Corporate Investigations and White Collar Defense

Insider Trading: Supreme Court Affirms Salman

Why it matters: On December 6, 2016 the Supreme Court decided Salman v. U.S., in which it upheld the petitioner’s insider trading conviction. The Court found its 1983 decision in Dirks v. SEC to be controlling, holding that, for purposes of establishing the necessary “personal benefit” to the insider, it is sufficient for the government to show that the insider relayed a “gift of confidential information to a trading relative or friend” and that no evidence of an additional tangible personal benefit to the insider is necessary.

Detailed discussion: On December 6, 2016 the Supreme Court unanimously decided Salman v. U.S., in which it upheld the conviction of a tippee for insider trading. The Court deemed its 1983 decision in Dirks v. SEC to be controlling, holding that the required “personal benefit” to the insider can properly be inferred from evidence showing that the insider gave “a gift of confidential information to a trading relative or friend” and that no evidence of an additional tangible personal benefit to the insider need be provided. In so doing, the Court affirmed the Ninth Circuit’s interpretation of Dirks, and set aside the Second Circuit’s opinion in United States v. Newman to the extent that it was “inconsistent” with Dirks. We covered the oral argument before the Court in this case in our October 2016 newsletter under “Supreme Court: What Constitutes an Insider Trading ‘Personal Benefit,’” and the Ninth Circuit’s decision in our August 2015 newsletter under “Are the Circuits A-Splitting? The Ninth Circuit Declines to Follow the Second Circuit’s Insider Trading Decision in U.S. v. Newman.”

Background, procedural history and Dirks

To briefly review the underlying facts and procedural history of the case, the government introduced facts at trial showing that petitioner Bassam Yacoub Salman had received insider information involving upcoming mergers and acquisitions of an international investment bank’s clients from his brother-in-law (via marriage to his sister) Michael Kara (Kara Brother #2). Kara Brother #2 had learned the information from his brother, Mahar Kara (Kara Brother #1), who worked in the bank’s healthcare investment banking group. Salman then shared the insider information he learned from Kara Brother #2 with the husband of his wife’s sister, with whom he split the illicit profits. Of particular relevance on appeal was evidence presented by the government at trial that showed that Salman was “well aware” both that Kara Brother #1 was the source of the insider information and that Kara Brother #1 and Kara Brother #2 shared an extremely “close fraternal relationship” that was “mutually beneficial.”

In the appeals period following Salman’s conviction, the Second Circuit decided Newman, which vacated the insider trading convictions of two downstream tippees on the grounds that the government failed to prove that the tippees knew whether the original insider tippers derived a “tangible personal benefit” from disclosing the information. After the Second Circuit sitting en banc denied the government’s petition for rehearing in Newman in April 2015 (the Supreme Court subsequently denied certiorari in Newman in October 2015), Salman appealed his conviction to the Ninth Circuit. Salman argued that, applying the Second Circuit’s Newman standard to his case (which Salman urged the Ninth Circuit to adopt), the information the government presented was insufficient because it failed to show that Kara Brother #1 disclosed the information to Kara Brother #2 in exchange for a tangible personal benefit, such as a financial benefit, and that Salman knew of such benefit.

On July 6, 2015, the Ninth Circuit upheld Salman’s conviction. The panel relied on the Supreme Court’s 1983 opinion in Dirks, the last time the issue came before the Court, which found that (1) in order to establish a “personal benefit” to the insider tipper—one of the elements of insider trading liability—“the test is whether the insider personally will benefit, directly or indirectly, from his disclosure … for in that case the insider is breaching his fiduciary duty to the company’s shareholders not to exploit company information for his personal benefit”; (2) the recipient of inside information (tippee) is equally liable if “‘the tippee knows or should know that there has been [such] a breach’ … i.e., knows of the personal benefit”; and (3) that such a personal benefit can be inferred “when an insider makes a gift of confidential information to a trading relative or friend.” The panel found that “this last-quoted holding of Dirks governs the case” because Kara Brother #1’s disclosure of confidential information to Kara Brother #2, “knowing that he intended to trade on it, was precisely the ‘gift of confidential information to a trading relative’ that Dirks envisioned.” The panel specifically declined to follow the Second Circuit’s standard in Newman because “[d]oing so would require us to depart from the clear holding of Dirks that the element of breach of fiduciary duty is met where an ‘insider makes a gift of confidential information to a trading relative or friend.’”

The Supreme Court granted certiorari in Salman to consider the question presented of “[w]hether the personal benefit to the insider that is necessary to establish insider trading under Dirks v. SEC requires proof of ‘an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,’ as the Second Circuit held in U.S. v. Newman, or whether it is enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case.” The Supreme Court heard oral argument on October 5, 2016.

The Court’s Holding

In a brief (12-page) opinion written by Justice Samuel Alito, the Court unanimously held that the Ninth Circuit properly applied Dirks—which the Court deemed to be controlling—to affirm Salman’s conviction and that, under Dirks, a jury can properly infer (as they did in Salman) that an insider receives a “personal benefit” if they make a “gift of confidential information to a trading relative or friend.” The Court further found that “[t]o the extent the Second Circuit [in Newman] held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends … we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.”

At the outset of its opinion, the Court said that it agreed to review Salman to “resolve the tension between the Second Circuit’s Newman decision and the Ninth Circuit’s decision in this case.”

