In the Courts

In a technical sense, the opinion did not purport to require such an admission. Indeed, in briefing and at oral argument before the Second Circuit, the district court's pro bono counsel stated that the court did not seek an admission of liability before approving the consent decree. Rather, Judge Rakoff found the settlement “neither fair, nor reasonable, nor adequate, nor in the public interest” because it failed to “provide the court with a sufficient evidentiary basis to know whether the requested relief [was] justified.” Id. at 332. In short, Judge Rakoff held that the settlement failed to stipulate sufficient underlying facts and that, without such an evidentiary basis, “the public [was] deprived of ever knowing the truth in a matter of obvious public importance.” Id.

In response to an appeal by both the SEC and Citigroup, the Second Circuit reviewed the district court's denial of the settlement under an abuse of discretion standard. In so doing, Judge Pooler found that the district court erred in two significant respects.

In the first instance, the court failed to apply the proper standard for reviewing a proposed consent judgment involving an enforcement agency. While correct in asking whether the consent decree was fair, reasonable, and in the public interest, Judge Rakoff strayed in examining the adequacy of the settlement. Adequacy is never an issue for the court, Judge Pooler explained, when an agency enters a consent decree. Agencies are political entities, and as such they are politically liable if they fail to adequately perform their duties. Citigroup (2014), WL 2486793 at 21.

After putting aside notions of adequacy, Judge Pooler scrutinized the fairness and reasonableness of the settlement, holding that when evaluating these notions, a court should examine a decree's: 1) basic legality; 2) clarity; 3) success in resolving the actual claims; and 4) incidence of improper collusion or corruption. This narrow examination, Judge Pooler was careful to point out, should “[take] care not to infringe on the SEC's discretionary authority to settle on a particular set of terms,” Id. at 22.

The second and more controversial error cited by the circuit court was Judge Rakoff's abuse of discretion in requiring that “the SEC establish the 'truth' of the allegations against a party as a condition for approving the consent decree.” Id . Requiring truths to be established, Judge Pooler held, is the purpose of a trial. Consentdecrees on the other hand are about pragmatism and provide parties with a means to manage risk.

In reviewing such decrees, a far less substantial factual basis is required and in many cases, colorable claims that are supported by factual averments by the SEC will suffice. Id . at 24. While other cases may require more, Judge Pooler found it sufficient that the SEC provided facts that allowed the court to analyze fairness and reasonableness under the factors set out above.

While distinct in kind, these two reversals on error share a common theme: They confirm the SEC's discretion in entering settlements. However, in the interim between the 2011 decision and the Second Circuit's reversal this June, the SEC has already shifted course and limited its settlement authority ' in what many view as a reaction to the criticisms raised by Judge Rakoff. In June 2013, the SEC announced it would seek admission of wrongdoing more often in settlement cases. In a technical sense, this policy change goes beyond the district court's “established truths” condition. Indeed, Judge Pooler's opinion explicitly held, that “there is no basis in the law ' to require an admission of liability as a condition for approving a settlement between parties.” Id. at 17. With the Second Circuit's reversal, practitioners now must wait to see whether the SEC reverses course in future settlements.

FCPA 'Instrumentality' Analysis Takes Shape in Esquenazi

On May 16, 2014, the United States Court of Appeals for the Eleventh Circuit affirmed the Southern District of Florida's interpretation of “foreign official” under the Foreign Corrupt Practices Act (FCPA). The case, United States v. Esquenazi, 11-15331, 2014 WL 1978613 (11th Cir. May 16, 2014), involved an alleged kick-back scheme orchestrated by Joel Esquenazi and Carlos Rodriguez, co-owners of Terra Telecommunications Corp. (Terra), a Florida company that purchased phone time from foreign vendors and resold the minutes in the U.S.

