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White-Collar Defense

April 2013

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White-Collar Defense August 2012

After much anticipation, counsel has received new insight into the government's interpretation of the Foreign Corrupt Practices Act thanks to a resource guide it released last fall. Our expert panelists from Northern and Southern California discuss the guide's impact as well as the falling quality of internal investigations, and vetting client funds in a post-Madoff world. They are Eric L. Dobberteen of Clark & Trevithick; Robert Humphries of Akin Gump Strauss Hauer & Feld; Matt Jacobs of Vinson & Elkins; Courtney Linn of Orrick, Herrington & Sutcliffe; and Doug Sprague from the U.S. Attorney's Office in Northern California. The roundtable was moderated by California Lawyer and reported by Cherree Peterson of Barkley Court Reporters.

Moderator: The Resource Guide to the U.S. Foreign Corrupt Practices Act (FCPA) (see: www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf) was released in November 2012. What clarity or questions have resulted from the new guidance?

Dobberteen: I was happy to see it. I now handle white-collar issues for a firm with a lot of smaller corporate clients in the $5 million to $50 million revenue range. More and more, a lot of these clients are engaged in international trade. These smaller companies aren't as in tune with the FCPA as perhaps the bigger companies. They don't have in-house counsel. So the new guidance, while it's a long document, certainly gives clients like mine more concrete examples and hypotheticals that will help their compliance officers - assuming they even have them - better understand how to develop and maintain a compliance program. I'm even going to try to get my client base to actually read the 120-page document. That length may be a downside, but I like having something more than just generalized policy statements.

Humphreys: The guide provides very useful information to companies, large and small, to help create compliance programs or refine the ones that they have. While the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have interpreted the FCPA as broadly as possible, there are hypotheticals in which even the government has concluded that certain payments or actions do not violate the FCPA. That's really helpful since so few of the legal issues surrounding the FCPA have been resolved by the courts. The guide may be long, but it's a lot better than trying to deduce the government's position from settlements and press statements over the course of many years.

The DOJ will probably get mileage out of it as well because they can say that companies are on notice of the government's view of the scope of the FCPA, and so cannot claim that the law is unconstitutionally vague. So it will be an important document for everyone and of definite value to defense lawyers.

Jacobs: There is nothing new in the resource guide in terms of policy or position compared to positions that the DOJ has taken in individual cases. On the other hand, there is always an issue in dealing with the government regarding the unpredictability of a prosecutor's reaction to a particular set of facts. Some prosecutors respond one way to a given set of facts and other prosecutors will respond entirely differently. So to the extent that the government is actually willing to commit to a position about how a certain set of facts will be viewed, the guide can be helpful.

However, it is worth noting that the government has taken a fairly aggressive position on certain issues in this document, particularly as it relates to jurisdictional foundations for the bringing of FCPA cases, and in particular what conduct the government believes has had an impact on U.S. commerce. But in an investigation or in a contested case, the government is just one party. Sometimes the government pretends that its pronouncements are the law, but some of the aggressive positions taken by DOJ in this document will need to be tested in a court of law. There is a danger that someone unfamiliar with this practice area would pick up this document and interpret it as if it's settled law. Frankly, this document is most helpful not for people who are practicing regularly in the white-collar or investigation space, but for clients or other partners who are dealing regularly with clients throughout the world who may be dealing with these issues, but do not have the FCPA experience as part of their normal practices. At Vinson & Elkins, for example, we have offices throughout Asia and the Middle East. It is very helpful to be able to say to our transactional partners, "Here's an official DOJ document that might be worth reading."

Linn: I agree with your point Matt [Jacobs] about the value of being able to predict the behavior of the government, especially where there are not many cases that go to trial or issues that get litigated. And it's not an area laden with regulations, so you don't have that guidance either. I also agree with Eric [Dobberteen]. From the government's point of view I see lots of upside. After Skilling v. United States (130 S. Ct. 2896 (2010)), and after the FCC lost the Fox Television case (FCC v. Fox Television Stations, Inc., 132 S. Ct. 2307 (2012)) on vagueness/inadequate notice grounds, having a guide that says, "this is what we think the law is and we're putting the industry on notice," has value to the government and very little downside. This isn't a document that went through the notice and comment process. The government is not bound to it.

