by T. GormanPosted on Posted in SECActions

The bribery provisions of Exchange Act Section 30A are one of the three critical components of the Foreign Corrupt Practices Act. The other two are the books and records and the internal control requirements. While the latter two sections have frequently been litigated in SEC and other securities cases over the years since they apply to all issuers, the FCPA bribery sections have not. A key question in the wake of the Supreme Court’s decision in McDonnell v. U.S., 136 S. Ct. 2355 (2016) which overturned the bribery based conviction of the former Governor of Virginia, is whether the approach used in that case applies to the FCPA bribery provision. The Second Circuit joined two other circuits in rejecting efforts to delimit the reach of Section 30A by applying McDonald. U.S. v. Seng, No. 18-1725 (2nd Cir August 9, 2019).

The decision

Defendant Ng Lap Seng paid two United Nations ambassadors over $1 million to obtain a commitment by the international organization to use his Macau real estate development as the site for its annual convention. Following a jury trial, Mr. Seng was convicted of paying and conspiring to pay bribes and gratuities in violation of a number of statutes including the FCPA. He was ordered to serve 48 months in prison, concurrently, on each of the six counts, to forfeit $1.5 million, pay a $1 million fine and make restitution to the U.N. of $302,977.20. The Circuit Court affirmed.

Mr. Seng claimed that the each of the FCPA bribery provisions was delimited by Section 201(a)(3)’s definition of the phrase “official act,” the predicate McDonald. The District Court errored by refusing to give an instruction on the point Mr. Seng argued.

In McDonald the former governor was convicted of honest services fraud based on his acceptance of bribes. The parties agreed that bribery would be defined for the jury according to the general federal bribery statute. It requires in part proof that the person “committed or agreed to commit an ‘official act’ in exchange for” undisputed loans and gifts. Central to the ruling was the question of whether arranging a meeting, contacting another public official or hosting an event concerning a subject was an official act. To establish this standard the Government was required to prove that there was a question, matter, cause, suit or controversy that was then pending and involved a formal exercise of governmental power and that the official made a decision or acted on it.

Under this standard a jury charge defining “official Act” in McDonald was over inclusive because: a) it failed identify the question, matter, cause , suit or proceeding; b) require that it was specific, focused and pending or may by law be brought before a public official; and c) that the Governor made a decision or took an action on the identified question, matter, cause suit or proceeding. The absence of such an instruction could not be deemed harmless error.

In examining the question of bribery, the quid pro quo element has always been key. Congress can define the particular quid and quo prohibited as it did in the FCPA. There the statute “addresses certain foreign trade practices, makes it a crime corruptly to give a foreign official anything of value . . .” to influence a decision of a foreign official or secure an improper advantage or have the foreign official use his influence” for the purpose of assisting “the giver in obtaining, retaining or directing business.” A comparison of the specific quos defined by Congress in the FCPA demonstrates that they differ from those included in Section 201(a)(3). That section thus cannot be used to cabin the reach of the FCPA bribery provisions. Accordingly, the District Court did not error by declining to give a McDonell instruction.

Comment

The Supreme Court in McDonald rejected the broad application of bribery which was the predicate for the conviction of the former Virginia Governor. In contrast, the Second Circuit rejected the effort of Mr. Seng to cabin the reach of the FCPA. To the contrary, the Court’s reading of bribery provisions of that statute permits the kind of expansive reading McDonald rejected. Interestingly, Seng is based largely on reading the text of the section with no reference to the legislative materials or the overall focus and purpose of the statute. While this approach may be consistent with the so-called conservative approach to statutory construction, it presents significant questions about the Court’s conclusion.

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by T. GormanPosted on Posted in SECActions

Sometimes people are lucky. Everything goes just right. Sometimes a mistake but there are few if any real consequences. Other times the mistake has a significant impact. Even in those instances, however, over time the consequences may fade into the past along with many other things that nobody wants remembered. That may turn out to be the situation for the defendant in the Commission’s most recent insider trading case – or maybe not. SEC v. Tsai, Civil Action No 1:19-cv-07501 (S.D.N.Y. Filed August 12, 2019).

At the age of 23 Bill Tsai seemed to have it all. He was a college student moving toward graduation. He had a summer internship at an International Investment Bank in New York City. The position gave him the opportunity to watch and learn first hand about big time financial transactions.

Bill took the firm’s employee training course. The young intern learned that he was subject to the Bank’s confidentiality policies. The information that was part of his job was non-public, material and highly confidential he was instructed. It was imperative that the intern carefully follow the firm’s policies and procedures regarding the information – a failure would not just violate the Bank’s rules, but possibly the federal securities laws. Bill was working on mergers and acquisitions.

As the summer drew to a close the internship ended. It was almost mid-August 2017. The day after it terminated Bill was handed an offer letter for a full-time position as an analyst at the Investment Bank. The position would start after his anticipated graduation from college in May 2018. The offer letter reiterated what he had learned earlier – confidentiality was essential and trading on inside information prohibited. The eager intern accepted the offer.

Following graduation Bill Tsai began his new career. It was July 2018. The Bank had him execute a copy of its confidentiality and insider trading policy. Over the next year he would be schooled in the policies no less than five times.

A second part of the firm’s compliance procedures focused on securities accounts. From the outset it was made clear that he was required to disclose any existing brokerage accounts, trade only through two specific, authorized broker-dealers and preclear all trades through the compliance department. Although Mr. Tsai had a brokerage account at a firm that was not authorized, when he was filling out all the new employee firms he checked the box representing that he did not have such an account. In another section of the documents which also called for disclosure of the unauthorized account he again failed to disclose it as required.

During his work at Investment Bank Bill Tsai was essentially in a stream of material non-public deal information. On March 11, 2019 he received an email inviting him to participate in the tech team’s portfolio review meeting. The transaction list attached to the email list listed a pending leveraged buyout by Firm A, by a Client of the Bank. The target date was only a couple of weeks away.

Although the target date for the LBO passed, Mr. Tsai continued to see Client on the “pipeline” report – a listing of pending deals. A key internal report available to Mr. Tsai showed that the LBO deal was up for committee approval in late March with closing for the financing set for April 30, 2019.

On March 29 Bill Tsai began buying options of Client. He continued to build his position through the first part of April. All purchases were in the unauthorized account.

On April 15, 2019 Firm A announced the deal prior to the market open. It was an all cash transaction for $1.7 billion. Trading volume spiked up. Mr. Tsai liquidated his position, reaping profits of over $98,000. The complaint alleges violations of Exchange Act Section 10(b). That case is pending. The U.S. Attorney’s Office for the Southern District of New York announced a parallel criminal case. That case is also pending.

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