How Corporate Officials Can Get A Good Night’s Sleep Despite Current SEC Enforcement Trends - The Conclusion

How Corporate Officials Can Get A Good Night’s Sleep Despite Current SEC Enforcement Trends - The Conclusion

This is the last three parts of an eight part series discussing new trends in SEC enforcement which impact corporate directors and officers and steps that can be taken to avoid future liability.

While increasing corporate fines is a hallmark of the aggressive posture of FCPA enforcement officials, another key focus is on individuals despite the recent set back for the DOJ in the Africa Sting case. That case was based on the largest FCPA sting operation ever conducted. It involved a proposed transaction in which companies were solicited to bid on procuring uniforms for an overseas government. To obtain the contract bribes had to be paid. At the center of the proposed deal was an FBI sting operation. Overall 21 individuals were named in 19 cases. Three individuals pleaded guilty prior to the commencement of what was planned as a series of trial involving groups of defendants. The case collapsed when the first two that proceeded to trial ended with hung juries and acquittals and amid adverse court rulings on key legal issues for the DOJ. Eventually all the cases were dismissed and the DOJ requested that the guilty pleas vacated. U.S. v. Goncalves, No. 09-cr-335 (D.D.C.)

Despite the set back, the prosecution of individuals continues to be a center piece of the New Era. Key to these efforts is the increasing demand for longer prison sentences although that demand has been met with mixed results. For example:

  • U.S. v. Green, No. 2:08-cr-00059 (C.D. Cal. Filed Jan. 16, 2008). The defendants were convicted on nineteen counts which included conspiracy, FCPA and money laundering charges. The government sought sentences of ten years in prison despite the advanced age of the defendants. The court imposed a sentence of six months.
  • U.S. v. Jumet, No. 09-cr-00397 (E.D. Va. Nov. 13, 2009). The defendant was convicted on one count of conspiracy to violate the FCPA and one count of making a false statement. The guideline range was 87-108 months in prison. The Government requested 87 months, which the Court ordered.
  • U.S. v. Warwick, No. 3:09-cr-444 (E.D. Va. Dec. 15, 2009). The defendant was convicted of one count of conspiracy to violate the FCPA. The pre-sentence report contained a sentencing range of 37-46 months. The Government requested 40 months. The Court ordered 37 months.
  • U.S. v. Steph, No. 07-cr-307 (S.D. Tex. Jul. 19, 2007). The defendant pleaded guilty to one count of conspiracy to violate the FCPA. The sentence was 15 months in prison.
  • U.S. v. Nyugen, No. 2:08-cr-00522 (E.D. Pa. Sept. 4, 2008). The defendant was convicted of one count of conspiracy and one count of FCPA charges. The Government sought 37-46 months in prison. The Court ordered 24 months of probation.
  • U.S. v. Esquenazi, No. 09-cr-21010 (S.D. Fla. Filed Dec. 4, 2009). Defendants Joel Esquenazi and Carlos Rodriguiz were sentenced to, respectively, 15 years and 7 years in Haitian Telco related cases.

In the end corporations and their executives are at risk when doing business internationally. Enforcement authorities continue to be aggressive and while many companies have adopted compliance procedures the increasing ability of enforcers to conduct industry sweeps continues to result in FCPA liability. Those efforts are aided by a growing legion of whistleblowers from inside and outside the company, a development which will be discussed later in this series.

The continued criminalization of securities enforcement

Attorney General Eric Holder, in recent remarks, stressed that the government will use the "full range of parallel criminal and civil enforcement resources to combat financial fraud." The point is efficiencies for the government. By brining together the resources of various agencies to consider a situation, enforcement officials have the benefit of added expertise and efficiency.

Parallel civil and criminal proceedings can also be beneficial for potential defendants. By having multiple agencies consider the situation at the same time the defendant has the opportunity to obtain a global resolution of a situation rather than what otherwise be fragmented approach.

