Corporate investigations are getting riskier and more difficult, experts say

May 29, 2012

By Stuart Gittleman

NEW YORK, May 29 (Thomson Reuters Accelus) – U.S. corporate officers and directors are increasingly concerned over the business and legal challenges their entities face from potential securities enforcement and criminal probes, lawyers and corporate officers are saying.

A program last week analyzed how directors, executives and corporate counsel can appropriately manage the business and legal risks of an enforcement proceeding arising from earnings misstatements or employee misconduct at both low and high levels. The Directors Roundtable, an educational group, brought together Marc Berger, chief of the Manhattan U.S. Attorney’s securities fraud unit; Stasia Kelly, a law partner at DLA Piper; Victoria Harker, chief financial officer of AES Energy; Damon Vocke, global general counsel of General Reinsurance; and Anthony Lendez, a BDO Consulting partner.

The Dodd-Frank Act and the Foreign Corrupt Practices Act both present large risks, panel members said at the forum last Tuesday. Dodd-Frank is new and untested, and the FCPA has a global reach with potential penalties that can include huge fines and felony convictions.

In terms of enforcement risks, Dodd-Frank is primarily a function of the Securities and Exchange Commission. The commission shares FCPA oversight with the Department of Justice.

Dodd-Frank, which was passed to rein in global financial risk, and the FCPA, which was designed to prevent the bribing of foreign officials, also present reputational risks and the potential of being barred from competing for government contracts.

Both laws can also push entities to conduct expensive internal investigations, share the results with investors and government officials and, as part of resolving the probes, agree to outside monitoring that, depending on the corporate culture, can be highly intrusive.

Alleged FCPA violations can bring legal action in the nation where the violation takes place, which may have legal processes and penalties unfamiliar to the business. Internal or official probes over Dodd-Frank or the FCPA can spur inquiries by shareholders or other stakeholders, and by United Nations, European Union and other non-U.S. governmental bodies.

The panelists likened an investigation into serious corporate misconduct to a high-stakes chess or poker game, requiring the entity to out-think or out-bluff the government. Balking may make the case go away or turn it into a criminal prosecution of top executives, and even if the case is dropped the entity must also consider the public relations aspects.

Expect and prepare for the worst-case scenario, because federal and state agencies increasingly cooperate with each other and with the DoJ, the panelists said. Cases in point include the investigations into initial public offering abuses, mutual fund market timing practices, and auction rate securities offerings and sales, the 49-state mortgage servicing settlement and the multiagency federal-state task force on mortgage securitization.

Investigations that cross state and national borders must also consider data privacy rules, the panelists said.

A key sticking point in many investigations has involved attorney-client privilege. The less it is unjustifiably invoked the smoother the inquiry will go, Berger said, adding that the government cannot ask an entity to waive its rights.

Besides, Berger said, “we just want the facts,” not the privileged communications.

On Thursday, Weil Gotshal & Manges law partner and former DoJ fraud section chief Steven Tyrrell; Ellen Zimiles, a former federal prosecutor who heads global investigations at Navigant Consulting; and Mary Jacoby, founder of Main Justice, a news service, discussed the politics of the FCPA and the chances it could be watered down under political pressure.

Despite a strong push by the U.S. Chamber of Commerce and other groups to take some of the teeth out of the act, prospects for amending the FCPA are dim because of a lack of political will that may further weaken after reported payments by global retailer Wal-Mart, the panelists said.

Other topics included corporate prosecutions, internal investigations, deferred- and non-prosecution agreements and corporate monitors, and efforts to clarify terms such as “facilitation payments,” “foreign officials” and “successor liability.”

The Wal-Mart reports have raised attention to whether it is illegal to make payments to facilitate non-discretionary action by an official to grant a right the payer is legally entitled to. Whether or not it is illegal, entities should consider how it looks in the local foreign press or in their hometown paper, and whether it will have negative political ramifications.

U.K. Bribery Act’s long reach

A new U.K. law, the Bribery Act, does implicate facilitation payments. The law applies to U.K. entities wherever they do business, and to non-U.K. entities if any part of the transaction is done there. The Serious Frauds Office, which investigates and enforces the law, has said the law applies if payments pass through U.K. financial institutions.

The FCPA was enacted in 1977 but was largely dormant until 2003, when enforcement started to ramp up, and even more so after 2006. German technology firm Siemens’ December 2008 agreement to pay $800 million to settle allegations by U.S. regulators was a “game changer” in terms of headlines and financial recoveries, the panelists said.

The SEC focuses mostly on books-and-records, internal controls and false-certification violations, some of which can also be treated as criminal violations by the Justice Department. Most cases that reach the enforcement stage are resolved by DPAs and NPAs, the panelists said.

Remediating harm, voluntarily disclosing the misconduct, cooperating in the investigation and improving the entity’s compliance program can significantly reduce the sanctions. A disclosure may not be voluntary if the entity has a legal obligation to do so, and cooperation includes providing evidence against agents, contractors and employees, whatever their level in the hierarchy, the panelists said.

A global body, the Organization for Economic Cooperation and Development, reported that 150 cases were under U.S. investigation in 2010, mostly in pharmaceuticals, medical devices, and oil and gas. The SEC is focused on financial services firms’ deals with sovereign wealth funds and with entertainment deals in China, the panelists said.

Mergers and acquisitions are key risks, but an acquiring entity can avoid successor liability for an acquired entity’s conduct by beginning inquiries within 180 days of closing. The better practice is to conduct due diligence before doing a deal, the panelists said.

If the case spins out of control into a criminal prosecution, the threshhold level to establish guilty knowledge is less than for most other federal felonies, the panelists warned. The DoJ has published standards for determining whether to prosecute an entity for criminal violations.


(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. <a href=” ions/regulatory-intelligence/compliance- complete/” target=_new”>Compliance Complete</a> provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)


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