In a memorandum released on April 18, 2016, the private blood-testing company Theranos – once valued at over $9 billion – announced that it is under investigation by the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Attorney’s Office for the Northern District of California, among other government agencies. The memorandum did not disclose the focus of the government investigations. Theranos’ announcement about the investigations comes on the heels of a series of October 2015 Wall Street Journal (“WSJ”) articles critical of the accuracy of the company’s blood-testing methods. The government investigations into Theranos are not surprising, particularly in light of recent remarks by SEC Chair Mary Jo White (“White”) at a March 31, 2016 address at Stanford University’s Rock Center for Corporate Governance, where White revealed the SEC’s focus on Silicon Valley’s privately held unicorns – private start-up companies with valuations exceeding $1 billion.
In recent years, the DOJ and SEC have significantly increased their Foreign Corrupt Practices Act (FCPA) enforcement efforts, and in the process, have successfully advocated the theory that state-owned or state-controlled entities should qualify as instrumentalities of a foreign government under the FCPA. The FCPA defines a foreign official as “any officer or employee of a foreign government or any department, agency or instrumentality thereof.” In August 2014, the government’s broad definition of who constitutes a “foreign official” came into question for the first time when two individuals (Joel Esquenazi and Carlos Rodriguez) filed a petition for writ of certiorari with the Supreme Court to challenge their convictions under the FCPA and argued for the high court to limit the FCPA’s definition of the term. However, on October 6, 2014, the Supreme Court declined to consider the potential landmark case effectively upholding the government’s broad view of the term “foreign official.” READ MORE
On April 9, 2014, the Securities and Exchange Commission announced that Hewlett-Packard had agreed to pay more than $108 million to settle Foreign Corrupt Practices Act actions brought by the SEC and the Department of Justice. These actions were based on HP’s subsidiaries’ alleged payments of more than $3.6 million to Russian, Polish, and Mexican government officials to obtain or maintain lucrative public contracts. The settlement is important because it highlights the SEC’s and DOJ’s continued focus on companies’ internal controls, particularly in the FCPA arena. It also shows that the SEC may be able to use lesser, non-fraud offenses in which the underlying conduct involves a fairly de minimis amount of money to police behavior and subject companies to significant financial consequences. READ MORE
Comments made by Kara N. Brockmeyer, the Securities Exchange Commission’s chief of the Foreign Corruption Practices Act (FCPA) unit, and Charles E. Duross, deputy chief of the Department of Justice’s FCPA unit, at the recent International Conference on the FCPA suggest that both agencies are increasing their scrutiny of possible FCPA violations for the next year. Both units have increased their resources for tackling investigations of possible FCPA violations. Additionally, both agencies have increased awareness among other U.S. and international government agencies so that those agencies could also be on the lookout for possible FCPA violations. Having strengthened their relationships with overseas regulators, both agencies are optimistic that they are in the position to bring significant FCPA cases in the following year.
According to Andrew Ceresney, co-director of the SEC’s enforcement division, the SEC also expects that FCPA violations will be “increasingly fertile ground” for the Dodd-Frank whistle-blower program. The SEC received 149 FCPA violation tips from whistle-blowers in just the last year and the SEC expects more enforcement cases to arise from whistle-blowers. READ MORE
In its seminal decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), regarding antifraud provisions of the U.S. securities laws, the Supreme Court held that “Section 10(b) [of the Securities Exchange Act of 1934] reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” Id. at 2888. Although Morrison—which involved a private action by foreign plaintiffs—appeared to set down a bright-line rule, it spurred a number of questions, including whether its holding would apply beyond the private civil context, to SEC civil enforcement actions and criminal prosecutions as well. A large number of courts have already applied Morrison to SEC actions. In a recent significant development, the Court of Appeals for the Second Circuit concluded that Morrison also applies to criminal cases brought pursuant to Section 10(b) and Rule 10b–5. United States v. Vilar, Case No. 10-521, at *3 (2d Cir. Aug. 30, 2013). But the Dodd-Frank Act’s “extraterritorial jurisdiction” amendment to the Exchange Act for actions brought by the SEC and the DOJ—the immediate congressional response to Morrison—will presumably be invoked by the government for actions based on post-amendment conduct. READ MORE
In 2008, Rajat Gupta made a handful of short phone calls to his friend Raj Rajaratnam. The information that Gupta conveyed to Rajaratnam in those phone calls is now likely to cost Gupta millions of dollars, two years in prison, and the loss of his livelihood. These are the fateful consequences of the government’s use of wiretapping to uncover evidence of insider trading on Wall Street.
