by T. GormanPosted on Posted in SECActions

The Department of Justice issued its first FCPA opinion in six year. Foreign Corrupt Practices Act Review, Opinion Procedure Release, No.: 20-01 (Aug. 14, 2020). The opinion process provides a mechanism by which a question regarding FCPA enforcement can be submitted to the Department requesting a no-action letter. While the mechanism has long been available and is mentioned in the Guide that was recently updated, the process has seldom been used. One reason is the time. The recently issued response took nine months, a point cited by FCPA Professor Mike Koehler in his FCPA Professor Blog (here) and on the FCPA Blog (here). Another is the lack of confidentiality.

The request

The question presented centered on a transaction between a multinational U.S. based firm called Requestor and the foreign subsidiary (Country A Office) of an investment bank that is majority owned by a foreign government. The transaction involved the purchase of a portfolio of assets from Country Office A.

Requestor sought and secured the assistance of another subsidiary of the foreign investment bank called Country B Office. There was no agreement between Requestor and Country B Office. There was, however, an unexecuted agreement which provided in part that Country B Office would be paid 0.5% of the face value of the assets by Requestor.

The transaction began in 2017 but stalled. About one year after the transaction began Requestor sought assistance from a local finance company. In February 2019 a transaction was finally consummated. Country B Office then requested a fee in accord with the unexecuted agreement which is $237,500. The fee would be paid to the foreign subsidiary, Country B Office.

Determination

The Department concluded that it “does not presently intend to take any enforcement action in response to the fee Requestor intends to pay the Country B Office. This is because there is no information evincing a corrupt intent to offer, promise, or pay anything of value to a ‘foreign official’ in connection with the contemplated payment . . .”

In reaching its conclusion, the Department assumed that Country B Office is an instrumentality of a foreign government. It also assumed that the employees of that instrumentality are “foreign officials” within the meaning of the FCPA. Based on the facts detailed above, and the two assumptions stated, three points support the Department’s conclusion:

First, the payment will be made by the Requestor to Country B Office, not an individual, according to the representations. See, e.g., U.S. v. Esquenazi, 752 F. 3d 912, 925 (11th Cir. 2014)(discussing term instrumentality in FCPA).

Second, there is no evidence that the payment is intended to corruptly influence a foreign official. To the contrary, representations which are confirmed and certified by the Chief Compliance Officer of the Country B Office, establish that the money will be put in Country B Office’s corporate bank account and “will only be used for the benefit of Country B Office . . . and will not be forwarded to any other entity.” See, e.g., U.S. v. Kozeny, 667 F. 3d 122, 135-36 (2nd Cir. 2011)(jury instructions re acting corruptly and intentionally with improper motive in context of FCPA).

Finally, Requestor sought and received specific, legitimate services from the Country B Office. The payment is for services the Country B Office provided during the two-year period in which the deal was pursued. This fact is certified by the Chief Compliance Officer of the Country B Office. See, e.g., U.S. Dept. of Justice, FCPA Op. Release 09-01 (Aug. 3, 2009)(declining enforcement action in part since value provided to foreign government and not government officials).

In view of these factors, the Department will not at this time recommend an enforcement action.

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by T. GormanPosted on Posted in SECActions

Municipal bonds is an area in which the Commission has limited authority. Nevertheless, the agency has periodically focused on the area. In 2016 the Commission conducted a very successful cooperation initiative. Two years ago, the agency began to focus on improper tactics in the muni IPO market. A series of enforcement actions were launched claiming fraudulent tactics were undercutting new offerings. See, e.g. SEC v. Core Performance Management, LLC, Civil Action No. 18-cv-8181 (S.D. Fla. Filed August 14, 2018). This week the Commission prevailed on a summary judgment motion in one of those cases. SEC v. RMR Asset Management Company, Civil Action No. 18-CV-1895 (S.D. CA. Ruling Aug. 17, 2020).

The firm, its founder, Ralph Riccardi, and Jocelyn Murphy, Michael Murphy and Richard Gounaud, each of whom worked with the firm, are named defendants. Each was paid a percentage of the profits from the firm’s muni bond transactions.

Many muni offerings are oversubscribed. As a result certain checks and balances are often built into the offering process by the issuer. Those safeguards ensure, for example. that the securities are allocated to retail investors. The safeguards tend to thwart dealers who attempt to use multiple accounts to purchase a large part of the offering. The dealers who secure large portions of the offering typically mark-up the price and quickly “flip” the bonds. One method used to thwart flipping is requiring a local zip code be provided. Only those with such a zip code get an allocation from the offering.

RMR and its crew sought to obtain a portion of an offering. The goal was to immediately markup the bonds and flip them. Each named defendant would help sell the bonds. Ms. Murphy supplied a zip code that could be furnished to the underwriters, ensuring allocations. The Commission filed suit alleging violations of Exchange Act Section 15(a), since those selling the bonds were not registered brokers. The complaint also alleged violations of Exchange Act Section 10(b), based on the misrepresentations used to secure the bonds.

The Court, on a motion for summary judgment by the Commission, found in favor of the agency. Section 15(a) makes it unlawful for an unregistered broker or dealer to use the mails to effect any transaction in a security. In assessing if there is a violation of the Section the Ninth Circuit applies a conduct-based test tied to the totality of the circumstances.

Under this test, the Commission argued that Defendants effected transactions in securities in return for transaction based compensation. Specifically, Defendants admitted that Mr. Riccardi and RMR directed the other Defendants to link their brokerage accounts to that of the firm so that its capital could be used to buy new mini bonds and other securities. Defendants controlled their accounts, however, and conducted the trading. In return they were paid transaction-based compensation. While Defendants offered alternative explanations for their conduct, none were supported by the facts.

Finally, the Court found that Ms. Murphy violated Exchange Act Section 10(b). MSRB Rules G-11 and G-17 permit the issuer to set the rules for the offering. Here the zip code was a key requirement. Ms. Murphy admitted that she received allocations in the offering. She also admitted that without the fraudulent zip code she would not have obtained the allocations. And, it is undisputed that she did not live within the zip code. Based on this record the Court concluded that the facts were not in dispute and that Ms. Murphy and violated the antifraud provision. Remedies will be considered in the future.

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