Corporate Investigations and White Collar Defense

Spotlight on the False Claims Act

Why it matters: This month we discuss two interesting court cases involving the False Claims Act (FCA). On April 19, 2016, the Supreme Court heard oral argument in Universal Health Services v. U.S. ex rel. Escobar, a case involving the issues of implied certification of compliance and legal falsity in an FCA context. This was the only FCA case as to which the Supreme Court granted certiorari this term, and the Supreme Court's decision will resolve a multicircuit split on these issues. We review the oral argument here. In addition, we discuss a recent Ninth Circuit decision addressing the question of whether the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (a.k.a. Fannie Mae and Freddie Mac, respectively) constitute "federal instrumentalities" for purposes of the FCA. Short answer: They don't. Last, the DOJ announced a couple of significant FCA resolutions in connection with FHA-insured mortgage loans and sleep apnea masks—read on for a recap.

Detailed discussion:

Oral argument in Universal Health Services v. U.S. ex rel. Escobar: On April 19, 2016, the Supreme Court heard oral argument in the only FCA case of the current term. The Court had granted certiorari in December 2015 to review the question of implied certification of compliance under the FCA and to resolve a multicircuit split on the issue (we covered the Court's grant of certiorari in our January 2016 newsletter).

To briefly recap the relevant facts and procedural history, the case arose out of the care provided to a teenage girl at Massachusetts-based Arbour Counseling Services (owned and operated by Universal Health Services) that allegedly led to her death in 2009. In February 2013, the girl's parents filed qui tam lawsuits under the FCA and its Massachusetts counterpart alleging that Arbour, by submitting claims for reimbursement, had engaged in fraudulent billing by misrepresenting that it and its staff members were in compliance with the requisite legal health standards and were properly licensed and/or supervised as required by relevant law. The district court dismissed the case in its entirety, holding that the relators had not established the requisite falsity to sustain the claims. On appeal, the First Circuit reversed, finding that the relators had stated a claim for "legal falsity" under the FCA because Arbour impliedly certified its compliance with applicable law when it submitted its claims for reimbursement to the government agencies, even though the specific statutory/regulatory language did not require an express statement of compliance as a condition of payment. The questions presented in the cert petition as to which the Court heard oral argument—which reflect the multicircuit split created by the First Circuit's holding, are (1) "Whether the 'implied certification' theory of legal falsity under the FCA—applied by the First Circuit below but recently rejected by the Seventh Circuit—is viable"; and (2) "If the 'implied certification' theory is viable, whether a government contractor's reimbursement claim can be legally 'false' under that theory if the provider failed to comply with a statute, regulation, or contractual provision that does not state that it is a condition of payment, as held by the First, Fourth, and D.C. Circuits; or whether liability for a legally 'false' reimbursement claim requires that the statute, regulation, or contractual provision expressly state that it is a condition of payment, as held by the Second and Sixth Circuits."

On to the oral argument. As one observer commented in his analysis on Scotus.blog, "[a]bout the only thing clarified by yesterday's oral argument in Universal Health Services v. United States ex rel. Escobar is that the Court is unlikely to issue a unanimous opinion. The visceral reactions of the Justices on the merits of the case could hardly be more disparate."

The Justices certainly subjected the attorneys for both sides to lively questioning. Roy T. Englert, Jr., the attorney for Universal Health Services, began by arguing that the theory of implied certification improperly expands the reach of the FCA beyond the legislative intent, stating that "the entire case turns on four words of the [FCA] statute: 'False or fraudulent claim,' " and that in this context, as construed by Court precedent, the term " '[f]alse' means false." Justice Ruth Bader Ginsberg pushed back on this notion, asking "[s]o 'false' can only mean false? It can't mean deceptive, misleading?" This set off a long back-and-forth between the Justices and Englert about the meanings of the terms "false," "fraudulent" and "material" under the FCA and the common law of contracts and torts (with much quoting from the Restatements of such laws), and as such terms have been interpreted by the Court and the lower courts in different contexts and hypotheticals (such as "material" misstatements and omissions in securities law).

Much of the oral argument was devoted to the concept of materiality, and the fact that, taken to its most extreme, a company can be in breach of a government contract, or be accused of filing a "false" claim for reimbursement under the FCA, for a violation of an immaterial regulation. As Englert argued, in this case the First Circuit improperly found implied fraud based on an immaterial "single alleged regulatory violation involving a regulation not cited in the complaint, not cited in any appellate brief, not cited in the amicus brief of the Commonwealth of Massachusetts." Chief Justice John Roberts seemed sympathetic to this argument in questioning and hypotheticals, and Justice Stephen Breyer said "[t]hat's to me what's at the heart of this. How do you distinguish those regulations, breach of which are fraudulent when you breach them, and implicit promise not to, from those that not? There are millions of regulations. That's what all the amici are worried about."

David C. Frederick, the attorney for the relators, argued that "[w]hen a claimant asserts a right to government funds without disclosing that it has knowingly violated the government's material payment conditions, that claim is both false and fraudulent regardless of whether it contains …express false statements." To this, Chief Justice Roberts asked, "[s]o is your position that every material breach of a contract gives rise to a claim under the False Claims Act as false and fraudulent?" There followed another long back-and-forth with hypotheticals under government contracts generally (e.g., contracts to supply guns to the army which malfunction was a hypothetical that was returned to throughout the oral argument) and specifically with respect to the requirement in the FCA that false claims be made with respect to something "material" and be made "knowingly" (as defined in the FCA). Here, the argument turned to the facts of the case where the relators were arguing that the facility billed the government entitlement program for medical services when it "knew" that its staff wasn't in compliance with a material condition of payment, i.e., that the staff providing the medical treatment be properly licensed. At one point, Justice Sonya Sotomayor posed the issue this way (which was echoed by Justice Elena Kagan in a similar line of questioning): "I always thought that when you asked for payment, you're making a promise: I did what I agreed to do. Pay me, please. That's, to me, what's sort of understood. If I hired you to provide me with doctor services, you ask me for money, I'm assuming you provided me with doctor services. And you know you didn't. Why isn't that a fraud?"

