General counsel, already concerned about their companies falling victim to U.S. prosecution of violations of the Foreign Corrupt Practices Act (FCPA), will likely see their potential liability increase even further when the U.K.’s Bribery Act 2010 goes into effect this April.
Howard Goldstein
The NACD biannual General Counsel Advisory Board meeting, co-chaired by Fried Frank, offered an opportunity to preview the regulatory environment and provide recommendations for what should be on the working agenda of every public company director when meeting with general counsel. The consensus was that growing cooperation among enforcement agencies—including the Department of Justice, Securities and Exchange Commission and the Federal Bureau of Investigation, along with their regulatory and enforcement counterparts overseas— is likely to perpetuate the increase in enforcement and prosecution activity under both the FCPA and Britain’s soon-to-be implemented Bribery Act.
“At the end of the day, it’s all about prevention and how we are going to position ourselves within our respective organizations,” said Joseph Polizzotto, managing director and general counsel for the Americas at Deutsche Bank. “I would rather prevent the problems in the first place. This is a good moment in time for general counsel to be assertive.”
In addition to the onset of enforcement under the Bribery Act and stepped-up FCPA activity, at least two provisions of the Dodd-Frank Act are also likely to increase investigations, according to Fried Frank Partner William F. Johnson. The SEC is now studying whether broker-dealers should be subject to a federal fiduciary duty and has recently promulgated regulations that could provide sizable payments to whistleblowers in successful prosecutions. Johnson noted that “continued political pressure for investigations in capital markets will continue to ramp up the pace of investigations as shown by the recent uptick in cases related to subprime and CDO exposures.”
William Johnson
A regulatory provision that would allow money to be paid to individuals whose whistleblowing results in a successful prosecution is a purely American phenomenon. There are no such rewards for whistleblowing in the U.K., said James Kitching, who practices in Fried Frank’s London office, adding, “The emerging consensus is that the introduction of a reward would be seen as a retrograde step for the U.K.”
Howard W. Goldstein, a litigation partner at Fried Frank since 1990, was serving as an assistant U.S. attorney in the Southern District of New York when the FCPA was passed by Congress in 1977. For years, there was little if any enforcement, but two months before the close of 2010, there were some 40 FCPA-related cases pending.
Moreover, FCPA settlements continue to set records, and Goldstein predicts that cases “will continue to grow bigger and bigger.” Companies settling FCPArelated charges in 2010 paid a record $1.8 billion in financial penalties to the DOJ and SEC, according to the FCPA website. That compares with $641 million in 2009 and $890 million in 2008, the year of Siemens’ $800-million settlement, still the largest ever.
Referring to a recent FCPA case in which the company’s general counsel played a key role in investigating and preventing a fraud scheme, Johnson said that the GC’s actions could prove useful to others who might need help convincing their boards or CEOs that compliance programs should be improved or expanded: “The fact that the general counsel got some credit for stopping this scheme is something companies should want. It’s definitely something that makes both the company and the general counsel look good.”
Joseph Polizzotto
FCPA investigators could begin to use wiretaps, Goldstein said, given the predilection of the courts to allow conversations gleaned from professional eavesdropping into evidence as witnessed in the ongoing insider-trading case now underway against Galleon Group executives and employees.
Johnson, who worked at the SEC and was chief of the Securities and Commodities Fraud Task Force in the U.S. Attorney’s Office for the Southern District of New York prior to joining Fried Frank in 2009, said that many banks have strong internal compliance programs, but that non-financial services companies also need to address this area too: “The SEC is under no obligation to alert a company if a problem arises, so companies need to be proactive about ensuring their compliance programs adhere to high standards.”
The assembled GCs were also advised to be aware of the Bevill Test, adopted by the Ninth Circuit Court in US v. Graf, which sought to clarify the standard on whether a corporate employee has a special privilege with inside counsel. “In-house counsel should clearly state to any employee that you represent the entity and not the individual,” Johnson said.
The outcome of the global Innospec case, settled for $40 million, was also significant because it raised questions about London’s Serious Fraud Office (SFO)—the independent government department that investigates and prosecutes complex cases of fraud and corruption—and its adoption of more American-style strategies such as plea bargaining, settlements and protection from prosecution. Multinational companies are also likely to place greater emphasis on achieving global settlements, though it is unclear to what extent that will be achievable in light of the decision of the U.K. Court in Innospec.
Goldstein anticipates a major shift once the Bribery Act goes into effect, with greater cross-border cooperation in the investigation and enforcement of corruption offenses. A striking example of this new cooperation, he pointed out, occurred last year when a sting operation at a conference in Las Vegas involving the FBI, DOJ and City of London Police resulted in the arrests of 22 executives on bribery charges under the FCPA.
The upper limit of sanctions for bribery offenses in the U.K. will also be much more severe than under the FCPA. In the United States, settlements are more common. Under the Bribery Act, Kitching points out, “Maximum penalties are ten years imprisonment and unlimited fines.”
Other penalties upon conviction can include disbarment from public procurement contracts and disqualification from acting as a company director. “Notably, the sentencing judge in the Innospec case observed that corruption is much more serious in terms of both culpability and harm in cartel-type offenses,” Kitching said, “where the level of fines imposed is now very substantial and measured in tens of million of pounds.”
Participants:
Matthew Biben – Chief Administrative Officer, Senior Vice President, General Counsel; Next Jump
Chris Clark – Publisher, NACD Directorship
Paul Golding – General Counsel, Citi Infrastructure Investors
Howard W. Goldstein- Litigation Partner, Fried, Frank, Harris, Shriver, and Jacobson, New York
William F. Johnson – Litigation Partner, Fried, Frank, Harris, Shriver, and Jacobson, New York
James Kitching – Litigation Partner, Fried, Frank, Harris, Shriver, and Jacobson, London
David Maryles – Director, Legal, BlackRock
Robert Masters – SVP, Chief Compliance Officer, Secretary, General Counsel; Acadia Realty Trust
Jason Ment – Chief Compliance Officer, General Counsel; StepStone
Joseph Polizzotto – Managing Director, General Counsel; Deutsche Bank
Scott Posner – Assistant General Counsel, Terex Corp.
Alexander Simpson – Vice President, Corporate Secretary, General Counsel; Reis
Will Terrill – Vice President, U.S. Flag Services, Intermarine, LLC
Judy Warner – Managing Editor, NACD Directorship and directorship.com