The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

If you are one of those people who still need persuading that the increasing crack-down on corrupt behavior is a big deal, you will want to take a look at The FCPA Blog’s recent breakdown of the top ten Foreign Corrupt Practice Act settlements, which can be found here. As Dick Cassin, the blog’s author elaborated in a subsequent post, the top ten settlements collectively total $2.8 billion, but the top six, all of which took place just in the last 20 months, represent 95% of the total. Four of the top six settlements were reached just in 2010.

As if this past activity were not enough, the newly effective Dodd-Frank Wall Street Reform and Consumer Protection Act seems likely to lead to even further enforcement activity. As noted in a July 20, 2010 memorandum from the Proskauer law firm, Section 922 of the Dodd-Frank Act contains new provisions designed to encourage whistleblowers to report securities law violations. Among other things, the Section provides that if the whistleblower’s information leads to the imposition of sanctions in excess of $1 million, the whistleblower will receive between ten and thirty percent of the total.

The law firm memo comments that "if the whistleblower provisions Congress previously provided in other areas are an accurate indication, the Dodd-Frank Act will increase dramatically the likelihood that suspected violators of the securities laws will face costly enforcement actions."

This threat, the memo notes further, is "particularly great" with respect to FCPA violations, precisely because of the massive scale of the settlements that the SEC has been achieving in this area. Given the size of these settlements, the potential rewards for whistleblowers are enormous. The potential rewards are so massive that some commentators have referring to these provisions as the "whistleblower bounty provision."

A detailed overview of the Dodd-Frank Act’s whistleblower provisions can be found on the FCPA Professor blog, here. Among other things, Professor Mike Koehler, the blog’s author, points out the danger that these whistleblower provisions represent, because the standards for violation of the FCPA are so ill-defined and because so many companies find it expedient to settle FCPA allegations rather than to try to test them in Court. Against this backdrop, he questions the wisdom of offering whistleblowers rewards of up to 30%.

However, Professor Koehler, unlike many commentators, conjectures that the whistleblower provisions may have a "negligible impact." in part because the whistleblower provisions are only triggered when public company issuers are involved, whereas many companies targeted in FCPA enforcement actions are private companies. He also points out that the whistleblower provisions create huge incentives for companies to self-report violations. If a company has self-reported, then the whistleblower’s information is not "original" and the whistleblower is not entitled to the bounty.

By contrast, and as Ross Todd reports in a July 21, 2010 article on the AmLaw Litigation Daily (here), many commentators, including the former head of FCPA enforcement at the Department of Justice, are advising that we should expect the size and scope of FCPA enforcement cases to increase.

Meanwhile, there are important developments across the ocean with respect the UK Bribery Act, which received Royal Assent on April 8, 2010. On July 20, 2010, the U.K. Ministry of Justice released its timetable for the implementation of the Bribery Act, setting April 2011 as the effective date. The Act is widely viewed as in several important respects more "far-reaching" than the FCPA, and is likely to have significant impacts on business that either are based in the U.K. or have significant parts of their operations in the U.K.

The April 2011 effective date represents something of a delay, as noted in a July 20, 2010 memo from the Morgan Lewis law firm. The FCPA Professor blog has a detailed discussion here of the possible reasons behind the delayed implementation. Essentially, the extension is intended to allow business to become familiar with the law and to permit the U.K. government to launch a "shore consultation exercise" to provide "guidance" firms can adopt to prevent bribery.

Though the U.K. provisions may be somewhat delayed and though the impact of the new Dodd-Frank Act whistleblower provisions may be uncertain, there is no question that this is an area where many things are happening. Anti-corruption enforcement represents a significant and growing area of liability exposure for corporate officials, especially in light of the government’s apparent willingness to resort to sting tactics and other prosecutorial techniques as part of the heightened enforcement.

These developments also have significance for purposes of the structure and implementation of insurance calculated to enforce corporate officials. The fines and penalties associated with these kinds of enforcement actions typically would not be covered under a D&O policy, but the defense fees, at least for the individuals might well be. However, the Dodd-Frank Act whistleblower provisions, for example, may raise concerns under the typical D&O policy’s insured vs. insured exclusion.

