Even amid an uncertain, disorderly—and arguably, botched—changing of the guards at the Department of Justice and Securities and Exchange Commission, the agencies’ enforcement priorities can be summed up with one adage: the more things change, the more they stay the same.
Under the Obama Administration, both the SEC and DoJ aggressively pursued violations of the Foreign Corrupt Practices Act (FCPA) and other white-collar crime; focused more acutely on individual accountability; and increased their efforts to credit companies with robust compliance programs when considering prosecutions. Expect those trends to continue under the leadership of Attorney General Jeff Sessions and SEC Chair Jay Clayton.
Although it’s still early in the game, with many leadership appointments announced in just the last few months, one telltale sign of likely enforcement priorities can be garnered from public remarks made by Sessions and Clayton themselves.
“This Department of Justice will continue to investigate and prosecute corporate fraud and misconduct; bribery; public corruption; organized crime; trade-secret theft; money laundering; securities fraud; government fraud; health care fraud; and Internet fraud, among others,” Sessions said in remarks at the Ethics and Compliance Initiative’s (ECI) annual conference in April.
With two new co-directors now in place, the SEC’s Division of Enforcement also portends an aggressive enforcement agenda. Leading the SEC’s enforcement program are Stephanie Avakian, who served as the Enforcement Division’s Deputy Director for the past three years, and Steve Peikin, an experienced former Assistant U.S. Attorney who also served as chief of the securities fraud task force for the Southern District of New York.
“In FY 2018, under their leadership, the SEC will continue to focus resources on key areas where misconduct harms investors, undermines confidence, and impairs market integrity. This includes such critical areas as retail investor fraud and investment professional misconduct, insider trading, market manipulation, and accounting fraud,” Clayton said in June 27 testimony on the SEC’s $1.6 billion budget request for the 2018 fiscal year.
FCPA enforcement. Anti-corruption enforcement will continue to be a high priority for both agencies, with both Sessions and Clayton pledging to enforce the FCPA with the same fervor as their respective predecessors. “Our Department wants to create an even playing field for law-abiding companies,” Sessions said. “We will continue to strongly enforce the FCPA and other anti-corruption laws.”
Rod Rosenstein, confirmed in April as Deputy Attorney General—the second highest post at Department of Justice—also aired his support for the FCPA. During his confirmation hearing, Rosenstein said he “will enforce all federal laws, including the [FCPA] and the International Bribery Act of 1998, as appropriate, based on the facts and circumstances of each case.”
Moreover, during remarks at ACI’s Annual Conference on Foreign Corrupt Practices Act, Acting Principal Deputy Assistant Attorney General Trevor McFadden of the Justice Department’s Criminal Division reiterated that the FCPA is “as alive as ever.”
“Motivated as ever by the importance of ensuring a fair playing field for honest corporations doing business abroad, the Department continues to vigorously enforce the FCPA,” McFadden said. “The Department is committed to enforcing the FCPA and to prosecuting fraud and corruption more generally.”
SEC Chair Clayton, during his confirmation hearing, similarly discussed the important role the government plays in combatting corruption. When asked about his plans for enforcing the FCPA, Clayton responded that he plans to work “with fellow Commissioners, Enforcement Division staff, and other authorities in the U.S. and abroad to coordinate enforcement of the FCPA and other anti-corruption laws. In particular, I believe that coordination with the Department of Justice is integral to effective enforcement of the FCPA.”
Especially in the financial fraud area, the SEC in recent years has become a strong co-player with the Justice Department, jointly investigating cases, sharing information, and gleaning prosecutions. “That relationship is always there, regardless of who is in power,” says Alec Koch, formerly an Assistant Director in the SEC’s Division of Enforcement and now a partner at law firm King & Spalding.
“This Department of Justice will continue to investigate and prosecute corporate fraud and misconduct; bribery; public corruption; organized crime; trade-secret theft; money laundering; securities fraud; government fraud; health care fraud; and Internet fraud, among others.”
Attorney General Jeff Sessions
To further its mission of enforcing the FCPA, the SEC in April announced the appointment of Charles Cain, current deputy chief of the FCPA Unit, as acting chief of the FCPA Unit. This position had been held by Kara Brockmeyer since 2011.
No more ‘broken windows.’ Pertaining to SEC enforcement, specifically, many in the defense bar predict a shift away from the “broken windows” strategy, championed since 2013 by former SEC Chair Mary Jo White. The “broken windows” philosophy is based on the theory that when a window is broken and immediately fixed, it sends a signal that disorder will not be tolerated, while a broken window left unrepaired suggests an environment of disorder that encourages more serious crimes to flourish.
