commission’s November 2012 FCPA Resource guide, DOJ’s recent guidance again reinforces that a compliance program should be individualized to a company’s risk profile, and so should the government’s evaluation of the program. The guidance is clearly not a checklist that applies to all. It does, however, provide more detail about the way a company should evaluate its own program. Companies can leverage the information to design more robust compliance programs and better respond to potential violations. READ MORE
According to a report in the Wall Street Journal, the acting Chairman of the Securities and Exchange Commission has centralized authority to issue formal orders of investigation – a critical authority that triggers the ability of SEC staff attorneys to issue subpoenas. The move, which was not publicized by the SEC, would curb existing powers of the Commission’s enforcement staff.
Since 2009, the power to issue formal orders of investigation had been “sub-delegated” to about 20 senior attorneys within the SEC’s Enforcement Division. However, according to the Journal report, acting SEC Chairman Michael Piwowar ordered the authority to be centralized exclusively with the Director of Enforcement. READ MORE
On August 2, 2016, U.S. District Judge Edward Chen dismissed a shareholder lawsuit brought against children’s educational toymaker LeapFrog Enterprises, Inc. (“LeapFrog”) for failure to adequately plead statements were false or misleading, or made with requisite intent. Plaintiffs’ suit, which was consolidated in 2015, alleged that LeapFrog and its executives hid demand and inventory problems from investors. The judge disagreed, finding that the investors had been sufficiently warned of problems with LeapFrog’s product lines and that the allegedly misleading statements were forward-looking and cautionary, and therefore fell within the PSLRA’s safe harbor. Defendants’ public statements about many of the allegedly misleading topics helped drive home that Plaintiffs’ theory amounted to classic “fraud by hindsight.”
In a move that highlights both the increased focus on holding individuals accountable and the credit that can be earned through cooperation, the U.S. Securities and Exchange Commission (“SEC”) announced last week that, for the first time, it entered into a deferred prosecution agreement (“DPA”) with an individual allegedly involved in a Foreign Corrupt Practices Act (“FCPA”) case. On February 16, 2016, the SEC announced a DPA with Yu Kai Yuan, a former employee of software company PTC Inc.’s Chinese subsidiaries. The SEC agreed to defer civil FCPA charges against Yu for three years in recognition of his cooperation during the SEC’s investigation. PTC also reached a settlement with the SEC, in which the company agreed to disgorge $11.8 million. Prior to the Yu DPA, the SEC had entered into one DPA with an individual in November 2013, in a matter involving a hedge fund manager allegedly stealing investor assets. However, never before this time was a DPA with the SEC related to an FCPA case.
On January 14, 2016, the SEC entered into two no-admit, no deny settlements regarding an alleged pay-to-play scheme to obtain contracts from the Treasury Office for the State of Ohio. The first was with State Street Bank and Trust Company (“State Street” or “the Bank”) – a custodian bank that provides asset servicing to institutional clients, and the second with Vincent DeBaggis, a former State Street executive. On the same day, the SEC filed suit against attorney Robert Crowe for his role in the scheme which allegedly involved causing concealed campaign contributions to be made to the Ohio Treasury Office to influence the awarding of contracts to State Street. Mr. Crowe is a partner at the law firm of Nelson Mullins Riley & Scarborough and a former lobbyist for the Bank.
In what will surely not be the last word on this continuing controversy, on September 3, 2015, a majority of the members of the Securities and Exchange Commission held that the appointment process for the Commission’s administrative law judges (“ALJ”) does not violate the Constitution. As we reported just last month, a federal judge in the Southern District of New York preliminarily enjoined a separate SEC administrative proceeding based in part on the judge’s view that the SEC ALJ appointment process is likely unconstitutional. In light of the key role ALJs play in SEC proceedings and the number of administrative cases brought each year, the question is likely to be addressed at the appellate level and could have significant implications for the securities defense bar.
Last week, the SEC scored a victory in its battle to defend the use of administrative proceedings in enforcement actions seeking penalties against unregulated entities or persons. On June 30, 2015, Southern District of New York Judge Ronnie Abrams denied Plaintiffs Lynn Tilton, Patriarch Partners LLC, and affiliated entities’ motion for a preliminary injunction halting the SEC’s administrative proceedings against them. Judge Abrams’ decision in Tilton v. SEC is the latest in a string of challenges to the SEC’s use of administrative proceedings in enforcement actions (also discussed in earlier posts from July 31, 2014 and October 28, 2014). As we have written, the SEC has faced mounting scrutiny for its increasing use of administrative proceedings, including criticism that the Administrative Law Judges (ALJs) presiding over the proceedings are biased in favor the SEC’s Enforcement Decision and that defendants subjected to administrative proceedings are entitled to fewer due process protections, including limited discovery and no right to a jury trial. The SEC began increasing its use of administrative proceedings after the 2010 Dodd-Frank Act enabled the Commission to file actions against unregulated entities or persons in its in-house forum, rather than in federal courts, as it had traditionally been required to do.