Sprague: On that note, my comments today and certainly any opinions I express are my own, not those of the DOJ or any U.S. Attorney's office. I'm glad that the consensus seems to be that this was a very positive development and a very good document by the DOJ and the SEC. With roughly 130 pages of guidance, complete with definitions of legal terms, hypotheticals, in conjunction with what had existed for some time - the opinion letter process - people in various industries and their attorneys have many resources to determine how the DOJ might look at their conduct in a given area.

Matt [Jacobs] answered the question that he posed regarding whether the DOJ will be bound by these hypotheticals or will the individual prosecutors follow them. But as he said, a hypothetical that takes up five or six lines in a 130-page document and an answer that takes up about that much space, can't possibly encapsulate all the facts of that particular situation. Any good lawyer will be able to find distinguishing characteristics in the case that may help that particular client or entity in falling outside the reach of the FCPA or it may hurt. But overall, it sounds like based on the comments here a very positive development. Glad to hear it.

Moderator: Although, the Chamber of Commerce has had some members say it's not concrete enough.

Dobberteen: I know that some people wanted more specifics from the government, but I wasn't that surprised that the guide didn't offer the kind of specificity the Chamber of Commerce might have wanted. Having both prosecuted and now defending white-collar cases, I frankly didn't expect as much specificity as we got.

Linn: The law is still developing and as a result it would be hard for the government to articulate lots of bright lines of a kind the Chamber of Commerce might want. Just within the past four weeks from the Southern District of New York you've got two cases, Straub and Sharef, on a very important issue. They come out differently on an issue about when foreign nationals are subject to U.S. jurisdiction under the FCPA. It's really hard even for the government to predict how judges might behave in this area until more cases are litigated. ((SEC v. Straub, __ F.Supp.2d __, 2013 WL 466600 (S.D.N.Y.), SEC v. Sharef, __ F.Supp.2d __, 2013 WL 603135 (S.D.N.Y.).)

Moderator: Do you think the Straub or Sharef decisions are setting any sort of precedent?

Linn: The government has taken the aggressive position where if you're a foreign national and you do things purposely aimed at the United States, send a DHL package or something of that nature, then that kind of conduct could potentially bring you within the FCPA's reach. Straub supports this position. But Sharef comes out very differently on facts that were strong for the government. I'm sure the government thought it had a really good case in Sharef. Not that particular defendant, but some of his colleagues went to New York and Miami. And there were lots of other little facts like that that seemed to constitute purposeful availment or personal jurisdiction and yet that wasn't enough. So maybe we'll see the government retreat. In this document the government at least offers fallback positions, suggesting it will use the Travel Act, the money laundering statutes, and conspiracy and aiding and abetting charges to reach foreign nationals it couldn't otherwise reach through the FCPA directly.

Moderator: Doug [Sprague] do you think that jurisdiction is going to be more difficult to prove in an FCPA case because we have two outcomes in these cases?

Sprague: Not necessarily, but we're talking about two different things. One is guidance by the DOJ and SEC on what may or may not constitute violations of the FCPA. It has been mentioned DOJ can read the case law and offer guidance one way while courts may or may not agree. There's a case pending in the Eleventh Circuit, for example, concerning the definition of an instrumentality (United States v. Esquenazi, Case No. 11-15331 (11th Cir. oral argument set for week of May 20, 2013).) Of course attorneys are guided by case law in whether to bring cases. Policies also come into play. Before bringing a charge prosecutors will be quite familiar with internal DOJ policy as well as the case law in that field in their circuit. But if the suggestion is that the DOJ has its own opinion and will charge forward regardless of circuit precedent, that's not accurate.

