Over the past year, building off the 2015 Yates Memorandum, which had emphasized that holding individuals accountable for corporate misconduct has an important deterrent effect and incentivizes appropriate change in the way businesses behave, the Fraud Section of the U.S. Department of Justice (DOJ) has significantly increased individual prosecutions. The Fraud Section charged more individuals in 2018 than in previous years. The Foreign Corrupt Practices Act (FCPA) unit in particular emphasized its “clear commitment to holding individuals accountable for transnational corruption.” (DAAG, Matthew S. Miner, Remarks at 5th Annual GIR New York Live Event, Sept. 27, 2018).
Thirty-one individuals were charged in 2018 as a result, 18 of whom pleaded guilty. (See U.S. Department of Justice, Criminal Division, Fraud Section Year in Review, 2018 at 5). While the Yates Memorandum does not specifically apply to the U.S. Securities and Exchange Commission (SEC), the SEC noted in the Division of Enforcement’s 2018 Annual Report that “individual accountability is critical to an effective enforcement program and is one of the core principles of the Division of Enforcement.”
Perhaps an unintended consequence of the increased focus on individual prosecutions is the development of FCPA case law. Given that individuals are more likely to fight a government prosecution, the courts have been given an opportunity to weigh-in and interpret key provisions of the FCPA. Prior to this, the majority of cases against corporations settled and many of the statute’s terms were undefined by the courts, leaving parties to rely on often vague language contained in highly negotiated settlement documents. Issues such as the FCPA’s extraterritorial application and the scope of civil disgorgement were often glossed over in settlement agreements or were susceptible to the DOJ’s expansive interpretation.
Partially in recognition of this fact, in November 2012, the DOJ and the SEC published a “Resource Guide” to the FCPA (the FCPA Resource Guide), which set forth many of the same broad interpretations that practitioners had seen in prior settlements. However, with the rise of individual prosecutions and the resulting court challenges to prosecutions, courts have now weighed-in on some of these key issues. Notably, in connection with both the territorial application of the FCPA and disgorgement, courts have rejected the interpretation set forth by the DOJ and SEC in the FCPA Resource Guide.
If the DOJ and SEC continue to focus on individual prosecutions, we can expect more clarity from the courts on these issues and others over time, which, in the long run, is beneficial for FCPA practitioners and those conducting business internationally.
The DOJ has long taken an expansive view of the territorial reach of the FCPA. Indeed, the FCPA Resource Guide specifically stated that foreign nationals and companies may be criminally liable for conspiring or aiding and abetting a FCPA violation even if they did not take any act in furtherance of the violation within the territory of the United States. However, in August of 2018, in a challenge by an individual defendant, the U.S. Court of Appeals for the Second Circuit dealt a blow to the DOJ’s expansive reading.
In United States v. Hoskins, 902 F.3d 69 (2d Cir. 2018), the Second Circuit considered whether an individual may be held liable for conspiring or aiding and abetting a U.S. company in a violation of the FCPA if that individual is not in the categories of persons directly covered by the statute. As the Hoskins court put it, the question posed in the case is whether “a person can be guilty as an accomplice or a co-conspirator for an FCPA crime that he or she is incapable of committing as a principal?”
The Second Circuit concluded that, because the individual did not commit the actions in question while in U.S. territory and did not otherwise fall within the categories of persons directly covered by the statute, the individual was beyond the extraterritorial reach of the FCPA, and the government cannot use conspiracy and aiding-and-abetting liability to expand the statute’s territorial limitations.
Thus, the Second Circuit rejected the DOJ’s long-standing view regarding the extraterritorial reach of the FCPA. The court, however, left open the possibility that that the government may still prosecute foreign nationals as agents of those that fall within the categories of persons enumerated in the statute.