The Court began its analysis by restating the relevant insider trading law. The Court first pointed to Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission’s Rule 10b–5, which “prohibit undisclosed trading on inside corporate information by individuals who are under a duty of trust and confidence that prohibits them from secretly using such information for their personal advantage.” The Court said that, under this prohibition, “[t]hese persons also may not tip inside information to others for trading” and that “[t]he tippee acquires the tipper’s duty to disclose or abstain from trading if the tippee knows the information was disclosed in breach of the tipper’s duty, and the tippee may commit securities fraud by trading in disregard of that knowledge.”

Next, the Court pointed to its 1983 opinion in Dirks, in which it “explained that a tippee’s liability for trading on inside information hinges on whether the tipper breached a fiduciary duty by disclosing the information. A tipper breaches such a fiduciary duty, we held, when the tipper discloses the inside information for a personal benefit. And, we went on to say, a jury can infer a personal benefit—and thus a breach of the tipper’s duty—where the tipper receives something of value in exchange for the tip or ‘makes a gift of confidential information to a trading relative or friend.’”

After enumerating the arguments presented by Salman and the government, respectively, with respect to what constitutes the required “personal benefit” under the insider trading laws, the Court said that “[w]e adhere to Dirks, which easily resolves the narrow issue presented here.”

The Court first pointed to the language in Dirks that discussed the relationship between a “personal benefit” and making a quid pro quo “gift” of confidential information to family members or close friends, which it said “resolves the case”:

“In determining whether a tipper derived a personal benefit, [in Dirks] we instructed courts to ‘focus on objective criteria, i.e., whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earn- ings.’… This personal benefit can ‘often’ be inferred ‘from objective facts and circumstances,’ we explained, such as ‘a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient.’… In particular, we held that ‘[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend.’… In such cases, ‘[t]he tip and trade resemble trading by the insider followed by a gift of the profits to the recipient.’… We then applied this gift-giving principle to resolve Dirks itself, finding it dispositive that the tippers ‘received no monetary or personal benefit’ from their tips to Dirks, ‘nor was their purpose to make a gift of valuable information to Dirks’ (emphasis added).”

Applying this language in Dirks to the facts of the case, the Court said that “Maher, the tipper, provided inside information to a close relative, his brother Michael. Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to ‘a trading relative,’ and that rule is sufficient to resolve the case at hand.” The Court went on to explain its reasoning, and in so doing set aside the holding in the Second Circuit’s Newman decision to the extent that it was “inconsistent” with Dirks:

“As Salman’s counsel acknowledged at oral argument, Maher would have breached his duty had he personally traded on the information here himself then given the proceeds as a gift to his brother…. It is obvious that Maher would personally benefit in that situation. But Maher effectively achieved the same result by disclosing the information to Michael, and allowing him to trade on it. Dirks appropriately prohibits that approach, as well…. Dirks specifies that when a tipper gives inside information to ‘a trading relative or friend,’ the jury can infer that the tipper meant to provide the equivalent of a cash gift. In such situations, the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds. To the extent the Second Circuit held [in Newman] that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends … we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.”

The Court specifically rejected Salman’s argument that the gift-giving standard articulated in Dirks was unconstitutional on vagueness or “rule of lenity” grounds, stating that “[t]o the contrary, Salman’s conduct is in the heartland of Dirks’s rule concerning gifts. It remains the case that ‘[d]etermining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts.’… But there is no need for us to address those difficult cases today, because this case involves ‘precisely the “gift of confidential information to a trading relative” that Dirks envisioned.’”

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“Sons and Daughters” Are the New “Princelings”

Why it matters: On November 17, 2016, JPMorgan Chase & Co. and its Hong Kong-based subsidiary JPMorgan Securities (Asia Pacific) Limited agreed to pay an aggregate amount of approximately $264.4 million to the DOJ, SEC and Federal Reserve in parallel investigations into the subsidiary’s “Sons and Daughters” program, under which the investment banking firm and its subsidiary allegedly won lucrative banking deals in China by awarding prestigious jobs to often unqualified relatives and friends of Chinese government officials. The “Sons and Daughters” moniker appears to be the new name for the “Princelings” Foreign Corrupt Practices Act investigations that have been conducted in recent years by the government into suspect corrupt hiring practices throughout the Middle East and Asia.

Detailed discussion: On November 17, 2016, investment banking firm JPMorgan Chase & Co. (JPMC) and its Hong Kong-based subsidiary JPMorgan Securities (Asia Pacific) Limited (JPMorgan APAC) agreed to pay an aggregate amount of approximately $264.4 million to the DOJ, SEC and Federal Reserve in parallel investigations into JPMC APAC’s “Sons and Daughters” program, under which it, to quote the DOJ, “corruptly gain[ed] advantages in winning banking deals by awarding prestigious jobs to relatives and friends of Chinese government officials.” The “Sons and Daughters” moniker appears to be the new name for the “Princelings” Foreign Corrupt Practices Act (FCPA) investigations that have been conducted in recent years by the government into suspect corrupt hiring practices throughout the Middle East and Asia. We last reported on the Princelings investigations in our March 2016 newsletter.

