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Daniel Patrick Wendt: Are those DOJ disgorgements really disgorgement?

This year the DOJ required disgorgement of ill-gotten gains as a predicate for preferential treatment under the new FCPA enforcement Pilot Program, regardless of whether the participating company was publicly or privately owned. 

For FCPA enforcement, disgorgement has historically been a remedy used by the SEC against publicly-owned companies, but it is available to both the SEC and DOJ.

The DOJ and the SEC together are responsible for civil actions enforcing the FCPA, with the SEC responsible for enforcement against issuers and their employees, and the DOJ responsible for enforcement against private entities and their employees. 

But the DOJ hasn’t pursued a civil FCPA enforcement action for more than 15 years. Thus, while in theory the DOJ has had disgorgement available as an equitable remedy in civil FCPA cases, it hadn’t used disgorgement  until launching the new Pilot Program.

In September, the DOJ agreed to close two separate investigations into private companies after they agreed to disgorge more than $3 million total to the U.S. Treasury.  These decisions have been referred to as “declinations with disgorgement.”
Did the DOJ in fact impose disgorgement? The recent Tenth Circuit decision in SEC v. Kokesh (pdf) said disgorgement is a “nonpunitive remedy” that “does not inflict punishment” but rather “depriv[es] the wrongdoer of the benefits of wrongdoing.” 

In the initial Pilot Program cases (Nortek, Akamai, and Johnson Controls)  the DOJ didn’t have to conduct any disgorgement analysis because the public companies involved negotiated disgorgements with the SEC; thus, the DOJ requirement for disgorgement was satisfied through the SEC agreements.

But in both Pilot Program cases with private companies (HMT LLC and NCH Corporation), the DOJ and the two companies established a predicate for disgorgement. They agreed to a brief statement of facts indicating each company had violated the FCPA’s anti-bribery provisions and that it had received profits from those violations. 

This sounds like disgorgement: The DOJ is depriving companies of benefits of violating the FCPA, before closing the relevant investigations into those violations.
But let’s look deeper.

My first impression was that the two companies involved in the initial Pilot Program cases with disgorgement would have paid equivalent criminal fines if the cases had resulted in non-prosecution agreements or deferred prosecution agreements.

In large FCPA cases, it’s assumed that (1) the base fine will equal the company’s pecuniary gain; and (2) the fine multipliers under the Sentencing Guidelines and cooperation credit usually offset each other to a large degree. 

Thus, companies in large settlements typically end up with criminal fines equal to 80 percent – 120 percent of the company’s profits, depending on specific facts. 

But with the two declinations with disgorgement, the base fine as calculated under the Sentencing Guidelines would have much larger than the profits. By my estimate, NCH could have faced a base fine of $6.5 million, and HMT could have faced a base fine of $20 million. In other words, these companies paid substantially less than they would have if they had entered into agreements and consented to standard criminal fines under the Sentencing Guidelines. 

So the payments meet the definition of disgorgement and are different in scale from likely fines from any other criminal resolutions.
The DOJ requires disgorging companies to acknowledge that “no tax deduction may be sought in connection with any part of its payment of the Disgorgement Amount.”  This broad language appears to preclude the parent companies from seeking a tax deduction in the United States as well as any related subsidiaries from seeking tax deductions in other jurisdictions. 

The DOJ language is a sharp break from the SEC practice in civil enforcement actions.  While the SEC routinely prohibits companies from claiming tax deductions for civil fines, it doesn’t limit tax deductions for disgorgement. 

As my colleagues recently discussed, there is now a lively debate within the Internal Revenue Service over whether SEC disgorgements in FCPA resolutions are tax deductible. The debate turns on whether the disgorgement is in fact considered remedial or punitive. 

In the midst of this debate, a DOJ prohibition on tax deductions implies that the payment to the U.S. Treasury is a punitive remedy and meant to inflict punishment (contrary to “nonpunitive” disgorgement). 

Thus, in my view, it remains worthwhile to differentiate between SEC disgorgement and DOJ disgorgement.

Based on these initial Pilot Program cases, then, it appears that public and private companies are receiving different treatment in their FCPA settlements, although both the DOJ and SEC are using the term “disgorgement.”

*       *        *

In the next post, I’ll talk about whether the DOJ should calculate disgorgement the same way as the SEC. 


Daniel Patrick Wendt, pictured above, is a Member in Miller & Chevalier’s International Department. He focuses on matters involving the FCPA and U.S. customs law. 

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