Frederick also rebutted the argument that the theory of implied certification has improperly expanded liability under the FCA, citing to findings by an amicus expert that "not only has there been no spike as a result of the implied certification theory having been adopted, but that, in fact, the problems that are identified don't actually come to pass because the vast bulk of the cases that are not intervened in by the government, in fact, are done at a motion to dismiss." Deputy Solicitor General Malcolm L. Stewart, arguing for the government in support of the relators, summed it up by saying that, even though the theory of implied certification has only been around for 25 years, "the concept that a person can be held liable for fraud even though he says nothing explicitly false but labors to create a false impression, that's been around for ages."

We will be awaiting the Court's decision with avid interest and report back.

United States ex rel. Adams v. Aurora Loan Services: On February 22, 2016, the Ninth Circuit affirmed a Nevada district court's dismissal of an appeal brought by relators against various lenders and loan servicers in an FCA suit. The relators had argued that the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are "federal instrumentalities" for purposes of the FCA and thus false certifications made by the defendants regarding loans purchased by Fannie Mae and Freddie Mac fell under FCA purview. The Ninth Circuit disagreed, holding that Fannie Mae and Freddie Mac are private companies, "albeit companies sponsored or chartered by the federal government," and thus are not "federal instrumentalities" or "officers, employees, or agents" of the United States for purposes of the FCA.

FCA resolutions:

  1. On April 15, 2016, the DOJ announced that New Jersey-based Freedom Mortgage Corporation (Freedom) agreed to pay $113 million to resolve violations of the FCA by knowingly originating and underwriting single family mortgage loans insured by the U.S. Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) that did not meet applicable requirements for the FHA insurance program. As part of the settlement, Freedom admitted to the following facts: (a) between 2006 and 2011, it certified mortgage loans for FHA insurance that did not meet HUD underwriting requirements and were therefore not eligible for FHA mortgage insurance; (b) between 2006 and 2008, it failed to adhere to FHA's quality control (QC) requirements by, among other things, not sharing its early payment default (EPD) QC reviews with production and underwriting management; (c) between 2008 and 2010, due to staffing limitations it did not always perform timely QC reviews or perform audits of 100% of the EPD loans, as required by HUD; (d) between 2006 and 2011, it failed to report any improperly originated loans to HUD even though the EPD QC reviews that it did perform revealed high defect rates exceeding 30%; and (e) in 2012, after identifying hundreds of loans that "possibly should have been self-reported to HUD," it reported only one.
  2. On March 23, 2016, the DOJ announced that Respironics Inc. (Respironics) agreed to pay $34.8 million to resolve FCA and Anti-Kickback violations related to the payment of kickbacks in connection with the sale of masks designed to treat sleep apnea. The allegations, which were neither admitted nor denied by Respironics, centered around free call center services which it provided from 2012 to 2015 to durable medical equipment (DME) suppliers that bought Respironics' masks for patients with sleep apnea. The call center services, which were allegedly provided to "meet …patients' resupply needs," were free of charge "as long as the patients were using masks that Respironics manufactured; otherwise, the DME companies would have to pay a monthly fee based on the number of patients who used masks manufactured by a competitor of Respironics." Qui tam whistleblower to receive award of $5.38 million.

See (1) here to read the transcript of oral argument before the Supreme Court in Universal Health Services v. U.S. ex rel. Escobar, (2) here to read Ronald Mann, "Argument analysis: Justices display disparate views on implied fraud under False Claims Act," SCOTUSblog (4/20/16), and (3) here to read a discussion of the Escobar case in Manatt's January 2016 newsletter in the article entitled "Spotlight on the False Claims Act."

See here to read the Ninth Circuit's 2/22/16 opinion in United States ex rel. Adams v. Aurora Loan Services.

See here to read the DOJ's 4/15/16 press release entitled "Freedom Mortgage Corporation Agrees to Pay $113 Million to Resolve Alleged False Claims Act Liability Arising from FHA-Insured Mortgage Lending."

See here to read the DOJ's 3/23/16 press release entitled "Respironics to Pay $34.8 Million for Allegedly Causing False Claims to Medicare, Medicaid and Tricare Related to the Sale of Masks Designed to Treat Sleep Apnea."

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DOJ and SEC Enforcement Roundup

Why it matters: The DOJ and SEC have been busy in the weeks since our last newsletter. On the FCPA front, the DOJ announced to much fanfare the launch of its new FCPA Voluntary Disclosure pilot program, while the SEC announced another FCPA resolution with a pharmaceutical company relating to bribes paid by its drug sales reps in hotspot China. The SEC settled charges with another pharmaceutical company alleging that it fraudulently misled investors about a new drug's status with the Food and Drug Administration. And overall, the past weeks proved to be fraught for individuals, who were held accountable for wrongdoing ranging from FCPA violations, financial crimes (e.g., securities and bank fraud, money laundering, insider trading) to U.S. sanctions violations. Read on for a sampling of the recent activity in the world of DOJ and SEC enforcement.

