A trend emerged in the fall of 2014 of FCPA enforcement actions by the SEC but where the Department of Justice either declined to prosecute the company or settled via a non-prosecution agreement.
Earlier this month, Andrew Ceresney, director of the SEC’s enforcement division, spoke at CBI’s Pharmaceutical Compliance Congress in Washington D.C. He discussed the importance of internal controls in SEC enforcement.
What kinds of practice pointers for how to avoid these issues? Well, in cases we have brought, we see controls that were not carefully designed to match the business, or that were not updated as the business changed and grew. And we see that senior leadership was not asking the tough questions — and sometimes not even asking the easy questions. Senior management in some cases was just not engaged in any real discussion about the controls. As a result, employees did not properly focus on them and the firm and its shareholders are put at risk.
I believe Ceresney’s words and the recent enforcement trend portend a greater focus on internal controls review and enforcement in the FCPA context.
There’s no language in the FCPA that says an accounting provisions violation must be tied to an offer or payment of a bribe to obtain or retain business. While the FCPA does not specifically say that a company will be strictly liable for a violation of the accounting provisions, it is certainly not prohibited. Since violations of the accounting provisions as enforced by the SEC are civil violations only, I now believe that such a position is not prohibited by the FCPA.
Similar to my views on strict liability for accounting violations, I have also come to believe that profit disgorgement is a remedy fully supported and available to the SEC in FCPA enforcement actions. This is possible because of an un-related law, The Penny Stock Reform Act of 1990, which amended the Securities Exchange Act of 1934 to include profit disgorgement.
I think there will be a combination of the enforcement of the accounting provisions of the FCPA through a strict liability reading of them by the SEC, using the remedy of profit disgorgement. Admittedly this opinion seems contrary to the equitable nature of the remedy of profit disgorgement. However the greater focus of SEC scrutiny and enforcement of the accounting provisions point me in that direction.
It’s also true that profit disgorgement has traditionally required some specific ill-gotten gains. But with the statutory authority provided by the Penny Stock Act to the SEC that allows for disgorgement with no limiting language in spite of the remedy’s equitable beginning, this may be enough for the SEC to make such a leap.
Thomas Fox is a contributing editor of the FCPA Blog. He’s the founder of the Houston-based boutique law firm tomfoxlaw.com. A popular speaker on compliance and risk-management topics, Fox is also the creator and writer of the widely followed FCPA Compliance and Ethics Blog. His book Lessons Learned on Compliance and Ethics topped Amazon’s bestseller list for international law. He can be contacted here.