By Debevoise & Plimpton LLP | August 31st, 2015

By Andrew M. Levine, David A. O’Neil and Steven S. Michaels

Late last month, Andrew Weissmann, the Chief of the Fraud Section of the U.S. Department of Justice (“DOJ”) announced that the DOJ would be hiring a “compliance counsel.” This individual reportedly will serve as an in-house expert “to help prosecutors ‘differentiate the companies that get it and are trying to implement a good compliance program from the people who have a near-paper program.’” According to press reports of Weissmann’s statements, the compliance expert, who has been selected and is undergoing final vetting, hails from the private sector, has significant experience in developing and implementing compliance programs, and will be a resource to prosecutors in FCPA and non-FCPA cases alike.

The DOJ, of course, already has provided guidance about what it expects from compliance programs in its 2012 Resource Guide to the U.S. Foreign Corrupt Practices Act, published jointly with the U.S. Securities and Exchange Commission. DOJ has also issued internal guidance from which prosecutors are to work when assessing company compliance programs in the course of determining when to charge a company with an FCPA or other criminal law violation. And the U.S. Sentencing Commission has issued guidelines, which the Supreme Court has held are “advisory” for the U.S. federal courts, governing what sentence is appropriate in light of such matters as the effectiveness of a company’s compliance program. The Sentencing Guidelines apply upon conviction of an offense, but they are also routinely utilized to identify appropriate penalties in the course of settlement discussions, and are customarily analyzed in Deferred Prosecution Agreements (“DPAs”) presented by the parties to corporate resolutions to the U.S. courts.

In light of existing guidance, the main benefits from this new appointment – if and when it is finalized – seems most likely to be greater standardization of DOJ’s expectations for compliance programs and hopefully a further indication of DOJ’s seriousness in considering such programs when making charging decisions, even absent a formal compliance defense. While such standardization ideally should promote greater fairness in administration of the criminal law, the impact of the DOJ’s new hire remains uncertain. Companies, their boards, compliance officers, and in-house legal staff will thus doubtless be awaiting details on how this individual will function.

In this article, we identify some of the risks, opportunities, and issues presented by this innovative step by DOJ.

Practical Issues Presented by a DOJ Compliance Expert

To appreciate the issues that might arise under the DOJ compliance expert’s tenure, it is important for companies and their employees to be aware of some of the baseline rules governing criminal prosecutions. Because the FCPA has no compliance defense, compliance programs and their features come into play in an FCPA criminal matter principally at the stage at which DOJ considers whether to bring charges and then, if a conviction or settlement results, what the terms of sentence or penalty should be.

Although consistency in criminal law enforcement is an enormously important goal, the DOJ’s exercise of its prosecutorial discretion to select which cases not to bring is largely unreviewable. As the Supreme Court held 30 years ago, in Heckler v. Chaney, “[t]his Court has recognized on several occasions over many years that an agency’s decision not to prosecute or enforce, whether through civil or criminal process, is a decision generally committed to an agency’s absolute discretion.” For this reason, among others, absent a case in which a prosecution has been initiated, say, in retaliation for that defendant’s exercise of a constitutional right, or on the basis of a defendant’s or another’s race, religion, gender, or other protected class, the ability of a defendant to obtain dismissal of a charge on the basis of a claim of selective prosecution is limited. There is thus little likelihood that any corporate defendant could successfully argue that it received an unlawful result if it were prosecuted after having a compliance program in all material respects identical to that of a company that received a declination. Under existing law and procedure, many other facts can go into a particular charging decision.

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By Debevoise & Plimpton LLP | July 31st, 2015

By Sean Hecker, Andrew M. Levine and Steven S. Michaels

On July 17, the Department of Justice (“DOJ”) announced a settlement of FCPA allegations against Louis Berger International, Inc. (“LBI”), a privately-held consulting firm that provides engineering, architecture, program, and construction management services. In connection with alleged bribery-related misconduct in India, Indonesia, Kuwait, and Vietnam, the DOJ and LBI agreed to a three-year Deferred Prosecution Agreement (“DPA”) containing conditions that include the appointment of a compliance monitor. As part of resolving FCPA conspiracy charges, the company also agreed to pay a $17.1 million penalty.