Jacobs: It is important context that in the white-collar area the government's decisions are frequently not subjected to court scrutiny and review, at least not as quickly. The discussions about white-collar cases are driven by a basic fact that corporate criminal liability is created by the alleged unlawful acts of a single employee. Even if that employee is acting outside the scope of his or her authority, even if it's contrary to the policies of that corporation, as a matter of law, corporate criminal liability attaches to the company once that employee commits a crime. Therefore the government has enormous discretion about whether to charge a company. It's easier to charge a company than it is to charge an individual for that reason.

DOJ has given formal guidance about when it will and will not charge a corporation with a crime based on the acts of one or more employees. Indeed, every Deputy Attorney General has issued a slightly revised set of guidelines. But the reality is that the prosecutors in any given case have the ability to charge any company. The impact of being charged as a corporation can be enormous. The poster child for this is the Arthur Andersen prosecution. I was on the government side at that time as a prosecutor working on Enron matters (although I was not involved in the Arthur Andersen case), but the decision was made to charge Arthur Andersen. (Arthur Andersen LLP v. United States, 544 U.S. 696 (2005).)

Though the Supreme Court ultimately dismissed the substantive charges against Andersen, it was too late for the accounting firm because it disintegrated shortly after charges were filed. Any company that is doing major government contracting can be profoundly effected merely by the filing of charges, even if those charges turn out to be unsupportable. Sometimes prosecutors forget the enormous discretion and power they have. There is nothing I like less than a prosecutor who says his or her hands are tied by office policy - their job is to exercise reasoned discretion and judgment.

Dobberteen: If you're a government contractor, whether you have FCPA issues or not, an investigation can get you suspended. I've had clients who were more concerned with being suspended and debarred than they were about any ultimate charges. That's where you need a prosecutor who is willing to look at the entire picture and work with you.

Linn: That's probably a reason the guide refers to FCPA settlement agreements in the absence of a fully developed body of case law. It marshals FCPA settlement agreements and other documents in support of certain positions. And we should be cautious about drawing inferences about what the law is from settlement agreements. Companies settle cases for reasons that don't necessarily go to the merits of the government's claims.

Humphreys: The key stage in most white-collar cases is convincing prosecutors not to indict. Having the DOJ position clearly set out in this guidance document provides a valuable starting point for discussion. There's still plenty of opportunity to convince a prosecutor that just because the guidance document says something is illegal doesn't mean it necessarily is or that you can't win in court.

The guide frequently recommends self-disclosure of potential violations. But the guide is silent as to what impact voluntary disclosure has on a prosecution or enforcement decision and what they're looking for in the voluntary disclosure.

Moderator: How are developments in antitrust cartel enforcement, and in particular ongoing auto parts investigations, affecting the white-collar defense practice area?

Jacobs: The antitrust division has a number of very significant cases underway. This is one of the few areas where the government is affirmatively bringing in dollars into the coffers other than through tax collections, so the prosecutors have incentive to be very aggressive in these areas, and you can see that prison sentences for individuals and fines for corporations have radically increased over the last 10 to 15 years.

One of the important issues to be considered is the administration of the so-called Amnesty or Amnesty Plus programs. Frequently, the most culpable participants in a conspiracy escape punishment altogether. Also, at times it seems that in negotating resolutions, the government is just as motivated by the press release it wants to issue as by the extent of the wrongful conduct.

Humphreys: It's been my experience that the sooner you go in and do a deal, the better your sentence and if you wait, you pay more, regardless of your conduct or other mitigating circumstances. That may not always be fair, but experience shows that it is a very good enforcement tool. It gets people to come in and companies to cooperate.

Sprague: To pick up on the point about who's doing the internal investigations, recently some have noticed a difference in the quality of them or lack thereof. In the stock options backdating time period, for example, I sat through several reports from several different companies, sometimes more than one from various companies' lawyers, and the difference in quality was remarkable. Recently some prosecutors have opined about a lack of quality in internal investigations. Not only compared to the stock options backdating time period, but generally.