Detailed discussion: The following is a recap of the recent DOJ and SEC activity that caught our eye this month:

Foreign Corrupt Practices Act (FCPA):

  • The DOJ's FCPA voluntary disclosure pilot program: On April 5, 2016, the DOJ announced the launch of a one-year FCPA pilot program intended to, among other things, motivate corporations to (1) "voluntarily self-disclose," (2) "fully cooperate" and (3) "timely and appropriately remediate." The DOJ also provided written descriptions of those terms and outlined the maximum mitigation credit available to a corporation that adheres to them. We issued a special alert detailing the new pilot program on April 6, 2016, which you can read here.
  • March 23, 2016—The SEC announced another FCPA resolution in China: Last month, in our article entitled "FCPA Focus on China, Princelings and the First SEC FCPA DPA with an Individual: Qualcomm and PTC," we discussed the recent government enforcement focus on China as a hotbed of alleged improper FCPA activity by U.S. companies. After we had "gone to print," the SEC announced on March 23, 2016, that Novartis AG (Novartis) agreed to pay $25 million to resolve allegations that it had violated the FCPA in connection with improper payments and gifts by employees and "complicit managers" at its China-based subsidiaries to doctors and other healthcare professionals at Chinese state-run hospitals and health facilities. The SEC alleged that such payments and gifts resulted in several million dollars in increased prescription drug sales for Novartis at the relevant Chinese health facilities. Without admitting or denying the SEC's findings, Novartis consented to the SEC's order finding that it violated the FCPA's internal controls and books and records provisions because the payments and gifts were improperly recorded in Novartis's books as a result of Novartis failing to devise and maintain a sufficient system of internal accounting controls or an effective anticorruption compliance program to detect and prevent such improper activity. In addition to paying $25 million (consisting of $21.5 million in disgorgement, $1.5 million in prejudgment interest and a $2 million penalty), Novartis agreed to provide status reports to the SEC for the next two years on its "remediation and implementation of anti-corruption compliance measures." Novartis recently announced in a security filing that its Korean subsidiary is under criminal investigation by Korean prosecutors for allegedly "utiliz[ing] medical journals to provide inappropriate economic benefits to healthcare professionals."
  • April 20, 2016—Former owner and president of Chestnut Consulting Group Inc. and Chestnut Consulting Group Co. (the Chestnut Group) pleaded guilty to FCPA violations for bribing an official at the European Bank for Reconstruction and Development (EBRD): The DOJ announced that Dmitrij Harder admitted as part of his guilty plea to paying $3.5 million in bribes between 2007 and 2009 to an EBRD official in order to influence the official's actions on applications for EBRD financing submitted by the Chestnut Group's clients and to influence the official to direct business to the Chestnut Group. Sentencing is scheduled for July 21, 2016.
  • March 23, 2016—Miami businessman Abraham Shiera pleaded guilty to FCPA charges in connection with a bribery scheme involving state-owned energy company Petroleos de Venezuela S.A. (PDVSA): The DOJ announced that Shiera pleaded guilty to charges of violating the FCPA for his role in a scheme to corruptly secure energy contracts from PDVSA. Sentencing is scheduled for July 8, 2016. The DOJ said that four others charged in relation to the case had pleaded guilty, including three foreign officials. We covered Shiera's and another man's arrest and charging in our January 2016 newsletter under "The FCPA in 2016: DOJ and SEC Focus on International Cooperation and Investigation of Individuals."

Other enforcement resolutions of note with corporations and individuals:

  • March 29, 2016—Biotech company AVEO Pharmaceuticals, Inc. (AVEO) agreed to pay $4 million to settle charges that it fraudulently misled investors about a new drug's status with the Food and Drug Administration (FDA): The SEC announced that AVEO and three of its former officers fraudulently concealed the FDA's level of concern about a new "flagship" drug used to treat kidney cancer by omitting from public statements to investors the fact that FDA staff had recommended a second clinical trial to address their concerns about patient death rates during the first clinical trial. According to the SEC's findings in a complaint filed in a Massachusetts district court, which were neither admitted or denied by AVEO, AVEO and its former officers raised $53 million in a public stock offering in January 2013 while failing to disclose in offering materials, press releases or investor conferences that the FDA staff had explicitly recommended during a May 2012 meeting that AVEO conduct a second clinical trial (deemed by the defendants to be too "expensive and time consuming") for the drug. When the FDA made public months later that it had recommended an additional clinical trial (the drug was never approved), AVEO's stock price declined by 31%. The SEC's complaint charges AVEO and the three former officers with, among other things, violations of the antifraud provisions of the federal securities laws, and the settlement with AVEO is subject to court approval. Proceedings are continuing against the three former officers, as to which the SEC is seeking disgorgement plus interest and penalties, permanent injunctions, and officer-and-director bars.
  • March 28, 2016—The DOJ and SEC announced parallel criminal and civil investigations into a $95 million scheme to defraud investors conducted by a financial services firm partner: In its press release, the DOJ announced that Andrew Caspersen, a partner at the New York office of a "multinational financial services firm involved in private equity and alternative asset advisory work," was being charged in an unsealed complaint with securities and wire fraud in connection with "a scheme to defraud investors of over $95 million." The press release detailed the DOJ's allegations in the complaint filed in the S.D.N.Y. that from July 2015 through March 2016, Caspersen fraudulently solicited investors by "falsely representing that he had authority to conduct deals on behalf of his employer with another private equity fund, and that investors' funds would be invested in a secured loan to an investment firm." The DOJ alleged that Caspersen failed to do this and instead "converted the funds to his own use without the authorization of his investors." In its press release, the SEC announced a parallel civil investigation against Caspersen for "defrauding two institutions he solicited to invest in a shell company he controlled whose name was deceptively similar to that of a legitimate private equity fund." The SEC's complaint seeks a permanent injunction, disgorgement plus interest, and monetary penalties.
  • March 23, 2016—The former CEO of $3 billion publicly traded TierOne Bank was sentenced to 11 years in prison for orchestrating a scheme to hide over $100 million in losses from shareholders and regulators: The DOJ announced that, in addition to his jail sentence, Gilbert G. Lundstrom was also ordered to pay a $1.2 million fine. Lundstrom had been convicted in November 2015 after a two-week jury trial of wire fraud, securities fraud and falsifying bank entries, as well as conspiracy to commit those acts. According to the DOJ, evidence presented at trial showed that Lundstrom designed an "aggressive strategy" to expand TierOne's portfolio beyond traditional lending in Nebraska to riskier areas such as commercial real estate in Las Vegas, which strategy "decimated" the bank with the onset of the financial crisis. The jury found that, among other things, Lundstrom and his co-conspirators thereafter intentionally concealed the more than $100 million in losses in the bank's loan and real estate portfolio from investors and regulators, and provided inflated figures in its required filings with the SEC and the Office of Thrift Supervision.
  • March 21, 2016—Three foreign nationals charged with U.S. sanctions violations on behalf of Iran: The DOJ announced the unsealing of an indictment in the S.D.N.Y. against three foreign nationals charged with conspiring to conduct "hundreds of millions of dollars-worth" of international transactions between 2010 and 2015 benefitting the government of Iran and Iranian companies in violation of the U.S. sanctions that were put in place against Iran in 1979 pursuant to the International Emergency Economic Powers Act. The three foreign nationals were also charged with money laundering and bank fraud. One of the defendants, a Turkish national with dual Iranian and Turkish citizenship, was arrested on March 19, 2016. The other two defendants, both Iranian citizens, remain at large.
  • March 18, 2016—The former head of an offshore brokerage was sentenced to 18 years in prison for an international "pump and dump" scheme: The DOJ announced that Harold Bailey Gallison II was sentenced in Virginia federal court for conspiracy to commit international money laundering and wire fraud in connection with his admitted role in an off-shore "pump and dump" scheme involving stocks of two companies traded on the over-the-counter (OTC) market. As part of his guilty plea, Gallison admitted to participating in a conspiracy to use his offshore brokerage platform to artificially inflate (i.e., "pump") the trading volume and price of the shares of two OTC stocks by "touting business activities and deceptive revenue forecasts and by engaging in coordinated trading activity to create the appearance of increasing market demand." Gallison also admitted that he and others then sold (i.e., "dumped") the shares at the inflated prices and laundered the proceeds through bank accounts in the U.S. and overseas. In addition to jail time, Gallison was ordered to pay $1.7 million in restitution. Gallison had been charged along with eight other individuals for their roles in the scheme in an indictment unsealed in July 2015.
  • March 16, 2016—The SEC announced the settlement of insider trading charges against a former compliance associate at Goldman Sachs: Without admitting or denying the SEC's allegations, Yue Han, a former compliance associate at Goldman Sachs in New York, consented to judgment being entered against him in the S.D.N.Y. pursuant to which he agreed to disgorge over $460,000 in illegal profits and consent to an industry bar. The SEC had charged Han with insider trading on November 25, 2015, alleging that he "traded on confidential information contained in e-mails sent and received by Goldman Sachs' employees who advised investment banking clients on impending merger and acquisition transactions." Ironically, Han allegedly gained access to the e-mails "as part of his work developing surveillance software to monitor other employees for potential misconduct, including insider trading."

See here to read the SEC's 3/23/16 Litigation Release/Administrative Summary entitled "Novartis Charged With FCPA violations."

See here to read the DOJ's 4/20/16 press release entitled "Former Owner and President of Pennsylvania Consulting Companies Pleads Guilty to Bribing Official at European Bank for Reconstruction and Development."

See here to read the DOJ's 3/23/16 press release entitled "Miami Businessman Pleads Guilty to Foreign Bribery and Fraud Charges in Connection with Venezuela Bribery Scheme."

See here to read the SEC's 3/29/16 press release entitled "SEC: Biotech Company Misled Investors About New Drug's Status With FDA."

See here to read the DOJ's 3/28/16 press release entitled "Financial Services Firm Partner Arrested And Charged In Manhattan Federal Court With $95 Million Scheme To Defraud Investors" and here to read the SEC's 3/28/16 press release entitled "Securities Professional Charged With Defrauding Institutional Investors."

See here to read the DOJ's 3/23/16 press release entitled "Former CEO of $3 Billion TierOne Bank Sentenced to 11 Years in Prison for Orchestrating Scheme to Hide More than $100 Million in Losses from Shareholders and Regulators."

See here to read the DOJ's 3/21/16 press release entitled "Turkish National Arrested for Conspiring to Evade U.S. Sanctions Against Iran, Money Laundering and Bank Fraud."

See here to read the DOJ's 3/18/16 press release entitled "Former Head of Offshore Brokerage Sentenced to 18 Years for Conspiracy to Commit International Stock Fraud and Money Laundering."