We’ve recapped each of the three separate government resolutions into JPMC APAC’s “Sons and Daughters” hiring program below. First, the relevant facts: According to admissions made by JPMorgan APAC in connection with the resolution with the DOJ: (1) beginning in 2006, JPMorgan APAC senior Hong Kong-based investment bankers established a “client referral program,” also referred to as the “Sons and Daughters Program,” to hire candidates referred by clients and government officials, which program was used “as a means to influence those same officials to award investment deals to JPMorgan APAC”; (2) by late 2009, JPMorgan APAC executives and senior bankers revamped the client referral program to prioritize those hires linked to upcoming client transactions, such that in order to be hired, a referred candidate had to have a “directly attributable linkage to business opportunity”; and (3) candidates hired under the program were given the same titles and paid the same amount as entry-level investment bankers, “despite the fact that many of these hires performed ancillary work such as proofreading and provided little real value to any deliverable product.”

According to the SEC’s order, as a result of the “Sons and Daughters” program, “[d]uring a seven-year period, [JPMC] hired approximately 100 interns and full-time employees at the request of foreign government officials, enabling the firm to win or retain business resulting in more than $100 million in revenues to [JPMC].”

In addition, the DOJ said that the subsidiary JPMorgan APAC earned almost $35 million in profits under its “Sons and Daughters” program “from business mandates with Chinese state-owned companies.”

DOJ resolution

The DOJ announced that JPMorgan APAC agreed to pay a criminal penalty of $72 million and enter into a non-prosecution agreement (NPA) pursuant to which it agreed to continue to cooperate with ongoing investigations and prosecutions, including of individuals, to enhance its compliance program, and to report to the DOJ on the implementation of its enhanced compliance program. The DOJ said that its decision to grant the NPA and take “25 percent off of the bottom of the U.S. Sentencing Guidelines fine range” was based on a number of factors, including (i) even though JPMorgan APAC did not voluntarily or timely disclose its conduct, it received full credit for its and JPMC’s cooperation with the criminal investigation, including “conducting a thorough internal investigation, making foreign-based employees available for interviews in the United States and producing documents to the government from foreign countries in ways that did not implicate foreign data privacy laws”; (ii) JPMorgan APAC took “significant employment action” by firing 6 employees directly involved in the misconduct and disciplining 23 others who “failed to effectively detect the misconduct or supervise those engaged in it”; and (iii) JPMorgan APAC imposed more than $18.3 million in financial sanctions on former or current employees in connection with the remediation efforts.

SEC resolution

The SEC announced that JPMC agreed to pay over $130 million (consisting of $105,507,668 in disgorgement plus $25,083,737 in interest) to settle charges that it “won business from clients and corruptly influenced government officials in the Asia-Pacific region by giving jobs and internships to their relatives and friends” in violation of the anti-bribery, books and records, and internal controls provisions of the FCPA. The SEC said that it considered “the company’s remedial acts and its cooperation with the investigation when determining the settlement.”

Federal Reserve resolution

The Board of Governors of the Federal Reserve System (Federal Reserve) announced that it had ordered JPMC to pay a $61.9 million civil penalty for “unsafe and unsound practices related to the firm’s practice of hiring individuals referred by foreign officials and other clients in order to obtain improper business advantages for the firm.” The Federal Reserve found that JPMC “did not have adequate enterprise-wide controls to ensure that referred candidates were appropriately vetted and hired in accordance with applicable anti-bribery laws and firm policies.” The Federal Reserve’s order (i) requires JPMC to “enhance the effectiveness of senior management oversight and controls relating to the firm’s referral hiring practices and anti-bribery policies” and to “cooperate in its investigation of the individuals involved in the conduct underlying these enforcement actions”; and (ii) prohibits “the organizations from re-employing or otherwise engaging individuals who were involved in unsafe and unsound conduct.”

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Focus on the FCPA

Why it matters: In addition to the “Sons and Daughters” resolution covered elsewhere in this newsletter, there have been other interesting developments of note in connection with the Foreign Corrupt Practices Act (FCPA). Key among these was the November 8, 2016 presidential election that will usher in a new DOJ administration and possible changes in the priority and focus of the government’s FCPA enforcement efforts. Speaking at a recent post-election FCPA conference, Deputy Attorney General Sally Q. Yates said that, at least with respect to individual accountability for corporate wrongdoing, she was “optimistic” that the new administration would continue the current administration’s policies because “individual accountability isn’t a Democratic principle or a Republican principle, but is instead a core value of our criminal justice system that perseveres regardless of which party is in power.”

Detailed discussion: Below, we touch briefly on recent “State of the FCPA” speeches that were given by DOJ and SEC officials both pre- and post-presidential election, focusing on one by Deputy Attorney General Sally Q. Yates that addressed head-on her thoughts as to whether the new incoming administration will continue the DOJ’s current policies regarding holding individual corporate wrongdoers accountable. We also review some recent noteworthy FCPA resolutions and securities filing disclosures. Read on for a roundup.

The “State of the FCPA”

On November 30, 2016, Deputy Attorney General Sally Q. Yates spoke at the 33rd Annual International Conference on the Foreign Corrupt Practices Act in Washington, D.C. about the eponymous “Yates memo,” released in September 2015, which reiterated the DOJ’s policies and renewed emphasis on holding individual wrongdoers accountable for corporate misconduct. Yates addressed the majority of her remarks to the resolutions with individuals that had been entered into since the Yates memo was issued and the DOJ’s ongoing efforts to be transparent and address all questions and concerns about the policy.