Under Chairman White, the broken windows enforcement approach translated into the SEC bringing enforcement actions for even minor infractions of securities laws—such as for internal controls failures and books-and-records violations.
What the SEC may decide to intensify its focus on, instead, is more significant violations, like accounting fraud. “There is a lot of resources being devoted to that area at the Commission right now, and I don’t expect that to change anytime soon,” Koch says.
Signs of this are emerging: On June 28, the SEC charged Canadian-based oil and gas company, Penn West Petroleum, and three of its former top finance executives for their roles in an extensive, multi-year accounting fraud. “Combating financial fraud is critical to maintaining a fair and transparent marketplace,” Avakian said in announcement the action. “We will continue to vigorously pursue and punish corporate executives and other individuals whose actions violate the federal securities laws.”
Individual accountability. Prioritizing prosecutions of individuals for corporate misconduct is another continued ambition of the SEC and Department of Justice. During his nomination hearing, Clayton commented that he firmly believes “individual accountability drives behavior more than corporate accountability.”
That sentiment echoes Justice Department efforts that were revitalized in the form of a policy memo issued in September 2015 (commonly referred to as the “Yates Memo”). That policy states, “If a company wants any consideration for its cooperation, it must give up the individuals, no matter where they sit within the company.” Furthermore, to qualify for any cooperation credit, companies must provide “all relevant facts” relating to the individuals responsible for the misconduct.
“The reality, however, is that not many individuals have been prosecuted for FCPA violations over the years,” says Jeff Cramer, a former federal prosecutor and now a managing director at Berkeley Research Group, global strategic advisory and expert consulting firm. “While DoJ and SEC may strongly voice their approach to target individuals, we will have to wait to see if any actions follow that position.”
To complement its efforts of prioritizing prosecutions of individuals, the Justice Department is making a “concerted effort” to speed up the pace of FCPA investigations, Acting Principal Deputy Assistant Attorney General Trevor McFadden announced in April. “This will maximize our ability to bring cases against responsible individuals, before applicable statutes of limitations have run or evidence is lost,” he said.
ATTORNEY GENERAL JEFF SESSIONS REMARKS
Below is a partial text of remarks made by Attorney General Jeff Sessions at the Ethics and Compliance Initiative Annual Conference.
This Department of Justice will continue to investigate and prosecute corporate fraud and misconduct; bribery; public corruption; organized crime; trade-secret theft; money laundering; securities fraud; government fraud; health care fraud; and Internet fraud, among others.
The Department of Justice not only has a duty to uphold the rule of law, which makes our country so great, but we also have a responsibility to protect American consumers. These laws are in place for a reason. When they are broken, it has real consequences in people’s lives.
We will also enforce these laws so we can protect honest businesses. Companies that obey the law and do the right thing should not be at a disadvantage simply because their competitors choose to break the rules.
One area where this is critical is enforcement of the Foreign Corrupt Practices Act (FCPA). Congress enacted this law 40 years ago, when some companies considered it a routine expense to bribe foreign officials in order to gain business advantages abroad.
This type of corruption harms free competition, distorts prices, and often leads to substandard products and services coming into this country. It also increases the cost of doing business, and hurts honest companies that don’t pay these bribes.
Our department wants to create an even playing field for law-abiding companies. We will continue to strongly enforce the FCPA and other anti-corruption laws. Companies should succeed because they provide superior products and services, not because they have paid off the right people.
Let me conclude by briefly making two final points about our approach to this work.
The Department of Justice will continue to emphasize the importance of holding individuals accountable for corporate misconduct. It is not merely companies, but specific individuals, who break the law. We will work closely with our law enforcement partners, both here and abroad, to bring these persons to justice.
Also, when we make charging decisions, we will continue to take into account whether companies have good compliance programs; whether they cooperate and self-disclose their wrongdoing; and whether they take suitable steps to remediate problems.
For years, the Department of Justice has directed our prosecutors to consider these factors when making charging decisions. The U.S. Sentencing Guidelines also provide for substantial penalty reductions for companies that self-disclose, cooperate and accept responsibility for their misconduct. These principles will still guide our prosecutorial discretion determinations.
Our economy, and indeed, our whole system of self-government, depends on people believing that those who choose to disregard the law will be caught and punished. This is ultimately the responsibility of the Justice Department.
But more broadly, it depends on people and companies choosing of their own accord to obey the law and do the right thing. Making this happen is a larger task—one that is entrusted to all of us. Each of you plays an essential role in this work. So once again, thank you for your efforts, and thank you for listening to me today.