Several factors, including LBI’s self-reporting, cooperation, and remediation, were cited by the DOJ as reasons for entering into a DPA instead of a plea agreement, and to provide the presumptively maximum five-point reduction to LBI’s culpability score for purposes of calculating the financial penalty portion of the settlement. The resolution follows a previous settlement with the U.S. government for alleged improper billing, and LBI’s one-year conditional debarment by the World Bank in February 2015.

The same day the LBI DPA was announced, the DOJ also announced that two former LBI Senior Vice Presidents had each pleaded guilty to one count of conspiring to violate and one substantive count of violating the FCPA’s anti-bribery provisions.

And even beyond its debarment and future obligations to its monitor, LBI’s difficulties may be far from over. In particular, the case raises important and interesting questions regarding enforcement of the recently-enacted Justice for Victims of Trafficking Act of 2015 (the “JVTA”), which altered the United States District Courts’ procedures for handling DPAs. Under the JVTA, as of May 29, 2015, the Crime Victims Rights Act (codified at 18 U.S.C. §§ 3771 et seq.) has been amended to establish for each “crime victim” “[t]he right to be informed in a timely manner of any plea bargain or deferred prosecution agreement,” thus facilitating any “crime victim’s” “right to full and timely restitution as provided in law,” providing, in addition, for appellate review of any denial of restitution by a trial court under “ordinary standards of appellate review.”

The fact that the LBI DPA did not provide for restitution to any of the governments involved in LBI’s alleged bribery raises the question of whether the DPA, which was approved promptly after it was submitted to the District Court for the District of New Jersey, will withstand challenge should restitution be sought by any of the governments involved. That question turns, in part, on whether foreign governments may ever seek restitution under the CVRA, an issue that remains open in the federal courts of appeals, and also whether foreign governments have standing to seek restitution in circumstances in which the DOJ resolves a criminal matter by a DPA rather than by plea.

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By Debevoise & Plimpton LLP | January 5th, 2015

By Sean Hecker, Andrew M. Levine and Taz R. Shahabuddin

On November 12, 2014, the Dutch Public Prosecutor’s Office (“Openbaar Ministerie”) and Netherlands-based oil platform services company SBM Offshore N.V. (“SBM”) announced an out-of-court settlement for $240 million (193 million Euros) related to bribery allegations involving SBM sales agents in Brazil, Equatorial Guinea and Angola. This resolution is believed to be the fourth largest anti-corruption corporate resolution by any country in 2014 – and atypical for the Netherlands, which has consistently faced criticism for its weak foreign bribery enforcement practices.

At the same time, SBM announced that the U.S. Department of Justice (“DOJ”) had closed its own inquiry into the allegations and would not be prosecuting the company.

SBM CEO Bruno Chabbas commented in a company press release:

SBM welcomes the conclusion of all discussions with the Dutch and U.S. authorities. We have been open, transparent and accountable throughout this difficult process which has addressed issues from a past era. We can now focus on the future, secure in the knowledge that we have put in place an enhanced compliance culture which embeds our core values.

This optimism regarding the future may have been premature. Following reports of the settlement, Minister Jorge Hage, then Brazil’s Comptroller General of the Union, announced that an inquest launched in April was to be followed by a full-blown investigation. He further expressed the view that a resolution in Brazil would be far more expensive for SBM given the value - 20 billion reais - of the Brazilian contracts at issue. Indeed, media in Brazil have been regularly reporting on aspects of various investigations of SBM, and the status of official inquiries related to the company is highly fluid and evolving.

With respect to the Dutch settlement, what is notable was the willingness of the Openbaar Ministerie, at least in this instance, to accept a non- criminal resolution as a means of addressing the country’s anti- corruption objectives. That resolution, however, included a substantial financial payment, notwithstanding that the company self-initiated (and self-disclosed) its investigation. Meanwhile, the DOJ, which has long used settlements as a means of “extract[ing] compliance reforms from companies,” chose to abandon its own probe, likely due to the strong domestic-enforcement  outcome in the Netherlands and the possible lack of provable U.S. nexus. Leslie Caldwell, Assistant Attorney General of the DOJ’s Criminal Division, has indicated, for example, that the United States may choose not to prosecute when “the center of gravity… is in another country.” But SBM, a long-time partner of Brazilian state- controlled oil firm Petrobras, now faces the prospect of having to pay another substantial financial penalty to a third enforcement agency, Brazil’s Office of the Comptroller General (“CGU”).

