LAW vs. LORE: The Lack of Judicial Precedent in FCPA Cases

The text of the Foreign Corrupt Practices Act (FCPA) contains relatively few words, and its brevity leaves many areas of ambiguity. Certain provisions of the FCPA have either never been litigated or have only been litigated in one or two trials. See, e.g. , Kathleen A. Lacey & Barbara Crutchfield George, Expansion of SEC Authority into Internal Corporate Governance: The Accounting Provisions of the Foreign Corrupt Practices Act, 7 J. Transnat'l L. & Pol'y 119, 121 (1998) (discussing how the 1983 World-Wide Coin case is an important precedent because it was the only case concerning the books-and-records provisions that went to trial).

In criminal proceedings, for certain defendants ' in particular the corporate entity facing charges under the FCPA ' the stakes often are simply too high to risk a trial.
“[I]nnocence is no longer the key determinant ' even for those charged with white-collar offenses. Rather, our existing legal system places the risk of going to trial, and in some cases even being charged with a crime, so high, that innocence and guilt no longer become the real considerations. This is especially true for upper-level white-collar offenders like CEOs and corporate entities. In these cases, maneuvering the system to receive the least onerous consequences may ensure the best result for the accused party, regardless of innocence.” Ellen S. Podgor, White Collar Innocence: Irrelevant in the High Stakes Risk Game, 85 Chi.-Kent L. Rev' 77, 77'78 (2010).

The dearth of criminal trials is particularly startling when it comes to actions pursuant to the FCPA. Lindsey Manufacturing was the first (and, as far as we know, only) corporate defendant to go to trial on FCPA charges; its conviction was eventually vacated and the indictment dismissed by the district judge. United States v. Aguilar, 831 F. Supp. 2d 1180 (C.D. Cal. 2011). Despite this precedent, corporations ' generally not perceived as sympathetic defendants ' are unwilling to risk the potential consequences of trial. These could include disruption of business affairs, bad publicity, reputational damage from a potential conviction, enormous fines under the Alternative Fine Act, and potential collateral consequences of a criminal conviction, such as revocation of export licenses and exclusion from obtaining U.S. government contracts.

Similarly, as one observer has noted, “[F]ew individual FCPA defendants are willing to 'test their innocence.'” Mike Koehler, A Focus on FCPA Criminal Trials, FCPA Professor (May 14, 2014), http://bit.ly/1GIaufy. In addition, individual FCPA defendants' limited financial resources prevent them from robustly litigating many issues.

The criminal process is not alone in failing to provide guidance. Practitioners cannot look to Securities and Exchange Commission (SEC) enforcement actions for interpretations of the FCPA, as “there has never been an FCPA civil trial in which the SEC has been put to its burden of proof.” Mike Koehler, A Focus on FCPA Civil Trials, FCPA Professor (May 15, 2014), http://bit.ly/1MEOfW9.

Writing the FCPA Lore

Because of the lack of law arising from litigated matters, practitioners, in advising their clients, must rely on lore, which is derived by reading the “tea leaves” associated with previous interactions between government prosecutors and regulators enforcing the FCPA and the defense bar and negotiated resolutions. Whereas attorneys have hundreds of cases to help determine whether a destructive device constitutes a “firearm” under 18 U.S.C. ' 921(a)(3)(D), attorneys have few cases from which to determine whether a certain transfer constitutes an illicit payment under the FCPA. Even academics, in trying to understand FCPA provisions, acknowledge having to look at “the few cases that have gone to trial, along with the settled cases.” John P. Giraudo, Charitable Contributions and the FCPA: Schering-Plough and the Increasing Scope of SEC Enforcement, 61 Bus. Law 135, 142 (2005). Such an approach places too much reliance on the government's interpretation of the law, accepts the untested concessions of negotiated settlements, and further perpetuates the government's unchallenged views.