See here to read the SEC's 3/16/16 Litigation Release in the case of Securities and Exchange Commission v. Yue Han, et al.

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Eye on the Courts—Recent Opinions and Rulings of Note

Why it matters: It is time once again to survey the recent noteworthy opinions and rulings in the courts at all levels in the areas of white collar crime and securities fraud. In a case alleging federal healthcare offenses, the Supreme Court issued an opinion barring the government from freezing a criminal defendant's legitimate, untainted assets needed to hire defense counsel. The D.C. Circuit made clear the government's absolute authority to enter into deferred prosecution agreements with criminal defendants without interference or second-guessing by the courts, while the Second Circuit considered the question of what makes an opinion in a registration statement materially false or misleading for the first time since, and in light of, the Supreme Court's 2015 seminal Omnicare decision. Finally, a Tennessee district court ruled that the SEC's records from an FCPA investigation are protected from Freedom of Information Act requests, and a S.D.N.Y. court allowed to go forward a lawsuit brought by the former manager of a now defunct hedge fund against Southern District of New York U.S. attorney Preet Bharara in connection with a "misleading" affidavit Bharara filed in an insider trading investigation. Read on for a recap.

Detailed discussion: What do untainted assets, "anemic" DPAs, registration statement opinions, FOIA requests for SEC records and Manhattan U.S. Attorney Preet Bharara have in common? All figured prominently in recent court opinions, actions and rulings of note. We recap it here.

Supreme Court:

March 30, 2016—Luis v. U.S.: In the majority opinion written by Justice Stephen Breyer, the Supreme Court held that the pretrial restraint by the government of legitimate, untainted assets owned by a criminal defendant that are needed to retain defense counsel of choice violates the Sixth Amendment. First, a brief summary of the facts and procedural history that got us to this point: In 2012, the government charged petitioner Sila Luis (Luis) with fraudulently obtaining nearly $45 million via "paying kickbacks, conspiring to commit fraud, and engaging in other crimes all related to health care." In order to preserve the $2 million remaining in Luis's possession for payment of restitution and other criminal penalties, the government secured a pretrial order freezing Luis's assets, including her assets unrelated to, or "untainted by," her alleged crimes (there appears to have been no dispute that the assets at issue were, in fact, "untainted"). The district court recognized that the order could prevent Luis from obtaining counsel of her choice; nevertheless, it held that the Sixth Amendment did not give Luis the right to use her own untainted funds for that purpose, and the Eleventh Circuit affirmed. The Supreme Court vacated and remanded.

The Court began by reviewing the relevant language from the statute (18 U.S.C. Sec. 1345) that allows the government to freeze pretrial the assets of criminal defendants specifically charged with federal healthcare offenses or banking law violations. The Court noted that, under Section 1345(a)(2), the criminal defendant's assets that may be frozen fall into three categories: (1) if they were "obtained as a result of" the alleged violations, (2) if they are "traceable to" the alleged violations, or (3) if they are other "property of equivalent value" to the first two categories of assets. In this case, Luis argued that her "untainted" assets "of equivalent value" that were frozen under the third category left her with no funds with which to hire defense counsel of her choosing in violation of her Sixth Amendment right to assistance of counsel. The Court agreed, holding that "the pretrial restraint of legitimate, untainted assets needed to retain counsel of choice violates the Sixth Amendment. The nature and importance of the constitutional right taken together with the nature of the assets lead us to this conclusion."

Circuit Courts:

April 5, 2016—U.S. v. Fokker Services, BV: The D.C. Circuit, in an opinion written by Judge Sri Srinivasan, vacated D.C. District Court Judge Richard Leon's February 2015 ruling that had rejected, as within the valid exercise of his supervisory powers, the deferred prosecution agreement (DPA) entered into between the government and Dutch aerospace services provider Fokker Services, B.V. (Fokker). We covered Judge Leon's ruling in our May 2015 newsletter under "Judge Leon, Meet the Fokker: Court Shoots Down DPA."

To briefly summarize the facts, the DOJ had entered into the proposed 18-month DPA with Fokker in connection with alleged U.S. sanctions violations for facilitating, over the course of a five-year period commencing in 2005, more than 1100 shipments of aircraft and naval vehicle parts (manufactured in the U.S.) to embargoed countries Iran, Sudan and Burma. In addition to imposing reporting requirements on its sanctions compliance program efforts, the proposed DPA called for Fokker to forfeit $10.5 million and pay a civil fine of $10.5 million. In his February 2015 ruling, Judge Leon rejected the proposed DPA as, among other things, "anemic" and "grossly disproportionate to the gravity of Fokker Services' conduct in a post-9/11 world." The government filed a petition for writ of mandamus with the D.C. Circuit in March 2015, which the court granted a little over a year later on April 5, 2016.

In finding that Judge Leon legally erred and exceeded his authority in rejecting the proposed DPA, the court made clear that it was in no way commenting on the reasoning behind Judge Leon's objections, but "[r]ather, the fundamental point is that those determinations are for the Executive [Branch]—not the courts—to make." The court said that Judge Leon's rejection of the DPA was inappropriate because prosecutors and not judges are authorized to make charging decisions with respect to criminal defendants, including the decision to defer prosecution under a DPA: "The Constitution allocates primacy in criminal charging decisions to the Executive Branch…It has long been settled that the Judiciary generally lacks authority to second-guess those Executive determinations, much less to impose its own charging preferences." Furthermore, the court held that the language in the Speedy Trial Act that excludes deferred prosecutions from the exercise of statutorily imposed time periods "with the approval of the court" does not "empower the district court to disapprove the DPA based on the court's view that the prosecution had been too lenient." The court went on to explain that "[w]hile the exclusion of time is subject to 'the approval of the court,' there is no ground for reading that provision to confer free-ranging authority in district courts to scrutinize the prosecution's discretionary charging decisions. Rather, we read the statute against the background of settled constitutional understandings under which authority over criminal charging decisions resides fundamentally with the Executive, without the involvement of—and without oversight power in—the Judiciary."