It is possible that the three SBM probes mark significant new directions for the three enforcement agencies involved. Where Openbaar Ministerie, the DOJ, the CGU, and other regulators go from here in their anti-corruption efforts will be matters on which the compliance community will be focusing in 2015 and beyond. At a minimum, the Netherlands’ resolution and the related matters highlight the increasing potential for high-impact parallel anti-corruption investigations and resolutions by multiple affected countries.

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By Debevoise & Plimpton LLP | October 28th, 2014

By Sean Hecker, Andrew M. Levine, Bruce E. Yannett, David Sarratt and Blair R. Albom

This article is extracted from Debevoise & Plimpton LLP’s FCPA Report.

A company’s willingness to cooperate in the investigation of its agents has long been one of several factors that federal prosecutors openly consider under guidelines issued by the United States Department of Justice (“DOJ”) when determining whether (and how much) to award a company cooperation credit during a government investigation.[1] Until recently, however, corporate cooperation analysis appeared to focus more on a company’s voluntary disclosure of corporate malfeasance and less on the assistance it proffered against individual employees who were potentially responsible for the misconduct.  Now, amid increasing public criticism regarding the perceived dearth of individual prosecutions following the 2008 financial crisis, government officials are putting new emphasis on a company’s efforts to cooperate in the investigation and prosecution of culpable individuals.

As we discuss below, this new focus could have a number of important implications for companies and individuals involved in internal investigations.  A more adversarial and mistrustful relationship between companies and their employees may slow the pace of internal inquiries, increase their corresponding cost and complexity, even in cases in which no wrongdoing is found, and potentially reduce the quality of investigative findings.  On the other hand, a focus on individual prosecutions – particularly in the FCPA context, in which the government is required to prove willfulness for criminal violations – may restore a useful check on the government’s authority, in contrast to the distorted results sometimes reflected in compromises with organizational defendants that cannot sensibly risk the collateral consequences of litigation on a criminal matter.

I.       REMARKS BY PRINCIPAL DEPUTY ASSISTANT ATTORNEY GENERAL MARSHALL L. MILLER

Marshall L. Miller, Principal Deputy Assistant Attorney General for the Criminal Division of the DOJ, addressed the attendees of a Global Investigations Review conference held on September 17, 2014.  The primary focus of Miller’s remarks was to stress the importance of companies obtaining and providing evidence against culpable individuals in order to secure credit for cooperation under the DOJ’s Principles of Federal Prosecution of Business Organizations, also known as the “Filip memorandum.”[2] To illustrate his points, Miller highlighted a number of recent FCPA investigations, including the BizJet, Maurubeni, and PetroTiger cases, though his remarks were not limited to the FCPA context.

As Miller explained, the Filip memorandum lists nine considerations, often referred to as “Filip factors,” that prosecutors should assess in determining whether to bring criminal charges against a company. The fourth Filip factor instructs prosecutors to consider both “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.”[3] Miller noted that, too often, companies focus on the first prong of this factor and give “short shrift” to the second, which he described as “the heart of effective corporate cooperation.” Miller underscored that company’s “willingness to provide relevant information and evidence and identify relevant actors within and outside the corporation, including senior executives.”[4] The eighth Filip factor “reinforce[s]” this point, directing prosecutors to assess cooperation credit in light of “the adequacy of the prosecution of individuals responsible for the corporation’s malfeasance.”[5]

In no uncertain terms, Miller warned his audience to “expect that a primary focus [of the DOJ’s evaluation of any Filip factor presentation] will be on what evidence you uncovered as to culpable individuals, what steps you took to see if individual culpability crept up the corporate ladder, how tireless your efforts were to find the people responsible.”  As Miller “blunt[ly]” explained:

If you want full cooperation credit, make your extensive efforts to secure evidence of individual culpability the first thing you talk about when you walk in the door to make your presentation.

Make those efforts the last thing you talk about before you walk out.

And most importantly, make securing evidence of individual culpability the focus of your investigative efforts so that you have a strong record on which to rely.

Miller went so far as to compare organizations conducting an internal investigation to cooperators in an organized crime case, noting that mob cooperators do not receive credit for disclosing merely their own criminal conduct.  Rather, they must offer testimony or other evidence against their co-conspirators to be eligible for sentencing reductions.

Miller also noted that prosecutors intend to “pressure test” internal investigations by conducting their own parallel investigations.  In doing so, Miller said, the DOJ will coordinate closely with foreign law enforcement and will not hesitate to employ aggressive investigative techniques “that may not have been used frequently enough in white collar cases in past years,” such as “wiretaps, body wires, physical surveillance, and border searches.”

