When Chinese regulators hit GlaxoSmithKline with a $489 million penalty last month – the largest corporate penalty ever in China – it set off alarm bells around the world. Among other things it sent out a “wake-up call for global companies that assumed that their main regulatory risk is in their home countries,” according to a commentator quoted in an October 21, 2014 Bloomberg article entitled “Hong Kong is Hot Spot for U.S. Lawyers as Probes Rise” (here). The GSK penalty is just one of several developments that have triggered fears of increased regulatory enforcement action in China and elsewhere, that, according to the Bloomberg, has led to increased concerns in corporate executive offices and increased opportunities for lawyers and law firms in Hong Kong and elsewhere.
A critical aspect of the GSK bribery action in China is that it has triggered investigations in both the U.S. and the U.K. as regulators in those countries look into whether the company broke their anti-bribery laws. These circumstances provide just one example of how regulatory and enforcement actions in one country increasingly can lead to regulatory actions in multiple countries. Another example of this phenomenon is the investigation whether Wall Street’s hiring practices in China and Hong Kong violated anti-bribery laws. The issues are also being investigated in the U.S. as well. The ongoing investigations into Libor benchmark rate manipulation and foreign exchange rate manipulations are other examples where regulatory investigations quickly crossed borders and became multi-jurisdictional.
The upshot of al this is that a regulatory investigation in one country can lead to what one commentator in the Bloomberg article called “industrial strength investigations,” involving agencies in the U.S., Europe and Asia. These trends are only likely to accelerate as additional countries – including, for example, India, Indonesia and Thailand – step up efforts on anticorruption, antitrust and sanctions.
The point of the Bloomberg article is that this regulatory enforcement trend has fueled a boom for lawyers, as the cross-border investigations require the involvement of lawyers and law firms that can coordinate responses the investigations in the various jurisdictions. In addition, companies interested in trying to head off problems before they arise have been willing to enlist the services of lawyers to provide compliance and training services.
There are a number of interesting points in the Bloomberg article, particularly the point that increasingly companies’ greatest regulatory risks may not be in their home country. Even if the risks outside the home country are not greater, it is certainly true for many companies that their regulatory risks are not limited to those in their home country. As regulators everywhere become more active on anti-bribery and other issues, the risk of regulatory action is now widespread and dispersed, and includes not only the risk of a regulatory action outside a company’s home country, but also includes the risk of a cross-border, multi-jurisdictional regulatory action.
In many instances the onset of a regulatory action will not trigger a company’s D&O insurance policy, although it usually will trigger a claims notice from the company to its insurer. But as a regulatory action progresses into an enforcement proceeding, the D&O insurance may become a factor, at least for defense costs – particularly if individuals are targeted in the investigation or named as defendants in an enforcement action. So even though the D&O policy will not in most instances provide insurance for regulatory fines and penalties, it could nevertheless prove to be important even if just on a defense cost basis.
An additional factor be kept in mind as well is that regulator and investigative action can, as is noted in the Bloomberg article, be followed by a follow-on civil action against company management, which likely would trigger the D&O policy, or even possibly insolvency proceedings, which again could lead to actions that might trigger the D&O policy.
The risk of the follow-on civil action coming in the wake of a regulatory investigation is a phenomenon I have noted frequently on this blog — including in particular the risk of follow in civil actions in the U.S. following regulatory actions and investigations outside the U.S, as discussed here.
I happen to think that the increasing global regulatory enforcement activity is one of the important emerging trends in the corporate liability arena. These developments have very important liability implications both for non-U.S. companies in their home countries and operating abroad, and for U.S. companies operating overseas. For D&O underwriters, these developments have important underwriting implications. And for policyholders and their advisors, these developments raise important and challenging questions about the availability and effectiveness of their insurance to respond to these emerging regulatory claims in all of the jurisdictions in which the claims might arise.
More About Dark Pool Trading: If you have not yet read the article entitled “The Empire of Edge” in October 13, 2014 issue of The New Yorker (here) about the insider trading investigation of S.A.C. Capital and the conviction of former S.A.C. trader Mathew Martoma, you will want to set aside some time and read it carefully. It is absolutely fascinating, particularly on the questions surrounding Martoma’s motivations.
Among many other very interesting details in the article is its account of how S.A.C. Capital took advantage of trading on a private “dark pool” trading platform to unwind its massive positions in the securities of Elan and Wyeth — just ahead of public disclosures of clinical trial setbacks in a promising Alzheimer’s therapy the companies were pursuing – without attracting attention to its trades:
When the market opened on Monday, Cohen and Martoma instructed Phil Villhauer, Cohen’s head trader at S.A.C., to begin quietly selling Elan and Wyeth shares. Villhauer unloaded them using “dark pools”—an anonymous electronic exchange for stocks—and other techniques that made the trades difficult to detect. Over the next several days, S.A.C. sold off its entire position in Elan and Wyeth so discreetly that only a few people at the firm were aware it was happening. On July 21st, Villhauer wrote to Martoma, “No one knows except me you and Steve.”
[T]he next evening, word of the ambiguous results hit the news wires. Tim Jandovitz, a young trader who worked for Martoma, watched in dismay as the news appeared on his Bloomberg terminal in Stamford. He checked Panorama [an S.A.C. portfolio monitor], which showed that S.A.C. still held huge positions in Elan and Wyeth. Jandovitz believed that both he and Martoma had just lost more than a hundred million dollars of Steven Cohen’s money—and, along with it, their jobs. The next morning, he braced himself and went to the office. But when he consulted Panorama he saw that the Elan and Wyeth shares had vanished. Some time later, Martoma informed Jandovitz that S.A.C. no longer owned the stock.