The focus on parallel proceedings has spawned a number of interagency task forces. Those range from the President's Financial Fraud Task Force to more regional models such as the Virginia Tasks Force and the Southern District of Florida Securities and Investment Initiative. The President's Task Force is made up of a veritable alphabet soup of federal agencies, including the DOJ and the SEC. The Virginia Task Force is composed of the U.S. Attorney's Office for the Eastern District of Virginia, the SEC and Virginia state officials while the South Florida Group includes the U.S. Attorney's Office for that district and the SEC.

Whatever their composition, these task forces are binging together law enforcement officials in ways which while beneficial in some respects has a significant potential for overreaching. This trend toward closer cooperation contrasts sharply with the earlier approach. There the SEC would bring actions and later, if appropriate, formally refer the matter to the Department of Justice or the local U.S. Attorney's Office for consideration. Under these circumstances the SEC would develop the law through civil enforcement. Only the more egregious cases were referred for consideration by the criminal authorities who were often reluctant to take on the burdens of a complex securities prosecution as a criminal case. Few SEC investigations had a criminal analog under this model.

Under the task force approach, however, the DOJ, the SEC and a host of others share information as it is being developed. Now 50% to perhaps as many as 60% of SEC investigations have a criminal component. This can result in a bluring of the line between civil and criminal enforcement at a time when the courts have all but made it impossible to distinguish key elements differentiating civil and criminal violations. See, e.g., U.S. v. Kaiser, No. 07-2365-cr, 2010 WL 2607140 at * 11 (2nd Cir. July 1, 2010)(defining willfulness); U.S. v. Tarallo, 380 F. 3d 11174, 1188 (9th Cir. 2004)(same); U.S. v. King, 351 F. 3d 859, 866 (8th Cir. 2004)(deliberate ignorance); Sustrand Corp. v. Sun Chem Corp., 553 F. 3d 1033, 1045 (7th Cir. 1977)(defining sscienter in a civil securities fraud suit).

This approach also has the prospect for overreaching, a point illustrated in the option backdating cases. Prior to the joint announcement by the U.S. Attorney's Office for the Northern District of California and the SEC that each was brining an option backdating action, the law regarding the practice was largely undeveloped. The SEC had not brought enforcement actions focused on the issue. Rather, business journal publications and a series of Wall Street Journal articles spawned a civil SEC enforcement action and a criminal case charging corporate officials with violations of the law that could end in long prison terms simultaneously.

The prospect for overreach in these cases is best illustrated by the cases involving officials from California based Broadcom Corporation. There parallel criminal and civil actions were brought by the U.S. Attorney and the SEC. The criminal cases charged company co-founders Henry Samueli and Henry Nicholas as well as its former president William Rhuel. U.S. v. Samueli, Case No. 10-500024 (C.D. Cal.); U.S. v. Nicholas, Case No. 10-50005 (C.D. Cal.). Mr. Samueli pleaded guilty to obstruction and was awaiting sentencing prior to the trial of Mr. Nicholas.

When Mr. Nicholas' trial commenced, the defense sought to call Mr. Samueli to testify. The government refused to offer him immunity. After the court granted Mr. Samueli immunity he testify for two days. Following that testimony the court concluded that there was no basis for Mr. Samueli's guilty plea to obstruction and ordered it vacated.

Eventually the court dismissed all of the criminal charges based on prosecutorial misconduct.

The use of parallel proceedings is not the only cause of overreaching. While at one time criminal authorities were reluctant to bring charges in complex business actions because of the difficulty of proof, there is an increasing trend to criminalize such conduct. This aggressive trend also lends itself to overreaching. The prosecution of Prabhat Goyal, CFO of McAfee from 1997 through 2001, is a good illustration. Mr. Goyal was indicted and convicted of financial fraud.

The case centered on revenue recognition polices. The company adopted one policy which helped it make its quarterly numbers. The DOJ argued for an alternative treatment. Although the jury convicted Mr. Goyal, the Ninth Circuit Court of Appeals, in an unusual ruling, revered concluding that there was insufficient evidence to sustain the charges and support a conviction.

Chief Judge Kozinski concurred in the result penned what should be a cautionary note to the use of criminal charges:

this case has consumed an inordinate amount of taxpayer

resources, and has no doubt devastated the defendant's personal

and professional life. . . . in the end, the government couldn't

prove that the defendant engaged in any criminal conduct . . .