Notably, Miller singled out one common issue for multinational companies in conducting an internal investigation – navigating foreign data security laws – as a source of frustration for prosecutors.  Miller said that the DOJ would view with particular skepticism a company’s claimed inability to gather foreign documents due to foreign data protection laws, citing the DOJ’s “deepening relationships with foreign governments and growing sophistication and experience in analyzing foreign laws.” Miller warned that companies place their cooperation credit at risk if they use “inaccurately expansive interpretations of foreign data protection laws” to shield potentially culpable individuals or other evidence of misconduct.

Contextualizing the importance of cooperation efforts against individuals, Miller stated that DOJ’s publicly-announced declination of charges against Morgan Stanley in 2012 was in part motivated by the firm’s identification of, and efforts to secure evidence against, the individual executive responsible for the misconduct, Garth Peterson, who ultimately pleaded guilty to FCPA-related conspiracy violation for knowingly violating Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official.  By contrast, Miller cited the charges brought against BNP Paribas and Credit Suisse earlier this year as examples of how “the lack of timely and complete cooperation,” which “frustrated the pursuit of individual prosecutions,” can be “one of the tipping points” leading to charges against an organization.

II.        A SHIFT IN EMPHASIS

Miller’s address appears to reflect a larger, DOJ-wide shift in emphasis on the importance of individual prosecutions in the corporate criminal context, particularly in response to public criticism of prosecutors’ failure to hold corporate executives responsible for perceived corporate malfeasance in the aftermath of the financial crisis.  Miller’s remarks were reinforced by other government officials in recent speeches, including United States Attorney General Eric Holder, and Leslie Caldwell, Assistant Attorney General of the DOJ’s Criminal Division.

In an address given on the same day as Miller’s, Holder spoke about the importance of individual prosecutions in the financial fraud context.  Acknowledging that the dearth of such prosecutions “has been a source of frustration for the public for a long time,” Holder assured his audience that “[d]espite the growing jurisprudence that seeks to equate corporations with people, corporate misconduct must necessarily be committed by flesh-and-blood human beings.”[6] Holder emphasized that “wherever misconduct occurs within a company, it is essential that we seek to identify the decision-makers at the company who ought to be held responsible.”[7]

Similarly, in an early September interview in which she discussed the guilty plea by BNP Paribas to criminal sanctions violations, Caldwell emphasized that cooperation credit required full disclosure of evidence implicating individuals responsible for corporate misconduct: “Just as we would not allow an individual cooperator, who’s a member of a conspiracy, to get credit at sentencing if he didn’t implicate other conspirators, we want companies to know they will not get credit for cooperation when they fail to provide full, factual information that’s at their disposal about culpable individuals.”[8]

III.       POSSIBLE IMPLICATIONS FOR INTERNAL INVESTIGATIONS

Requiring a company to focus its investigative efforts on securing evidence of individual culpability in order to share such evidence with the DOJ could have significant effects on the tenor, pace and reliability of internal investigations.  Most immediately, the DOJ’s emphasis on corporate assistance in individual prosecutions may have a chilling effect on communication between employees and investigators during the course of an internal inquiry.  Although the potential for a conflict of interest between a company investigating potential misconduct and the employees who may be responsible for that conduct is often present, employees who view the company as starting with a strong incentive to identify potential individual culprits may be reticent to be fully forthcoming during interviews by counsel.

Relatedly, the perception of an adverse relationship between a company and its employees may lead employees to request separate counsel more often and at earlier stages of the investigation, irrespective of whether a conflict truly exists.  The precautionary addition of separate counsel for more witnesses will necessarily slow the pace and increase the cost of internal inquiries, even for those in which no wrongdoing is found.  For those witnesses who do not seek separate representation, investigating attorneys will be well advised to be vigilant in providing Upjohn warnings to make clear that the interests of the company and the employee may diverge.

An atmosphere of mistrust can also have a detrimental effect on the quality of the information gathered in the investigation.  Indeed, full and voluntary cooperation by employee witnesses is essential for a company to conduct successfully an internal investigation and respond effectively to any subsequent government inquiries, as well as to develop and implement a viable set of remedial measures.  One way to encourage otherwise reluctant employees to cooperate is through the use of corporate cooperation agreements that, among other things, release employees from corporate liability in exchange for their cooperation.[9] Although such agreements cannot (and should not) provide assurances that a company will not bring an employee’s conduct to the attention of the government, they nevertheless can provide incentives and protections that may be sufficiently encouraging in some cases.  The use of such agreements may be all the more necessary in light of the DOJ’s recent statements.

