does it still make sense to self-disclose corporate wrongdoing to the doj and sec?

GOOD. SMART. BUSINESS. PROFIT.TM

An Evolving Calculus: Does it Still Make Sense to Self-Disclose Corporate Wrongdoing to the DOJ and SEC?

December 17, 2014

Chelsie Chmela

Events Manager

[email protected]

847.293.8806

We encourage you to engage during the Q&A portion of today’s webcast by using the “Submit Question” button located within your viewing experience.

HOST

QUESTIONS

RECORDING Included in your registration: • Event recording and deck: West LegalEdcenter

provides on-demand event access for 180 days or until the end of your subscription, if sooner

3

4

SPEAKING TODAY

Joan E. MeyerCompliance & Investigations Group Chair, Partner, Baker & McKenzie Washington, DC

Douglas M. TweenPartner, Baker & McKenzie New York

Trevor N. McFaddenAssociate, Baker & McKenzie Washington, DC

© 2014 Baker & McKenzie LLP

An Evolving Calculus: Does it Still Make Sense to Self-Disclose Corporate Wrongdoing to the DOJ and SEC?

Ethisphere WebinarDecember 17, 2014

Joan E. Meyer, Washington, DCDouglas M. Tween, New YorkTrevor N. McFadden, Washington, DC

© 2014 Baker & McKenzie LLP 6

Topics Covered

1. Background considerations: when disclosure of a criminal violation is mandatory

2. What has changed? Part I: Evolving reasons to self-disclose Part II: Evolving reasons to avoid disclosure

3. Analytical framework for evaluating disclosure options

Background Considerations7


Important Decision?

‒ Often the most challenging decision a company and its lawyers will make

‒ Decision should be company’s, but made in consultation with experienced criminal lawyers

‒ Disclosing when you should not - the company is exposed to criminal liability and regulatory scrutiny for no reason

‒ Not disclosing when you should - the company is potentially exposed to more severe penalties


Mandatory Obligation to Report1. The general rule in the US is there is no legal

obligation to self-disclose criminal conduct

2. May be legally required under certain circumstances – always coordinate with securities disclosure counsel Sarbanes-Oxley Act may require disclosure of violations

that preclude management from certifying the effectiveness of internal controls or involve fraud

SEC public disclosure rules may require disclosure of material violations

Reporting requirements as a result of prior settlements

3. Non-US laws frequently require affirmative disclosure


Comparison of Criminal Antitrust and Other US Criminal Enforcement

‒ Special leniency rules in the antitrust context US and over 50 jurisdictions now have corporate and

individual leniency programs, which provide amnesty to the “first in the door” to cooperate Creates race to the government

‒ Contrast with the FCPA context Enforcers say they provide lenient treatment for self-

disclosure, but there is no certainty• Always treated case-by-case

Evolving Reasons to Self-DiscloseWhat has changed? Part I


Key Enforcement Trend: Increased Likelihood of Disclosure by Whistleblowers‒ Section 922 of the Dodd-Frank Act increases incentives for

whistleblowers who report violations to the SEC Bounty may be between 10% and 30% of the monetary

sanctions

‒ Enhanced anti-retaliation provisions also increase the likelihood of retaliation litigation filed by whistleblowers

‒ These incentives significantly increase the risk that public companies will be the target of US enforcement investigations

‒ Reports may be made anonymously through an attorney

‒ In FY14 alone, the SEC received 3,620 whistleblower tips – 20% increase in two years


Record Award of $30 Million to Whistleblower

On September 22, 2014, the SEC announced an expected award of more than USD $30 million to a whistleblower

Notable for several reasons:

Largest award to date – previousrecord was $14 million

Fourth award to a whistleblower outside the US

Noted delay of whistleblower in providing information (some of which predated Dodd-Frank)

Maintained anonymity of the whistleblower


Whistleblower Concepts – Original Information and Independent Knowledge and Analysis“Original information” must be derived from the whistleblower’s independent knowledge or independent analysis

Information that is not already known to SEC from another source (unless the whistleblower is the original source)

Information that is not exclusively derived from an allegation in a judicial or administrative proceeding

Will suffice if the new information materially widens an already existing investigation

“Independent knowledge” is factual information that is not obtained from publicly available sources

“Independent analysis,” however, can be based upon the whistleblower’s evaluation of publicly available sources

Whistleblower must bring some independent thought to the issue


The following people are not eligible to receive bounties: Persons whose principal duties involve legal, compliance,

investigative or audit responsibilities (with exceptions discussed on next slide)

Persons who obtained information through attorney-client privilege or as part of legal representation

Persons who obtained the information by a means or in a manner that violates federal or state criminal law

Persons who obtained the information from any of the above persons

15

Who Is Not Eligible to Receive a Bounty?


