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FCPA Update - New Guidance, New Chairwoman, D&O Coverage & Claims
SEC releases “Resource Guide to the FCPA”
The Securities Exchange Commission (SEC) released the highly anticipated 120 page Resource Guide to the U.S. Foreign Corrupt Practices Act on November 14, 2012. Robert Khuzami, Director of Enforcement for the SEC, reaffirmed that “the most effective law enforcement programs are those that combine vigorous prosecution of those who break the law with an equally vigorous effort to enable those who seek to abide by the law”. While the release of the guide is an attempt to summarize how the SEC and DOJ interpret and apply the FCPA by educating companies and their employees on violations of the act, the guide is not intended to limit (or increase) the enforcement intentions or litigating positions of the DOJ or SEC. The guide does not amend the FCPA (which turns 35 years old this year); rather, it provides useful guidance particularly in the sections regarding gifts, travel, entertainment, the integration of effective compliance practices, and fines and penalties. http://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf
FCPA and D&O Policies
While the Guide released by the SEC did not break new ground and fell below industry expectations, the guide is a compilation of the government’s past position on some controversial issues. The guide also sheds light into individuals’ liability exposure to potential FCPA violations. While combing through the guide, questions as to how companies’ current Directors & Officers Liability policies would respond in an FCPA investigation arise. As stated in the guide, companies may be held liable if a director, officer, employee or agent violate the FCPA in order to benefit the company. Once the SEC or DOJ decides to open an investigation on the company, individuals and companies may be subject to criminal or civil fines and penalties.
While many D&O policies provide coverage for FCPA penalties (to the extent they are insurable) and the costs of defending against the investigations by the SEC or DOJ, the coverage is generally limited to directors or officers of the company. There is usually no entity coverage for informal investigations in a traditional D&O policy and, depending on the insurer and jurisdiction; there may be only limited entity coverage for formal investigations or none at all.
In 2011 Chartis / AIG introduced investigation coverage for entities via a separate policy which is limited to investigations of securities violations but can be expanded in certain cases to include FCPA investigations and shareholder derivative investigations. McGriff has manuscripted coverage (on both a stand-alone basis and as part of a traditional D&O insurance program) that includes entity coverage for informal and formal investigations in connection with direct and derivative securities claims, as well as other investigations not tied to securities violations (FCPA, FTC, EPA, etc.). Several insurance companies will provide some level of securities-related entity investigation coverage as part of a traditional D&O policy subject to various restrictions and additional premium. An approach being considered by several, and offered by a few, provides coverage for investigations when and so long as there is also a standard securities claim. Since many FCPA related securities claims are not made until sometime after the final resolution of an entity FCPA investigation, such coverage may be of limited value with respect to the FCPA investigation costs (even if FCPA related entity investigations were not otherwise specifically excluded).
Historically, D&O policies have contained a specific exclusion for fines and penalties. However, recent coverage expansions provided by many D&O carriers include coverage for FCPA civil penalties against an Insured Person subject to 15 U.S.C. 78dd-2(g)(2)(B), the only section within the FCPA with reference to directors and officers. This specific FCPA penalty coverage grant applies to non-willful violations by individual directors and officers. This section applies a maximum penalty of $10,000 for any natural person that is an officer, director, employee, or agent of a domestic concern, or stockholder acting on behalf of such domestic concern, who violates such section. This penalty cannot be paid directly or indirectly by the company. Some policies provide coverage for any civil fines and/or penalties. In all cases such coverage is applicable only if such amounts are insurable by law. It is our understanding that settlements by individuals with the SEC and/or DOJ routinely prohibit the individual from seeking indemnification or insurance from any source.