IV.       THE BENEFITS OF MORE INDIVIDUAL PROSECUTIONS

Putting aside the potential negative corporate cultural consequences and the additional hurdles that may be imposed in the context of corporate investigations, the government’s focus on individual prosecutions could yield some welcome change.  Charges against individuals are more likely to result in adversarial proceedings, judicial review, and trials before a jury, all of which may have a beneficial effect on the development of the law.  Recent experience shows that companies are often willing to admit wrongdoing as a compromise with the government even when there are no individual employees against whom the government could prove a criminal violation.[10] As our colleague Matthew E. Fishbein has written elsewhere, “[b]y using their considerable leverage to induce companies to enter into settlements in increasingly marginal cases and forcing them to admit to egregious conduct to settle charges that likely would not survive a legal challenge or be proved to a jury, prosecutors have created a situation in which the public is deceived into thinking that the individuals involved in corporate criminal conduct are receiving a free pass.”[11] Although the Attorney General has recently suggested lowering (or eliminating) the standard of criminal intent required in certain financial services contexts,[12] the FCPA expressly falls at the other end of the spectrum, requiring that the government prove a willful violation in any individual prosecution.[13]

In light of that higher standard, we do not expect to see a flood of individual FCPA prosecutions.  Nor do recent charging statistics suggest that a marked shift toward the prosecution of individuals is underway.[14] Moreover, Miller did not point to specific shortcomings in the ways that well-represented companies commonly conduct internal FCPA inquiries (other than his reference to overbroad interpretations of foreign data privacy laws).  Whether the recent statements by DOJ officials are primarily a response to public criticism or represent a true shift in prosecutorial priorities remains to be seen.  This will be an issue to watch in the coming months.

Sean Hecker, Andrew M. Levine, and Bruce E. Yannett are partners, David Sarratt is a counsel, and Blair R. Albom is an associate at Debevoise & Plimpton LLP’s New York office.  They are members of the Litigation Department and White Collar Litigation Practice Group.


[1] United States Attorneys’ Manual § 9-28.000 et seq. (2008), https://www.justice.gov/sites/default/files/opa/legacy/2008/08/28/corp-charging-guidelines.pdf.

[2] Marshall L. Miller, Principal Deputy Assistant Attorney General, Criminal Division, DOJ, Address at the Global Investigations Review Live (Sept. 17, 2014), https://www.justice.gov/criminal/pr/speeches/2014/ crm-speech-1409171.html.

[3] United States Attorneys’ Manual § 9-28.300(A)(4) (emphasis added).

[4] Id. at § 9-28.700(A).

[5] Id. at § 9-28.300(A)(8).

[6] Eric Holder, Attorney General, Remarks on Financial Fraud Prosecutions at New York University School of Law (Sept. 17, 2014) [hereinafter “Holder Remarks”], https://www.justice.gov/opa/speech/attorney-general-holder-remarks-financial-fraud-prosecutions-nyu-school-law; see also Client Alert, “Provocative DOJ Proposal Aims to Hold Financial Services Executives Criminally Liable, Even Absent Criminal Intent,” September 22, 2014, https://www.debevoise.com/clientupdate20140922b.

[7] See Holder Remarks, note 6, supra.

[8] Tom Schoenberg and Greg Farrell, “Enron Buster is Back at Justice and Taking Aim at Real People,” Bloomberg News (Sept. 12, 2014), https://www.bloomberg.com/ news/2014-09-12/enron-busting-godzilla-aids-government-s-hunt-for-crime.html#disqus_thread.

[9] See Michael B. Mukasey and Helen V. Cantwell, “Encouraging Employee Cooperation in Internal Investigations,” New York Law Journal (Apr. 15, 2013).

[10] See Matthew E. Fishbein, “Why Individuals Aren’t Prosecuted for Conduct Companies Admit,” New York Law Journal (September 19, 2022).

[11] Id.

[12] Client Alert, “Provocative DOJ Proposal Aims to Hold Financial Services Executives Criminally Liable, Even Absent Criminal Intent,” September 22, 2014, https://www.debevoise.com/clientupdate20140922b.