The potential implications of these developments within the D&O insurance context represent a significant area of concern for D&O insurance professionals. It is worth noting that I will be participating in a panel entitled "Foreign Corrupt Practices Act: Unexpected Liabilities for D&O Insurers" at the November 2010 PLUS International Conference. I will be participating on the panel, which will be chaired by my friend, Joe Monteleone of the Tressler law firm.

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Two developments involving major European companies illustrate both the challenges and uncertain progress of global efforts to combat corruption.

First, on July 29, 2008, Siemens announced (here) that its Supervisory Board has resolved to claim damages from ten former members of the company’s Managing Board executive committee, including two former CEOs and a former CFO. The claims are “based on breaches of their organizational and supervisory duties in view of the accusations of illegal business practices and extensive bribery that occurred in the course of international business transactions and the resulting financial burdens to the company.”

The former executives will be “invited to respond to the claims before legal action is taken.” A July 30, 2008 Financial Times article describing the Siemens board action can be found here.

Second, in a July 30, 2008 opinion (here), the U.K. House of Lords overturned the April 10, 2008 ruling of the Queen’s Bench Divisional Court that the decision of the Serious Frauds Office Director to discontinue the investigation of possible corrupt activity involving BAE Systems was unlawful. (My prior post discussing the April 10 decision at length can be found here.)

The discontinued SFO investigation involved possible bribery in connection with the Al Yamamah arms contract between BAE Systems and the Saudi government. As detailed in the House of Lords opinion, the investigation proceeded despite Saudi resistance until investigators' attempt to subpoena certain Saudi account information from Swiss banks led to direct threats that the Saudis would withhold cooperation with British antiterrorism efforts. Among other things, the threats included the explicit possibility that “British lives on British streets were at risk.”

In reaching its conclusion that the SFO director properly exercised his discretion to discontinue the investigation, the senior law lord, Lord Bingham of Cornhill, wrote:

The Director was confronted by an ugly and obviously unwelcome threat. He had to decide what, if anything, he should do….The issue in these proceedings is not whether the decision was right or wrong, nor whether the Divisional Court or the House agrees with it, but whether it was a decision which the Director was lawfully entitled to make….In the opinion of the House the Director’s decision was one he was lawfully entitled to make. It may be doubted whether a responsible decision-maker would, on the facts before the Director, have decided otherwise.

Baroness Hale of Richmond added in a concurring opinion that “it is extremely distasteful that an independent public official should feel himself obliged to give way to threats of any sort….Although I wish the world were a better place where honest and conscientious public servants were not put in impossible situations such as this, I agree that his decision was lawful.”

A July 30, 2008 article in The Guardian (here) describing the House of Lords opinion quotes counsel for the SFO as saying that “the SFO director was convinced that Saudi Arabia wasn’t bluffing.”

These significant developments have important implications both for companies and for continuing efforts to enforce anticorruption provisions.

First, the decision of the Siemens Supervisory board to pursue claims against the company’s former officials underscores the growing threat, which I have discussed at length in prior posts (most recently here), of follow-on civil litigation arising out of anticorruption enforcement activity. Although Siemens officials already are the target of a shareholders’ derivative lawsuit in the U.S., the Supervisory Board’s decision to take up claims against the former officials highlights the potential seriousness of the civil litigation threat.

The House of Lords decision also has great significance and represents an outcome that can only be regretted. To be sure, if it is assumed that the Saudi threats were serious (that is, if they were in fact not bluffing) then the threat to British lives justifies the decision to discontinue the investigation as well as the House of Lords opinion. Nevertheless, the capitulation to a threat of this kind represents a subordination of the rule of law to forces of a kind and character that should have no role in free societies.

The BAE Systems case clearly tested the limits of what any government might be willing to risk in resisting corruption. The implication of the decision to terminate the investigation is that if corrupt forces are sufficiently rich and powerful, they have nothing to fear from the force of law, and that anticorruption laws are enforceable only against those too weak or powerless to resist.

In its June 2008 Progress Report (which I discuss here), Transparency International noted that antibribery enforcement is “critical in draining the supply of bribe money that distorts public decision making in some of the world’s poorest states, with disastrous consequences for the decision making.” The outcome of the BAE Systems case suggests that it is not only in the world’s poorest countries that corrupt activity disrupts the processes of an ordered society.

The FCPA Blog has a post discussing the House of Lords opinion here. The FCPA Blog notes that the U.S authorities are continuing their investigation of the BAE Systems sales to Saudi Arabia.