FCPA Recent Penalties against Individuals
Below is a list of the most recent FCPA charges against individuals in which coverage may have been triggered in the D&O policies for individuals facing civil penalties:
· Former Morgan Stanley Executive – SEC charged Garth R. Peterson with secretly acquiring millions of dollars worth of real estate investments for himself and an influential Chinese official who in turn steered business to Morgan Stanley’s funds. He agreed to a settlement in which he is permanently barred from the securities industry and must pay more than $250,000 in disgorgement and relinquish his approximately $3.4 million interest in Shanghai real estate acquired in his scheme. April 25, 2012
· Noble Corporation Executives – SEC charged three oil services executives with bribing customs officials in Nigeria to obtain illicit permits for oil rigs in order to retain business under lucrative drilling contracts. April 24, 2012
· Cinergy Telecommunications Case – The latest charge against Cecilia Zurita now brings the Cinergy Teleco Case to the largest in FCPA history in terms of defendants charged, 13. The latest indictment alleges that Zurita who was in charge of overseeing Cinergy’s finances, funneled bribes to Haitian officials through a Miami-based shell company that claimed to assist telecommunications companies wishing to do business in Haiti, but provided no real services.
Below are notable shareholder derivative and securities class action cases brought after an FCPA violation was announced:
· Alcoa, Inc. – When the government of Bahrain’s state owned aluminum company (Alba) filed a $1 billion Racketeering Influenced Corrupt Organization (RICO) lawsuit in the U.S. District Courfor the Western District of Pennsylvania against Alcoa for accusations that Alcoa paid bribes to the government of Bahrain’s state owned aluminum company (Alba) and officers of Alba, Alcoa shareholders followed by filing a derivative action based on the same allegations. The DOJ requested a stay of the RICO case so that the DOJ could conduct its criminal investigation with no distraction from the civil litigation. The stay in the RICO case was lifted and the Chief Judge denied the defendants’ motion to dismiss. Nine days later the shareholder plaintiffs re filed their derivative suit. June 22, 2012
· Wynn Resorts, Ltd. –An internal investigation conducted by Wynn Resorts, Ltd. found that one of its directors, Kazou Okada, paid $110,000 in bribes to gaming regulators in the Philippines. Wynn dismissed Okada from its Board and redeemed his 20% stake in the company. Wynn then filed a lawsuit against Okada for breach of fiduciary duty and related offenses. A counter suit by Okada seeking disclosure of information about a $135 million donation by the company to the University of Macau Development Foundation was filed shortly thereafter. A month later, shareholders filed a derivative action against the directors & officers with similar allegations to those in the above dispute. June 6, 2012
· Tidewater, Inc. – The U.S. District Court for the Eastern District of Louisiana granted Tidewater, Inc.’s motion to dismiss its 2011 derivative suit filed after the oil services provider’s 2010 FCPA settlement with the DOJ and SEC.
· Avon Products, Inc. – The original shareholder derivative suit filed on July 20, 2010 against the directors and officers of Avon products, Inc. alleging improper payments to Chinese government officials was dismissed on February 13, 2012 after defendants filed their motion to dismiss and plaintiffs voluntarily withdrew the complaint without prejudice.
SEC and FCPA Violations Update
According to the SEC, there were 15 reported FCPA violations in 2012 compared to 20 in 2011. According to the most recent Gibson Dunn Report, FCPA enforcement actions initiated by the SEC averaged 5.3 actions from 2004 to 2006 and 18.2 actions from 2007 to 2010 reaching a peak of 26 in 2010.
Mary Schapiro Steps Down
Mary Schapiro will step down as SEC Chairman on December 14, 2012 after almost four years at the helm of the agency. Mary Schapiro began leading the SEC in 2009 after the agency was embarrassed by the failure to uncover Bernie Madoff’s Ponzi scheme. During Shapiro’s reign, the SEC initiated a record number of enforcement actions – 735 in 2011 and 734 in 2012 as well as imposing $2.6 billion in fines. During this time the SEC also prosecuted the largest insider trading scheme in history when Raj Rajaratnam of Galleon hedge fund was fined $92.8 million. Schapiro’s successor will be Elisse Walter who has worked for Schapiro the majority of her career at the SEC. Many believe Walter and Schapiro share similar views; however Walter may be a tougher enforcer. Critics of Walter say while she may be tougher with regards to enforcing penalties, Walter may have a tougher time politically with Congress.