Jacobs: Doug [Sprague], are you saying that the quality generally was higher during the options backdating time period?

Sprague: Not necessarily. There were some excellent internal investigations and reports in the stock options backdating time period. There were also some mediocre and poor ones. Since then there certainly have been some reports that would fall into each of those categories. However, lately I've noticed more in the mediocre to poor category, in my opinion.

Jacobs: What is it that indicates to you that an internal investigation is mediocre or poor as opposed to good?

Sprague: Most of these reports are coming from former prosecutors or regulators with a vast amount of experience in these areas, be it DOJ, antitrust, SEC, or other regulatory entities. There are certain questions that people with that background should anticipate will be asked by the recipients of their presentations. One factor in the quality of an investigation is how many of those basic questions are they unable to answer without going back to the drawing board, sometimes repeatedly. Are there large troves of plainly relevant documents that were never reviewed? Are there large troves of plainly relevant documents that come up months later that the internal investigators apparently didn't know of at the time? Are some facts shaded or not revealed, thus possibly indicating an unfair bias to the investigation?

In sum, obvious questions unanswered or even not asked, relevant stones left unturned, relevant documents not reviewed or not even discovered, or unfair bias. Many investigations reflect an outstanding job of objectively distilling vast amounts of documents and witness information in a compressed time frame. Others appear not to. In the latter instances, is it fair to ask how cooperative the corporation is being, judging by the factors laid out in the DOJ policy?

Jacobs: What is your theory about why that is?

Dobberteen: The old "slip-it-by-the-prosecutor theory," maybe? This situation is always tough for a defense lawyer. Depending on when you come into the case, you'd like to do your internal investigation before you tell the prosecutor you're going to cooperate. And if your own internal investigation reveals serious problems, that's one reason you may want to hunker down, keep your mouth shut, and hope it works out. Frankly, I've done that, and sometimes it works and sometimes it doesn't.

Doug [Sprague], it sounds like you do give counsel a chance to go back to the drawing board, and that's useful. I was going to suggest maybe the attorney comes to you beforehand and says what are you looking for? But your answer assumes that he knows what you're looking for because he or she is quite experienced and knows what their problems are. I'm not stating anything other than the obvious defense counsel dilemma in dealing with AUSAs. But it is a difficult decision to make and sometimes it's your client that isn't helping you very much. And you can't drop a dime on your client in front of the prosecutor and say that information was withheld from you.

Jacobs: You've raised a very interesting question. The government expects a company to be cooperative. Our ethical obligation is to represent our clients, not to just do the work for the U.S. government as a matter of patriotic duty. Sometimes prosecutors lose sight of that. I have found it to be very helpful when the prosecutor is specific about the actual benefits to be conferred in connection with cooperation, or the consequences of failing to provide that cooperation.

In the options backdating cases, DOJ issued more than a hundred grand jury subpoenas. Those of us who had been prosecutors who had dealt regularly with DOJ felt that it was essential that the investigations be independent, thorough, complete, and reported candidly to the government. And those companies that didn't do independent investigations would face the wrath of the DOJ. Yet that didn't happen. Of the hundred-something subpoenas issued, the actual criminal cases brought can be counted on one hand. You had counsel and companies in that setting that did investigations that were not independent and which were in your own words "done poorly" and those companies never got charged and the counsel never faced repercussions. I think that changed the mind-set of a lot of defense lawyers and former prosecutors about what the government was going to require. So over the years, the carrot - what you get for cooperating - and the stick - what you get if you don't do the thorough job - has become less clear.

Sprague: Matt [Jacobs], are you saying some firms drew the conclusion that because certain internal investigations were not well-done during a time the government was focused on an apparent epidemic of stock options backdating - nationwide it was north of 200 cases - and those firms didn't face repercussions, that internal investigations do not need to be done well now?