Legal, Compliance, Audit Personnel as Whistleblowers

In the following limited circumstances, legal, compliance, audit, and other personnel may be considered whistleblowers eligible for bounties:

If the whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the company or its investors

If the whistleblower has a reasonable basis to believe that the company is engaging in conduct that will impede an investigation of the misconduct

If 120 days have elapsed after the whistleblower provided the information to the appropriate company representative (e.g., audit committee, chief legal or compliance officer, supervisor)


Key Enforcement Trend – Third Parties and How This Affects the Disclosure Calculus

Actions of third parties are likely to be attributable to companies engaging such third parties; disclosure of actions by third parties on behalf of companies is expected; due diligence and training of third parties are essential

The majority of FCPA cases brought in 2013 and 2014 involve allegations of a third party’s involvement in the alleged improper conduct

Evolving Reasons Not to Disclose What has changed? Part II


Key Enforcement Trend - Global Enforcement and How It Affects the Disclosure CalculusIncreased global enforcement and cooperation

Sharing information Joint and follow-on prosecutions and investigations More countries are active: UK, Canada, Australia, Russia, China,

Brazil• Competition investigations frequently lead to precisely coordinated dawn

raids in US, EU, Canada, Japan, China, and elsewhere

If disclosure in US, more likely to face prosecution by other agencies and in other countries

November 2014 DOJ Assistant Attorney General Leslie Caldwell: “If the company makes a decision not to disclose out of fear of what might happen to it in jurisdictions like China, and we find out about it in the many ways that we can – whistleblowers, foreign regulars or others – the fact that did not disclose to us because you were afraid of what might happen in China is not going to help you.”


Key Enforcement Trend – Focus on Individuals and How It Affects the Disclosure Calculus‒ Both the SEC and DOJ have promised more individual

prosecutions Marshall Miller, US Principal DAAG for the Criminal Division,

DOJ (September 2014): “The prosecution of individuals – including corporate executives – for white collar crimes is at the very top of the Criminal Division’s priority list under Assistant Attorney General Caldwell.”

‒ Cooperation includes providing evidence against individuals‒ Proactive government enforcement, e.g. active pursuit by SEC,

FBI and DOJ agents of witness interviews including overseas‒ Potential ramifications of disclosure in terms of individual

exposure to criminal liability must be considered for any company contemplating voluntary disclosure


Key Enforcement Trend – Compliance Programs And How It Affects the Disclosure Calculus‒ The SEC and DOJ remain keenly interested in the state of a

Company’s compliance program as well as remediation made in the wake of investigation findings Morgan Stanley declination: credit for preexisting compliance program Ralph Lauren SEC and DOJ non-prosecution agreements (first NPA for SEC)

‒ Companies receive credit for their compliance program enhancements. Cooperation and remediation go hand-in-hand with voluntary disclosure; companies may receive significant credit even if they do not self-disclose but cooperate and remediate, and demonstrate that their compliance program and internal controls are adequate But compare DOJ Antitrust Division, which gives no credit for

preexisting compliance efforts• Violation of law means compliance program was by definition ineffective


Key Enforcement Trend – Increased Risk in M&A Context and How It Affects the Disclosure Calculus‒ The SEC and DOJ exhibited low tolerance for FCPA risk in

mergers and acquisition context Emphasis on pre-acquisition due diligence If pre-acquisition due diligence precluded in certain circumstances,

prompt post-acquisition risk assessment and integration of acquired company and training of new employees

‒ DOJ opinion released in November 2014: a US company acquiring a foreign target whose controls and records are so deficient that it is not possible to determine whether tainted assets are being acquired; but DOJ indicated it did not intend to take any enforcement action

‒ The mere acquisition of a foreign company will not create FCPA liability for the acquiring issuer, if the target was not previously subject to FCPA


Is Self-Disclosure Worth It? Are Companies Appropriately Awarded?