[13] See 15 U.S.C. § 78dd-2(g)(2)(A).

[14] FCPA Update, January 2014, Vol. 5 No. 6, at 3.

By Debevoise & Plimpton LLP | September 4th, 2014

By Paul R. Berger, Sean Hecker,  Andrew M. Levine,  Steven S. Michaels and  Marisa R. Taney

Introduction

In the realm of FCPA enforcement, where the vast majority of cases are settled before the filing and litigation of formal charges, it is often hard to compare the outcomes of early and eve-of-trial or post-trial settlements in any meaningful way. The Noble case, however, provides a rare opportunity to engage in such a comparison, not only because it was litigated by the SEC farther than almost any other FCPA case has been, but also because it involved both pre-and post-litigation settlements for individual defendants based on charges arising out of the same series of events.

In February 2012, the U.S. Securities and Exchange Commission (“SEC”) charged three executives of Noble Corporation with violating various provisions of the FCPA and related laws in the course of their interactions with public officials in Nigeria’s energy sector. One of these defendants, Thomas O’Rourke, promptly settled with the SEC, accepting permanent injunctions against future violations as to every count on which he was charged, and agreeing to pay a $35,000 civil penalty.

The remaining individual defendants, Mark Jackson and James Ruehlen, decided to litigate. On July 2, 2022 – less than a week before trial was to start and after more than two years of litigation – the SEC settled with these two defendants. Although Jackson and Ruehlen agreed to be enjoined from future violations of the books and records provision of the FCPA, the settlements in their matters were notable in that the vast majority of the charges in the initial complaint, including the bribery charges, were conspicuously absent from the settlements, and no monetary penalties were imposed.

Although the Noble case offers just one data point, the outcomes for the three defendants raise important questions about both the difficulties of litigating these types of cases for the SEC and the potential advantages of declining pre-trial settlement for would-be defendants. In addition, the SEC’s litigation strategy in these cases highlights some possible problems with the expansive interpretation of the FCPA that the SEC and the Department of Justice (“DOJ”) have advanced in recent FCPA cases. These problems, highlighted in the District Court’s refusal to accept the SEC’s interpretation on certain key issues, such as the scope of the facilitation payments exception, as well as the concrete impact of the U.S. Supreme Court’s Gabelli decision (133 S. Ct. 1216 (2013)) in gutting large portions of the SEC’s claims for penalty relief, will doubtless affect future litigation, as well as the “market” for SEC (and in certain respects, DOJ) settlements for years to come. But at the same time, the SEC’s losses on these key issues, which drove the favorable settlements with Jackson and Ruehlen, could well incentivize the SEC to dig deeper, and earlier, for the evidence needed to sustain its burdens in FCPA matters.

Background of the Noble Case

In the Noble case, Noble Drilling (Nigeria) Ltd. (“Noble-Nigeria”) was accused of bribing Nigerian customs officials in exchange for the grant of what the SEC alleged were illegitimate Temporary Import Permits (“TIPs”) for Noble’s drilling rigs.

According to the SEC’s original complaint, Noble-Nigeria made illegal payments both to obtain false paperwork for new TIPs and to extend its existing TIPs – which normally are obtained through an application process and permit temporary use of Nigerian resources for one year, with three discretionary six-month extensions – more than three times without moving the rigs out of, and then back into, Nigerian waters, as otherwise would be required. These allegedly unlawful TIPs permitted Noble-Nigeria to operate its offshore drilling rigs without paying duties associated with permanent import status being applied to its drilling equipment and without having to shut down its operations and exit Nigerian waters while applying for a new TIP.

In addition to the charges brought by the SEC (and also the DOJ) against Noble-Nigeria’s parent, Noble Corporation, the SEC also brought charges against three executives: Mark Jackson, who held various positions at the Noble Corporation, including that of Chief Executive Officer, Chief Operations Officer, Chief Financial Officer, and President; James Ruehlen, director and division manager of Noble- Nigeria; and Thomas O’Rourke, at different times director of internal audit and controller.

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By Debevoise & Plimpton LLP | June 20th, 2014

By Jyotin HamidJonathan R. Tuttle, Ada Fernandez Johnson and Ryan M. Kusmin

This week, the U.S. Securities and Exchange Commission (“SEC”) brought its first case under the whistleblower anti-retaliation provision of Dodd-Frank, alleging that an investment adviser, Paradigm Capital Management, Inc., and its owner engaged in prohibited principal transactions and then retaliated against an employee who reported prohibited principal transactions at the firm to the SEC. Both Paradigm and its owner, Candace Weir, settled with the SEC, without admitting or denying the SEC’s allegations, agreeing to cease and desist from committing future violations of the Securities Exchange Act and Investment Advisers Act and to pay $2.2 million in disgorgement and civil penalties.

