by T. GormanPosted on Posted in SECActions

A critical part of cooperating with an SEC or DOJ investigation for FCPA or other possible violations is the production of documents. In order for the company to assess what happened it must conduct an internal investigation and interview the necessary witnesses. It is the only way for the company to self–evaluate its own conduct. The SEC and the DOJ are in the same position. To evaluate what happened, government investigators need to assess the conduct through an evaluation of the documents and information from key individuals. While furnishing enforcement officials the critical information may secure cooperation credit and possibly reduce liability in any enforcement action, it can increase potential future liability in other litigation. Chiquita Brands International, Inc. v. SEC, No. 14-5030 (D.C. Cir. Decided July 17m 2015).

In 2001 Chiquita reached a settlement with the SEC regarding books and records violations. The firm consented to the entry of a cease and desist order based on allegations that it failed to accurately record certain payments made by subsidiary Banadex to local officials in Columbia. In the parallel DOJ investigation Banadex pleaded guilty to engaging in unauthorized transactions with Autodefensas Unidas de Colombia or AUC. The group had been designated as a global terrorist organization. While Chiquita acknowledged that Banadex made the payments demanded by AUC, the company insisted it did so only to protect its Colombian employees from being kidnapped, injured and murdered.

In connection with the investigations Chiquita produced thousands of documents related to the payments to the DOJ and the SEC. The firm requested confidential treatment under the pertinent provisions of the Freedom of Information Act. In 2011 the DOJ released over 5,500 pages of these documents to the National Security Archive under the FOIA. The Archive is a non-profit library project of the George Washington University. It collects declassified documents related to U.S. national security.

At issue here are two FOIA requests made by the Archive to the SEC in 2008 relating to documents from the Banadex inquiry on which the SEC’s settlement with Chiquita was based. Chiquita was then a defendant in a multi-district litigation brought by Colombian citizens based on the Alien Tort Statute and the Torture Victim Protection Act. Plaintiffs claimed that some of the firm’s former officers should be held liable for making payments to paramilitary organizations such as AUC that tortured and murdered the plaintiffs and their families. Since 2008 discovery had been stayed while the parties litigated jurisdictional issues that the district court certified for interlocutory review. The federal claims against Chiquita were dismissed on appeal. Motions to dismiss are pending.

Chiquita requested that the SEC’s Office of FOIA Services withhold the documents requested by the Archive based on Exemption 7(B), in view of the pending litigation. Specifically, the firm argued that release of the documents would deprive it of a fair trial in that litigation, noting that the Archive is directly affiliated with, and actively supporting, plaintiffs in the case. Thus the release of the documents would constitute an end run around the stay of discovery. The FOIA Office rejected the claim. The SEC’s General Counsel, on appeal, also rejected the claim.

Chiquita then initiated an action in District Court, claiming that the SEC’s failure to apply Exemption 7(B) was inappropriate. The Archive intervened on the side of the Commission. The court granted summary judgment on behalf of the SEC. On appeal Chiquita focused again on Exemption 7(B), claiming that under the provision the release of the documents is barred until discovery begins and it can seek a protective order from the court. The company dropped an argument that release of the documents would deprive the firm and its officers of the right to an unbiased jury.

The Circuit Court affirmed, vacating an injunction precluding the release of the documents pending its determination. The FOIA, the Court began, requires government agencies to make public virtually all information not specifically exempted from release. This means that in some instances litigants can obtain materials they might not otherwise be able to obtain or which may not be readily available. In this context, exemptions under the Act are construed narrowly. The party asserting an exemption has the burden of establishing that the documents should be withheld from production.

Exemption 7(B) only applies under its express terms when the release of the records would deprive a person of the right to “a fair trial or an impartial adjudication.” Under this provision the Court stated that “Assuming that Congress used the word ‘trial’ in light of its long-settled meaning, we agree with the Commission and the Archive that Exemption 7(B) comes into play only when it is probable that the release of law enforcement records will seriously interfere with the fairness of ‘that final step which is called ‘the trial’.” (citation omitted). In reaching this conclusion the Court rejected Chiquita’s contention that the use of the phrase “fair trial” and the term “adjudication” in the provision broaden its coverage beyond the trial itself, giving it application to any point during a judicial proceeding, including discovery. While the Court agreed with Chiquita’s contention that the right of a party to a fundamentally fair decision making process can be denied through a number of events before trial, it concluded that the Exemption does not apply to situations where a “slight advantage conferred on a party in a single phase of a case necessarily threatens the fairness of the trial.”