The Second Circuit’s ruling is significant because it rejects a long-held view by the DOJ that it can charge foreign nationals under an aiding and abetting or conspiracy theory and gives practitioners leverage to push back on the DOJ’s expansive view of FCPA jurisdiction. The more significant impact may come on remand in the lower court, since presumably the court will add more clarity on the type of relationship necessary to establish that a foreign national who never enters the United States nor works for a U.S. company is an agent for purposes of falling within the coverage of the FCPA. Trial is currently scheduled for September 2019, with the government pursuing, inter alia, the agency theory.
The U.S. Supreme Court similarly dealt a blow to the SEC practice of seeking disgorgement without regard to any statute of limitations. In June 2017, it issued a unanimous decision in Kokesh v. SEC, 137 S.Ct. 1635 (2017), holding that disgorgement sought by the SEC is subject to the five-year statute of limitations set forth in 28 U.S.C. §2462. For many years, the SEC has sought both civil monetary penalties and disgorgement of unlawful gains from those alleged to have violated federal securities laws.
While civil monetary penalties are subject to a five-year statute of limitations under the Supreme Court’s 2013 decision in Gabelli v. SEC, 568 U.S. 442 (2013), the SEC could seek disgorgement of a defendant’s wrongful gains regardless of timing. For example, in 2015, Goodyear Tire & Rubber Company was ordered to disgorge more than $14 million based on actions that took place between 2007 and 2011. But SEC claims for disgorgement will no longer be able to reach so far back in time.
The Kokesh decision has the potential to significantly limit the financial sanctions at issue in SEC enforcement actions going forward, especially in the context of the SEC’s enforcement of the FCPA. Disgorgement in FCPA cases tends to be large, and the underlying conduct often spans a number of years—often beyond the five-year statute of limitations. Indeed, the SEC estimates that the Kokesh decision may cause it to forego up to approximately $900 million in disgorgement in connection with currently filed cases. See SEC Division of Enforcement’s 2018 Annual Report, at 5.
In light of this decision, we may begin to see a decrease in the length of time that the SEC takes to resolve actions. Moreover, defendants negotiating settlements will now have more leverage and should keep the court’s ruling in mind when considering requests for tolling agreements and its pursuit of injunctions.
We are beginning to see the impact of the Kokesh decision on pending cases and a willingness to extend Kokesh beyond its holding. In July 2018, for example, Judge Nicholas Garaufis of the Eastern District of New York dismissed as time-barred the SEC’s FCPA charges against the two former executives of Och-Ziff Capital Management, Michael Cohen and Vanja Baros, arising out of multiple alleged schemes to make improper payments to various officials in Africa. Included in the dismissal was the SEC’s request for an injunction ordering the defendants to refrain from any future violations of the securities laws.
Going beyond what the Supreme Court found in Kokesh, Judge Garaufis found that the injunction was subject to the five-year statute of limitations because it would serve as a penalty. The court’s ruling in this regard adds to the chorus of voices that have considered the applicability of §2462 to injunctive relief. Some courts have permitted injunctions for conduct occurring outside the five-year statutory of limitations, while others, like the Eastern District, have not. See SEC v. Quinlan, 373 F. App’x 581 (6th Cir. 2010) (allowing injunction); SEC v. Collyard, 861 F.3d 760 (8th Cir. 2017) (same); SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016) (same). Thus, this is another issue likely to be decided as more individuals challenge the SEC’s efforts to seek injunctive relief under §2462.
While both the DOJ and the SEC view individual prosecutions as a key to driving proper business behavior, as can be seen by these recent decisions, the perhaps unintended consequence is that having more individuals in the mix will allow for greater court scrutiny of the DOJ’s and SEC’s position concerning certain key elements of the statute. Indeed, courts have already started to reject the DOJ’s and SEC’s expansive interpretation of the statute as set forth in the FCPA Resource Guide.
As more individuals challenge charges, there will be a continued uptick in the number of issues that reach the courts and, consequently, more clarity around the application of the FCPA. As a practical matter, this will give practitioners more tools in their toolbox to defend criminal defendants and more clarity for those corporations operating internationally.
Martin S. Bloor is a member at Cozen O’Connor.