Toward the end of her remarks, Yates turned to the immediate future and said that “perhaps the most commonly asked question [I hear of late] is one that I can’t fully answer, which is: what comes next?” Yates continued that “[i]n 51 days, a new team will be running the department, and it will be up to them to decide whether they want to continue the policies that we’ve implemented in recent years.” Notwithstanding this, Yates said that she is “optimistic” because “[h]olding individuals accountable for corporate wrongdoing isn’t ideological; it’s good law enforcement.” Yates noted that in her almost three decades at the DOJ, she had worked under attorneys general appointed by both Democratic and Republican presidents “[a]nd I know—because I’ve witnessed it myself—that individual accountability isn’t a Democratic principle or a Republican principle, but is instead a core value of our criminal justice system that perseveres regardless of which party is in power.”

Yates acknowledged that there are a “significant” number of corporate investigations that began after the Yates memo was issued that won’t result in resolutions until “way into the next administration.” She said that she remains confident, however, that the line prosecutors and agents will diligently continue to investigate these cases irrespective of which party is in power and “in coming months and years, when companies enter into high-dollar resolutions with the Justice Department, you’ll see a higher percentage of those cases accompanied by criminal or civil actions against the responsible individuals. It won’t be every case, but the investments we’re making now are likely to yield a real increase in the years ahead.” Yates concluded her remarks by saying that “[i]n the days ahead, this institution—and those who lead it—will continue the hard work of rooting out corruption here and abroad. And we will remain determined to protecting and strengthening our values of justice, fairness, and the rule of law. That has always been, and will always be, at the core of the Department of Justice.”

There were a few other “State of the FCPA” speeches given in recent months by DOJ and SEC officials that bear noting, one of which was post-election, and the other two of which were pre-election:

  • Also on November 30, 2016, SEC Director of Enforcement Andrew Ceresney (who announced his resignation on December 8, 2016, effective year-end) gave the keynote speech at the 33rd Annual International Conference on Foreign Corrupt Practices Act summarizing the SEC’s recent successful FCPA enforcement efforts.
  • On November 3, 2016, Assistant Attorney General Leslie Caldwell spoke at the George Washington University Law School highlighting the DOJ’s enforcement efforts with respect to the FCPA and touting the success of the FCPA Pilot Program in the six months since its enactment.
  • On October 20, 2016, Attorney General Loretta Lynch spoke in Rome, Italy about global enforcement efforts to combat international fraud and corruption, and cited to recent high-profile FCPA resolutions to support her statement that the FCPA is an effective and “powerful” tool for the U.S. government.

Other recent FCPA enforcement actions/resolutions/disclosures of note

Resolutions

  • On October 24, 2016, the DOJ announced that Brazilian aircraft manufacturer Embraer S.A. (Embraer) agreed to resolve criminal FCPA charges and pay a criminal penalty of more than $107 million in connection with both schemes involving the bribery of government officials in the Dominican Republic, Saudi Arabia and Mozambique, and the payment of millions of dollars in India via a sham agency agreement. In addition, the SEC concurrently announced that, in its parallel investigation, Embraer agreed to pay over $98 million in disgorgement and interest to resolve FCPA violations with respect to the same conduct. The DOJ said that Embraer admitted that its executives and employees paid bribes to government officials and falsified books and records in connection with aircraft sales to foreign governments and state-owned entities, earning Embraer profits of nearly $84 million from aircraft sales. The DOJ said that, as part of the criminal resolution, Embraer entered into a three-year deferred prosecution agreement (DPA), pursuant to which Embraer admitted to its involvement in a conspiracy to violate the FCPA’s anti-bribery and books and records provisions and to its willful failure to implement an adequate system of internal accounting controls. In addition to paying the criminal penalty under the DPA, Embraer agreed to continue to cooperate with the DOJ’s investigation, enhance its compliance program, implement a more adequate system of internal accounting controls, and retain an independent corporate compliance monitor for a term of three years. The DOJ said that it reached its resolution with Embraer based on a number of factors, including the fact that Embraer did not voluntarily disclose the FCPA violations (although it did cooperate with the DOJ’s investigation after the SEC served it with a subpoena) nor did it “engage in full remediation.” Embraer will also pay a yet-to-be-determined amount to Brazilian authorities under parallel civil proceedings in Brazil.
  • On October 20, 2016, the SEC announced that Houston-based FMC Technologies agreed to pay a $2.5 million penalty to settle charges that it violated the books and records provisions of the FCPA by overstating profits in one of its business segments. The company consented to the SEC’s order without admitting or denying the charges. In addition, two former executives at the company agreed to pay penalties aggregating $40,000 to settle charges that they caused the violations in order to meet internal targets.