Finally, the Court distinguished its decision in Washington Post Co. v. U.S. Department of Justice, 863 F. 2d 96 (D.C. Cir. 1988), relied on by Chiquita. While the company claimed otherwise, according to the Court, there the same standard was applied – would the release of the records seriously interfere with the fairness of the proceeding as a whole. In Washington Post a newspaper reporter made a FOIA request to the DOJ which was investigating claims that Eli Lilly marketed an arthritis drug to Americans while failing to tell regulators or consumers that it had caused severe adverse reactions among patients overseas. Faced with product liability claims the company conduced an internal investigation under the supervision of a special committee of independent directors to assess its exposure. The committee produced a comprehensive report and furnished it to the DOJ. The Post requested the report. The DOJ denied the request.

On appeal Lilly and the DOJ argued that the report could taint the potential jury pool and it was unavailable in discovery because it was protected by the self-evaluative privilege. This distinguishes Washington Post from the situation presented here the Court held because “in Washington Post that disclosure of the report of the outside directors, a document unavailable in discovery, would grant the company’s adversaries an ‘unfair advantage’ and thus deprive Eli Lilly of a fair trial.” That differs from this situation where the company would only suffer a temporary disadvantage during discovery, according to the Court.

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by T. GormanPosted on Posted in SECActions

The role of the chief compliance officer is the talk of the Securities and Exchange Commission these days – or at least some of its Commissioners. Those who are speaking for the record agree that the role of the CCO is important. Those who are speaking for the record agree that the CCO should not have a target on his or her back. But what is the message to CCOs that two SEC Commissioners and the Chair of the agency are discussing their role and if they should be concerned about an SEC enforcement action?

First, there was SEC Commissioner Gallagher who published a dissenting statement regarding two recent, settled enforcement actions filed by the agency. One was In the Matter of Blackrock Advisers, LLC, Adm. Proc. File No. 3-16501 (April 20, 2015). The other was In the Matter of SFX Financial Advisory Management Enterprises, Inc., Adm. Proc. File No. 3-16590 (June 15, 2015). Each case centered on the adequacy of the policies and procedures of the firm. In each case the CCO settled with the Commission.

The point of Commissioner Gallagher’s dissent was two-fold. First, he argued that Rule 206(4)-7 is “not a model of clarity” since it is addressed to the adviser but applied to the CCO. Second, there is no guidance as to the distinction between the role of the CCO and that of management in carrying out the compliance function. And, enforcement actions are not the way to give guidance to these critical gatekeepers, Commissioner Gallagher noted. Statement of Commissioner Daniel Gallagher, June 18, 2015 (here).

Then Commissioner Luis Aguilar weighed in with comments appropriately titled “The Role of Chief Compliance Officers Must be Supported.” Commissioner Aguilar, who is a former head of compliance, expressed “concern that the recent public dialogue may have unnecessarily created an environment of unwarranted fear in the CCO community . . . [that ] is unhelpful, sends the wrong message . . .”

Commissioner Aguilar then pointed out that the SEC has brought “relatively few cases targeting CCO’s relating solely to their compliance-related activities.” Rather, the “vast majority of these case involved CCOs who ‘wore more than one hat’. . .” Citing Commissioner Gallagher’s remarks he went on to argue that “those who believe that Rule 206(4)-7 unduly puts a target on the back of CCOs. . .” are simply wrong. Since the adoption of the Rule “enforcement actions against individuals with CCO-only titles and job functions have been rare.” Those few cases should not be of concern. Rather, “the Commission has approached CCO cases very carefully. . .” Remarks of Commissioner Luis Aguilar, June 29, 2015 (here).

Now Chair White has joined the discussion. After reiterating the remarks of her fellow Commissioners regarding the importance of the position and its gatekeeper function, the Chair stated: “To be clear, it is not our intention to use our enforcement program to target compliance professionals. We have tremendous respect for the work you do. You have a tough job in a complex industry where the stakes are extremely high. That being said, we must, of course, take enforcement action against compliance professionals if we see significant misconduct or failures by them. Being a CCO obviously does not provide immunity from liability, but neither should our enforcement actions be seen by conscientious and diligent compliance professionals as a threat.” Chair Mary Jo White, “Opening Remarks at the Compliance Outreach Program for Broker-Dealers,” Washington, D.C. (July 15, 2015)(here).

For all the words spoken, and reassurances given, are CCO’s comforted that they are not being targeted by the SEC? That the standards which might be used in any enforcement actions might be vague? Or that only appropriate enforcement actions will be brought? In the end what message does it send to CCOs who are praised for being key gatekeepers that three SEC Commissioners – enough to authorize and enforcement action – are debating their role, the standards and the prospects of an enforcement action?

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