Finally, and to bring this discussion full circle, the BAE Systems investigation is also the subject of follow on civil litigation, as discussed at greater length here.

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In prior posts, I have examined the increasing importance of anticorruption efforts and their significance for purposes of corporate governance. But a recent report by a global watchdog group suggests that not all governments are actively enforcing their anticorruption commitments, with potentially serious consequences for the developing world.

Transparency International describes itself as a “global civil society organization leading the fight against corruption.” Among other things, the group issues an annual progress report on the enforcement of the OECD Convention on Combating Bribery of Foreign Officials.

On June 24, 2008, the group issued its 2008 Progress Report (here), which states that there has been a “dangerous stalemate on enforcement” and that “less than half” of the OECD Convention signatories “are living up to their commitments.” The report further states that while there has been “significant enforcement by 16 governments,” there is “little or no enforcement by 18 governments.”

The watchdog group is particularly worried about the “mixed message” that these uneven enforcement efforts may be sending. One commentator for the group is quoted as saying that “strong enforcement action against Siemens signaled to German business that foreign bribery will no longer be tolerated. But the backtracking of other countries, including the UK’s termination of an investigation into BAE Systems’ deals in Saudi Arabia, reinforces doubts about government commitment to enforce the Convention.”

The report leave no doubt about the importance of anticompetitive enforcement; as the report states, “compliance by signatory states is critical in draining the supply of bribe money that distorts public decision making in some of the world’s poorest states, with disastrous consequences for their citizens.”

My most recent post discussing the BAE Systems investigation can be found here, and my most recent post discussing the Siemens investigation can be found here.

Hat tip to the SOX First blog (here) for the link to the Transparency International report.

Siemens might not only have problems with the anticorruption laws, but also with its complexion, according to a June 24, 2008 Financial Times article reporting on comments from Siemens' current head, in an article entitled "Siemens is 'too white, German and male'" (here).

Another Options Backdating Securities Class Action Settlement: On June 24, 2008, Brooks Automation announced (here) that it had settled the securities class action lawsuit that was pending against the company and certain of its directors and officers. The defendants’ motion to dismiss the lawsuit had previously been denied, as I discussed in a prior post, here. The case settled for $7.75 million dollars, all of which is to be paid by the company’s liability insurance carrier.

In any event, I have added the Brooks Automation settlement to my table of options backdating-related lawsuit dismissals, denials and settlements, which can be accessed here.

“Aggregator” Standing: Ordinarily this blog would not pause to comment on a “justiciability” case, at least one outside the context of directors and officers liability. But we found some of the commentary about the U.S. Supreme Court’s June 23, 2008 decision in Sprint Communications v. APCC Services (here) particularly interesting, and we thought we would pass it along for the benefit of those readers as interested as we are in procedural and jurisdictional matters.

George Washington University Law Professor Jon Siegel has a post on his blog Law Prof on the Loose (here) discussing the decision and the question whether “aggregators” who compiled the claims of payphone operators against long-distance carriers can demonstrate a sufficient injury to have standing to sue. The Supreme Court decided that they do. Siegel’s post does an interesting and humorous job explaining the case, the issues, and the decision, and he also explores the interplay between the majority and dissenting opinions. Read and enjoy.

Attention Deficit: We all suffered through those undergrad classes that seemed like they would never end, but the Chronicle of Higher Education has a June 20, 2008 article entitled “Short and Sweet: Technology Shrinks the Lecture”(here) reporting that after all these years, academia may finally be doing something about it.

Apparently, many Profs who have made their living droning on and on have finally seen themselves on video, as part of the effort to put their lectures on line. Appropriately enough, the experience seems to have been a wake-up call for many professors. As one Prof observed, “You wanted to kill yourself after about 20 minutes.” (I am not sure, but I think that particular Prof may have taught my Econ 101 class.)

So as part of their transition to online teaching, many professors are breaking their sessions into 20-minute segments. I guess the 20 minute time frame was selected to minimize the number of boredom-induced suicides.

At least some of the professors have managed to make the mental leap: “Shorter may work better in the classroom, too.” Tragically, this breakthrough comes too late to benefit the current generation, but at least our children and grandchildren can hope for a better tomorrow.

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