March 4, 2016—In re Sanofi Securities Litigation: In its first published opinion since the Supreme Court's 2015 Omnicare decision, the Second Circuit narrowly applied the Omnicare holding to affirm the dismissal by the district court of consolidated class action complaints that had alleged that the defendant pharmaceutical company and drug developer it acquired (defendants) made materially false or misleading statements or omissions in offering materials regarding the development progress and clinical testing of the defendants' "breakthrough" drug used to treat multiple sclerosis. Specifically, the plaintiffs alleged that, in their consistent optimistic projections about the drug's development and progress toward FDA approval, the defendants omitted to disclose that the FDA had expressed concerns regarding the use of single‐blind (as opposed to double-blind) clinical studies for the drug, a fact that could (and ultimately did) slow the drug's approval progress. The plaintiffs alleged that these omissions misled investors and artificially inflated the value of the plaintiffs' specialized financial instruments known as contingent value rights (CVRs), whose value is tied to the achievement of certain milestones in drug development such as FDA approval. The Second Circuit stated at the outset of its opinion that "[w]e see no reason to disturb the conclusions of the district court. However, after the district court's opinion, the Supreme Court decided Omnicare, which refined the standard for analyzing whether a statement of opinion is materially misleading. Plaintiffs have urged us to reconsider the district court's ruling in light of Omnicare. We do so here, but conclude that even under Omnicare's standard, Plaintiffs have failed to allege that Defendants made materially misleading statements of opinion."

The Second Circuit began by reviewing the Supreme Court's opinion in Omnicare, which we wrote about in our April 2015 newsletter. To briefly recap, at issue in Omnicare was whether Section 11 of the '33 Act applies to statements of opinion contained in a registration statement. In a two-pronged analysis, the Supreme Court found that a sincerely held statement of opinion will not create liability as an "untrue statement of material fact" under the first part of Section 11, even if the opinion later proves to be wrong. However, the statement of opinion can create liability under the second part of Section 11 if it omits facts that, if included, would demonstrate to a reasonable investor that the issuer lacked the basis for making that statement of opinion.

In its review, the Second Circuit placed great weight on language in the Supreme Court's opinion that seemingly "tempered" the new standard it put in place, which the Supreme Court admitted was "no small task for an investor" to meet. For example, the Second Circuit pointed out that the Supreme Court "cautioned against an overly expansive reading of this standard, noting that '[r]easonable investors understand that opinions sometimes rest on a weighing of competing facts,' and adding that '[a] reasonable investor does not expect that every fact known to an issuer supports its opinion statement'…[and] that a statement of opinion 'is not necessarily misleading when an issuer knows, but fails to disclose, some fact cutting the other way.' " Moreover, the Supreme Court noted that " 'the investor takes into account the customs and practices of the relevant industry,' and instructed that 'an omission that renders misleading a statement of opinion when viewed in a vacuum may not do so once that statement is considered, as is appropriate, in a broader frame.' "

The Second Circuit then looked at the three categories of "statements of opinion" at issue in the case—all relating to the defendants' optimistic projections about the development, FDA approval and launch of the drug, and found that the Omnicare decision did not affect the district court's dismissal of the case. The court concluded that "[i]ssuers must be forthright with their investors, but securities law does not impose on them an obligation to disclose every piece of information in their possession. As Omnicare instructs, issuers need not disclose a piece of information merely because it cuts against their projections. Given the sophistication of the investors here, the FDA's public preference for double‐blind studies, and the absence of a conflict between Defendants' statements and the FDA's comments, we conclude that no reasonable investor would have been misled by Defendants' optimistic statements regarding the approval and launch of [the drug.] The judgment of the District Court is affirmed."

District courts

March 12, 2016—Robbins, Geller, Rudman & Dowd, LLP v. SEC: A Middle District of Tennessee judge granted the SEC's motion for summary judgment and ruled that records prepared by the SEC in connection with an FCPA probe involving accusations that Walmart bribed Mexican officials were exempted from Freedom of Information Act (FOIA) requests. The plaintiff law firm had filed an FOIA request for the SEC records in 2013. The judge ruled that the SEC records were protected by Section 7(a) of the FOIA, which exempts records from FOIA requests if they meet a two-prong test that demonstrates (1) they were "compiled for law enforcement purposes" and (2) their release "could reasonably be expected to interfere" with a "pending or prospective" enforcement proceeding. The judge ruled that both prongs had been satisfied in this case and that the SEC had "appropriately walked the Exemption 7(a) tightrope."

