Part VIII: SEC Enforcement Trends And Priorities, 2008 – The FCPA

Like insider trading, the FCPA is a traditional enforcement area which has become a recent priority of the SEC and the Department of Justice. Last year, there were 38 FCPA cases compared to 15 the prior year. At the end of 2007, there were reportedly more than 100 open FCPA investigations, as well as a docket of significant cases heading toward trial.

The FCPA, 15 U.S.C. §§ 78dd-1 et seq., is rooted in the Watergate scandal and the SEC’s “volunteer program” of the 1970’s. Under that program, hundreds of companies self-reported after conducting internal investigations focused on “questionable foreign payments” and the failure to properly record those payments in the books and records of the company. Since the statutes were passed in 1978, and amended in 1988, this has been a traditional enforcement area.

The statutes have two key sections. First, and perhaps best known, is the anti-bribery provisions. Generally, these sections prohibit payments to foreign officials to obtain or retain business. The “obtain or retain business” provision was intended to be a key limitation on this section, denoting the determination of congress that not every payment to a foreign official was prohibited.

Second, is the books and records and internal control provisions which are perhaps less well known than the anti-bribery provisions, but more expansive. Unlike the ant-bribery provisions, these sections do not apply only to certain payments to foreign officials. Rather, they apply generally to all of the books and records and internal controls of all issuers. Since they substitute a standard of “reasonable detail” for the usual “materiality” standard applied under the federal securities laws, they can have a far reaching impact.

Enforcement of the sections is generally shared between the SEC and DOJ. Generally, the SEC is responsible for civil enforcement as to all issuers. In those actions, the SEC can utilize all of its traditional enforcement weapons – civil injunctive actions, including seeking equitable relief such as disgorgement and requesting penalties. The agency can also bring administrative proceedings.

DOJ is generally responsible for criminal prosecutions of the anti-bribery provisions as well as the books and records and internal control provisions. The Department also has limited civil enforcement authority over “domestic concerns,” which are generally non-SEC reporting U.S. companies.

Many SEC investigations in this area have a parallel DOJ criminal investigation. The SEC’s policies on parallel proceedings, discussed in an earlier post here, are thus of particular importance in this area.

Next: SEC and DOJ FCPA enforcement – an expansive view

This Week In Securities Litigation (April 25, 2008 edition)

Last week, the Refco scandal moved closer to conclusion. The options backdating scandal however, continued and widened with a tax indictment.

Debates continued regarding the vitality of the SEC’s enforcement program. SEC Chairman Cox made a flawed effort to defend the program’s health with an argument which, in fact, supports its critics’ claims that it lacks vigor. Fortunately, one Senator held out the prospect for help in the future – real budget increases for the SEC for fiscal 2009, rather than the inadequate proposals made by the administration and endorsed by the SEC Chairman.

Refco owner convicted

The former owner of collapsed derivatives giant Refco, Tone M. Grant, was convicted on criminal charges based on the scheme to conceal the $1 billion in losses the company had incurred. Eventually, those hidden losses surfaced and the company collapsed into scandal, bankruptcy and litigation. Refco had been one of the largest clearing houses for derivatives. U.S. v. Bennett, 1:05-cr-1192 (S.D.N.Y. Nov. 10, 2007).

Previously, former Refco CEO Phillip Bennett and former company CFO Robert Trosten pled guilty in connection with the huge fraud. The SEC also has a civil fraud case related to the collapse of the company and the IPO it conducted shortly before the demise of the once high flying company.

Monster Worldwide criminal options probe

Criminal prosecutors moved last week to intervene in a civil action against Monster Worldwide and its senior executives. The civil case is based on option backdating claims.

Government prosecutors are seeking to block the depositions of several former Monster Worldwide executives. According to the court papers, the government expects to call the witnesses in a future criminal prosecution, although at this point the criminal inquiry is not complete.

Previously, the General Counsel of the company, Myron Olesnychy, and its former CFO, Andrew McKlelvey, pled guilty to criminal charges in connection with the backdating scheme at the company.

Criminal tax charges and option backdating

While the SEC may be working toward the end of its inventory of option backdating investigations, the IRS is opening a new phase of the scandal. Last week, a three-count indictment was filed against Sharlene Abrams, the former CFO of Mercury Interactive. The charges claim that the former CFO concealed her true gains on the options since they were backdated. U.S. v. Abrams, 5:08-cf-0252 (N.D. CA. April 17, 2008).

Broadcom option backdating

Last week, the SEC filed a settled civil action against Broadcom based on allegations relating to backdated options. The SEC’s complaint alleged the kind of intentional conduct seen in the initial options backdating cases in contrast to the negligence based enforcement action the agency brought at in December 2007. That suit raised significant questions concerning the prosecution standards being used by the agency.

While the Broadcom case may signal a return to the standards used prior cases, it does not fully resolve those issues and, in fact, raised more questions than it resolved, including: 1) the prosecution standards going forward; and 2) what action (if any) will be brought against the company’s founder and others, some of whom are under the scrutiny of criminal prosecutors as discussed here.

The SEC – the vitality of enforcement and the budget

In a letter dated April 1, 2008 to Senator Christopher Dodd SEC Chairman Christopher Cox responded to Congressional concerns about the vitality of the enforcement program. Questions were raised following a report that the amount of court ordered disgorgement and penalties the SEC obtained last year in its enforcement actions dropped by 50%.

Chairman Cox argued in his letter however, that the enforcement program is as vigorous as ever. To support this claim the Chairman noted that court ordered disgorgement and penalties this year is skyrocketing.

That may be true, if the numbers in SEC press releases are totaled. Those numbers however, include the $600 million settlement reported in an SEC litigation release related to the settled enforcement action against Dr. McGuire of United Health Previously discussed here). The difficulty with that number however, is that most of it relates to the private class actions and derivative suits settled in conjunction with the SEC enforcement action. While the SEC generally maintains its enforcement cases on a separate track from private actions, in the case of Dr. McGuire, it chose to consolidate its settlement with those in the private actions. This consolidation allowed the SEC to issue a litigation release trumpeting a $600 million settlement when the agency obtained a $7 million penalty in its enforcement case.

The fact that Chairman Cox tried to defend the enforcement program with what can only be viewed as a headline built on an illusion raises even more questions concerning the vitality of the enforcement program and its ability to police the markets in these increasingly difficult times.

At the same time, perhaps the Enforcement Division will obtain at least some of the help it needs in the future. Senator Jack Reed has apparently concluded that the administration’s budget for the SEC for fiscal 2009, which was largely endorsed by Chairman Cox, is inadequate. The proposed budget contains only very modest increases to cover basic pay raises as discussed here and no real increases for Enforcement, Senator Reed has proposed that a $40 million be added to the SEC’s budget. That addition would be a step in the right direction and might help revive Enforcement without resorting to illusory headlines and arguments.