One of Terra's main vendors was Telecommunications D'Haiti (Teleco). In October 2001, Mr. Esquenazi met with Teleco's Director of International Relations, Robert Antoine, to negotiate an amortization of $400,000 in debt that Terra owed Teleco. Mr. Antoine refused to amortize the debt, but did agree to shave minutes off Terra's bills in exchange for receiving 50% of what Terra saved. By March 2005, Terra's bills were reduced by over $2 million and Teleco officials had received nearly $890,000 in kick-backs.

At trial in 2010, and again on appeal, defense counsel argued that Teleco employees were not “foreign officials” under the FCPA. The Act prohibits “any domestic concern” from making use of the mails or any means of interstate commerce in furtherance of a bribe to “any foreign official.” 15 U.S.C. ” 78dd-2(a)(1), (3). A “foreign official” is defined as ” any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” 15 U.S.C. ” 78dd-2(h)(2),(A) (emphasis added).

The FCPA does not define “instrumentality” and, given the dearth of FCPA case law generally, the Esquenazi decision was highly anticipated by FCPA practitioners. At trial, defense counsel argued that only an actual part of the government should qualify as an instrumentality. In holding this connotation “too cramped,” the Eleventh Circuit cast a wider net for potential FCPA liability, defining “instrumentality” as an “entity controlled by the government of a foreign county that performs a function the controlling governments treats as its own.”

In finding “instrumentality” to have broader application than as proposed by the defense, the court distinguished the text of the FCPA from that found in the Americans with Disabilities Act (ADA). The latter defines “public entity” to include “any department, agency ' or other instrumentality of the state.” 42 U.S.C. ' 12131(1)(B) (emphasis added). In the FCPA, by contrast, the word preceding “instrumentality” is “any,” not “other.” Thus, the court reasoned, “instrumentality” is a distinct class of entities and not a generalized catchall for things very much like the preceding category of “officer[s] or employee[s] of a government.” Esquenazi at 12.

So, when is an entity sufficiently “controlled by the government” and “performing a function the government treats as its own,” such that it is included in this distinct class? In articulating the boundaries of the former, the court provided a list of factors relevant in determining what constitutes “control.” Careful to describe these factors as neither dispositive nor necessary, the court held that juries could look to the foreign government's formal designation of the entity in question, whether the government has a majority interest in the entity, the government's ability to hire and fire the entity's principals, the extent to which the entity's profits go to the government, and the length of time these indicia have existed. Id. at 21.

The court provided similar guideposts for determining whether an entity “performs a function the controlling government treats as its own.” It held that courts and juries should examine whether the entity has monopoly control in its realm, whether the government subsidizes costs associated with the entity providing services, whether the entity provides services to the public at large, and whether the public and government perceive the entity to be performing a governmental function. Id. at 22.

In applying this framework to the Esquenazi case, the court found that Teleco clearly met both elements of its “instrumentality” definition. The company was “overwhelmingly majority-owned by the state, had no fisc independent of the state, was a state-sanctioned monopoly for its activities, and was controlled by a board filled exclusively with government-appointed individuals.” Id. at 28.

These facts allowed the court to comfortably affirm the district court judgment below. Yet, it remains to be seen how the Eleventh Circuit definition of “instrumentality” will withstand the pressure of attenuation over time. This corner of the FCPA will be watched closely by the SEC and DOJ, as the flexibility of that definition will govern a key aspect of the reach of their FCPA powers. ' Corey Ciorciari , Mayer Brown, LLP

'

SEC Settlement Discretion Affirmed in Citigroup Reversal

On June 4, 2014, Judge Rosemary Pooler of the United States Court of Appeals for the Second Circuit reversed District Court Judge Jed Rakoff's highly publicized rejection of the Securities and Exchange Commission's (SEC's) $285 million settlement with Citigroup. The case, SEC v. Citigroup Global Markets, 11-5227-CV L, 2014 WL 2486793 (2d Cir. June 4, 2014), dates back to a 2011 consent decree in which Citigroup agreed to pay a $95 million civil penalty and disgorge $190 million in realized profits and interest for allegedly misrepresenting its role in selling ' and shorting ' an investment fund collateralized by subprime mortgage securities.

