Heightened FCPA Exposure for Executives

Unprecedented Efforts

In the midst of these developments over the past year, unprecedented efforts have emerged to hold corporate executives accountable with minimal regard for the degree of knowledge or culpability. First, the prosecution of Frederic Bourke, co-founder of handbag maker Dooney & Bourke, demonstrated the DOJ's zeal for pursuing corruption. After being indicted in 2005, Bourke was tried and convicted in the summer of 2009 for his role in a conspiracy involving a failed effort to bribe government officials in Azerbaijan to gain control of the state-owned oil company, SOCAR. Bourke lost $8 million of his own money, and there was no attempt by DOJ to prove that Bourke had directly engaged in any bribery or that Azeri officials were complicit in the failed scheme. Instead, the government's proof centered on Bourke's failure to act in response to his knowledge of the allegedly corrupt political environment and Bourke's knowledge of the actions of others who were alleged to be acting on his behalf.

The jury in Bourke's trial was instructed that knowledge could be established if the government demonstrated that Bourke suspected a fact pointing to bribery, realized its high probability, but refrained from obtaining the final confirmation because he wanted to attain plausible deniability. In the end, Bourke's failure to confirm certain suspect facts was effectively deemed criminally negligent by the jury, as evidenced by one juror's post-trial remarks that it was Bourke's job as a sophisticated investor and executive to know all the facts. Addressing Bourke's motion for a judgment of acquittal, Judge Scheindlin ruled that there was sufficient evidence for the jury to find a “high probability that payments to Azeri officials were illegal and that Bourke deliberately avoided confirming this fact.”

Among other things, the court found that Bourke and his co-conspirators deliberately structured their involvement in the Oily Rock venture so that they wouldn't learn about Kozeny's corrupt dealings. Overall, Bourke's willful blindness to evidence of Kozeny's suspect business practices and failure to conduct further due diligence earned Bourke a sentence of 13 months in prison and a $1 million fine. His direct appeal of his conviction and sentence is pending in the Second Circuit.

Another Example

In a clearer foreshadowing of things to come, the SEC took a decidedly novel approach in its recent enforcement action brought against Nature's Sunshine Products Inc. (“NSP”), a manufacturer of nutritional and personal care products, and two of its high-level executives. The SEC complaint alleged that in 1999 and 2000, the Brazilian government reclassified NSP's herbal products, vitamins, and supplements as medicines, thereby requiring product registration prior to import and sale in Brazil. NSP's wholly owned subsidiary in Brazil was unable to meet the registration requirements and suffered steep losses ' almost $20 million ' between 2000 and 2003. In order to circumvent the strict registration requirements, the complaint alleged that NSP Brazil made over $1 million in undocumented cash payments to customs brokers, which were in turn improperly booked as “importation advances.”

In addition to the FCPA anti-bribery and internal-controls allegations, the SEC charged Doug Faggioli, a current executive, and Craig Huff, a former executive, with internal-controls and books-and-records violations predicated on a “control theory” of liability under ' 20 of the 1934 Securities and Exchange Act. During the time in question (2000 and 2001), Faggioli was COO and a board member, while Huff was CFO for NSP, thus giving them supervisory control over senior management and over the policies that governed the company's internal controls and books and records. At the core of the SEC's allegations was the executives' failure to supervise adequately the senior managers charged with maintaining accurate books and records and devising internal controls. Most notable was the lack of any allegation or evidence that Faggioli or Huff had any knowledge of the payments to Brazilian customs brokers.

Precedent and the 'Claw-Back' Provision

While there are ample civil enforcement actions holding companies strictly liable for books-and-records and internal-controls violations under ' 13(b)(2)(B) of the Exchange Act, there does not appear to be any precedent for holding individuals strictly liable. To establish an individual's liability under ' 13(b)(2)(B), generally he must be shown to have some degree of knowledge, such as that he knowingly evaded or failed to implement internal controls or falsified books and records. But here, the SEC relied on the rather novel “control person” theory under
' 20(a), which essentially creates joint and several liability for the controlling party and controlled person, unless controlling parties can show that they acted in good faith and did not directly or indirectly induce the conduct at issue. While to date most executives have been held civilly liable under the FCPA only upon a showing of direct participation or aiding and abetting, the NSP enforcement action highlights what appears to be a trend toward strict liability for executives.