Jacobs: No, I don't think I said that at all. I'm saying I think there are a lot of lessons that could be learned from stock options backdating. The government should not send out 100 to 200 subpoenas in one case without having pretty good evidence about what was going on in that company, because it triggers a lot of work, money, and distraction in the companies that are the recipient of subpoenas. I recall advising clients that you had to do an independent, thorough investigation or face the wrath of the DOJ. And I could see that plenty of counsel and their clients did not do that in the stock options area and no negative consequences followed for those counsel or companies. So that does give you pause about what was the government doing in those investigations. In the antitrust area, at least, the amnesty program is very clear about the benefits that will be conferred, at least regarding the first conspirator in the door of the Justice Department.

Humphreys: What makes the antitrust program work so effectively is that everyone knows what you get when you participate and disclose your wrongdoing. The antitrust division delivers on their promise to give you leniency when you're the first in and that is a huge motive. Companies want to come in and come in quickly. When you get into these other areas where you don't have that level of certainty, you have a more difficult decision. The government might be better off providing firm promises to companies that self-report, rather than keeping its options open.

Dobberteen: A DOJ antitrust lawyer recently made comments about the deteriorating quality of cooperation that they're seeing in antitrust cases. One would assume if you have amnesty, although you have to do your investigation before you get it, you would have an incentive to do a really good job. But even the antitrust division is complaining about this insufficient cooperation. I wonder if the government's idea of cooperation, now that we don't have to waive the privilege anymore in terms of taking our corporate clients in, has somehow generated a more stringent view of what cooperation is, in other words, has the government raised the bar since the easy access to information is now gone?

Linn: Part of the hazard a company faces when cooperating in antitrust investigation is that increasingly the company faces legal issues across multi-jurisdictions. A company can reach a compromise with the us, but that doesn't take care of Brazil, Korea, or Japan. The company faces numerous parallel proceedings-type issues that make it hard to really cooperate because you're not just dealing with AUSA Doug Sprague.

Moderator: What are some of the new trends around vetting the source of client funds in regard to attorneys fees, claw backs, and asset forfeiture?

Linn: It used to be that the white-collar defense bar viewed this as a problem for defense lawyers representing drug defendants. But then came the Madoff, Dreier, and Stanford cases and trustees and receivers who pursue very aggressive claw back theories. The law around issues such as who qualifies as a bone fide purchaser for value develops.

Attorneys are in a category of people who at least within the asset forfeiture world need to qualify as bone fide purchasers if they are to retain their fees in the face of an asset forfeiture claim. Recently, the case law has developed to the point where it's not sufficient any longer to take your client's word for it. In certain circumstances you're going to have to do more, make more inquiry, maybe even look at financial records and the like.

DOJ's policies were recently revamped to catch up with this trend. Those policies now guide prosecutors to seek the forfeiture of attorneys fees where they're paid in a civil case where the attorney had reasonable cause to know that they were from an unlawful source. The standard applied to attorneys representing criminal defendants is slightly higher to reflect Sixth Amendment concerns. But it's a problem - the problem of attorneys fees, forfeitures, and clawbacks - that's spreading to the white-collar defense bar and maybe we've been a little slow to recognize it. It's a bigger issue than it was.

Dobberteen: I stay away from any case with a bankruptcy, any case that had the word Ponzi in it. The problem is you can be representing those people and then the next thing you know the charges come down and you've got a problem.

Linn: You've raised one of the issues. In the DOJ's view you evaluate the attorney's knowledge at the time of the transfer. Take an engagement where you have a criminal defense attorney operating under a retainer agreement. The defense lawyer starts out the engagement with a certain base of knowledge. Then the attorney's client is charged and then the attorney gets discovery, and then more discovery, and all the while the attorney is billing against this retainer. At just the critical moment when the client most needs the attorney's help, the attorney now possesses an increased level of knowledge of the circumstances - knowledge that the DOJ views as imparting potential actual knowledge that the retainer fee derives from crime proceeds.

Sprague: I've encountered this issue more in the last six months than in the few years before that. In a white-collar case we recently had a defense lawyer ask whether the government had any information that his potential client was making any money by legitimate means, which was the first time I had heard that question.

