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

No federal court decisions have addressed directly the question of whether contributions to legitimate charities could be prohibited payments under the FCPA. Only one court decision has even mentioned the possibility that charitable contributions could be considered bribes. That decision, part of Chevron's never-ending battle with Steven Donziger over pollution at the Lago Agrio oil field, did not involve charitable contributions. Chevron Corp. v. Donziger, 974 F. Supp. 2d 362, 597 (S.D.N.Y. 2014). Although that opinion, in passing, did state that “[t]he term 'anything of value' is construed broadly to include such benefits as ' charitable contributions,” see id., the statement was not only dicta, but also itself cited only the SEC's complaint in its case against Schering-Plough, a case that was eventually settled. Complaint, SEC v. Schering-Plough Corp., No. 04'cv'945, (D.D.C. June 9, 2004) (“Schering-Plough Complaint”). Moreover, the Chevron court merely listed types of payments that could be a transfer of anything of value, without considering whether such a transfer was to a government official. Finally, the Schering-Plough case cited was “the first occasion in which a company was found to have violated the FCPA by making donations to a charity.” Giraudo, supra at 151.

Without law on which to rely, lore suggests that a charitable contribution to an organization favored by a foreign official is an FCPA violation. The SEC has pursued enforcement actions against, and reached settlements with, a number of companies that have made such contributions. In its enforcement actions, the SEC has asserted that charitable contributions can fall under the FCPA's prohibition of giving “anything of value” to a foreign official. The emphasis on whether something of value was given, however, ignores another fundamental question ' whether the thing of value was given to a foreign official.

In its 2004 complaint against Schering-Plough, the SEC focused on payments to a bona fide charitable foundation whose president was also a Polish official responsible for the purchase of pharmaceuticals. Schering-Plough Complaint ” 1, 6'9. The complaint, however, did not allege that the payments were a violation of the FCPA. See id. Rather, the SEC claimed that Schering-Plough committed violations of the books-and-records and internal-controls provisions of the FCPA. Id. ” 1, 9'15. Schering-Plough consented to pay a $500,000 civil penalty without admitting or denying the allegations in the civil complaint. SEC Files Settled Enforcement Action Against Schering-Plough Corporation for Foreign Corrupt Practices Act Violation, Litigation Release No. 18740 (S.E.C. June 9, 2004). In its administrative order, however, the SEC found that “while the payments in fact were made to a bona fide charity, they were made to influence the Director with respect to the purchase of Schering-Plough's products.” In re Schering-Plough Corp., Securities Exchange Act of 1934 Release No. 49838, File No. 3-11517 (S.E.C. June 9, 2004).

When Eli Lilly agreed to pay nearly $30 million in 2012 for wide-ranging misconduct, one charge was almost identical to the Schering-Plough facts. See Complaint, SEC v. Eli Lilly and Co , No. 12'cv'2045, ' 2 (D.D.C. Dec. 20, 2012). Lilly's Polish subsidiary made similar payments to the same charitable foundation to curry favor with the same government official during approximately the same time period. Id. Lilly consented to the entry of a final administrative judgment without admitting or denying the allegations. Given the allegations of millions of dollars of payments to government officials in Russia and Brazil (see id. ” 22'43) it is hardly surprising that Lilly did not fight over whether $39,000 worth of payments to a bona fide charity could be considered an FCPA violation.

Finally and similarly, the SEC's $13 million settlement with Stryker Corporation included an allegation that Stryker's $200,000 donation to a public university in Greece to fund a laboratory that was a pet project of a public hospital doctor violated the FCPA. The SEC also alleged that Stryker made about $2 million worth of improper payments to government officials in Argentina, Greece and Mexico. Stryker settled without admitting or denying these allegations, but had little reason to fight the charges related to Greece when settling charges elsewhere.

Thus, despite the lack of court decisions grappling with the question, the SEC has asserted its view vigorously that bribes can come in the form of charitable contributions even to bona fide charities where a government official does not benefit financially from the contribution. Yet, in none of the cases did the targets of the investigation have a strong incentive to challenge this particular charge. Consequently, in the absence of law developed in adversarial proceedings, lore based on negotiated settlements has prevailed as practitioners now look at charitable contributions to charities favored by government officials skeptically.

Lore in Other Contexts

Without case law, practitioners have no choice but to rely on well-established lore. Attorneys and their clients, however, must recognize the downside of such reliance is that expectations may be thwarted instantly by a contrary court decision.

The development of lore and law around “big boy letters” provides a particularly enlightening example outside of the FCPA context. Corporate attorneys relied on so-called “big boy letters,” which stated that the buyer has assessed an investment independently of representations by the seller and acknowledged that the seller possessed undisclosed, material, nonpublic information. Such reliance waivers were believed to insulate a seller from a securities fraud suit by a buyer by eliminating the reliance element. Yet, the U.S. Court of Appeals for the Third Circuit, in AES Corp. v. Dow Chemical Co., 325 F.3d 174 (3d Cir. 2003), concluded that such waivers are prohibited under “Section 29(a) of the Exchange Act which forecloses anticipatory waivers of compliance with the duties imposed by Rule 10b-5.” Id. at 180. The waivers could be evidence of a lack of reliance, but could not undermine fraud claims as a matter of law. Id.