This same approach ' punishing an executive absent a showing of any knowledge or culpability ' was taken earlier this year in the SEC's effort to compel disgorgement of compensation from former CSK Auto Inc. executive Maynard Jenkins. Jenkins, who was not accused of any wrongdoing, was the first non-culpable individual to be subjected to the Sarbanes-Oxley ' 304 “claw-back” provision holding executives accountable for returning compensation and stock sale profits received within 12 months after a company's restatement of its financials. The SEC sought an order to compel Jenkins to reimburse over $4 million in compensation and stock sale profits after CSK restated its financials following an alleged accounting fraud. Jenkins has challenged this ruling, correctly noting that “disgorgement” has generally been used as a remedy to recoup ill-gotten gains from persons engaged in wrongdoing.

What's Happening Abroad

Lest anyone think that movement toward strict liability is unique to U.S. regulators, authorities in the United Kingdom are currently advancing through Parliament a comprehensive anti-corruption measure, modeled after the FCPA, which would cover not only corrupt payments to foreign officials but also commercial bribery. Significantly, the proposed UK law would impose strict criminal liability for corporations which fail to prevent bribery committed by those acting on their behalf. Numerous other countries have devoted similar emphasis to anti-corruption policy in the wake of increased economic and political pressure.

With worldwide anti-corruption enforcement momentum at its peak, the stakes for global companies and high-level executives have never been higher. Corporate executives, therefore, have good cause for losing sleep over the evolving standards of anti-corruption enforcement here and abroad.

Brian Whisler ([email protected]) is a Partner in the Business Crimes and Investigations and Corporate Compliance practice in the Washington, DC office of Baker & McKenzie. He joined the firm in 2008 after 15 years as a federal prosecutor, concluding his service as Criminal Chief Assistant United States Attorney in the Richmond United States Attorney's Office in the Eastern District of Virginia.

Government standards and expectations should be consistent and predictable. In enforcement of the Foreign Corrupt Practices Act (FCPA), however, the standards are continuously evolving, leaving corporate executives increasingly preoccupied with how prosecutors and regulators might view their activities. Some executives say this issue keeps them up at night.

For purposes of assigning criminal or civil liability, guilty knowledge ' the starting point for any criminal prosecution ' must be demonstrated by direct or circumstantial evidence. Yet, in the vigorous quest to deter global corruption, the Department of Justice (DOJ) and SEC appear to be loosening the knowledge requirement in order to hold corporate executives personally accountable for the actions of others in the corporate organization.

FCPA enforcement in 2009 was notable in several respects, including:

• the record-breaking Siemens settlement (over $1 billion in aggregate fines and penalties in global settlement with U.S. and German authorities;
• the DOJ's success in each of its three high-profile individual FCPA trials (Bourke, Jefferson, Greens); and
• the SEC's renewed commitment to criminal enforcement.

Taken together, these events clearly signal that that the current wave of aggressive enforcement has not crested and, according to recent public pronouncements from DOJ and SEC officials, is not expected to do so anytime soon.

Unprecedented Efforts

In the midst of these developments over the past year, unprecedented efforts have emerged to hold corporate executives accountable with minimal regard for the degree of knowledge or culpability. First, the prosecution of Frederic Bourke, co-founder of handbag maker Dooney & Bourke, demonstrated the DOJ's zeal for pursuing corruption. After being indicted in 2005, Bourke was tried and convicted in the summer of 2009 for his role in a conspiracy involving a failed effort to bribe government officials in Azerbaijan to gain control of the state-owned oil company, SOCAR. Bourke lost $8 million of his own money, and there was no attempt by DOJ to prove that Bourke had directly engaged in any bribery or that Azeri officials were complicit in the failed scheme. Instead, the government's proof centered on Bourke's failure to act in response to his knowledge of the allegedly corrupt political environment and Bourke's knowledge of the actions of others who were alleged to be acting on his behalf.

The jury in Bourke's trial was instructed that knowledge could be established if the government demonstrated that Bourke suspected a fact pointing to bribery, realized its high probability, but refrained from obtaining the final confirmation because he wanted to attain plausible deniability. In the end, Bourke's failure to confirm certain suspect facts was effectively deemed criminally negligent by the jury, as evidenced by one juror's post-trial remarks that it was Bourke's job as a sophisticated investor and executive to know all the facts. Addressing Bourke's motion for a judgment of acquittal, Judge Scheindlin ruled that there was sufficient evidence for the jury to find a “high probability that payments to Azeri officials were illegal and that Bourke deliberately avoided confirming this fact.”

