Posts Tagged ‘sec’

How the Feds Enforce the FCPA

Monday, October 25th, 2010

 

The other day, we drew a contrast between the Manhattan DA’s new public integrity unit and the way the feds go after FCPA violations, and some folks asked just what exactly the feds do in these cases.  That’s a good question.  Especially now, as the FCPA has become a major star of the feds’ redoubled efforts to fight white-collar crime.

The Foreign Corrupt Practices Act, among other things, says it’s against the law for any U.S. citizen or business to pay a bribe to a foreign official.  The penalties can be staggering, with fines calculated as the amount of income the briber hoped to receive down the road as a result of paying the bribe.  “Any” U.S. citizen means just that: anybody, not just a corporate executive.  A “foreign official” means anyone with a government job — including people working in industries that are government-owned or government-controlled.

“Bribery” includes giving anything of value in the hopes of getting something in return.  It’s really a broad standard.  A bribe doesn’t have to be an explicit tit-for-tat, and it doesn’t have to be just for the purpose of landing a choice contract.  A bribe can be just a nice dinner at a fancy restaurant that might make get you looked on with more favor next time contracts are being awarded.  A bribe can be a “facilitation payment” to a petty bureaucrat, some grease to ensure that you are allowed to do what you are already entitled to do (this, by the way, is an example of where Wikipedia, at least as of today, get things wrong).  See here for a more thorough discussion.

As with many white-collar offenses, this one is enforced by both the SEC and the DOJ.  As of this year, the SEC now has a special unit dedicated to investigating and punishing suspected offenders.  As we mentioned the other day, the point is to keep as much expertise in the institutional memory, and also to better coordinate investigation and enforcement.  On the criminal side, the DOJ’s Frauds Section is the main enforcer as a matter of law, though some local U.S. Attorney’s offices like the SDNY will handle most of the work in-house.

Over the past few years, the number of FCPA cases has risen dramatically, in part because the (more…)

Stop the Music – 3rd Circuit Slams DOJ’s “Musical Chairs” in Securities Fraud Prosecution

Wednesday, April 7th, 2010

musical chairs

SEC Rule 10b-5 is one of the main securities fraud laws. It says you can’t mislead people in connection with the purchase or sale of a security. You can’t make an untrue statement of a material fact. And you can’t fail to state a fact, when without that fact the statements you just made would be misleading.

That seems simple enough. But federal prosecutors in New Jersey seem to be having a hard time figuring out what that means.

In June 2005, the feds in New Jersey indicted Frederick Schiff, the CFO of Bristol-Myers Squibb, for failing to disclose material facts to investors. Allegedly, Bristol-Myers (a drug company) was paying wholesalers to order more drugs than they really needed, so Bristol-Myers could report higher sales numbers and inflate its stock value. Schiff allegedly didn’t tell investors about it during conference calls and in SEC filings. (See the indictment here and the DOJ’s press release here.) That indictment got thrown out for a grand jury leak, so they got a second one in May 2006, and finally a third one in April 2007 that dropped allegations of accounting violations.

With respect to the omissions, the government kept changing its tune. First, they said the company had a duty to correct misleading statements of others, based on a “general fiduciary duty.” The district court helpfully pointed out that there is no such duty in the law. So then the feds said there was a statutory duty under SEC regs S-K, which might actually have worked, but then they changed their mind and put on the record that they weren’t pursuing that theory. There was a “theory of duty based on falsity of reported sales and earnings,” which the District Court said wouldn’t fly. Then they tried to say the stuff left out of filings is a material omission that is misleading if you include the earlier analyst calls in the context (calling it “all of a piece”). The district court ruled that, no, there is no affirmative duty under either the “falsity” or the “all of a piece” theory. “It defies logic,” the court ruled, “to charge as a crime that an utterance in an analyst call must have other words written in a later SEC filing in order to make the utterance in the prior phone call ‘not misleading.’” Thanks for playing. The feds appealed.

