Joe Murphy and Jeff Kaplan
PLI Advanced C&E Workshop
October 7, 2014
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No official version, but centers on
◦ The “why” of C&E – sticks and carrots
◦ The “how” of C&E – program elements
 Includes legal impediments to effective C&E programs
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Sources
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Litigated cases (rarely)
Settlement agreements, sometimes monitor reports
Guidance documents
Speeches by enforcement officials
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We believe that C&E legal history and public
policy are relevant to the work of C&E
professionals
◦ History can help one understand the trajectory and
velocity of the C&E law
◦ Public policy can help make that law more C&E-friendly
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Our book: Compliance Programs and the
Corporate Sentencing Guidelines (Thomson
Reuters)
Make sure to read Rebecca Walker’s history of
C&E law in course materials (a free mini treatise)
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Focus on legal developments of general
relevance to C&E programs than substantivelaw related ones
◦ E.g., case on what is a foreign official under FCPA
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Some of the cases we’ll mention will also be
discussed in other sessions
We want your questions and ideas on how to
best use law-related C&E information to
make programs stronger
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Massive fines have become routine in the US:
• Bank of America - $16 billion (bank fraud) (2014)
• BNP Paribas - $8.9 billion (violations of sanctions
laws) (2014)
• BP - $4.5 billion (environmental offenses) (2013)
• Credit Suisse - $2.6 billion (aiding and assisting
tax fraud) (2014)
• JP Morgan Chase - $1.7 billion (BSA) (2014)
• Countrywide/B of A - $1.3 billion (bank fraud)
(2014)
• Toyota - $1.2 billion (fraud) (2014)
(Thanks to Rebecca Walker for this list)
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It is not only the very biggest fines that are
relevant, but records set for given type of
violation, e.g.,
◦ Three of four largest antitrust fines in US history
have been imposed in 2012-2014
◦ Record punishment in immigration case: $34
million fine against Infosys in 2013
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Other nations are joining the party. E.g., in
just the past two month China has imposed:
◦ A $492 million fine against GSK for bribery – largest
corporate fine ever there
◦ Record competition law fines
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Governments increasingly need revenue:
◦ The “demand side” of law enforcement strategies
◦ Not likely to change any time soon
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Individual prosecutors may have their own
interests in securing large fines
◦ Lemos and Minzer, “For-Profit Public Enforcement,”
Jan. 2014 Harvard L Rev
◦ A non-fixable form of “moral hazard”?
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In general awareness
training/communications
◦ Particularly for board members
◦ Senior managers may be more responsive to the
prospect of individual punishment
 A different form of moral hazard
 Is it fixable?
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In connection with budget/resource
discussions
◦ Increasingly important in an era of “economic
headwinds”
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Poor compliance program as a basis for
organizational liability:
◦ SAC Capital Advisors indictment in 2013
◦ The Medco FCA precedent
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Lawsuits against S&P and Goldman Sachs for
false claims of having strong conflict of
interest policies
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False statement liability for internal controls
certification without allegation of accounting
fraud – In re Marc Sherman, SEC, July 30, 2014
◦ Significance discussed in Ropes & Gray post in the
Harvard corporate governance blog
http://blogs.law.harvard.edu/corpgov/2014/08/17/sec
-charges-corporate-officers-with-fraud/#more-65167
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What does this all mean? As programs become
more important, program-related
misconduct/deficiencies will themselves likely
become a greater source of direct liability
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An unfortunate recent twist: compliance program
supervision of subsidiary by parent company has
become a basis for piercing the corporate veil in
FCPA case
◦ http://www.fcpablog.com/blog/2014/2/27/parentalcontrols-anti-corruption-compliance-programs-forjo.html
◦ Experience in EU
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A difficult balancing act, but our view is that risk
of doing too little with subsidiaries and JVs is
generally greater than the risk of doing too much
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Not much activity in the past year
One 2013 decision is somewhat typical of this
line of cases: while certain “red flags may tend to
establish that [the company’s] employees were
marketing [the product] illegally and that [the
company’s] officers likely knew the details of
[this] marketing and sales, [the purported red
flags] are insufficient, in the absence of more
direct evidence, to support an inference that the
outside directors’ actually knew these details.“
◦ Kococinski v. Collins, 935 F.Supp. 909 (D. Minn. 2013 )
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Less about liability – which is a hard sell given
the case law
More about best practices
◦ In 2006 Disney decision Delaware Supreme Court
encourages directors to follow best practices and
reduce potential litigation costs
◦ Not a C&E case, but logic definitely applicable to
the C&E context
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Not much criminally – in terms of preexisting programs
◦ Several FCPA cases in 2010-2012 – culminating
with Morgan Stanley case
◦ We’ll hear from DOJ today
◦ The strange case of antitrust – the one exception in
DOJ’s policy: programs not considered
◦ There are many cases of after-the-fact C&E
programs being rewarded
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SEC – First Solar Reg FD case
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Speech by Brent Snyder
Speech by Bill Baer
Response to criticism about difference from
DOJ policy
Will Antitrust Division consider compliance
programs?