Disclosures

  • On November 15, 2016, Israel-based Teva Pharmaceutical Industries Limited disclosed in a Form 6-K that it was in “advanced discussions” with the DOJ and SEC and had reserved $520 million for an FCPA settlement. Teva said in the filing that “[f]or several years, Teva has conducted a voluntary worldwide investigation into business practices that may have implications under the U.S. Foreign Corrupt Practices Act (‘FCPA’), following the receipt, beginning in 2012, of subpoenas and informal document requests from the SEC and the DOJ with respect to compliance with the FCPA in certain countries. Management has established a provision of approximately $520 million based on advanced discussions with the DOJ and SEC to settle these FCPA matters. The provision relates to conduct in Russia, Mexico and Ukraine during the time period covering 2007-2013. Any final settlement would be subject to court, DOJ and SEC Commission approval.”
  • On October 21, 2016, Swedish telecom Telia Company (formerly TeliaSonera) disclosed in a securities filing that it had reserved $1.45 billion to settle FCPA allegations with the DOJ and Dutch authorities relating to a bribery scheme in Uzbekistan. Telia previously disclosed in September 2016 that it had received a settlement proposal from U.S. and Dutch authorities of approximately $1.4 billion. Telia’s disclosure is related to the VimpelCom investigation pursuant to which VimpelCom paid $795 million to U.S. and Dutch authorities to resolve similar FCPA bribery claims in February 2016 (covered in our March 2016 newsletter under “A Bad Day for Kleptocracy: U.S. and Multiple International Authorities Coordinate to Prosecute and Forfeit Global Assets of VimpelCom”).
  • On October 17, 2016, Lennox International Inc. said in a securities filing that it had self-disclosed a $425 (i.e., less than $500) bribe paid to a Russian customs official. The FCPA Blog, which reported the disclosure, speculated that the company made the unusual disclosure of such a small bribe in an effort to comply with the FCPA Pilot Program, which encourages corporate self-disclosure. The company said in the filing that its audit committee had launched an internal investigation with outside counsel and forensic accountants to see if the issue was widespread.

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Spotlight on the False Claims Act

Why it matters: Increasingly, the False Claims Act (FCA) is being viewed by the DOJ as a powerful weapon in its arsenal to combat international fraud and corruption. In a recent speech given in Rome, Italy, Attorney General Loretta Lynch singled out the FCA and its whistleblower provisions as an important tool in the DOJ’s efforts to “root out fraud and misappropriation in public funds and government contracts” in the global arena. Read on for a recap of the recent FCA healthcare resolutions—and one unique unsealed FCA complaint—that caught our eye since our last newsletter.

Detailed discussion: On October 20, 2016, U.S. Attorney General Loretta Lynch spoke in Rome, Italy about the DOJ’s global enforcement efforts to combat international fraud and corruption. In her talk, she included the FCA, “powered by a unique whistleblower provision,” as an important tool in such efforts, stating that “[s]ince its inception in 1986, the FCA has allowed for the recovery of more than $53 billion in industries ranging from healthcare to defense.”

Below, we recap a few of the recent such FCA healthcare resolutions that caught our eye, but first we wanted to highlight an interesting FCA complaint that was recently unsealed—and is pending dismissal—in the Eastern District of Texas.

On October 17, 2016, the complaint in the case of USA ex rel. Lower Drug Prices for Consumers v. Allergan plc et al., originally filed in the Eastern District of Texas on January 13, 2016, was unsealed. The complaint contained unique allegations that Allergan plc (Allergan) and two of its subsidiaries had violated the FCA by charging federal and state health programs an artificially high and “false price” for the drug Bystolic because the drug’s patent was invalid and therefore the drug was not worth the amount being charged. The complaint was filed under the qui tam whistleblower provisions of the FCA by an organization named Lower Drug Prices for Consumers (LDPFC), which is backed by the hedge fund Foxhill Capital Partners LLC. The DOJ filed a Notice of Election to Decline Intervention on September 21, 2016.

In the complaint, LDPFC said that it had simultaneously filed a request with the Patent Trial and Appeal Board (PTAB) to institute an inter partes review (IPR) of the drug’s patent to underscore its claim that the patent was invalid. On December 7, 2016, the LDPFC filed a motion to dismiss without prejudice, indicating that the PTAB had first denied its request for IPR institution on July 1, 2016, and then denied its request for reconsideration on October 19, 2016. As the PTAB’s decision is statutorily “final and not appealable,” LDPFC filed the motion to dismiss but without prejudice to refile in case it found other evidence to support its claim. We’ll keep an eye out for any further developments in this interesting use of the FCA’s whistleblower provisions.