In June 2012, after a weeks-long trial and relying heavily on recorded conversations between Gupta and Rajaratnam, a jury convicted Gupta of three counts of federal securities fraud and one count of criminal conspiracy. The jury found that Gupta, a former director of Goldman Sachs, had provided Rajaratnam with material non-public information regarding Goldman’s then-unreported financial results and an imminent investment by Berkshire Hathaway at the height of the financial crisis. Though the court found that Gupta did not receive “one penny” in return for providing the information, he was convicted and ultimately sentenced by Judge Jed Rakoff to two years in prison and assessed a $5 million fine, a heavy penalty for his gratuitous generosity to his friend, Rajaratnam. To prove insider trading, the government is not required to prove that the “tippee” receive any direct financial benefit in recompense for transmitting material nonpublic information in violation of a duty of nondisclosure.
It is important to note that Gupta’s brief phone calls, which later became the key evidence used against Gupta in the criminal trial, were recorded by federal criminal prosecutors without Gupta’s knowledge or consent. (The SEC can seek to obtain wiretap evidence from criminal proceedings through civil discovery.) While the nation debates NSA snooping, this is a reminder that the Department of Justice could be listening to and recording your most sensitive domestic telephone conversations with court authorization. Gupta’s criminal prosecution was only possible because federal law enforcement officials had obtained warrants to record telephone communications of Gupta’s friend, Rajaratnam – telephone conversations that happened to include Gupta – based on evidence of possible insider trading. Gupta’s criminal conviction was then used to underpin his civil liability. The use of federal wire taps, previously the weapon of choice in organized crime prosecution, to generate the evidence needed to pursue both criminal and civil insider trading cases is a watershed moment in securities enforcement. READ MORE
Judge Carter issued his final order on July 16, 2013, following our blog post. The final order is substantively the same as the tentative order, and denies S&P’s motion to dismiss the case for the same reasons previously set forth. Judge Carter added a note rejecting Defendants’ argument at the hearing on July 8, 2013 that no reasonable investor or issuer bank could have relied on S&P’s claims of independence and objectivity, because this would beg the question of whether S&P truly believed that S&P’s rating service added zero material value as a predictor of creditworthiness. Judge Carter’s finding that an issuer bank could be a victim that was misled by S&P’s fraudulent ratings of its own mortgage-backed security products is an interesting development, and one that may open new doors to mortgage-backed securities litigation under FIRREA.
We first blogged about the obscure Financial Institutions Reform Recovery Enforcement Act (“FIRREA”) on May 14. As we explained, this statute provides a generous ten-year statute of limitations and a low burden of proof. Just as we predicted, the FIRREA story is beginning to heat up.
The most recent FIRREA litigation involves claims brought under this statute against ratings agency giant Standard & Poor’s. The DOJ sued S&P for $5 billion, accusing it of knowingly issuing ratings that didn’t accurately reflect mortgage-backed securities’ credit risk. S&P’s practices of issuing credit ratings to banks that paid for those services led to an inherent conflict of interest. To reassure banks and investors that its ratings were accurate, S&P issued a “Code of Conduct,” containing promises that it had established policies and procedures to address these conflicts of interest. The DOJ alleged that the “Code of Conduct” statements were false and material to investors.
On July 8, Judge David O. Carter of the Central District of California tentatively denied S&P’s motion to dismiss the case. In his tentative order, Judge Carter explained why S&P’s three arguments for dismissal were unpersuasive. First, he found that the allegedly fraudulent statements regarding the credibility of S&P’s ratings were not “mere puffery” because they were filled with “shalls” and “must nots” that went beyond mere aspirational language. READ MORE
On November 14, 2012, the Department of Justice (“DOJ”) and Securities Exchange Commission (“SEC”) issued a much anticipated Resource Guide to the U.S. Foreign Corrupt Practices Act. Despite the fact the Guide is 130 pages, it is a surprisingly easy read. It provides a rare glimpse into the DOJ and SEC’s interpretation of the FCPA and the guiding principles for enforcement. Although the Guide will undoubtedly provide much awaited guidance on existing issues with which companies are currently grappling, it also serves to reinforce the well held belief that the DOJ and SEC are taking a hard line view on the FCPA.
The Guide provides insights into the government’s view on various aspects of the FCPA and covers issues surrounding both the Anti-Bribery Provisions as well as Books and Records and Internal Controls Provisions. Below are just a few key highlights.
The Guide lays out explanations of the key provisions of the FCPA, and offers hypothetical examples that highlight the DOJ and SEC’s interpretation of those key provisions. For example, in a lengthy discussion regarding what “anything of value” means, the guide discusses the various forms that an improper benefit can take–from travel expenses to payments of cash through “consulting fees” or “commissions” to expensive gifts. Examples of proper gifts is also discussed: “Some hallmarks of appropriate gift-giving are when the gift is given openly and transparently, properly recorded in the giver’s books and records, provided only to reflect esteem or gratitude, and permitted under local law. Items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action by DOJ or SEC.” READ MORE