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From Securities Regulation Daily, October 11, 2013

Former Commissioner Paredes opens enforcement conference, followed by FCPA discussion

By Jacquelyn Lumb

Former SEC Commissioner Troy Paredes opened the recent Securities Enforcement Forum in Washington, D.C., with a keynote address about his experience at the Commission. Paredes said he had no preconceived notions about being a commissioner and was promptly greeted by the biggest financial crisis since the Great Depression. He also talked about the sobering responsibility that comes with making decisions about whether to charge an individual or an entity with securities violations, which he said is a significant assertion of government power in a very public way. The decisions affect real lives and have real consequences that can be seriously disruptive to the targets, he said.

Paredes said it is important not to lose sight that the SEC should not be tough just for the sake of toughness. The offense and the law must drive the decision of whether to bring an action. There are many instances where justice and due process obligate the government not to pursue a particular case, he said, even when an agency is facing public outcry and outside pressure. The SEC has to weigh the opportunity costs of the time and effort necessary when deciding whether to pursue a case. Even then, it should pursue only those with the most culpable individuals who do the most harm, in his view.

Paredes said it is possible to have a misstatement or an omission that is not necessarily the product of scienter or negligence. However, he also believes that deterrence matters. The SEC cannot lose sight of pump and dump schemes, Ponzi schemes boiler room operations and affinity frauds in which real lives are at stake, even as other issues may get more attention in the press.

SEC/DOJ FCPA guide. A resource guide on the Foreign Corrupt Practices Act was published nearly a year ago by the Department of Justice’s Criminal Division and the SEC’s Enforcement Division. The guide is intended to provide information for businesses and individuals regarding the FCPA. Kara Brockmeyer, chief of the SEC’s FCPA unit, said it was an extensive work that has generally been well received. The guide is aimed at businesses and their in-house lawyers. Brockmeyer has heard that some companies are using the guide in their training programs. The guide will not be updated yearly, but Brockmeyer said there may be updates to reflect any law changes.

Cheryl Scarboro, a partner with Simpson Thacher & Bartlett LLP, reported that some say the guide did not go far enough and contained nothing new. But others see it as an incredible resource with its information on the statute, its history and the presentation of hypotheticals. She agreed that many are using it in training and to help develop compliance programs.

Mark Mendelsohn, a partner with Paul Weiss, said the guide institutionalized the SEC’s and the DOJ’s thinking as government doctrine and has been cited in cases. It contains rich underlying source material that underpins the government’s views on a wide range of topics, he said. Mendelsohn sees it as less for the expert practitioner and more for the in-house counsel at small and medium-sized enterprises. It also responds to criticism from other countries about the lack of U.S. guidance on the FCPA.

Admissions. Since the SEC amended its no admit/no deny policy in connection with cases in which the parties have admitted conduct in a companion DOJ case, a member of the audience asked how the SEC will handle a situation where the DOJ decision is pending. Brockmeyer noted that the SEC has required admissions in every FCPA case since that policy change was announced. The panelists noted that the SEC’s cases are often broader and cover more conduct than the companion DOJ cases, which complicates that issue. Scarboro said there will be admissions to the extent there is overlap, but not with respect to the other allegations. Brockmeyer said the SEC has never permitted an admission in part, but companies are typically admitting to the most serious conduct.

Hiring friends and family. The panelists talked about considerations under the FCPA when hiring friends or family of officials at a state-owned enterprise. F. Joseph Warin, a partner at Gibson Dunn & Crutcher LLP, said these individuals are often highly credentialed academically. Scarboro said that hiring a family member is not a violation of the FCPA, but since the FCPA references giving anything of value, the job cannot be given with corrupt intent. The enterprise must be able to justify the hire. Some companies have concluded that it is not worth the risk. The hiring process must be well documented and subject to competition, she said.

Brockmeyer said the SEC has brought hiring cases and has seen an uptick in whistleblower complaints and other tips and referrals.

Self-reporting. Warin asked if the recent payout of $14 million to a whistleblower is likely to raise concerns among companies and lead to more self-disclosures about violations. Brockmeyer said that self-disclosure comes in many forms—some on the eve of a newspaper breaking a story or on the verge of disclosing a finding in an SEC filing. Those may not get much credit, she advised.

Brockmeyer said the Seaboard guidelines on cooperation are still in effect. As a result, it is not that helpful if a company spends a year on an internal investigation before coming to the SEC. A whistleblower may come to the SEC first, in that case the company will get no self-reporting credit, she said. She said it is best to report a possible violation first, then proceed with the investigation. Depending on the magnitude of the problem, Brockmeyer said, you do not want the SEC to call you first. Companies that self-report always end up in a better position, except in situations where companies report a very small violation while hiding something bigger, which will cause a loss in the self-reporting credit, she said.

Scarboro said people always ask why they should self-report. The SEC will reward self-reporters in the end, she said. If the violation is small enough, isolated and handled correctly, the SEC may walk away without bringing any charges. In response to a question about relying on a previous declination to bring charges in deciding not to report, Scarboro said that was not a good idea since the SEC may discover the violation. The small violation may turn out to be the tip of an iceberg, she said. She recommended that companies develop a clear plan for telling the SEC what they have found, what they are doing and what they are planning regarding providing regular reports.

Brockmeyer said the SEC does not provide statistics on the cases they choose not to bring. In some cases, the SEC does not even open an inquiry because a situation has been dealt with appropriately. In other cases, the SEC may “kick the tires,” then let a company know if the investigation is closed with no further action.

Mendelsohn said self-reporting is a most vexing issue. The easy calls are few and far between. If a violation is truly isolated, a company may be able to make the decision not to report. But if disclosure is likely, there is an incentive to report. The threat of a whistleblower is a driver as well. He added that the SEC and DOJ have more resources now for discovering violations.

Economics. The panel also talked about the role of economists in the settlement discussions. Brockmeyer said the SEC has economists and other experts that help with these issues. The SEC does not want to take more than the profit the company made with its illegal conduct. It is a robust discussion and much more sophisticated now, she said. She added that the SEC hears some pretty incredible arguments from companies about what constitutes profits.

Monitors. Warin said that many companies are concerned that if they self-disclose, the SEC will require that they hire a monitor. Brockmeyer said that is not always the case. Self-reporting may bolster the argument that a company does not need a monitor, she said. She added that it is not a punishment. Brockmeyer called it “training wheels”, although very expensive training wheels. Many companies see the benefits of the resulting compliance programs that will enable them to avoid similar problems in the future.

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