Lacking court decisions upon which to rely, attorneys look to settled cases to determine not only the government's interpretation of the law, but also what other defendants have accepted. Here again, the government's interpretation can mislead. After all, individual settlements are based on unique facts and circumstances. Government prosecutors and regulators and defense attorneys spend significant time negotiating the deal, including the admitted facts and the punitive sanctions and fines.

Once a satisfactory dollar amount and other terms are reached, defendants may have no incentive to fight over the legal conclusions even if they had robust disagreement during their initial sparring over those same legal propositions. The goal is to get the deal done. Where the defendant is willing to admit some more clearly criminal conduct, there is particularly little incentive to fight over the government's legal interpretations on more marginal conduct. Thus, the legal concessions found in settlements reflect the complex circumstances of particular negotiations rather than positions defendants would take in adversarial proceedings. Yet, the government often drafts terms or releases public statements announcing its successful negotiation with broad pronouncements regarding such untested legal conclusions.

Future reliance by practitioners on the government's interpretation of the FCPA and settled cases ' which is inevitable given the dearth of case law ' merely adds to the lore; whether the recommendation is to avoid challenging the government's interpretation or avoid engaging in conduct that may be legal, the perceived illegality of the conduct is further ingrained. In next month's issue, we will discuss some of the consequences of this situation.

Robert J. Anello, a member of this newsletter's Board of Editors, is a partner in Morvillo, Abramowitz, Grand, Iason & Anello PC, specializing in the defense of white-collar criminal cases, securities litigation, other civil litigation, and the representation of attorneys and accountants. He is a Fellow of the American College of Trial Lawyers, a Fellow of the American Bar Foundation and the President of the Federal Bar Council. Kostya Lantsman is an associate with the firm.

When delivering legal advice, lawyers attempt to provide informed guidance based on the prevailing law. Yet, when it comes to significant chunks of the white-collar criminal and regulatory landscape, practitioners often are forced to provide advice based on professional lore derived from negotiated settlements rather than enacted laws or judicially established case law.

Statutes, regulations and court decisions make up the rules of law. But white-collar practitioners often encounter vast swaths of the landscape that have only the most basic or broad statutory language and lack any judicial precedent. In these areas, they may not be able comfortably to provide counsel based on law and, instead, often rely on lore ' the accepted traditions developed among prosecutors, government regulators, and defense attorneys. This lore develops from negotiated settlements often lacking the true dynamics of adversarial proceedings before a neutral magistrate.

Lack of FCPA Precedent

The text of the Foreign Corrupt Practices Act (FCPA) contains relatively few words, and its brevity leaves many areas of ambiguity. Certain provisions of the FCPA have either never been litigated or have only been litigated in one or two trials. See, e.g. , Kathleen A. Lacey & Barbara Crutchfield George, Expansion of SEC Authority into Internal Corporate Governance: The Accounting Provisions of the Foreign Corrupt Practices Act, 7 J. Transnat'l L. & Pol'y 119, 121 (1998) (discussing how the 1983 World-Wide Coin case is an important precedent because it was the only case concerning the books-and-records provisions that went to trial).

In criminal proceedings, for certain defendants ' in particular the corporate entity facing charges under the FCPA ' the stakes often are simply too high to risk a trial.
“[I]nnocence is no longer the key determinant ' even for those charged with white-collar offenses. Rather, our existing legal system places the risk of going to trial, and in some cases even being charged with a crime, so high, that innocence and guilt no longer become the real considerations. This is especially true for upper-level white-collar offenders like CEOs and corporate entities. In these cases, maneuvering the system to receive the least onerous consequences may ensure the best result for the accused party, regardless of innocence.” Ellen S. Podgor, White Collar Innocence: Irrelevant in the High Stakes Risk Game, 85 Chi.-Kent L. Rev' 77, 77'78 (2010).