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Anti-corruption
◦ UKBA
 Adequate procedures defense still untested
 To watch: proposal to create a failure to prevent
economic crime offence
◦ Brazil Clean Companies Act went into effect in
January
 Some recent enforcement activity
 Gov’t has not yet issued guidance on compliance
programs
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Antitrust/competition law
◦ EU issued a guide, but no recognition
◦ Canadian Competition Bureau – new draft guide &
new policy to recognize programs
◦ CADE is Brazil considering how to approach
compliance programs
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Is reporting to a regulatory authority
necessary for a Dodd-Frank claim for
retaliation?
◦ Asadi v. G.E Energy, (5th Cir. 2013) holds it does.
◦ Various other cases say otherwise. E.g., Yang v
Navigators Group (SDNY 2014)
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Geographic considerations. Liu Meng-Lin v.
Siemens, Second Circuit holds in 2014 that
noncitizens working for a foreign company
are not afforded protection by the antiretaliation provision of the Act
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Lawyers as whistleblower
◦ NY County Bar Opinion 746 (2013): prohibits
lawyers from disclosing confidential info in support
of bounty claim under Dodd-Frank
◦ Lawson v FMR (Supreme Court 2014) – private
contractors of public company can sue under S-Ox
 Includes lawyers
 But opinion doesn’t address use of privileged
information
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In re Kellogg Brown & Root, Inc. (DC Cir 2014)
◦ Reversed much-derided district court opinion which
threatened privileged status of in-house investigations
conducted by C&E office
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A very broad approach to crime fraud exception:
◦ A lawyer was consulted about whether a contemplated
payment would violate the Foreign Corrupt Practices Act,
told the client that it would, but the client disregarded
the advice and made the payment. While noting that this
was a “close case,” the court held that the exception
applied. In re Grand Jury Subpoena, ___ F 3rd__, No. 131237 2014 WL 541216 (3d Cir 2014)
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MoneyGram: Restructure executive review and bonus system so
that each executive is evaluated on what they have done to
ensure their business or department adheres to compliance
policies and procedures. Failing score will make the executive
ineligible for any bonus that year. Implement a “clawback”
system for bonuses paid to executives later determined to have
contributed to compliance failures
HSBC: Extent to which a senior executive meets compliance
standards and values has a significant impact on his/her bonus,
and failure to meet those compliance standards and values
could result in the voiding of his/her entire year-end bonus.
GSK: Company shall make adherence to the Code an element in
evaluating the performance of all relevant employees.
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If senior people involved in violation, need to
be involved in the cure
“Reporting” to the board needs real substance
Risk assessment focused on antitrust
Monitors in antitrust cases – a sign of things
to come?
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Writt v. Shell Oil, 409 S.W.3rd 59, Tex App
(Ist Dist) 2013, statements to DOJ as
concerning possible FCPA violations as part
of a disclosure held not absolutely immune to
a defamation suit
◦ Because these were made prior to the initiation of
criminal proceedings, such statements were
actionable if made recklessly or with malice
◦ While good faith reports to government
investigators may ultimately be found protected,
companies can be forced to litigate this issue
◦ Decision is being appealed
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Restrictions on doing them
Development of “ban the box”
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Speech to 2013 SCCE C&E Institute by
Stephen A. Cohen of SEC:
◦ “Where we find fraud, there are often early warning
signs that may have suggested a corporate
compliance culture that is not meeting appropriate
standards….. Risk-taking in the area of legal and
ethical obligations invariably leads to bad
outcomes. Any company or person prepared to
come close to the line when it comes to legal and
ethical standards is already on dangerous ground.
Tolerating close-to-the-line behavior sends a
terrible message throughout an organization that
pushing the envelope is acceptable. “
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“Be on the lookout for people who are overly technical in
their approach to issues of ethics and professional
responsibility. Pay particular attention to those who may
disparage or diminish the importance of respect for the
law and protecting the organization from reputational
harm.”
“A strong ethical culture flows from good governance and
requires leaders to promote integrity and ethical values in
decision-making across the organization. This entails
asking not just ‘can we do this,’ but ‘should we do this?’ A
culture of compliance and ethics can and should be
measured from interaction with leadership across the
organization as well as from front line employees who are
often a revealing barometer of what the culture and
expectations really are.”
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