The FCPA: The New SEC and DOJ Enforcement Priority – Part 1: Introduction

Until recently, neither DOJ nor the SEC have focused their enforcement efforts on the Foreign Corrupt Practices Act (“FCPA”). Although the statutes were passed in 1977 and amended in 1988, for years enforcement did not appear to be a priority, while critics claimed that laws put U.S. business at a disadvantage – essentially the same claim many are currently asserting with regard to the Sarbanes-Oxley Act. By 1996, the world began to follow suit. Now many countries have adopted similar legislation.

Now, FCPA enforcement also appears to be the new DOJ and SEC enforcement priority. Last year, DOJ and the SEC brought 38 FCPA cases. That compares to only 15 enforcement cases in 2006. In addition there are currently reportedly 100 open FCPA law enforcement investigations. See, e.g., 39 Sec. Reg. L. R. 157 (Oct. 15, 2007).

This occasional series will examine the FCPA and recent SEC and DOJ enforcement efforts. In segments over the next few weeks, the series will::

1. cover the statutes;
2. review the recent court decisions interpreting key provisions;
3. identify penalty trends and discuss the large penalties imposed last year;
4. examine key case trends;
5. discuss significant cases which are heading to trial this year; and
6. provide an analysis of the trends in enforcement.

Next: The statutes: an overview of the bribery provisions and the books and records and internal control provisions.

The Refco Saga Continues With an SEC Enforcement Action

Yesterday, another chapter in the Refco saga unfolded as the SEC brought a suit against its former CEO, Phillip R. Bennett, for fraud as well as books and records violations. The suit follows on the heels of Mr. Bennett’s plea to all twenty counts of a superseding indictment for conspiracy, securities fraud and false filings on February 15, 2008. Mr. Bennett had been scheduled to stand trial on the criminal charges, along with Robert Torsten, Refco’s form CFO and Tone Grant, the company’s former president on March 17, 2008 as discussed here.

Refco is the former Wall Street derivatives giant that collapsed into bankruptcy following the sale of a 53% stake to a group led by Thomas H. Lee Partners, L.P. in a $1.9 billion leveraged buyout. The next year, the firm conducted an initial public offering of its shares, raising about $583 million from the public. A few weeks after the IPO, the true financial condition of Refco began to emerge as the firm collapsed into bankruptcy.

The demise of Refco has spawned a web of litigation. In addition to the criminal action against Mr. Bennett and other former top Refco officials and yesterday’s SEC enforcement action, both the SEC and the U.S. Attorneys office have brought charges against attorney Joseph Collins, the former head of Mayer Brown’s derivative practice, who is alleged to have helped orchestrate the fraud against at Refco, also discussed here.

Private suits have also been filed. Thomas H. Lee Equity Fund has brought an action against Mayer Brown. That suit alleges in part that the law firm engaged in securities fraud, a claim which may in part rest on the application of the Supreme Court’s decision in Stoneridge (discussed here) and its holding on secondary actors under Section 10(b). That count of the complaint is backed by an alternative based on RICO. See Thomas H. Lee Equity Fund v. Mayer Brown, Civil Action No. 07 CIV 6767 (S.D.N.Y. Filed July 2, 2007). Other litigation has also been filed. See Kirschner v. Grant Thorton, Civil Action No. 07 CV 5306 (N.D. Ill. Filed Sept. 19, 2007). No doubt it will be sometime before the demise of Refco is finally sorted out.