Today, the lore about big boy letters has shifted in the opposite direction. In a 2007 enforcement action, the SEC alleged that Barclays Bank committed insider trading even though it used “'big boy letters' to advise ' counterparties that [it] possessed material nonpublic information. According to the SEC, however, despite the use of a big boy letter, in no instance did [Barclays] disclose the material nonpublic information” to the counterparties. Complaint, SEC v. Barclays Bank PLC, No. 07'cv'4427, ' 18 (S.D.N.Y. May 30, 2007). Barclays ultimately settled the enforcement action without admitting or denying the allegations. Barclays Bank Pays $10.9 Million to Settle Charges of Insider Trading on Bankruptcy Creditor Committee Information, Litigation Release No. 20132 (S.E.C. May 30, 2007). Despite this settlement, a court confronted by this issue might find no fault with a bank's failure to disclose material, nonpublic information subject to confidentiality agreements.

Because little FCPA case law exists, similar, potentially deceptive lore has grown around the FCPA, and attorneys provide advice based on this lore. In doing so, attorneys should recognize and acknowledge that much of their advice is based on FCPA lore rather than law. Neither the statute nor any judicial decisions suggest that a payment to a bona fide charity is a payment to a foreign official. Yet, the SEC has pushed this interpretation in settlements, press releases and public statements. Charitable contributions are one example where FCPA lore predominates over law; it is, however, far from alone.

Conclusion

Settlements have their place. The defense bar should advise clients that resolutions based on settlements do not necessarily reflect the law and should be willing to stand up to such government assertions of untested lore across the FCPA landscape. Doing so may not only benefit the individual client, but also promote the development of law.

Robert J. Anello is a partner in the firm of 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.

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Last month, we discussed the “lore” that counsel must rely upon when tackling FCPA enforcement actions. A concrete example of the establishment of FCPA lore is useful when discussing how the lack of judicial precedent in these cases puts corporations and their counsel at a disadvantage.

A corporate client could be aware that the SEC has pursued FCPA enforcement actions against companies that make contributions to charities to curry favor with foreign officials, who oversee awards of government contracts and “hint” that a contribution to such a worthy organization would be welcome.

The client researches the charity and determines that the charity is legitimate, is focused on an area the company generally supports through charitable giving, and is successful in achieving substantial charitable goals. Moreover, the client concludes that a charitable donation would be commercially beneficial as it would reflect well on the company locally and would provide the client with access to other local business and government leaders. The client wishes to make a sizeable contribution, but is wary of running afoul of the FCPA. The client seeks counsel.

No federal court decisions have addressed directly the question of whether contributions to legitimate charities could be prohibited payments under the FCPA. Only one court decision has even mentioned the possibility that charitable contributions could be considered bribes. That decision, part of Chevron's never-ending battle with Steven Donziger over pollution at the Lago Agrio oil field, did not involve charitable contributions. Chevron Corp. v. Donziger , 974 F. Supp. 2d 362, 597 (S.D.N.Y. 2014). Although that opinion, in passing, did state that “[t]he term 'anything of value' is construed broadly to include such benefits as ' charitable contributions,” see id., the statement was not only dicta, but also itself cited only the SEC's complaint in its case against Schering-Plough, a case that was eventually settled. Complaint, SEC v. Schering-Plough Corp., No. 04'cv'945, (D.D.C. June 9, 2004) (“Schering-Plough Complaint”). Moreover, the Chevron court merely listed types of payments that could be a transfer of anything of value, without considering whether such a transfer was to a government official. Finally, the Schering-Plough case cited was “the first occasion in which a company was found to have violated the FCPA by making donations to a charity.” Giraudo, supra at 151.

Without law on which to rely, lore suggests that a charitable contribution to an organization favored by a foreign official is an FCPA violation. The SEC has pursued enforcement actions against, and reached settlements with, a number of companies that have made such contributions. In its enforcement actions, the SEC has asserted that charitable contributions can fall under the FCPA's prohibition of giving “anything of value” to a foreign official. The emphasis on whether something of value was given, however, ignores another fundamental question ' whether the thing of value was given to a foreign official.