Dobberteen: In other words: "Do you think my guy has ever earned an honest dollar? Because I sure don't."

Sprague: I could see, for example, a defense attorney who had not heard of the defendant or the case and was receiving calls to possibly represent the defendant, and the nature of the charges might make a reasonable person wonder whether the potential client had earned much, if any, recent legitimate income, particularly if there had been some court proceedings with respect to bail where the government had made certain allegations.

There have been cases where a defendant gets convicted and the government is pursuing assets, whether it's cash, or assets that cash purchased, and in following all of the money and its transfers sometimes attorneys are the recipients. And the government has tried to get some of that money back to victims or to pay other obligations that the defendant has been ordered to comply with, such as restitution or forfeiture or fines.

Jacobs: Is the government at all concerned that there could be an impact on the Sixth Amendment right to choice of counsel by going after attorneys fees?

Sprague: The government is always concerned about potential impacts on constitutional rights. Pursuing third-party assets is a very fact-specific inquiry. The government needs to look at what the recipient knew at the time, the size of the transfer, when did it happen in the proceedings, was it early or was it immediately on the eve of or even just after a conviction, and many other facts in any particular circumstance. That analysis differs greatly depending on the specific set of facts.

Moderator: Has anyone seen this come up in the white-collar field outside of the Ponzi scheme concept?

Jacobs: I had a case as a prosecutor in which there was a target who had actually used the lawyer's trust account as a place to make deposits and withdrawals. We saw a whole series of deposits, withdrawals, deposits, withdrawals. So the money wasn't going to the lawyer, it was passing through the attorney trust account as a way of insulating that money. In that instance there was no indication the attorney knew.

Humphreys: Outside of the context where the attorney is actively involved in some kind of wrongdoing or the client's earnings are entirely fraudulent, I don't typically see an issue you have to worry about. In most contexts, there is no dispute that your client earned an honest dollar, and so usually you can rely on your client's statement about the fees. The issues arise if your client's business is wholly fraudulent.

And those issues arise for all lawyers, not just white-collar defense lawyers. There was a Minnesota case where a large law firm settled a claim for $13.5 million dollars with a bankruptcy trustee in a Ponzi scheme case, even though the trustee admitted having no evidence that the law firm had actual knowledge of client's frauds. (In re Petters Company, Inc., No. 08-45257 (Bankr. D. Minn. 2012), ECF Doc. 1705, para. 23 (notice of hearing re settlement); ECF Doc. 1723 (order approving settlement).)

Dobberteen: Maybe offshore gambling operations might have that problem, which has concerned me from time to time. The other thing that you read and hear about, though I only experienced it partially, is the pre-indictment forfeiture of money. I recently had a case where the feds came in with the IRS task force and seized the operating bank account of the client. Fortunately it was an honest business, but they tripped the SAR reports from the bank, the bank sent it to the IRS, the IRS came in, got their seizure warrant, came by, dropped off the grand jury subpoena, walked out and that was it. I couldn't even find a criminal AUSA to listen to me on the grand jury investigation. But the forfeiture unit AUSA and I negotiated a deal. If it weren't for the other supply of funds, the client wouldn't have hired me. So that's another growing development.

Linn: To Rob [Humphries]'S point, this isn't just a problem for white-collar lawyers. And, in fact, I think the case law that's breaking the hardest against attorneys right now is coming out of the FTC cases and enforcement-type actions. The leading one in our circuit is FTC v. Network Services Depot (FTC v. Network Depot Services, Inc., 617 F.3d 1127 (9th Cir. 2010)) from 2010, and there the attorney had a draft complaint from the SEC, and that draft complaint the Ninth Circuit said put the attorney on notice that he had to do more than just take his client's word for it that the business was something other than a Ponzi scheme or some kind of marketing fraud scheme. (FCC v. Network Services Depot, Inc., 617 F.3d 1127 (9th Cir. 2010).)

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