The dearth of criminal trials is particularly startling when it comes to actions pursuant to the FCPA. Lindsey Manufacturing was the first (and, as far as we know, only) corporate defendant to go to trial on FCPA charges; its conviction was eventually vacated and the indictment dismissed by the district judge. United States v. Aguilar , 831 F. Supp. 2d 1180 (C.D. Cal. 2011). Despite this precedent, corporations ' generally not perceived as sympathetic defendants ' are unwilling to risk the potential consequences of trial. These could include disruption of business affairs, bad publicity, reputational damage from a potential conviction, enormous fines under the Alternative Fine Act, and potential collateral consequences of a criminal conviction, such as revocation of export licenses and exclusion from obtaining U.S. government contracts.

Similarly, as one observer has noted, “[F]ew individual FCPA defendants are willing to 'test their innocence.'” Mike Koehler, A Focus on FCPA Criminal Trials, FCPA Professor (May 14, 2014), http://bit.ly/1GIaufy. In addition, individual FCPA defendants' limited financial resources prevent them from robustly litigating many issues.

The criminal process is not alone in failing to provide guidance. Practitioners cannot look to Securities and Exchange Commission (SEC) enforcement actions for interpretations of the FCPA, as “there has never been an FCPA civil trial in which the SEC has been put to its burden of proof.” Mike Koehler, A Focus on FCPA Civil Trials, FCPA Professor (May 15, 2014), http://bit.ly/1MEOfW9.

Writing the FCPA Lore

Because of the lack of law arising from litigated matters, practitioners, in advising their clients, must rely on lore, which is derived by reading the “tea leaves” associated with previous interactions between government prosecutors and regulators enforcing the FCPA and the defense bar and negotiated resolutions. Whereas attorneys have hundreds of cases to help determine whether a destructive device constitutes a “firearm” under 18 U.S.C. ' 921(a)(3)(D), attorneys have few cases from which to determine whether a certain transfer constitutes an illicit payment under the FCPA. Even academics, in trying to understand FCPA provisions, acknowledge having to look at “the few cases that have gone to trial, along with the settled cases.” John P. Giraudo, Charitable Contributions and the FCPA: Schering-Plough and the Increasing Scope of SEC Enforcement, 61 Bus. Law 135, 142 (2005). Such an approach places too much reliance on the government's interpretation of the law, accepts the untested concessions of negotiated settlements, and further perpetuates the government's unchallenged views.

Lacking court decisions upon which to rely, attorneys look to settled cases to determine not only the government's interpretation of the law, but also what other defendants have accepted. Here again, the government's interpretation can mislead. After all, individual settlements are based on unique facts and circumstances. Government prosecutors and regulators and defense attorneys spend significant time negotiating the deal, including the admitted facts and the punitive sanctions and fines.

Once a satisfactory dollar amount and other terms are reached, defendants may have no incentive to fight over the legal conclusions even if they had robust disagreement during their initial sparring over those same legal propositions. The goal is to get the deal done. Where the defendant is willing to admit some more clearly criminal conduct, there is particularly little incentive to fight over the government's legal interpretations on more marginal conduct. Thus, the legal concessions found in settlements reflect the complex circumstances of particular negotiations rather than positions defendants would take in adversarial proceedings. Yet, the government often drafts terms or releases public statements announcing its successful negotiation with broad pronouncements regarding such untested legal conclusions.

Future reliance by practitioners on the government's interpretation of the FCPA and settled cases ' which is inevitable given the dearth of case law ' merely adds to the lore; whether the recommendation is to avoid challenging the government's interpretation or avoid engaging in conduct that may be legal, the perceived illegality of the conduct is further ingrained. In next month's issue, we will discuss some of the consequences of this situation.

Robert J. Anello, a member of this newsletter's Board of Editors, is a partner in Morvillo, Abramowitz, Grand, Iason & Anello PC, specializing in the defense of white-collar criminal cases, securities litigation, other civil litigation, and the representation of attorneys and accountants. He is a Fellow of the American College of Trial Lawyers, a Fellow of the American Bar Foundation and the President of the Federal Bar Council. Kostya Lantsman is an associate with the firm.