Understanding the New DOJ Compliance Guidance: Part Three – Policies & Procedures

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.

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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.

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Understanding the New DOJ Compliance Guidance: Part 2 – Autonomy, Resources, and Staffing

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.

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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?

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Hold the Phone: SEC Takes One Last Stand Before the Tenth Circuit regarding the Constitutionality of the SEC’s Administrative Law Judges

Last week, the United States Securities and Exchange Commission filed a petition for rehearing en banc with the Tenth Circuit Court of Appeals, imploring the court to reconsider a divided panel’s ruling on the unconstitutionality of its administrative law judges in Bandimere v. SEC.  In that ruling (detailed here), the Tenth Circuit overturned the Commission’s sanctions against Mr. Bandimere because the SEC administrative law judge (“ALJ”) presiding over Mr. Bandimere’s case was an inferior officer who should have been constitutionally appointed (rather than hired) to the position, in violation of the Appointments Clause of the United States Constitution.

Primarily relying on its prior submissions and Judge Monroe G. McKay’s dissent in the panel’s original ruling, the SEC argues that the original decision reflects a fundamental misunderstanding of the role of ALJs and Supreme Court precedent, and risks throwing essential features of the agency into disarray. In particular, the SEC questioned the majority’s opinion that Freytag v. Commissioner, 501 U.S. 868 (1991), was dispositive in equating special trial judges of tax court to the ALJs to find that the ALJs are inferior officers who must be constitutionally appointed.  The SEC distinguishes the roles of its ALJs from those of the special tax court trial judges by noting differences in their power and function.  First, the special trial judges are vested with authority, including the power to enforce compliance with their orders, that is different in degree and kind from the powers given to ALJs.  For example, both the special trial judges and ALJs have the power to issue subpoenas, but unlike the special trial judges, ALJs have no authority to enforce subpoenas.  ALJs can only request the Commission to seek enforcement of the subpoenas in district court.  In addition, unlike the special trial judges, ALJs cannot use contempt power—a hallmark of a court—to enforce any order it may issue.  Second, the function between the special trial judges and ALJs differ because the Tax Court in Freytag was required to defer to the special trial judge’s factual finding unless “clearly erroneous, whereas the SEC decides all questions of fact and law de novo.

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Understanding the New DOJ Compliance Guidance: Part 1 – Tone at the Top

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.

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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.”

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Circuit Split on Whistleblower Protections Widens

On March 8, 2017, a divided panel of the Ninth Circuit issued an opinion in Somers v. Digital Realty Trust Inc. that further widened a circuit split on the issue of whether the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply to whistleblowers who claim retaliation after reporting internally or instead only to those who report information to the SEC.  Following the Second Circuit’s 2015 decision in Berman v. Neo@Ogilvy LLC, the Ninth Circuit panel held that Dodd-Frank protections apply to internal whistleblowers.  By contrast, the Fifth Circuit considered this issue in its 2013 decision in Asadi v. G.E. Energy (USA), LLC and found that the Dodd-Frank anti-retaliation provisions unambiguously protect only those whistleblowers who report directly to the SEC.

Plaintiff Paul Somers alleged that Digital Realty Trust fired him after he made several reports to senior management regarding possible securities law violations. Somers only reported these possible violations internally at the company, and not to the SEC.  After his employment was terminated, Somers sued Digital Realty, alleging violations of state and federal securities laws, including violations of the whistleblower protections under Dodd-Frank.  Digital Realty moved to dismiss on the ground that Somers was not a “whistleblower” under Dodd-Frank.  The district court denied the motion, deferring to the SEC’s interpretation that internal reporters are also protected from retaliation under Dodd-Frank.

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The Call for a Statutory Insider Trading Law

Judge Jed S. Rakoff (S.D.N.Y.) recently made headlines after urging lawyers to draft and advocate for a more straightforward insider trading statute to replace judicially-created insider trading law. During his keynote speech at the New York City Bar’s annual Securities Litigation & Enforcement Institute, Judge Rakoff explained that the law has become overly-complicated since courts were forced to define insider trading by shoehorning the concept into the fraud provisions of the Securities Exchange Act of 1934. As a result, increasingly suspect theories have been developed to address potential insider trading in an expanding variety of scenarios.

In promoting a statutory solution for insider trading law, Judge Rakoff pointed to the Europe Union (“EU”) as an example. He explained that the EU defined insider trading by statute in simple and broad terms, and avoided relying on the framework of fraud.  Considering Judge Rakoff’s influence and expertise in securities law, inquiry into the EU’s approach to insider trading is warranted.

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With New Guidance, DOJ Signals What Companies Should Expect to Answer During FCPA Inquiries

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

SEC Reportedly Centralizing Authority to Issue Formal Investigation Orders

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

Insider Trading Around Private Placements: Was Tom Price’s Investment Down Under Above Board?

On February 10, the Senate confirmed Representative Tom Price (R-GA) as Secretary of Health and Human Services, where he will oversee the U.S. Food and Drug Administration (FDA). His nomination has not been without controversy, including several Senators and a coalition of public interest advocacy groups demanding an investigation into whether Price violated insider trading laws when he invested in an Australian pharmaceutical company last summer.  This highlights some basic precautionary steps that public companies can take when considering private placements.

The company Price invested in, Innate Immunotherapeutics, is working to develop a single product. The company is essentially a bet that the drug will succeed in clinical trials and receive FDA approval.  Price was introduced to the company by Representative Chris Collins (R-NY), who sits on the company’s board and is its largest shareholder.  The introduction was regarding a private placement that Innate was offering to select U.S. investors to raise additional working capital for a clinical trial and to “seek approval from the United States Food and Drug Administration for an Investigational New Drug programme in the United States,” among other purposes.  The private placement was priced at $0.18 USD per share, a 12% discount to the stock’s market price in early June 2016 (the stock is publicly traded on the Australian Securities Exchange).  Even though both Price and Collins sit on committees that oversee the health care and pharmaceutical industries, both invested in the private placement last summer.

President Trump nominated Price to head HHS on November 29, 2016.  By then, Innmate’s share price had risen to $0.58 USD.  The stock peaked at $1.39 USD on January 25, 2016, representing a 670% increase on the congressmen’s investments.  Last Friday, when the Senate confirmed Price, the stock closed at $0.71 USD.

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Delaware Supreme Court Wastes No Words: Summarily Affirms In re Volcano Corp. Stockholder Litigation, Upholding Business Judgment Rule and Dismissing Remaining Waste Claim

On February 9, 2017, the Supreme Court of Delaware summarily affirmed the Court of Chancery’s decision in In re Volcano Corp. Stockholder Litigation which had dismissed plaintiffs’ complaint on defendants’ 12(b)(6) motion to dismiss.

Plaintiffs, former stockholders of Volcano Corporation, had brought an action against defendants for breaches of fiduciary duty arising from the all-cash merger between Volcano and Philips Holding USA Inc. The parties had disputed what standard of review the Court of Chancery should apply: the Revlon test, as plaintiffs claimed, because Volcano’s stockholders received cash for their shares, or the irrebuttable business judgment rule, as defendants argued, because Volcano’s stockholders were “fully informed, uncoerced, and disinterested” when they approved the merger by tendering a majority of Volacano’s shares into a tender offer.  As the Court of Chancery explained, if a business judgment rule is irrebuttable, plaintiffs could only challenge the transaction on the basis of waste.  Thus, plaintiffs also argued in the alternative that if the business judgment rule did apply, it should only be a rebuttable presumption.

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