As previously reported in these pages, Judge Rakoff refused to approve the settlement agreement in October 2011. SEC v. Citigroup Global Markets Inc. , 827 F. Supp. 2d (S.D.N.Y. 2011). The judge's opinion in the case was heralded by some as a direct challenge to the SEC practice of negotiating settlement agreements that require no admission of guilt or liability.

In a technical sense, the opinion did not purport to require such an admission. Indeed, in briefing and at oral argument before the Second Circuit, the district court's pro bono counsel stated that the court did not seek an admission of liability before approving the consent decree. Rather, Judge Rakoff found the settlement “neither fair, nor reasonable, nor adequate, nor in the public interest” because it failed to “provide the court with a sufficient evidentiary basis to know whether the requested relief [was] justified.” Id. at 332. In short, Judge Rakoff held that the settlement failed to stipulate sufficient underlying facts and that, without such an evidentiary basis, “the public [was] deprived of ever knowing the truth in a matter of obvious public importance.” Id.

In response to an appeal by both the SEC and Citigroup, the Second Circuit reviewed the district court's denial of the settlement under an abuse of discretion standard. In so doing, Judge Pooler found that the district court erred in two significant respects.

In the first instance, the court failed to apply the proper standard for reviewing a proposed consent judgment involving an enforcement agency. While correct in asking whether the consent decree was fair, reasonable, and in the public interest, Judge Rakoff strayed in examining the adequacy of the settlement. Adequacy is never an issue for the court, Judge Pooler explained, when an agency enters a consent decree. Agencies are political entities, and as such they are politically liable if they fail to adequately perform their duties. Citigroup (2014), WL 2486793 at 21.

After putting aside notions of adequacy, Judge Pooler scrutinized the fairness and reasonableness of the settlement, holding that when evaluating these notions, a court should examine a decree's: 1) basic legality; 2) clarity; 3) success in resolving the actual claims; and 4) incidence of improper collusion or corruption. This narrow examination, Judge Pooler was careful to point out, should “[take] care not to infringe on the SEC's discretionary authority to settle on a particular set of terms,” Id. at 22.

The second and more controversial error cited by the circuit court was Judge Rakoff's abuse of discretion in requiring that “the SEC establish the 'truth' of the allegations against a party as a condition for approving the consent decree.” Id . Requiring truths to be established, Judge Pooler held, is the purpose of a trial. Consentdecrees on the other hand are about pragmatism and provide parties with a means to manage risk.

In reviewing such decrees, a far less substantial factual basis is required and in many cases, colorable claims that are supported by factual averments by the SEC will suffice. Id . at 24. While other cases may require more, Judge Pooler found it sufficient that the SEC provided facts that allowed the court to analyze fairness and reasonableness under the factors set out above.

While distinct in kind, these two reversals on error share a common theme: They confirm the SEC's discretion in entering settlements. However, in the interim between the 2011 decision and the Second Circuit's reversal this June, the SEC has already shifted course and limited its settlement authority ' in what many view as a reaction to the criticisms raised by Judge Rakoff. In June 2013, the SEC announced it would seek admission of wrongdoing more often in settlement cases. In a technical sense, this policy change goes beyond the district court's “established truths” condition. Indeed, Judge Pooler's opinion explicitly held, that “there is no basis in the law ' to require an admission of liability as a condition for approving a settlement between parties.” Id. at 17. With the Second Circuit's reversal, practitioners now must wait to see whether the SEC reverses course in future settlements.

