THE SEC AND RETROACTIVITY: A QUESTION OF FAIRNESS

Dodd-Frank significantly added to the weapons available to the SEC. New provisions extended its authority to bring actions based on aiding and abetting while lowering the proof requirements to recklessness. Collateral bars were added and a provision making civil penalties available against all respondents in administrative proceedings.

While this new authority clearly applies to future conduct, a critical question is whether it can be applied to acts which occurred prior to the passage of Dodd-Frank. Stated differently can these new weapons be applied retroactively?

Earlier this year Commissioner Kathleen Casey discussed the retroactivity of the Dodd-Frank provisions in enforcement actions. While the Commissioner outlined the basic principles which stem from the Supreme Court’s decision in Landgraf v. USI Film Products, 511 U.S. 244 (1994) she did not specifically analyze the various Dodd-Frank provisions where such an issue might arise. Rather, the Commissioner stressed the key to resolving these issues is fairness: “But is it necessary for us to decide exactly where the line of legality lies? Could the Commission instead choose to be guided . . . by notions of fairness and a respect for the principle of anti-retroactivity? Could the Commission elect to stand comfortably behind the line of legality in order to ensure that it does not inadvertently cross it?” SEC Commissioner Kathleen Casey, Address at PLI’s SEC Speaks in 2011 Program, www.sec.gov/news/speech/2011/spch02041klc.htm.

Perhaps a partial answer to this question came in a recent Initial Decision by Chief Administrative Law Judge Brenda Murray in In the Matter of John W. Lawton, Adm. Proc. File No. No. 3-14162 (April 29, 2011). The action was brought under Section 203(f) of the Advisors Act which permits the Commission to order certain sanctions in the public interest if the Respondent is found to have been criminally convicted or enjoined under certain circumstances.

Mr. Lawton, who apparently appeared pro se, previously managed a multi-million hedge fund through an investment adviser, Crossroads Capital Management, LLC. As a result of his misconduct over fifty investors lost somewhere between $2.5 million and $7 million. The Respondent pleaded guilty to one count of mail fraud and one count of false statements in a criminal case. U.S. v. Lawton, No. 09-cr-319 (D. Minn.). He also consented to the entry of a permanent injunction in SEC v. Lawton, No. 09-cv-00368 (D. Minn.). Based on this record a request for summary disposition was granted.

The critical question in the case was the application of Section 925 of Dodd-Frank. That Section amended Advisors Act Section 203(f). Previously the Section only authorized the imposition of a bar from associating with an investment adviser. The amendment expands that into a collateral bar.

The Division of Enforcement argued for a collateral bar. Judge Murray, sua sponte, raised and analyzed the question of retroactivity, rejecting a portion of the Division’s request. Citing Landgraf the Initial Decision notes that there is a presumption against retroactivity. That presumption is grounded in elementary notions of fairness. In addition, provisions which attach new legal consequences to events which previously took place thereby enhancing the penalty are not retroactive. There is an exception where the new provision provides for prospective relief.

Here Section 203(f) prior to amendment provided only for the imposition of a bar from the investment advisory industry. Exchange Act Section 3(a)(39) however provided a statutory disqualification which effectively prohibited Respondent from association with a broker, dealer, municipal securities dealer, and transfer agent the court found. To the extent these provisions correspond to the new Dodd-Frank Section, there is nothing new. What is new however is the ability to impose a bar as to municipal advisors and NRSROs. Since that bar did not exist at the time of the conduct, Judge Murray concluded that it would be impermissible to apply it here.

In the future there will undoubtedly be other cases which present difficult questions regarding the application of the Dodd-Frank provisions.. The section providing that reckless conduct is sufficient for aiding and abetting could, for example, significantly ease the burned of proof for the Commission if applied retroactively in some jurisdictions. The new provision granting the Commission authority to seek a civil money penalty against all respondents in an administrative proceeding could be result in enforcement cases which traditionally were brought in district court being instituted in that forum for similar reasons. Such gamesmanship decries the principles of fundamental fairness which are suppose to guide retroactivity. It would also ignore the Commission’s traditions as outlined by Commissioner Casey in her call for fundamental fairness.

AN FCPA MOTION THAT MAY ALTER SETTLEMENT PROCEDURES

Victims in federal criminal cases typically get restitution. After an SEC case they may get payments from a fair fund. Not in FCPA cases. In FCPA cases the billions of dollars DOJ and the SEC now collect annually in settlements are paid to the U.S. treasury. This may change.