This enforcement action and recent statements from the SEC, serve as an important reminder to employers, including public and private companies, private equity and hedge fund advisers, and other SEC- regulated firms, that the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which became law in 2010, imposed some important changes in relation to whistleblower protection. In addition to creating the financial incentives (up to 30 percent of monetary sanctions) for whistleblowers that report securities law violations to the SEC, Dodd-Frank also enhanced anti- retaliation protections for whistleblowers. Specifically, Exchange Act Section 21F(h) prohibits an employer from discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating against a whistleblower in the terms of employment because the whistleblower engaged in protected whistleblowing activities, including providing information to the SEC related to a violation of the securities laws. The Paradigm case demonstrates that the SEC will not hesitate to pursue actions against companies that are viewed as retaliating against alleged whistleblowers.

THE UNDERLYING MISCONDUCT

According to the SEC Order, Candace Weir caused Paradigm to engage in principal transactions with C.L. King & Associates, Inc., a broker-dealer also owned and controlled by Weir, “without providing effective disclosure to, or obtaining effective consent from, PCM Partners L.P. II, a hedge fund client advised by Paradigm.” Weir also owned and controlled an entity that was the general partner of PCM Partners. From 2009-2011, Paradigm—in an effort to reduce the tax liability of its client PCM Partners—allegedly engaged in 83 principal transactions in which Paradigm sold securities with unrealized losses held by PCM Partners to a proprietary account at C.L. King. Occasionally, these securities would later be repurchased for PCM Partners. The trades were executed at the market price, and there were no commissions or markups charged, but Paradigm purportedly never provided written disclosure to, or obtained consent from, PCM Partners in violation of Section 206(3) of the Investment Advisers Act. The SEC also noted that a Conflicts Committee established at Paradigm to review and approve principal transactions, in an attempt to comply with the disclosure and consent requirements, could not do so because one of its two members also served as C.L. King’s Chief Financial Officer, which put him in a conflicted position.

RETALIATION AGAINST THE WHISTLEBLOWER

In March 2012, the then-head trader at Paradigm made a whistleblower submission to the SEC, informing them about the principal transactions at Paradigm and, in July 2012, the whistleblower informed Weir that he had made the submission to the SEC. According to the SEC, on the next day, the whistleblower was informed that he would be relieved of his day-to-day trading and supervisory responsibilities while Paradigm investigated his actions. He was also asked to work off-site and prepare a report detailing his allegations made to the SEC and facts used to support them. A week later, Paradigm purportedly told the whistleblower that the employment relationship was “irreparably damaged” and sought to come to an agreement on severance. Paradigm and the whistleblower were unable to come to an agreement, so in August 2012, the whistleblower sought to return to his old position as head trader. Paradigm did not permit that, but allowed him to return to the office, albeit not on the trading floor, and instructed him to continue to investigate potential wrongdoing at the firm. A month after the whistleblower informed Weir of his report to the SEC, the whistleblower resigned.

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By Debevoise & Plimpton LLP | April 3rd, 2014
By Sean Hecker, Andrew M. Levine and Philip Rohlik

On March 17, 2014, the United States Department of Justice (“DOJ”) issued its first opinion of 2014 (the “Opinion” or “Opinion Release 14-01”) under its Opinion Release Procedure. The requestor, “a United States financial services company and investment bank” (“Requestor”), was faced with the problem of what to do when its foreign business partner was appointed to a government position, thereby becoming a “foreign official” under the FCPA.

Requestor proposed to do three things. First, Requestor would institute controls to avoid conflicts of interest and separate the individual who had become a foreign official from the operation of the business. Second, Requestor would terminate its business relationship with its partner in a transparent and commercially reasonable manner (which involved buying shares from the partner). Finally, Requestor would receive assurances from the partner and institute other controls in order to prevent lingering conflicts of interest. Eight months after submitting its initial request, and after significant back-and-forth, the DOJ informed Requestor that it “does not intend to take any enforcement action.”