March 10, 2016—Ganek v. Liebowitz, et al.: S.D.N.Y. Judge William H. Pauley III denied a motion to dismiss and allowed portions of a lawsuit brought by former hedge fund manager David Ganek against U.S. Attorney Preet Bharara and Bharara's deputies and FBI agents and supervisors named in the lawsuit to go forward and enter the discovery phase. Ganek had alleged that Bharara and the named others violated his civil, Fourth and Fifth Amendment rights when they "fabricated" an affidavit falsely naming him as a target in an insider trading probe that "killed" his once $4 billion fund, Level Global Investors. The case was brought in connection with a 2010 raid on the hedge fund by the DOJ and FBI in response to information received from an analyst that insiders at the hedge fund had improperly traded in Dell Computer's stock. The analyst allegedly specifically told the government that Ganek was not aware of or involved in the insider trading, but in an affidavit to get a search warrant that was made public, Ganek was named as a target. The government failed after repeated requests from Ganek—some made to Bharara personally—to publicly clarify that he was not a target. The fund collapsed in 2011, and Ganek was never charged. In allowing the case to go forward, Judge Pauley said that "[d]iscovery is now appropriate to ascertain whether this case is about a simple misunderstanding or whether something more troubling is afoot." Ganek's partner, Anthony Chiasson, was convicted of insider trading in 2012 but his conviction was overturned in 2014 as part of the Second Circuit's Newman decision.

See here to read the Supreme Court's 3/30/16 opinion in Luis v. U.S.

See here to read the D.C. Circuit's 4/5/16 opinion in U.S. v. Fokker Services B.V.

See here to read the S.D.N.Y. court's 3/10/16 opinion in Ganek v. Liebowitz, et al.

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Still Whistling While You Work—Whistleblower Programs Update

Why it matters: A year ago, we surveyed some of the government whistleblower programs that were put in place to reward individuals who report corporate wrongdoing with big payouts. Flash forward twelve months, and whistleblower programs continue to be an effective tool in the government's arsenal to combat corporate malfeasance. Here, we focus on recent announcements by the SEC and the CFTC about payouts under their respective whistleblower programs, including the CFTC's announcement about a $10 million payout under its whistleblower program, only the third such award—and by far the largest—since the program's inception in 2011. In addition, we briefly touch upon recent legislation relating to financial crimes and trade secret theft, respectively, which contains enhanced protections for whistleblowers and underscores the importance Congress is placing on incentivizing individuals with knowledge of corporate wrongdoing to come forward.

Detailed discussion: In our May 2015 newsletter, we surveyed the substantially similar whistleblower programs being implemented by the SEC and the CFTC that were created by the 2010 Dodd-Frank reforms and launched in 2011, pursuant to which the government will pay monetary awards—ranging from 10% to 30%—to individuals (whose identities remain confidential) that provide "original" information about corporate wrongdoing that leads to a successful enforcement action with sanctions exceeding $1 million. Recent announcements by the SEC and CFTC illustrate that their whistleblower programs continue to be powerful tools in the government's arsenal to fight financial crimes. In addition, whistleblower protections in newly proposed legislation illustrate the importance legislators are placing on programs to incentivize individuals with evidence of corporate wrongdoing to come forward.

SEC whistleblower program: On March 8, 2016, the SEC announced that it had awarded almost $2 million to three whistleblowers under its whistleblower program. The SEC said that the largest of the three awards, $1.8 million, was being awarded to an individual who voluntarily provided original information that prompted the SEC to open its investigation and continued to provide valuable information throughout the investigation. The other two whistleblowers received approximately $65,000 each for providing information after the investigation started. These awards followed the SEC's January 15, 2016, announcement that, for the first time, it had awarded a "company outsider"—i.e., an individual not employed by the company—more than $700,000 under its whistleblower program for providing "a detailed analysis that led to a successful SEC enforcement action" against the company. In the March 8 press release, the SEC noted that, since its inception in 2011, its whistleblower program had to date paid more than $57 million to 26 individuals. Said Sean X. McKessy, Chief of the SEC's Office of the Whistleblower, "[w]e're seeing a significant uptick in whistleblower tips over prior years, and we believe that's attributable to increased public awareness of our program and the tens of millions of dollars we've paid to whistleblowers for information that helped us bring successful enforcement actions."

CFTC whistleblower program: On April 4, 2016, the CFTC announced an award of more than $10 million—the third such award under the CFTC's whistleblower program and by far the largest—to an individual who provided "key original information" that led to a successful CFTC enforcement action. In stark contrast to the SEC, the CFTC had previously only made two awards under its whistleblower program, the first in 2014 in the amount of $240,000 and the second in September 2015 in the amount of $290,000. Recent indications are that the CFTC is ramping up its whistleblower program, starting with the CFTC's highly publicized launch in January 2016 of a new whistleblower website designed to encourage the public to submit tips about potential financial crimes under the Commodity Exchange Act. In addition, we spoke in our May 2015 article about a potential multimillion-dollar payout by the CFTC to a whistleblower in connection with the "Flash Crash" case, where a U.K. futures trader was arrested—based on information provided by the whistleblower—for allegedly manipulating the U.S. stock market in May 2010, causing a 600-point drop in a five-minute span and gaining $40 million in illegal profits. This case has not yet been resolved—the trader is still in the U.K. although it was announced in March 2016 that a U.K. judge had ordered him extradited to the U.S. to face trial (the first step in a lengthy process)—but assuming a resolution of the case results in a "successful enforcement action," another multimillion-dollar CFTC whistleblower award can be expected. The Director of the CFTC's Division of Enforcement, Aitan Goelman, said of the $10 million payout that "[a]n award this size shows the importance that the Commission places on incentivizing future whistleblowers." Added Christopher Ehrman, Director of the CFTC's Whistleblower Office, "[t]he Whistleblower Program is working. My hope is that this multimillion dollar award will encourage others to come forward with information that will assist the Commission in protecting our markets."

