White Collar Crime-Fighting and Other Web Notes

Posted on May 31, 2011 by Kevin LaCroix

In a May 27, 2011 post on the FCPA Compliance and Ethics Blog (here), Tom Fox has some interesting observations about the ongoing FCPA gun sting trial. (Readers will recall that this prosecution involves numerous individuals from the armaments industry who were caught up in a government sting operation that included extensive wiretaps and an FBI agent posing as a representative of an African government.)

 

Among other things, Fox comments that this prosecution is a “game changer” because of the government’s use of “organized crime fighting techniques in very mundane white collar crime.”

 

Fox’s point is a serious one, particularly in view of the government’s use of wiretaps in several other recent high-profile prosecutions. The insider trading conviction of Raj Rajaratnam depended critically on extensive government wiretaps. The prosecution of the former big law associate who had passed along inside information gained from the law firms where he worked also relied on use of wiretaps.

 

The government’s use of these aggressive crime-fighting techniques underscores how seriously the government is taking its responsibility to enforce these laws. The government’s willingness to use these techniques also has important implications for anyone concerned about the potential exposures for companies and their executives. The most obvious lesson is that the government is vigilant and will actively pursue criminal activity. For that reason, corporate compliance efforts are critically important.

 

Another, perhaps more chilling implication is that presuming confidentiality for even the most private conversations and communications could be dangerous. There is probably a larger essay for another day here. Suffice it to say that the line between necessary vigilance and intrusive surveillance is a fine one, and the government’s involvement in monitoring its citizen’s activities is fraught with difficulties. Some might say it is only those involved in criminal activities that have any thing to fear.  I note that we only hear about the wiretaps that result in criminal prosecutions. One can only wonder about the extent of governmental intrusion into purely lawful communications.

 

Independent Director Liability Insurance: Do independent directors need a separate liability insurance policy? The IDL insurance product has been around for years, though relatively few companies buy it. The problem is that sometimes when things go wrong, things go catastrophically wrong. Though IDL continues to attract relatively few buyers, there are occasions when it could be critically important. A May 26, 2011 article from Corporate Secretary magazine (reprinted here) takes a closer look at the IDL product. (Full disclosure, I was interviewed for the article).

 

Take Two: Perhaps there are no panaceas, but there may be one thing Americans could do to solve many of their problems -- everything “from stuck zippers to the national debt” -- according to a recent report you might have missed.

 

The American Scene: A series of recent trips has reminded me that there are a multitude of beautiful places in this big country. Among other delightful places I have visited are several that are well worth the journey, including Davidson, North Carolina; Lake Tahoe, California; Denver, Colorado; and Lexington, Virginia.

 

My most recent sojourn, a Memorial Day weekend  trip to South Carolina for a wedding, introduced me to Greenville, which is yet another delightful surprise. The cluster of restored buildings and pedestrian bridges surrounding the waterfalls on the Reedy River and the blocks of shops and restaurants along the tree-lined Main Street make the town a pleasant and enjoyable place to explore. Greenville is only one of several U.S. cities that recently have made big investments in reorienting themselves toward their riverine setting, including Dubuque, Iowa and Jacksonville, Florida.

 

Travel has its stresses and headaches, but it also occasionally affords agreeable discoveries that reward the exertion. Truly, you could explore this country endlessly and never exhaust its aesthetic possibilities.    

 

 

Greenville, South Carolina  May 28, 2011

 

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Wave of Indictments from Largest Ever FCPA Investigation: More Action Ahead?

Posted on January 20, 2010 by Kevin LaCroix

Longtime readers know  I have frequently argued that claims related to the enforcement of the Foreign Corrupt Practices Act are a growing source of liability exposure for companies and their senior officials, a stand that has made me the subject of occasional derisive comments. One reader recently suggested to me that I am "obsessive" about the topic. But after yesterday’s massive indictment of 22 individuals as a result of an FBI sting -- the DoJ’s largest FCPA-related investigative action ever -- I think my occasional critics will have to agree that enforcement activities really do represent a significant corporate exposure that must be taken very seriously.

 

As reflected in the Department of Justice’s January 19, 2010 press release (here), the 22 individuals were indicted for engaging in schemes to bribe foreign government officials. The indictments are the result of an FBI undercover operation that focused on allegations of foreign bribery in the military and law enforcement products industries.

 

The 16 separate indictments can be found here. Only individuals are named in the indictments; no companies have been named. The individuals worked for companies in the U.S, the U.K and Israel. All but one of the individuals was arrested while attending an industry convention in Las Vegas.