In a unanimous decision today (opinion here), the Third Circuit slammed the DOJ for constantly changing its theory of the case, for playing “musical chairs” with its theory of how Schiff’s conduct counted as an unlawful omission under Rule 10b-5.

More importantly, the Circuit said the DOJ’s ultimate theory of liability here — that Schiff had a “general fiduciary” duty as a “high corporate executive” to disclose the inventory issue — was simply overbroad. “This argument reaches too far.”

This is a big setback for the feds, who now are left with a much narrower (more…)

Something to Tide You Over

Tuesday, November 17th, 2009

writer-boxed-flipped

We apologize to our loyal readers for the unusual delay between posts. We’ve been on trial, and you know how that goes. Trial is all-consuming. And then there’s all the work that piles up in the meantime. And the wife and kids need a token appearance from us once in a while. So the blog just isn’t happening while we’re on trial.

And that’s how it should be, of course.

So yeah, we’ve been on trial since November 2. We keep predicting that it will end soon, but it never does. With any luck, we’ll have closing arguments tomorrow. But we said the same thing yesterday, and on Friday, and on Thursday… And we’re going to have to take Thursday off if the jury’s still not back with a verdict then, because we’re giving our next “Hope for Hopeless Cases” lecture for West Legal Ed Center that day. So yeah, this case could easily last through Friday.

To tide you over until we finally get a chance to blog again, here’s a link to our latest article in Forbes magazine.

Link

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Excerpt:
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Expert View
BEAR STEARNS DEFENSE HOLDS LESSONS FOR EXECS

Going on offense is the best defense in white-collar cases.

It didn’t take long after the housing boom turned bust and trillions of dollars of wealth had gone poof that the public was out for blood. The government needed to “do something” about the mess.

An obvious point of focus were the securities firms Bear Stearns (now a part of JPMorgan Chase) and Lehman Brothers (now a part of Barclays) which blew up in quick succession. From there, it does not take a huge leap of logic to understand how federal prosecutors set their sights on Ralph Cioffi and Matt Tannin, two former managers of Bear hedge funds who were plucked out of obscurity, paraded through a perp walk and unceremoniously read their rights as criminal defendants.

As their Nov. 10 acquittals attest, they didn’t actually commit any crimes. But that didn’t spare them from two years of hell during which they were investigated, indicted, vilified, prosecuted and put on trial. If they’d lost, that would have all been a picnic compared with the 20 years of prison time they would have faced.

If the case teaches us anything, it’s that such ordeals can befall executives–innocent and otherwise. If enough things go wrong on their watch, it’s not all that rare for bosses to find gung-ho prosecutors eager to indict them before all the facts are in.

That leads to the question: What can you do to protect yourself if you fall under the eye of a suspicious prosecutor? Here, the Bear Stearns case is instructive.

Lesson One
You’re on your own. If you ever find yourself on the receiving end of an indictment related to your professional activities, don’t count on your…

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Memo to White-Collar Witnesses: Get Your Own Lawyer!

Wednesday, March 4th, 2009

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A “Martha Stewart moment” is that unhappy moment during a white-collar investigation when one’s client misleads the investigators. A client who may have escaped prosecution entirely has now practically ensured that she will be prosecuted. If his client must speak with investigators, a good attorney tries to prepare her well, to prevent any Martha Stewart moments from happening.

During the recent SEC investigation of a possible $8 billion fraud at Stanford International Bank, they interviewed Stanford Financial Group’s chief investment executive, Laura Pendergest-Holt (pictured). She was accompanied to the interview by Proskauer Rose partner Thomas Sjoblom, a very good and experienced attorney.

Last Thursday, the investigation went criminal, as Pendergest-Holt was charged with a federal crime. She’s alleged to have had a Martha Stewart moment, lying to the SEC about her knowledge of Stanford’s investments, and about not meeting with other Stanford people to prepare for her meeting with the SEC.

How could that happen, when she had such a good lawyer?

The answer appears to be (first pointed out by Zach Lowe) that Sjoblom wasn’t actually her lawyer. He represented Stanford, not its executive.