Although the summary above can be seen as providing guidance, Opinion Release 14-01 ventures no farther than previous guidance and likely reflects a conservative approach. Although a business partner becoming a “foreign official” is not an everyday occurrence, it is not unprecedented. Indeed, a prior Opinion Release (Opinion Release 00-01) dealt with a very similar situation. Given the previous release, it is not clear why Requestor sought additional guidance, or why it took eight months to receive an answer. Moreover, during those eight months, the DOJ appears to have conducted a rather rigorous review of the proposed transaction, apparently going so far as to double check an outside auditor’s valuation. As discussed in greater detail below, the Opinion also contains novel qualifications to the no-action conclusion. Although it is possible to speculate as to the reason of the Opinion’s conservatism and unusual qualifications, without additional information it is difficult to see how the Opinion provides much new “non-binding guidance to the business community.”

Opinion Release 14-01

In 2007, Requestor, through a subsidiary, purchased a majority interest in a foreign financial services company, from a “Foreign Shareholder” and others. An individual (“Foreign Shareholder”) remained as chairman and later served of CEO of the company. As part of the purchase, Requestor and Foreign Shareholder agreed to a five year lock-in period, prohibiting Foreign Shareholder from selling his interest, with the proviso that if Foreign Shareholder was appointed to high government office, Requestor would purchase his shares according to a contractually agreed-upon formula based on the company’s average net earnings. At the end of 2011, Foreign Shareholder was appointed to a high- level position in the country’s central monetary and banking authority. The banking authority did not directly regulate the company, but the authority was a long-term client of Requestor for investment banking and asset management services.

When Foreign Shareholder became a “foreign official,” he ceased to have any operational role in the company and recused himself from any decision concerning awards of business to the company, the Requestor, and their affiliates. As a result of losses due to the financial crisis, the contractually agreed-upon formula to determine the price of Foreign Shareholder’s shares returned a value of zero, even though the company was an ongoing concern. Because this was not the intent of the parties and would have resulted in litigation and other potential risks, the parties agreed to have a “highly regarded, global accounting firm” determine the value of the shares. Foreign Shareholder also received his 2011 bonus, severance payment and accrued pension contributions. The value of the shares and other compensation is not provided in the Opinion.

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By Debevoise & Plimpton LLP | February 10th, 2014

By Lord Peter H. Goldsmith QCKarolos Seeger, Matthew Howard Getz and Robin Lööf

On 31 January 2014, following a consultation process which started on 27 June 2022 and closed on 6 October, the UK’s Sentencing Council (the “Council”) published the final version of the sentencing guideline for corporate offenders convicted of fraud, bribery and money laundering (the “Guideline”), the UK’s first ever sentencing guideline aimed specifically at corporate offenders. The Guideline does not materially differ from the draft version contained in the consultation and which formed the subject of a Debevoise Client Update dated 1 July 2013. The Guideline will apply to all corporate offenders sentenced from 1 October 2014, regardless of when the offences were committed or the date of the conviction.

The Council is the independent body responsible for developing guidelines for courts in England & Wales to use when passing sentence. Courts have a statutory obligation to follow the Council’s guidelines unless “satisfied that it would be contrary to the interests of justice to do so”.

COMPENSATION AND CONFISCATION

Under the Guideline, a sentencing court’s first consideration is whether to make a compensation order to victims for any injury, loss or damage suffered. Such an order should be given priority over any other financial penalties. It was already recognised that compensation was an important part of sentencing for corporate offending. For instance, in September 2009, Mabey & Johnson Ltd, the steel bridging group, was ordered to pay £658,000, £139,000 and £618,000 to Ghana, Jamaica and Iraq respectively by way of reparations for the effects of corrupt payments.

If asked for by the prosecution or deemed appropriate by the court, the court should also consider, before turning to the fine, whether to make a confiscation order under the Proceeds of Crime Act 2002. Confiscation is seen as distinct from any punishment and solely concerned with depriving offenders of any ill-gotten gains. The UK’s confiscation regime has often been referred to as “draconian”, but as far as corporate offenders are concerned, this has partly been a reflection of the relative leniency of the sentencing regime. Under the Guideline, however, the punishment element of any sentencing, i.e., the fine, can often be expected to be far larger than the confiscation order. While the amount ordered by way of confiscation should inform the sentencing court’s assessment of the totality of the fine (see below), its share of any total amount a corporate offender can expect to pay is likely to be considerably smaller than at present.

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