FCPA 'Instrumentality' Analysis Takes Shape in Esquenazi

On May 16, 2014, the United States Court of Appeals for the Eleventh Circuit affirmed the Southern District of Florida's interpretation of “foreign official” under the Foreign Corrupt Practices Act (FCPA). The case, United States v. Esquenazi, 11-15331, 2014 WL 1978613 (11th Cir. May 16, 2014), involved an alleged kick-back scheme orchestrated by Joel Esquenazi and Carlos Rodriguez, co-owners of Terra Telecommunications Corp. (Terra), a Florida company that purchased phone time from foreign vendors and resold the minutes in the U.S.

One of Terra's main vendors was Telecommunications D'Haiti (Teleco). In October 2001, Mr. Esquenazi met with Teleco's Director of International Relations, Robert Antoine, to negotiate an amortization of $400,000 in debt that Terra owed Teleco. Mr. Antoine refused to amortize the debt, but did agree to shave minutes off Terra's bills in exchange for receiving 50% of what Terra saved. By March 2005, Terra's bills were reduced by over $2 million and Teleco officials had received nearly $890,000 in kick-backs.

At trial in 2010, and again on appeal, defense counsel argued that Teleco employees were not “foreign officials” under the FCPA. The Act prohibits “any domestic concern” from making use of the mails or any means of interstate commerce in furtherance of a bribe to “any foreign official.” 15 U.S.C. ” 78dd-2(a)(1), (3). A “foreign official” is defined as ” any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” 15 U.S.C. ” 78dd-2(h)(2),(A) (emphasis added).

The FCPA does not define “instrumentality” and, given the dearth of FCPA case law generally, the Esquenazi decision was highly anticipated by FCPA practitioners. At trial, defense counsel argued that only an actual part of the government should qualify as an instrumentality. In holding this connotation “too cramped,” the Eleventh Circuit cast a wider net for potential FCPA liability, defining “instrumentality” as an “entity controlled by the government of a foreign county that performs a function the controlling governments treats as its own.”

In finding “instrumentality” to have broader application than as proposed by the defense, the court distinguished the text of the FCPA from that found in the Americans with Disabilities Act (ADA). The latter defines “public entity” to include “any department, agency ' or other instrumentality of the state.” 42 U.S.C. ' 12131(1)(B) (emphasis added). In the FCPA, by contrast, the word preceding “instrumentality” is “any,” not “other.” Thus, the court reasoned, “instrumentality” is a distinct class of entities and not a generalized catchall for things very much like the preceding category of “officer[s] or employee[s] of a government.” Esquenazi at 12.

So, when is an entity sufficiently “controlled by the government” and “performing a function the government treats as its own,” such that it is included in this distinct class? In articulating the boundaries of the former, the court provided a list of factors relevant in determining what constitutes “control.” Careful to describe these factors as neither dispositive nor necessary, the court held that juries could look to the foreign government's formal designation of the entity in question, whether the government has a majority interest in the entity, the government's ability to hire and fire the entity's principals, the extent to which the entity's profits go to the government, and the length of time these indicia have existed. Id. at 21.

The court provided similar guideposts for determining whether an entity “performs a function the controlling government treats as its own.” It held that courts and juries should examine whether the entity has monopoly control in its realm, whether the government subsidizes costs associated with the entity providing services, whether the entity provides services to the public at large, and whether the public and government perceive the entity to be performing a governmental function. Id. at 22.

In applying this framework to the Esquenazi case, the court found that Teleco clearly met both elements of its “instrumentality” definition. The company was “overwhelmingly majority-owned by the state, had no fisc independent of the state, was a state-sanctioned monopoly for its activities, and was controlled by a board filled exclusively with government-appointed individuals.” Id. at 28.

These facts allowed the court to comfortably affirm the district court judgment below. Yet, it remains to be seen how the Eleventh Circuit definition of “instrumentality” will withstand the pressure of attenuation over time. This corner of the FCPA will be watched closely by the SEC and DOJ, as the flexibility of that definition will govern a key aspect of the reach of their FCPA powers. ' Corey Ciorciari , Mayer Brown, LLP

'