Source: Department of Justice.
The SEC may also start to speed up its investigation process, but for a different reason: In June, an unanimous Supreme Court decision, in the case Kokesh v. SEC, ruled that disgorgement collected by the SEC is subject to the five-year statute of limitations on monetary civil penalties. Koch says it will be interesting to see how the SEC responds to the Kokesh decision “in terms of how that will change the way they do investigations or try to negotiate settlements.”
Reduced penalties. One area where the SEC may look to change course may be in the amount of civil penalties levied against companies. “Companies should be held accountable; if they make illicit profits, those profits should be disgorged,” Clayton said. “But, you know, shareholders do bear those costs, and we have to keep that in mind.”
Any decisions to reduce civil penalties will likely occur behind the scenes. Much of the SEC enforcement process “happens behind closed doors in closed Commission meetings,” Jimmy Fokas, a partner at law firm BakerHostetler, said during a recent webcast. It is in those closed meetings where the enforcement staff presents its recommendations to the full Commission on what charges or civil penalties it wants to pursue against the target companies or individuals.
“That’s where a lot of the feedback will come from,” Fokas said. By the time an enforcement recommendation gets to a closed Commission meeting for a vote by the Commissioners, several constituencies within the SEC have already weighed in, including the enforcement directors, the Office of the General Counsel, and the Office of Chief Counsel, he said.
“I have a feeling this is going to be a better year for the defense bar in those closed Commission hearings,” John Carney, also a partner at law firm BakerHostetler, said during the webcast. A company with a robust compliance program that can show it was doing everything it could to avoid a violation will be in particularly good standing with the government.
The SEC formally began granting cooperation credit to companies since 2001 under its so-called Seaboard report. In that report, the SEC identified four broad factors to be considered in evaluating a company’s cooperation when determining appropriate charges and remedies: self-policing (compliance, effectively); self-reporting; remediation; and cooperation. “But it doesn’t take a hard line at what that will mean in dollars and cents at the end of the day,” Fokas said.
In that vein, the FCPA Pilot Program—an initiative launched last year by the Criminal Division’s Fraud section—is starting to bear fruit. Historically, companies that fully cooperate in an FCPA criminal investigation and remediate flaws in their internal controls and compliance program often receive a reduction below the low end of the U.S. Sentencing Guidelines fine range. These reductions and other incentives, however, have not previously been articulated in a written framework. The pilot program formalized that process.
Under the pilot program, if a criminal fine is still warranted in cases where a company self-discloses an FCPA violation, fully cooperates with the agency, and remediates compliance deficiencies, the company will be eligible to receive up to a 50 percent reduction off the bottom end of the U.S. Sentencing Guidelines fine range. In cases where the company makes no self-disclosure but does fully cooperate and remediates the issue, it could still receive up to a 25 percent reduction.
The initial trial period of the pilot program ended April 5, at which time the Justice Department “beg[an] the process of evaluating the utility and efficacy of the Pilot Program, whether to extend it, and what revisions, if any, we should make to it,” Acting Assistant Attorney General Kenneth Blanco said during remarks in March at the American Bar Association National Institute on White Collar Crime. “The program will continue in full force until we reach a final decision on those issues.”
In cases in which the company has fully satisfied all its obligations, the FCPA Unit will consider a declination of prosecution. To date, seven companies have received declinations.
All of this is to say that corporate compliance programs will continue to be “an integral part of investigations, enforcement, and resolutions,” says Scott Fredericksen, a former federal prosecutor and now a partner at law firm Foley & Lardner. That’s both good news and bad news for compliance officers, depending on the maturing of the compliance program, and whether the government views it as being state-of-the-art.
Stated priorities aside, however, no one can say for sure what’s actually in the enforcement pipeline until a team is firmly in place at both agencies. On June 5, President Donald Trump announced his intent to nominate Brian Benczkowski, a partner at law firm Kirkland & Ellis, to head the U.S. Department of Justice’s Criminal Division.
That’s progress, but more than 100 days into the Trump Administration, the SEC still has Commissioner spots to fill, and the hunt is still on to permanently fill some other pretty big seats at the Justice Department—among them, a new compliance counsel to fill the post formerly held by Hui Chen, and a new Chief of the FCPA Unit.
“While U.S. Attorneys’ Offices and the Department of Justice continue to operate with mostly interim leaders, the fact remains that this administration has been painfully slow to nominate people to run the local offices and hold key leadership roles,” Cramer of Berkeley Research Group says. “That is a necessary component for any priorities to be effectively implemented, in that there must be steady leadership for these cases to be brought.”