Recent healthcare resolutions/actions

  • On December 7, 2016, the U.S. Attorney’s Office for the Southern District of Florida announced that South Miami Hospital, a not-for-profit regional hospital located in South Miami, Florida, agreed to pay approximately $12 million to settle allegations that it violated the FCA by submitting false claims to federal healthcare programs for medically unnecessary electrophysiology studies and other procedures allegedly performed by John R. Dylewski, M.D., at South Miami Hospital. Two qui tam whistleblower doctors to split a $2.7 million award.
  • On November 11, 2016, the DOJ announced that medical device manufacturer Biocompatibles Inc., a subsidiary of BTG plc (Biocompatibles), pleaded guilty to misbranding its embolic device LC Bead and will pay more than $36 million to resolve criminal liability for misbranding under the Food, Drug and Cosmetic Act and civil liability under the FCA. The DOJ said that, under the plea agreement entered into with Biocompatibles, the company pleaded guilty to a misdemeanor misbranding charge and will pay an $8.75 million criminal fine plus an additional $2.25 million in forfeiture. In addition, the DOJ said that Biocompatibles will pay $25 million to resolve civil allegations under the FCA that the company caused false claims to be submitted to government healthcare programs for procedures in which the misbranded LC Bead device was improperly “loaded with chemotherapy drugs and used as a drug-delivery device.” In reaching the settlement of the FCA portion of the case, Biocompatibles neither admitted nor denied the allegations. Qui tam whistleblower to receive a $5.1 million award.
  • On October 24, 2016, the DOJ announced that Life Care Centers of America Inc. (Life Care) and its owner, Forrest L. Preston, agreed to pay $145 million to resolve civil allegations that Life Care violated the FCA by knowingly causing skilled nursing facilities (SNFs) to submit false claims to government healthcare programs for rehabilitation therapy services that were not “reasonable, necessary or skilled.” In reaching the settlement, Life Care neither admitted nor denied the allegations. The DOJ said that the Cleveland, Tennessee-based company owns and operates more than 220 SNFs across the country. Two qui tam whistleblowers to split a $29 million award.
  • On October 17, 2016, the DOJ announced that Omnicare, Inc. (Ominicare), described as the “nation’s largest nursing home pharmacy,” agreed to pay approximately $28 million to resolve civil allegations under the FCA that it solicited and received kickbacks from pharmaceutical manufacturer Abbott Laboratories in exchange for promoting the prescription drug Depakote for nursing home patients. According to the DOJ, Omnicare (now owned by CVS Health Corporation) disguised the kickbacks it received from Abbott as, among other things, “grants” and “educational funding,” even though “their true purpose was to induce Omnicare to recommend Depakote.” In reaching the settlement, Omnicare neither admitted nor denied the allegations. The DOJ said that the settlement with Omnicare resolved its part in a kickback scheme that included a $1.5 billion “global civil and criminal resolution” with Abbott in May 2012 and a $9.25 million settlement with PharMerica in October 2015. The Omnicare settlement, together with the previous Abbott and PharMerica settlements, resolved the allegations in two qui tam lawsuits filed by former Abbott employees, in which the DOJ intervened in May 2014. One of the qui tam whistleblowers will receive a $3 million award from the Omnicare resolution.

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White Collar Enforcement Roundup—Year-End Edition

Why it matters: What do the Avalanche network, FIFA coins, AML violations, and a couple of Big Four accounting firms have in common? They all figured prominently in white collar enforcement actions and resolutions announced by government agencies in the last quarter of 2016. For a recap of these announcements and others that we found worthy of note, read on.

Detailed description: Here we provide a roundup of government enforcement actions announced in the last quarter of 2016 that we found to be of particular interest:

DOJ

  • On December 5, 2016, the DOJ announced an “unprecedented” multinational “seize, block and sinkhole” operation involving arrests and searches in four countries to dismantle a complex and sophisticated network of computer servers known as “Avalanche.” According to the DOJ, the Avalanche network, which began operations in 2010, hosted “more than two dozen of the world’s most pernicious types of malicious software and several money laundering campaigns” and led to monetary losses worldwide in the “hundreds of millions of dollars.” The DOJ said that “the Avalanche network offered cybercriminals a secure infrastructure, designed to thwart detection by law enforcement and cyber security experts, over which the criminals conducted malware campaigns as well as money laundering schemes known as ‘money mule’ schemes. Online banking passwords and other sensitive information stolen from victims’ malware-infected computers was redirected through the intricate network of Avalanche servers and ultimately to backend servers controlled by the cybercriminals. Access to the Avalanche network was offered to the cybercriminals through postings on exclusive, underground online criminal forums.” The DOJ said that several of the network’s malware victims—companies as well as a government office—were located in the Western District of Pennsylvania.
  • On November 30, 2016, the DOJ announced that a Northern District of California court entered an order authorizing the IRS to serve a John Doe summons on San Francisco-based virtual currency exchanger Coinbase Inc. seeking information about U.S. taxpayers who conducted transactions in a convertible virtual currency during the years 2013 to 2015.
  • On November 17, 2016, the U.S. Attorney’s Office for the S.D.N.Y. announced that Gary Tanner, a former executive at publicly traded pharmaceutical manufacturer Valeant Pharmaceuticals International, Inc. (Valeant), and Andrew Davenport, the former Chief Executive Officer of specialty mail-order pharmacy Philidor Rx Services LLC (Philidor), were arrested and charged for engaging in a “multimillion-dollar fraud and kickback scheme.” According to allegations in the criminal complaint, Tanner, among other things, used his undisclosed interest in Philidor to enrich both Davenport and himself by orchestrating a $300 million purchase by Valeant of Philidor in 2014 and using shell companies through which upfront and milestone payments to Davenport made in accordance with the purchase agreement were laundered and a portion of which were then “kicked-back” to Tanner.
  • On November 16, 2016, the DOJ announced that a fourth defendant was convicted by a jury of wire fraud in connection with his involvement in a scheme to defraud software company Electronic Arts (EA) of over $16 million in the virtual in-game currency “FIFA coins.” The DOJ said that the California resident, Anthony Clark, and three co-conspirators defrauded EA, the publisher of video game FIFA Football, in which players can earn FIFA coins based on the time users spend playing FIFA Football. The DOJ said that, due to the popularity of FIFA Football, “a secondary market has developed whereby FIFA coins can be exchanged for U.S. currency.” The DOJ further said that Clark and his co-conspirators “circumvented multiple security mechanisms created by EA in order to fraudulently obtain FIFA coins worth over $16 million.” Specifically, the DOJ said that Clark and his co-conspirators “created software that fraudulently logged thousands of FIFA Football matches within a matter of seconds, and as a result, EA computers credited Clark and his co-conspirators with improperly earned FIFA coins. Clark and his co-conspirators subsequently exchanged their FIFA coins on the secondary market for over $16 million.” Clark’s three co-conspirators pleaded guilty and are awaiting sentencing.