 

According to the DoJ’s press release, the indictments represent "the largest single investigation and prosecution against individuals in the DoJ’s enforcement of the Foreign Corrupt Practices Act." The press release also quotes the Assistant Attorney General as saying that the "ongoing investigation" is "the first large-scale use of undercover law enforcement techniques to uncover FCPA violations."

 

If you have any doubts about the government’s willingness to commit resources to enforce the FCPA, you should know that, as part of this investigation, 150 FBI agents executed 14 search warrants in at least twelve locations around the country.

 

The investigation also reflects a frequently common aspect of these kinds of enforcement actions – that is, crossborder cooperation between investigative agencies. Specifically, in this case, the City of London’s police executed seven search warrants in connection with their own investigation of the foreign bribery conduct that formed the basis of the indictments.

 

The DoJ’s press release describers how the FBI’s sting operation worked:

 

the defendants allegedly agreed to pay a 20 percent "commission" to a sales agent who the defendants believed represented the minister of defense for a country in Africa in order to win a portion of a $15 million deal to outfit the country’s presidential guard.  In reality, the "sales agent" was an undercover FBI agent. The defendants were told that half of that "commission" would be paid directly to the minister of defense. The defendants allegedly agreed to create two price quotations in connection with the deals, with one quote representing the true cost of the goods and the second quote representing the true cost, plus the 20 percent "commission." The defendants also allegedly agreed to engage in a small "test" deal to show the minister of defense that he would personally receive the 10 percent bribe.　

 

The indictments were returned on December 11, 2009 by a grand jury sitting the District of Columbia and were unsealed yesterday.

 

The indictments allege that the individuals conspired to violate the FCPA, conspired to engage in money laundering, and engaged in substantive violations of the FCPA.

 

The maximum prison sentence for the conspiracy count and for each FCPA count is five years. The maximum sentence for the money laundering conspiracy charge is 20 years in prison. The indictments also seek criminal forfeiture of the defendants’ ill gotten gains.

 

The FCPA Blog has a summary regarding the indictments here. The FCPA Professor Blog also has a post about the indictments here.

 

According to statements quoted in a January 19, 2010 Bloomberg article (here), the investigation has been underway for 2 ½ years, and "is continuing." The official quoted in the article declined to say whether there would be further indictments as a result of this investigation. However, the official noted that there are over 140 open investigations into violations of the bribery laws and he added that ""I can assure you there will be more charges as a result of some of those investigations."

 

The involvement of criminal charges against so many individual defendants raises many questions, including whether or to what extent D&O insurance might respond in these circumstances. The issue will of course depend to a large extent on the precise wording of the policies involved. The criminal forfeitures would not in any event be covered under any policy. However many policies include within their definition of claim the filing of criminal charges in an indictment, which at least for policies with that language might hold open the possibility that the policies might provide at least defense cost coverage.

 

Whether any specific policy would provide coverage for criminal defense expenses will depend in large part on the wordings of other policy provisions, including in particular any potentially relevant policy exclusions. Though they do not appear in many contemporary policies, some older policy forms contain certain exclusions that (if not removed by endorsement) could potentially operate to preclude coverage for FCPA-related criminal defense expenses.

 

But as I have frequently pointed out, the greatest relevance of the D&O policy in connection with bribery related legal proceedings may be in connection with any follow-on civil action that may arise. The FCPA itself does not contain a private right of action, but investors and others sometimes raise claims that company’s senior officials did not take appropriate steps to protect against the improper conduct, or that the company misrepresented its financial condition.

 

The sheer magnitude of this most recent FCPA criminal enforcement action, taken together with the existence of 140 open FCPA-related investigations and the likelihood of further enforcement actions ahead, underscores the seriousness of FCPA exposures for senior company officials. And as highlighted by my brief discussion above of the way the D&O policy may respond in connection with FCPA claims, it is critically (and increasingly) important that these issues are taken into account at the time the D&O policy is formed.

 

Year-End Securities Litigation Review Webinar: On January 22, 2010 at 11 am EST, I will be participating in a webinar sponsored by Advisen entitled "Review of Securities Litigation 2009 and Expert Views for the Year Ahead." Joining me for the hour-long webinar will be Jeffrey Lattman of Beecher Carlson and Mark Lamendola of Travelers, as well as David Bradford and Jim Blinn of Advisen. You can register for the webinar here.

 

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