Controversial 2012 NYU Law School study found no empirical evidence that voluntary disclosures affect FCPA penalty amount

Professors’ review of enforcement actions from 2004-2011 found that “current enforcement practices are not creating clear incentives”

This study contradicts frequent claims by DOJ and SEC officials that self-disclosures are treated more leniently in charging and penalty decisions

Analytical Framework for Evaluating Disclosure Options


Both an Art and a Science

‒ Given imperfect information, impossible to predict‒ But it is possible to conduct a systematic analysis and

doing so will protect you down the road‒ Considerations:

Likelihood of discovery Likelihood of prosecution

• DOJ principles • Analysis of comparable cases• Prosecutorial appeal

Other


I. Likelihood of Discovery

‒ Whistleblowers?‒ Disgruntled current or former employees?‒ Press reports?

If so, what media and what language?

‒ Competitors? ‒ Political issues? ‒ Other investigations/reporting obligations of company?


II. Likelihood of Prosecution: DOJ Criteria (Principles of Federal Prosecution of Business Organizations)1. Nature and seriousness of the offense/risk of harm

2. Pervasiveness of wrongdoing within the corporation

3. History of similar misconduct

4. Timely and voluntary disclosure

5. Existence and effectiveness of compliance program

6. Remedial actions

7. Collateral consequences to shareholders

8. Adequacy of prosecution of individuals

9. Adequacy of civil remedies


Likelihood of Prosecution: Analysis of Comparable Cases

Systematic comparison to other prosecuted cases in industry by same agency

Nature of violations Extent of violations Amount of loss Nature of evidence

Beware other cases do not necessarily define the current minimum requirements for prosecution


Likelihood of Prosecution: Prosecutorial Appeal ‒ If source is a whistleblower, how likely is he/she to be

taken seriously? ‒ Market intelligence:

Is the company an “attractive target”? Are competitors being prosecuted? Are competitors cooperating? What are prosecutorial resources/priorities? Are there prosecutorial personnel and resource issues?


III. Other Considerations

1. Advocacy considerations/how good a “story” does the company have to tell?

2. Likely penalties

3. Collateral Consequences Debarment Prosecution in other jurisdictions Civil litigation PR/reputational damage


If Disclosing

‒ Disclose timely‒ Begin investigation promptly‒ Start remediation early‒ Be ready to cooperate fully‒ Be prepared to report on your compliance program‒ Be ready to handle parallel investigations by foreign

authorities and shareholder litigation‒ Be prepared that company employees may be targeted


If Not Disclosing‒ Stop misconduct immediately‒ Investigate thoroughly

Involve competent independent professionals Reconsider the issue of disclosure as the investigation

progresses

‒ Retain investigation files‒ Conduct remediation and upgrade your compliance

program (address controls failures, discipline)‒ Conduct periodic risk assessments to ensure no repeat

misconduct


Follow ongoing developments in global enforcement trends at:

‒ http://globalcompliancenews.com/‒ Baker & McKenzie FCPA Newsletter

http://www.bakermckenzie.com/insidethefcpa/

http://www.bakermckenzie.com/insidethefcpa/


Thank you!

Any questions?


Contact information

Joan E. Meyer, Compliance & Investigations Group Chair, Partner, Baker & McKenzie, Washington, DC• Email: [email protected]• Phone: + 1 202 835 6119

Douglas M. Tween, Partner, Baker & McKenzie, New York• Email: [email protected]• Phone: + 1 212 626 4355

Trevor N. McFadden, Associate, Baker & Mckenzie, Washington DC• Email: [email protected]• Phone: + 1 202 835 1869


December 18, 2014The Power of Giving: How Leading Organizations are

Making a Difference in Representing the Needs of Migrant Children

All upcoming Ethisphere events can be found at:http://ethisphere.com/events/

PLEASE JOIN US FOR

http://ethisphere.com/events/

This webcast and all future Ethisphere webcasts are available complimentary and on demand for BELA members. BELA members are also offered complimentary registration to Ethisphere’s Global Ethics Summit and other Summits around the world.

For more information on BELA contact:

Laara van Loben SelsSenior Director, Engagement [email protected]

Business Ethics Leadership Alliance (BELA)

mailto:[email protected]

THANK YOU

does it still make sense to self-disclose corporate wrongdoing to the doj and sec?

Business

baker mckenzie llp

baker mckenzie washington

disclosure of violations

affirmative disclosure

disclosure options

baker mckenzie new york

evolving reasons

criminal liability