In prior posts (most recently here), I have discussed the growing threat that Foreign Corrupt Practices Act (FCPA) enforcement may present for companies doing business overseas. This trend became even more pronounced in 2007, and at least one legal commentator has suggested (here) that the increasing FCPA enforcement trends raise the possibility that FCPA violations "may be this year’s corporate crime of the century."

The one thing that is clear is that FCPA enforcement activity is escalating. As discussed in the January 28, 2008 Fenwick & West memorandum entitled "The Foreign Corrupt Practices Act: The Next Corporate Scandal?" (here), 2007 was "a watershed year for FCPA enforcement." Among other things, the memo notes that that "the number of enforcement actions brought by the DoJ and the SEC doubled compared with the number brought in 2006."

The memo also notes that "public companies disclosed over 50 pending government investigations." In addition, the DoJ and the SEC imposed the largest combined civil and criminal fines in history in 2007, the total fines of $44 million imposed against Baker Hughes and its subsidiaries (as discussed in my prior post, here).

There are a number of important trends driving this increased FCPA enforcement. Obviously the globalization of business activity provides an important context, but globalization alone does not explain the increased enforcement. The enforcement activity is being driven by a number of trends and patterns.

First, the DoJ and the SEC have developed a practice of targeting specific industries, through an industry-wide investigation. For example, a January 25, 2008 Sidley Austin memo entitled "FCPA Enforcement Trends During 2007" (here) notes that the authorities have targeted "sales and marketing practices of companies in the medical device industry in Europe." A January 24, 2008 Jenner & Block memorandum entitled "Recent Enforcement Activity Under the Foreign Corrupt Practices Act" (here) also cites the recent enforcement actions involving the "companies participating in the U.N. Iraq Oil for Food program." The Fenwick & West memo cited above also notes that the FCPA is now "being actively enforced against technology companies."

Second, the authorities have targeted companies doing business in countries where bribery is part of the local business culture. The Jenner & Block memo notes that the authorities have "continued to press enforcement as to companies doing business in Nigeria." Business activities in China have also drawn scrutiny, which is certainly a challenge given that many companies are finding it indispensible to have a China strategy.

Third, the U.S. authorities have shown an increased willingness to cooperate with foreign governments in joint investigations, even, the Jenner & Block memo notes, where the target companies "are already the subject of law enforcement investigation or sanction in their home country." The most prominent example of this latter phenomenon is the current investigation involving Siemens (which I discussed in prior posts, here and here). Another example is the investigation of BAE Systems (which has been surrounded by some significant controversy, as discussed here).

Fourth, increased M & A activity has led to the discovery and disclosure to the authorities of a number of FCPA violations. The Sidley & Austin memo referenced above cites the entry of Delta & Pine into a $300,000 FCPA settlement following its merger with Monsanto (refer here) and York International’s FCPA settlement following its merger with Johnson Controls, whereby York agreed (here) to a $10 million criminal penalty, a $2 million civil penalty, and the disgorgement of $10 million profit.

The Sidley & Austin memo notes that "acquisition due diligence is an essential program, and the failure to adequately assess potential liabilities can result in serious consequences." The Fenwick & West memo notes that "FCPA issues can be a major sticking point in negotiations with the acquiring party, often causing delay of the deal or a change in the price terms."

Fifth, as a result of changing priorities and increased resources, the authorities are no longer dependant on self-reporting alone as the means by which FCPA violations are identified. In recent year, the combination of the increased self-scrutiny SOX requires and corporations’ desire to obtain cooperation credits have led companies to self-report, providing the authorities with the bases for many of the FCPA enforcement investigations. But, as the Jenner & Block memo notes, "the Government is increasingly interested in developing cases affirmatively, without relying on disclosures." Both the DoJ and the SEC have increased their staffing in this area, and the agencies have said repeatedly said publicly that they will be more "proactive."