In the Alcatel-Lucent criminal FCPA case a motion was recently filed by Instituto Costaricense de Electricidad (“ICE”), the Costra Rican power company whose officials were bribed. U.S. v. Alcatel-Lucent S.A., Case No. CR-20907 (S.D. Fla. Dec. 27, 2010); see also SEC v. Alcatel-Lucent, S.A., Case No. 1:10-cv-24620 (S.D. Fla. Dec. 27, 2010). ICE is objecting to the plea agreement and requests that the court protect its rights as a victim since DOJ did not.

The FCPA cases: The Department of Justice and the SEC settled FCPA cases with Alcantel-Lucent S.A., a company formed in a November 30, 2006 merger involving Paris, France based Alcantel, S.A. and U.S. based Lucent Technologies, Inc. The cases allege violations of the anti-bribery, books and records and internal control provisions of the FCPA between December 2001 and June 2006 by Alcantel-Lucent S.A. subsidiaries.

Prior to the 2006 merger Alcatel, a French telecommunications equipment and services company, conducted much of its business through subsidiaries. Those subsidiaries in turn retained local business agents who helped the company secure business. Using this business model, the company paid bribes in Costa Rica, Honduras, Malaysia and Taiwan. The cases also involved violations in other countries (here).

Bribes were paid in Costa Rica according to the court papers. There Alcatel CIT (now known as Alcatel-Lucent France S.A.) obtained three contracts worth more than $300 million which yielded profits of over $23 million. About $18 million was paid to two consultants retained by Alcatel Standard A.G. (now known as Alcatel-Lucent Trade International A.G.). About half of that sum was passed to government officials. Phony invoices were used to conceal the scheme. ICE was the company involved.

To settle with DOJ, the parent company entered into a deferred prosecution agreement. The two count information charged violations of the FCPA internal controls and books and records provisions. Under the terms of the agreement, the company will pay a $92 million criminal fine and a monitor will be installed for three years. In addition, subsidiaries Alcatel-Lucent France S.A., Alcatel-Lucent Trade International A.G., and Alcatel Centroamerica S.A. (formerly known as Alcatel de Costa Rica S.A.) each agreed to plead guilty to a one count information charging conspiracy to violate the anti-bribery, books and records and internal control provisions of the FCPA. The company also agreed to pay $45.372 million as part of its settlement with the SEC. In January 2010, Alcatel-Lucent agreed to pay $10 million to settle a corruption case brought by the government of Costa Rica for bribing government officials. The case is the first in Costa Rica’s history in which a foreign corporation paid damages to the government for corruption.

The motion: ICE’s motion may well be the first of its kind and, depending on its resolution, the beginning of new settlement procedures in FCPA cases. The company requests that the court reject the DOJ settlement. According to the motion an order should be entered declaring the power company a victim of the criminal conduct of Alcatel-Lucent and its subsidiaries. In addition, ICE is seeking order stating that it is entitled to all the rights of a victim including restitution. Accordingly, a full pre-sentence report should be prepared and ICE would be permitted to present evidence of its damages to the Probation officer so it can secure restitution. Finally, the motion requests an order requiring DOJ to comply with the provisions of Section 3771 of Title 18 and its obligations to ensure that ICE secures all the rights of a victim of the crimes involved in the case.

The motion is based on ICE’s contention that it was victimized and damaged by the corrupt conduct of Alcant-Lucent. According to the motion papers ICE is an autonomous legal entity established by Costa Rica in 1949. The company is responsible for providing electrical power and telecommunications services in Costa Rica. In that country Alcant-Lucent, through its subsidiary, used three consultants. Money was funneled from the company to the consultants that was used to corruptly induce five decision makers affiliated with ICE to award the Alcant-Lucent telecommunications contracts. Over $18 million was given to the consultants who paid the bribes over the course of several years. The contracts were valued at over $400 million.

The activities of Alcant-Lucent were first revealed in the Costa Rican press in 2004 according to the motion papers. An official of Alcant-Lucent admitted paying bribes to an ICE official. ICE promptly terminated the five individuals involved. All were prosecuted by the Costa Rican government with the assistance of the company. All of this conduct caused huge losses for ICE according to the motion.

During the years of investigation neither DOJ nor the SEC contacted ICE regarding these matters. The company thus contacted both, identifying itself as a victim. DOJ referred to a policy of not recognizing foreign governments although no such written policy has been identified. The SEC denied a request for a fair fund without offering any explanation.

If this motion is granted the position of DOJ and perhaps the SEC may well change in the future. Indeed, settlement procedures in FCPA cases may well change significantly as a result of the motion brought by ICE and its Florida counsel, Wiand Guerra King P.L.