Among other things, the court found that Bourke and his co-conspirators deliberately structured their involvement in the Oily Rock venture so that they wouldn't learn about Kozeny's corrupt dealings. Overall, Bourke's willful blindness to evidence of Kozeny's suspect business practices and failure to conduct further due diligence earned Bourke a sentence of 13 months in prison and a $1 million fine. His direct appeal of his conviction and sentence is pending in the Second Circuit.

Another Example

In a clearer foreshadowing of things to come, the SEC took a decidedly novel approach in its recent enforcement action brought against Nature's Sunshine Products Inc. (“NSP”), a manufacturer of nutritional and personal care products, and two of its high-level executives. The SEC complaint alleged that in 1999 and 2000, the Brazilian government reclassified NSP's herbal products, vitamins, and supplements as medicines, thereby requiring product registration prior to import and sale in Brazil. NSP's wholly owned subsidiary in Brazil was unable to meet the registration requirements and suffered steep losses ' almost $20 million ' between 2000 and 2003. In order to circumvent the strict registration requirements, the complaint alleged that NSP Brazil made over $1 million in undocumented cash payments to customs brokers, which were in turn improperly booked as “importation advances.”

In addition to the FCPA anti-bribery and internal-controls allegations, the SEC charged Doug Faggioli, a current executive, and Craig Huff, a former executive, with internal-controls and books-and-records violations predicated on a “control theory” of liability under ' 20 of the 1934 Securities and Exchange Act. During the time in question (2000 and 2001), Faggioli was COO and a board member, while Huff was CFO for NSP, thus giving them supervisory control over senior management and over the policies that governed the company's internal controls and books and records. At the core of the SEC's allegations was the executives' failure to supervise adequately the senior managers charged with maintaining accurate books and records and devising internal controls. Most notable was the lack of any allegation or evidence that Faggioli or Huff had any knowledge of the payments to Brazilian customs brokers.

Precedent and the 'Claw-Back' Provision

While there are ample civil enforcement actions holding companies strictly liable for books-and-records and internal-controls violations under ' 13(b)(2)(B) of the Exchange Act, there does not appear to be any precedent for holding individuals strictly liable. To establish an individual's liability under ' 13(b)(2)(B), generally he must be shown to have some degree of knowledge, such as that he knowingly evaded or failed to implement internal controls or falsified books and records. But here, the SEC relied on the rather novel “control person” theory under
' 20(a), which essentially creates joint and several liability for the controlling party and controlled person, unless controlling parties can show that they acted in good faith and did not directly or indirectly induce the conduct at issue. While to date most executives have been held civilly liable under the FCPA only upon a showing of direct participation or aiding and abetting, the NSP enforcement action highlights what appears to be a trend toward strict liability for executives.

This same approach ' punishing an executive absent a showing of any knowledge or culpability ' was taken earlier this year in the SEC's effort to compel disgorgement of compensation from former CSK Auto Inc. executive Maynard Jenkins. Jenkins, who was not accused of any wrongdoing, was the first non-culpable individual to be subjected to the Sarbanes-Oxley ' 304 “claw-back” provision holding executives accountable for returning compensation and stock sale profits received within 12 months after a company's restatement of its financials. The SEC sought an order to compel Jenkins to reimburse over $4 million in compensation and stock sale profits after CSK restated its financials following an alleged accounting fraud. Jenkins has challenged this ruling, correctly noting that “disgorgement” has generally been used as a remedy to recoup ill-gotten gains from persons engaged in wrongdoing.

What's Happening Abroad

Lest anyone think that movement toward strict liability is unique to U.S. regulators, authorities in the United Kingdom are currently advancing through Parliament a comprehensive anti-corruption measure, modeled after the FCPA, which would cover not only corrupt payments to foreign officials but also commercial bribery. Significantly, the proposed UK law would impose strict criminal liability for corporations which fail to prevent bribery committed by those acting on their behalf. Numerous other countries have devoted similar emphasis to anti-corruption policy in the wake of increased economic and political pressure.

With worldwide anti-corruption enforcement momentum at its peak, the stakes for global companies and high-level executives have never been higher. Corporate executives, therefore, have good cause for losing sleep over the evolving standards of anti-corruption enforcement here and abroad.

Brian Whisler ([email protected]) is a Partner in the Business Crimes and Investigations and Corporate Compliance practice in the Washington, DC office of Baker & McKenzie. He joined the firm in 2008 after 15 years as a federal prosecutor, concluding his service as Criminal Chief Assistant United States Attorney in the Richmond United States Attorney's Office in the Eastern District of Virginia.