In its 2004 complaint against Schering-Plough, the SEC focused on payments to a bona fide charitable foundation whose president was also a Polish official responsible for the purchase of pharmaceuticals. Schering-Plough Complaint ” 1, 6'9. The complaint, however, did not allege that the payments were a violation of the FCPA. See id. Rather, the SEC claimed that Schering-Plough committed violations of the books-and-records and internal-controls provisions of the FCPA. Id. ” 1, 9'15. Schering-Plough consented to pay a $500,000 civil penalty without admitting or denying the allegations in the civil complaint. SEC Files Settled Enforcement Action Against Schering-Plough Corporation for Foreign Corrupt Practices Act Violation, Litigation Release No. 18740 (S.E.C. June 9, 2004). In its administrative order, however, the SEC found that “while the payments in fact were made to a bona fide charity, they were made to influence the Director with respect to the purchase of Schering-Plough's products.” In re Schering-Plough Corp., Securities Exchange Act of 1934 Release No. 49838, File No. 3-11517 (S.E.C. June 9, 2004).

When Eli Lilly agreed to pay nearly $30 million in 2012 for wide-ranging misconduct, one charge was almost identical to the Schering-Plough facts. See Complaint, SEC v. Eli Lilly and Co , No. 12'cv'2045, ' 2 (D.D.C. Dec. 20, 2012). Lilly's Polish subsidiary made similar payments to the same charitable foundation to curry favor with the same government official during approximately the same time period. Id. Lilly consented to the entry of a final administrative judgment without admitting or denying the allegations. Given the allegations of millions of dollars of payments to government officials in Russia and Brazil (see id. ” 22'43) it is hardly surprising that Lilly did not fight over whether $39,000 worth of payments to a bona fide charity could be considered an FCPA violation.

Finally and similarly, the SEC's $13 million settlement with Stryker Corporation included an allegation that Stryker's $200,000 donation to a public university in Greece to fund a laboratory that was a pet project of a public hospital doctor violated the FCPA. The SEC also alleged that Stryker made about $2 million worth of improper payments to government officials in Argentina, Greece and Mexico. Stryker settled without admitting or denying these allegations, but had little reason to fight the charges related to Greece when settling charges elsewhere.

Thus, despite the lack of court decisions grappling with the question, the SEC has asserted its view vigorously that bribes can come in the form of charitable contributions even to bona fide charities where a government official does not benefit financially from the contribution. Yet, in none of the cases did the targets of the investigation have a strong incentive to challenge this particular charge. Consequently, in the absence of law developed in adversarial proceedings, lore based on negotiated settlements has prevailed as practitioners now look at charitable contributions to charities favored by government officials skeptically.

Lore in Other Contexts

Without case law, practitioners have no choice but to rely on well-established lore. Attorneys and their clients, however, must recognize the downside of such reliance is that expectations may be thwarted instantly by a contrary court decision.

The development of lore and law around “big boy letters” provides a particularly enlightening example outside of the FCPA context. Corporate attorneys relied on so-called “big boy letters,” which stated that the buyer has assessed an investment independently of representations by the seller and acknowledged that the seller possessed undisclosed, material, nonpublic information. Such reliance waivers were believed to insulate a seller from a securities fraud suit by a buyer by eliminating the reliance element. Yet, the U.S. Court of Appeals for the Third Circuit, in AES Corp. v. Dow Chemical Co. , 325 F.3d 174 (3d Cir. 2003), concluded that such waivers are prohibited under “Section 29(a) of the Exchange Act which forecloses anticipatory waivers of compliance with the duties imposed by Rule 10b-5.” Id . at 180. The waivers could be evidence of a lack of reliance, but could not undermine fraud claims as a matter of law. Id.

Today, the lore about big boy letters has shifted in the opposite direction. In a 2007 enforcement action, the SEC alleged that Barclays Bank committed insider trading even though it used “'big boy letters' to advise ' counterparties that [it] possessed material nonpublic information. According to the SEC, however, despite the use of a big boy letter, in no instance did [Barclays] disclose the material nonpublic information” to the counterparties. Complaint, SEC v. Barclays Bank PLC , No. 07'cv'4427, ' 18 (S.D.N.Y. May 30, 2007). Barclays ultimately settled the enforcement action without admitting or denying the allegations. Barclays Bank Pays $10.9 Million to Settle Charges of Insider Trading on Bankruptcy Creditor Committee Information, Litigation Release No. 20132 (S.E.C. May 30, 2007). Despite this settlement, a court confronted by this issue might find no fault with a bank's failure to disclose material, nonpublic information subject to confidentiality agreements.

Because little FCPA case law exists, similar, potentially deceptive lore has grown around the FCPA, and attorneys provide advice based on this lore. In doing so, attorneys should recognize and acknowledge that much of their advice is based on FCPA lore rather than law. Neither the statute nor any judicial decisions suggest that a payment to a bona fide charity is a payment to a foreign official. Yet, the SEC has pushed this interpretation in settlements, press releases and public statements. Charitable contributions are one example where FCPA lore predominates over law; it is, however, far from alone.

Conclusion

Settlements have their place. The defense bar should advise clients that resolutions based on settlements do not necessarily reflect the law and should be willing to stand up to such government assertions of untested lore across the FCPA landscape. Doing so may not only benefit the individual client, but also promote the development of law.

Robert J. Anello is a partner in the firm of 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.

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