This is something that comes up all the time in the white collar world. When a corporation is under investigation, it hires lawyers to protect its interests. The interests of its executives and employees are not always the same — in fact they are rarely the same — and so to avoid potential conflicts of interest they usually get separate counsel.

If the same law firm represented a corporation and its CIO, somewhere down the line the CIO might decide that it’s in her interest to testify against the company. That would cause a conflict of interest, so the company will usually insist that she get her own lawyer.

If the corporation’s attorneys speak with the CIO, they must make it very clear that they only represent the company, and do not represent the individual. In this case, Sjoblom made it very clear at least twice during the SEC meetings that he was Stanford’s lawyer and not Pendergest-Holt’s. It is not yet known whether he made this clear to Pendergest-Holt (he did not return Lowe’s calls seeking comment, but commenting is probably improper anyway), though it is hard to imagine that he did not do so.

Sjoblom had a bit of a dilemma in that situation, regardless. As Stanford’s lawyer, he probably needed to get information from Pendergest-Holt. And he probably needed to cooperate fully with the investigators. He would have had to make it perfectly clear to her that, as he did not represent her, anything she said to him would not be privileged. (Well, Stanford could assert a privilege perhaps, but Pendergest-Holt could not.)

If Pendergest-Holt reasonably believed that Sjoblom represented her, and then Sjoblom shared her information with Stanford or the SEC, then Sjoblom could well be liable in a civil suit. Again, there is no reason to believe that such is actually the case, and this is only mentioned to stress the challenges presented to the corporation’s attorney in a situation like this.

How does the company’s lawyer get information out of its CIO, then? If the lawyer tells the CIO he doesn’t represent her, and nothing she says is going to be confidential, and in fact he’s obligated to share her information, then she’s not going to want to talk. The solution is simple and cold: the lawyer must inform the CIO that if she doesn’t talk she will be fired.

Given all the warnings that must have been given, alerting her that Sjoblom did not represent her, it is strange to see that she didn’t get her own counsel. Nevertheless, Pendergest-Holt somehow appeared before the SEC without being represented by her own lawyer. She didn’t have someone watching out for her own interests, and now she’s been arrested and charged with a federal crime as a result.

She has lawyers now, of course. She is represented by the firm of Parsons Behle & Latimer in the civil SEC matter, and by Houston’s Dan Cogdell in the criminal matter. Still, we have to wonder why she waited until it was too late before she got her own counsel.

Memo to executives and employees: Get your own lawyers!

Wave of White-Collar Investigations is Coming

Wednesday, November 12th, 2008

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“The nation’s top white-collar criminal defense practices are receiving a steady flow of inquiries from clients embroiled in the ongoing credit crisis,” reports the National Law Journal. This is consistent with reports we have heard within the white-collar defense community.

With the economy continuing to take hits from the financial sector, there seems to be a growing demand for blame. Billions of dollars in pensions and retirement funds have disappeared, the money supply is crippled by banks refusing to extend credit, and jobs and tax revenue are at stake.

As the public and its elected officials call for punishment, state and federal prosecutors are launching investigations to see whether anyone broke the law. Anyone involved with complex debt instruments, which appear to have been responsible for much of the vanished wealth, ought not to be surprised to find themselves part of a criminal or regulatory investigation.

As we previously reported, Lehman Brothers executives are already being looked at. And of course the Eastern District of New York has already indicted two managers of the Bear Stearns subprime mortgage hedge funds. But that, our sources tell us, is only the tip of the iceberg.

Credit-default swaps, which enabled much of the subprime hedge fund investments, are now the focus of a joint investigation being brought by the New York Attorney General and the Southern District of New York.

The SEC has also begun taking action in investigations that had appeared to be dormant. Of particular interest to the SEC would be whether executives made misleading statements to investors or analysts about the financial health of their funds or institutions.

“Attorneys report hearing from clients,” reports the NLJ, “who are either already in receipt of subpoenas from federal and state investigators, or who are worried about what the mail will bring. Every lawyer interviewed agreed that their clients — including those confident they kept within the law — would be wise to anticipate that the government will cast a very wide net.”