SEC

  • On October 18, 2016, the SEC announced that Ernst & Young LLP (EY) agreed to pay $11.8 million to settle charges related to failed audits of oil services company Weatherford International that allegedly used deceptive income tax accounting to inflate earnings. In addition, two EY partners agreed to suspensions to settle charges that they disregarded significant red flags during the audits and reviews. EY and the two partners consented to the SEC’s order without admitting or denying the charges. The SEC previously announced on September 27, 2016, that Weatherford International had agreed to pay $140 million to settle charges that it inflated earnings by using deceptive income tax accounting (Weatherford International neither admitted nor denied the charges). The SEC said that, when the penalties being paid by Weatherford International (plus two former employees) and EY are combined, a “total of more than $152 million will be returned to investors who were harmed by the accounting fraud.”
  • On October 18, 2016, the SEC announced that Israeli bank Bank Leumi agreed to pay $1.6 million and admit wrongdoing to settle charges that it conducted unregistered U.S. cross-border business. The SEC said that, for a period of over 10 years, Bank Leumi provided investment advice and induced securities transactions for U.S. customers without registering as an investment adviser or broker-dealer as required under U.S. securities laws.

Other Enforcement Agencies

  • On November 14, 2016, the Office of Foreign Assets Control (OFAC) announced that Texas-based National Oilwell Varco, Inc., and its subsidiaries Dreco Energy Services, Ltd., and NOV Elmar (collectively, “NOV”) agreed to pay a civil penalty of almost $6 million to settle alleged sanctions violations between 2002 and 2009. OFAC said that NOV’s settlement with OFAC was concurrent with NOV entering into a Non-Prosecution Agreement (NPA) with the U.S. Attorney’s Office for the Southern District of Texas pursuant to which NOV agreed to pay $25 million in criminal and civil penalties for the same conduct (the payment of which “satisfied” the penalty owed to OFAC).
  • On November 4, 2016, the New York Department of Financial Services (DFS) announced that the Agricultural Bank of China Limited (Bank) and its New York branch will pay a $215 million penalty and install an independent monitor for violating New York’s AML laws. The DFS issued a consent order pursuant to which the Bank agreed to take “immediate steps” to correct violations, including engaging an independent monitor reporting directly to DFS to “address serious deficiencies within the bank’s compliance program and implement effective anti-money laundering controls.” The DFS’s investigation found “intentional wrongdoing” by the Bank, including actions by Bank officials to “obfuscate U.S. dollar transactions conducted through the New York Branch that might reveal violations of sanctions or anti-money laundering laws.” The DFS also found that the Bank “silenced and severely curtailed the independence of” the New York branch’s chief compliance officer (CCO), who tried to raise concerns to branch management and conduct internal investigations regarding suspicious activity, leading the CCO and most of the compliance department to ultimately resign in 2015.

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Keeping an Eye Out—Updates and Briefly Noted

Updates:

  • SEC whistleblower program: We last covered the SEC’s whistleblower program in our November 2016 newsletter under “Give a Little Whistle—SEC Whistleblower Program Update.” Some more updates:
    • On December 9, 2016, the SEC announced that it had granted an award of $900,000 (“nearly $1 million”) to a whistleblower “whose tip enabled the SEC to bring multiple enforcement actions against wrongdoers.” This was the second whistleblower award within one week. The SEC said that, with this award, “[m]ore than $136 million has been awarded to 37 whistleblowers who voluntarily provided the SEC with original and useful information that led to a successful enforcement action.”
    • On December 5, 2016, the SEC announced that it had granted an award of approximately $3.5 million to a person “for coming forward with information that led to an SEC enforcement action.” The SEC said that “since issuing its first award in 2012 . . . SEC enforcement actions from whistleblower tips have resulted in more than $874 million in financial remedies.”
    • On November 14, 2016, the SEC announced that it had granted an award under its whistleblower program of more than $20 million to a person who “promptly came forward with valuable information that enabled the SEC to move quickly and initiate an enforcement action against wrongdoers before they could squander the money.” The SEC said that the $20 million award was the third-highest award issued to date under its whistleblower program.
    • On November 15, 2016, the SEC’s Office of the Whistleblower delivered its Fiscal Year 2016 annual report to Congress.
    • On October 24, 2016, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert titled “Examining Whistleblower Rule Compliance.” In the alert, the OCIE advised investment advisers and broker-dealers that in upcoming inspections the OCIE will be looking for illegal restrictions on individuals communicating with the SEC about potential securities law offenses in violation of Dodd-Frank and the SEC’s whistleblower program. The OCIE said that SEC examiners will focus on compliance manuals, codes of ethics, employment agreements, and severance agreements. The alert cited recent SEC actions (Blue Linx, etc.) involving restrictive language in severance agreements.
  • On November 9, 2016, the DOJ announced that futures trader Navinder Singh Sarao pleaded guilty to “spoofing” and manipulating the futures market in connection with, among other things, the 2010 “Flash Crash,” when the Dow Jones Industrial Average plunged 600 points in five minutes. We discussed Sarao’s role in the “Flash Crash” in connection with the CFTC’s whistleblower program in our May 2015 newsletter under “Whistle While You Work: April Showers Bring Big Whistleblower Awards, Some to Compliance Officers.”
  • On October 10, 2016, Bloomberg reported that the SEC administrative trial against self-described “Diva of Distress” Lynn Tilton (Tilton) commenced before an SEC administrative law judge. The SEC originally brought charges on March 31, 2015, against Tilton and her investment firms Patriarch Partners LLC and related Patriarch limited liability companies for fraud and breach of fiduciary duty for hiding from investors the poor performance of loan assets in three collateralized loan obligation funds they managed. On April 1, 2015, Tilton brought suit in the Southern District of New York to enjoin the SEC’s administrative proceedings and challenge their constitutionality, which eventually resulted in the Second Circuit denying Tilton’s challenge on June 1, 2016, on lack of subject matter jurisdiction and exhaustion of remedies grounds. We covered Tilton’s original challenge in our April 2015 newsletter under “Wherefore Art Thou Due Process? SEC Administrative Hearings Under Attack.”
  • On October 4, 2016, the U.S. Supreme Court heard oral argument in Shaw v. U.S. regarding the question presented of whether proving a scheme to defraud a bank in violation of 18 U.S.C. § 1344(1) requires proving an intent that the bank be the victim of the fraud. For a summary of the oral argument, see the article titled “Supreme Court Considers the Necessary Intent for Bank Fraud” in Manatt’s October 2016 Financial Services Law newsletter. We discussed this case and the Supreme Court’s grant of certiorari in our June 2016 newsletter under “Eye on the Supreme Court—Corruption and Fraud Edition.”