New whistleblower legislation:

  • On February 25, 2016, Rep. Elijah E. Cummings, D-Md., the ranking member of the House Committee on Oversight and Government Reform, and Senator Tammy Baldwin, D-Wis., introduced the Whistleblower Augmented Reward and Non-Retaliation Act of 2016 (WARN Act), which would expand protections for those who blow the whistle on financial crimes. Rep. Cummings said of the bill that "[w]hen we in Congress passed the Dodd-Frank Act, we put in place protections for whistleblowers that are now being undermined by financial firms. Our bill would address these abuses and create stronger protections for whistleblowers who shine a light on corporate malfeasance." Added Senator Baldwin, "[t]he middle class has paid a steep price for the irresponsible actions of others, yet only one top banker went to jail for the financial crisis. If we strengthen and empower whistleblowers in the financial industry, we can do a better job of holding Wall Street accountable. These reforms will help us do that."
  • On April 4, 2016, the Senate unanimously passed the Defend Trade Secrets Act of 2016, which, among other things, creates a private civil right of action in federal court for the misappropriation of trade secrets. The Senate version of the bill was approved by the House Judiciary Committee on April 20, 2016, and at press time a vote before the full House was imminent, where it was expected to pass easily. President Obama has indicated that he will sign the bill into law as soon as it hits his desk. Relevant here, the legislation contains whistleblower protections for individuals who disclose trade secrets in the course of reporting violations of the law, and imposes obligations on employers to reference the new whistleblower provisions in any employment contract that governs the use of a trade secret or other confidential information.

See here to read the SEC's 3/8/16 press release entitled "SEC Awarding Nearly $2 Million to Three Whistleblowers" and here to read the SEC's 1/15/16 press release entitled "SEC Awards Whistleblower More Than $700,000 for Detailed Analysis."

See here to read the CFTC's 4/4/16 press release entitled "CFTC Announces Whistleblower Award of More Than $10 Million."

See here to read the 2/25/16 press release entitled "Cummings and Baldwin Introduce Legislation to Expand Protections for Wall Street Whistleblowers" and here to read the 4/12/16 Daily Business Review article entitled "Trade Secrets Bill Likes Quiet Whistleblowers, Not News Hogs" by Monika Gonzalez Mesa.

See here to read the article in our May 2015 newsletter entitled "Whistle While You Work: April Showers Bring Big Whistleblower Awards, Some to Compliance Officers."

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Keeping an Eye Out—Updates and Briefly Noted:

Updates

  • March 28, 2016—Supreme Court denied cert petition in Bebo v. SEC: The Court denied petitioner Bebo's petition for writ of certiorari (filed in February 2016) and let stand the Seventh Circuit's opinion that Bebo must first exhaust her remedies via the SEC's "in-house" administrative proceedings before filing suit in federal court. Mark Cuban was among those who filed amicus briefs in support of Bebo's petition. We most recently covered the Bebo case in our October 2015 newsletter under "Wherefore Art Thou Due Process? Part III."
  • March 16, 2016—Judge denied motion to reconsider ruling in U.S. v. Hoskins: District of Connecticut Judge Janet Bond Arterton denied the government's motion to reconsider her August 13, 2015, ruling in U.S. v. Hoskins that limited the government's theory of "accomplice liability" under the FCPA. See here to read Judge Arterton's "Ruling Denying the Government's Motion for Reconsideration." We covered Judge Arterton's August 13, 2015, ruling in our September 2015 newsletter under "Judge Limits FCPA 'Accomplice Liability' in Hoskins." It is expected that the government will appeal.

Briefly Noted

  • April 6, 2016—The FCPA Blog announced the creation of The FCPA Enforcement Action Database: The searchable database depicts every DOJ and SEC FCPA enforcement action starting from January 1, 2008, through the present day and will be updated as the enforcement actions are announced. The database graphs the actions in several different ways (by year, by industry, by country, etc.), summarizes each one, and links back to the relevant entry on the FCPA Blog.
  • March 16, 2016—NAVEX Global 2016 Ethics and Compliance Hotline Benchmark Report: Law.com reported that ethics and compliance advisory company NAVEX Global issued its Ethics and Compliance Hotline Benchmark Report for 2016, which found after analyzing approximately 860,000 reports from 2,300 organizations that, among other things, (i) companies are taking longer to investigate and close whistleblower cases (a median 46 calendar days in 2016, up from 39 in 2014 and 32 in 2011), (ii) companies are able to substantiate 41% of all whistleblower reports, up from 30 percent in 2010, and (iii) companies that collect complaints only from websites and hotlines have an "incomplete picture of risk" and that "employers recording complaints from all channels, such as email and walk-ins," document 72% more whistleblower reports.

Talks about town:

  • On April 18, 2016, Assistant Attorney General Leslie R. Caldwell spoke at the Health Care Compliance Association's 20th Annual Compliance Institute in Las Vegas.
  • On March 30, 2016, Assistant Attorney General John P. Carlin delivered keynote remarks at the Intellectual Property Protection and Cybersecurity Roundtable at Iowa State University.
  • On March 21, 2016, Deputy Attorney General Sally Q. Yates spoke at the Ninth Meeting of the National Commission on Forensic Science in Washington, D.C.
  • On March 16, 2016, Attorney General Loretta Lynch spoke at the Organization for Economic Co-Operation and Development Anti-Bribery Ministerial Meeting in Paris, France.

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