As I have previously noted, companies’ exposures in this area represent an increasing source of corporate risk. In addition, all three law firm memos cited above also note that the threat of enforcement activity is a growing threat for individuals as well as companies. As described above, these enforcement activities can result in very substantial fines and penalties. But as I have also observed in prior posts (most recently here), these investigations can also trigger follow-on civil lawsuits. Indeed, many of the most prominent recent FCPA investigations, including Siemans, Baker Hughes, and BEA Systems, have all also involved follow-on shareholders’ derivative lawsuits.

While the FCPA’s fines and penalties would not be covered under the typical D & O policy, the defense costs and indemnity amounts incurred in connection with the follow-on civil litigation would trigger coverage under the typical D & O policy. Given the increased enforcement activity and the authorities’ heightened priority in this area, the exposure arising from the threat of civil litigation following-on from FCPA enforcement activity could represent an increasingly important D & O risk.

More About 2007 Securities Lawsuits, Trends: Adding to the prior 2007 year-end securities litigation reports issued by NERA Economic Consulting (here) and Cornerstone Research (here), The Corporate Library has released its own year-end report entitled "Predicting Securities Litigation." The report is proprietary (refer here), but there is a good short summary of the report’s details in this January 28, 2008 Business Insurance article (here).

The Corporate Library’s report is directionally consistent with the two prior reports. It does, however, add a number of interesting additional observations. For example, the report notes that the increased securities litigation activity in the second-half of 2007 suggests "a rising tide of activity that may not crest until well into the coming year [i.e., 2008] – if then." The report also notes that if the heightened activity continues into 2008, "this rise in frequency alone could render today’s low D & O rates unsustainable, perhaps even resulting in [securities class action] filings against the insurers themselves."

The report also has an interesting observation with respect to the comment (refer here) that the increased litigation activity in 2007 may have been a "one-time event" driven by the nonrecurring phenomenon of the subprime litigation wave. The Corporate Library, by contrast, "believes that the lull in new [securities class actions] that occurred in 2006 was the anomaly," not the increase filing rate in 2007. The report also speculates that "new [securities class actions] filed in 2008 will in fact more likely exceed those filed in 2007, perhaps even reaching the historical mean of 192 cases per year cited by Cornerstone Research."

The Corporate Library report concludes with an analysis of the criteria it believes can be used to predict securities litigation. Among other things, the report notes that "CEO compensation practices that are poorly aligned with shareholder interests remain a powerful indicator of potential securities fraud." The report notes that "good corporate governance and effective boards have never been more important or a better indicator of potential liability."

Many thanks to Ric Marshall at the Corporate Library for sharing a copy of the report with me.

Bear Stearns Conference Call Summary: On January 28, 2008, I participated in a telephone conference call hosted by Bear Stearns entitled "D & O Losses from the Credit Crunch," in which I discussed emerging trends from the subprime litigation wave and the implications for the D & O insurance industry. The MAPO Online blog (here) has a good short sketch of my comments on the call. Special thanks to Mason Power for posting his notes of the call online.

Take Five, Jérôme (Days Off, Not Billions Away): Many interesting details have emerged from the Société Générale rogue trading incident, but I think my favorite item is the speculation that one of the ways Jérôme Kerviel may have evaded detection is by avoiding taking any time off. As discussed in the January 29, 2008 Wall Street Journal article entitled "Too Many Days on the Job" (here), Kerviel’s bosses "ultimately went along with his excuses for staying at work." The article observes that "if he had gone, his frauds probably would have been spotted." The implication? "Obligatory time off" is a "best practice."

We may yet celebrate Monsieur Kerviel if a new workplace ethic emerges in which corporate management is suspicious of workaholism and considers it part of its job to ensure that all employees take extended vacations. The Journal article cites a vacation "rule of thumb" of "at least five workdays in a row, and often 10."

If stamping out rogue trading requires that we all take off at least ten days in a row – for the good of the company, mind you – then who are we to stand in the way? Those workaholics now -possible rogue traders? Who knows…?