This is not the way criminal law is supposed to work. Civil law

often covers conduct that falls in a gray area of arguable legality.

But criminal law should clear separate conduct that is criminal from conduct that is legal . . . [it] represents the community's sense of the

type of behavior that merits the moral condemnation of society. . .

When prosecutors have to stretch the law or the evidence to secure a conviction as they did here, it can hardly be said that such moral

judgment is warranted.

U.S. v. Goyal, No. 08-1436 (9th Cir. 2010).

Nevertheless, the trends which created the Broadcom backdating cases and the prosecution of Mr. Goyal continue. Task forces continue to multiply, the line between criminal and civil conduct continues to blur and brining criminal charges is not only popular but a priority.


In the future, the efforts of enforcement officials will be aided by two groups of whistleblowers. First, the new SEC whistleblower rules offer significant bounties ranging from 10% to 30% of certain amounts obtained by the SEC in a successful enforcement action. Under the SEC's controversial whistleblower rules, the person is not required to report the information first to the company. At the same time the whistleblower is protected under Section 922 of the Dodd-Frank Act. This means that the company may well have no opportunity to remedy a situation before an SEC investigation begins.

Presently, it is difficult to evaluate the potential for liability from this program. It is instructive however that the SEC has established a special office to handle the information developed from under the Dodd-Frank Sections. While it may be some time before the program can be fully evaluated, reportedly the new whistleblower office is receiving tips and information at a rapid rate and is being overwhelmed.

Second, an emerging trend in "cooperation credit" in FCPA cases is creating the new corporate whistleblower. Business organizations ensnared in FCPA inquires are now developing evidence against others in an effort to mitigate their own liability. Panalpina Worldwide Transport (Holdings) Ltd., Siemens A.G. and Johnson & Johnson, Inc. have become corporate whistleblowers.

This trend may be particularly troublesome for business organizations and their executives. Business partners and associates and even those in the same industry can be expected to have significant information regarding those with whom they deal and in their line of business. In view of this trend and the new SEC Dodd-Frank rules many business organizations may well find themselves in a sea of those who are pointing the finger at some perceived wrong doing which drops the company and its executives into the uncertain turmoil of an SEC or DOJ law enforcement investigation.


Current trends in key areas of SEC enforcement, coupled with the rise of parallel proceedings and the increasing tendency to criminalize actions threaten potential criminal and civil liability for business organizations and their executives. There is little doubt that enforcement officials are aggressively targeting corporate officials and their organizations. New approaches are being combined with additional theories to expand liability. These efforts are aided by a growing legion of whistleblowers may come from inside the company, business associates, competitors and others.

Avoiding these trends and getting that good night's sleep begins with identifying and understanding them. Understanding the approach of enforcement officials is critical. This permits preparation of compliance procedures based on what enforcement officials are doing today.

Unfortunately focusing on today is not sufficient. Compliance procedures cannot be adjusted every time there is a new case, speech or comment from an enforcement official. The critical point is to focus on tomorrow. This means on the direction of the trends and those themes being developed today to be out in front tomorrow. The theme to the SEC's actions against independent directors is vigilance, a point the agency will continue to fortify by expanding its reach while easing the burden of proof. The point of the insider trading employee cases is that learning information on the job or perhaps even through someone's job that is not available to others and then trading can lead to liability. Many may debate the validity of this approach but that is of little import for the company and its employees who are mired in a long running, time consuming and expensive insider trading investigation. The central point to aggressive FCPA enforcement is a level playing field where goods and services compete on the merits, not through envelopes of cash or gifts.

Overall these cases are designed to bring a new ethics to the market place - hardly something new since it is the predicate for securities statutes that arose out of the great depression. Bringing this approach to the company is key to being prepared for tomorrow. It begins with a core culture driven from the top of ethics and compliance built on straight forward and practical procedures. It does not require purchasing the most expensive system or every bell and whistle. It does require a focus from the top driven through the organization and a consistency in application by employees. That culture positions the organization and its executives and employees ahead of the curve. That type of culture gives executives a good night's sleep today and tomorrow.

For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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