New rulemaking/advisories:

  • On October 26, 2016, the Financial Crimes Enforcement Network (FinCEN) issued an advisory to financial institutions on cyber events and cyber-enabled crime. FinCEN said that the advisory was meant “to assist financial institutions in understanding their Bank Secrecy Act (BSA) obligations regarding cyber-events and cyber-enabled crime” and “also highlights how BSA reporting helps U.S. authorities combat cyber-events and cyber-enabled crime.” The areas covered in the advisory are (1) “Reporting cyber-enabled crime and cyber-events through Suspicious Activity Reports (SARs)”; (2) “Including relevant and available cyber-related information (e.g., Internet Protocol (IP) addresses with timestamps, virtual-wallet information, device identifiers) in SARs”; (3) “Collaborating between BSA/Anti-Money Laundering (AML) units and in-house cybersecurity units to identify suspicious activity”; and (4) “Sharing information, including cyber-related information, among financial institutions to guard against and report money laundering, terrorism financing, and cyber-enabled crime.” For a detailed discussion of FinCEN’s advisory, see Manatt partner David Gershon’s November 10, 2016, news alert titled “FinCEN: Cyber Events Should Be Reported via SARs.”
  • On October 19, 2016, the Board of Governors of the Federal Reserve System (Federal Reserve), Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) (collectively, “Agencies”) released a joint Advance Notice of Proposed Rulemaking (ANPR) titled “Enhanced Cyber Risk Management Standards.” The ANPR said that the Agencies are considering establishing enhanced standards to increase the operational resilience of “large and interconnected entities under their supervision and those entities’ service providers” and to reduce the impact of a cyber event on those entities. The ANPR addresses five categories of cyber standards: (1) cyber risk governance; (2) cyber risk management; (3) internal dependency management; (4) external dependency management; and (5) incident response, cyber resilience, and situational awareness. The Agencies said they “are considering implementing the enhanced standards in a tiered manner, imposing more stringent standards on the systems of those entities that are critical to the functioning of the financial sector.” The ANPR requests that comments be submitted by January 1, 2017. For a detailed discussion of the ANPR, see Manatt partner David Gershon’s November 10, 2016, news alert titled “Federal Regulators Seek Comments on Proposed Cybersecurity Rulemaking.”
  • On October 2, 2016, the DOJ’s National Security Division published a memo titled “Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations” that sets out a policy framework for negotiated resolutions with companies involved in criminal economic sanctions and export control investigations.

Talks about town: In addition to the talks by government officials referenced elsewhere in this newsletter, other government officials were making the rounds:

  • On December 7, 2016, Assistant Attorney General Leslie R. Caldwell spoke about cybercrime enforcement at the Center for Strategic and International Studies in Washington, D.C. In addition, on December 8, 2016, Attorney General Loretta E. Lynch and Homeland Security Secretary Jeh Johnson, together with Chinese State Councilor and Minister of the Ministry of Public Security Guo Shengkun, co-chaired the third U.S.-China High-Level Joint Dialogue on Cybercrime and Related Issues.
  • On November 18, 2016, outgoing SEC Chair Mary Jo White (who announced on November 14, 2016, that she was stepping down from her position as SEC Chair effective January 2017) spoke at the New York University School of Law Program on Corporate Compliance and Enforcement in New York. Also on November 14, 2016, SEC Chair White gave the opening remarks at the first-ever Fintech Forum in Washington, D.C.
  • On November 17, 2016, Jamal El-Hindi, Deputy Director of FinCEN, spoke at the 2016 ABA/ABA Money Laundering Enforcement Conference in Washington, D.C.

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