Investigations and White Collar Defense

Eye on the Courts—Recent Opinions and Rulings of Note

Why it matters: From a white collar and securities fraud standpoint, there has been a lot of noteworthy activity in the courts of late. The Supreme Court granted certiorari in U.S. v. Salman, where it will take up the issue of downstream insider trading (something it declined to do in Newman). The Second Circuit made an important "first impression" ruling regarding sovereign immunity in a securities fraud context. Last but not least, district courts in the Eastern District of New York and the District of Minnesota made significant rulings in cases involving the confidentiality of a court-ordered compliance monitor's report and the individual accountability of compliance officers for their employer's anti-money laundering failures, respectively. Read on for the details.

Detailed discussion: What do downstream tippees, sovereign immunity, the First Amendment, and compliance officers have in common? All figured prominently in recent court opinions, actions and rulings of note. We recap it here.

U.S. Supreme Court:

January 19, 2016—U.S. Supreme Court granted certiorari in an insider trading downstream tippee case (no, not NewmanSalman): In our August 2015 newsletter, we discussed the July 6, 2015 case of U.S. v. Salman, in which the Ninth Circuit (in an opinion written by Southern District of New York Judge Jed S. Rakoff sitting by designation) declined to adopt the standard for establishing the "personal benefit" part of the breach of fiduciary duty element at the core of insider trading liability cases set by the Second Circuit in 2014 in U.S. v. Newman. Instead, the Ninth Circuit relied on the "personal benefit" test established in the 1983 Supreme Court case of Dirks v. SEC to uphold the conviction for insider trading of defendant Bassam Yacoub Salman (Salman) in connection with a complicated "downstream tippee" scheme involving members of Salman's extended family.

To briefly recap the tension between the Newman and Dirks tests, in Newman the Second Circuit cited to the controlling Supreme Court Dirks case but held that, in order to establish the "personal benefit" to the insider necessary for an insider trading conviction, there must at a minimum be "an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature." The Second Circuit overturned the insider trading convictions of the downstream tippee defendants in that case. By contrast, the Ninth Circuit in Salman upheld Salman's conviction by relying on the broader "personal benefit" test established in Dirks, which was that a "personal benefit" can be established by " 'an insider mak[ing] a gift of confidential information to a trading relative or friend.' " In so doing, the Ninth Circuit specifically declined to follow the Newman test, which Salman had argued would overturn his conviction if applied.

The government in Newman filed a petition for writ of certiorari in late July 2015 with the Supreme Court, arguing that its review was necessary because, among other things, the Salman decision created a bona fide circuit split between the Second and Ninth Circuits regarding the proper test for establishing "personal benefit" in insider trading downstream tippee cases. In October 2015, the Supreme Court declined to review Newman and let the Second Circuit's decision stand. In November 2015, Salman filed a petition for writ of certiorari with the Supreme Court raising the same circuit split argument from the Newman petition, and this time the Court acknowledged the split and granted certiorari, limiting its review exclusively to the first question presented: "Does the personal benefit to the insider that is necessary to establish insider trading under Dirks v. SEC … require 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 United States v. Newman … or is it enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case?"

As of this writing, oral argument had not yet been scheduled in Salman. As always, we will be watching developments and report back.

See here to read the 11/10/15 Petition for Writ of Certiorari in Salman v. U.S.

For more on this issue, read the article in our 8/15 newsletter entitled "Are the Circuits A-Splitting? The Ninth Circuit Declines to Follow the Second Circuit's Insider Trading Decision in U.S. v. Newman."

Circuit Courts:

February 3, 2016—Second Circuit ruled, in a matter of first impression, that sovereign immunity does not protect a foreign sovereign wealth fund from being sued in the United States if its misrepresentations had a "direct effect" on U.S. investors: On February 3, 2016, the Second Circuit held in the case of Atlantica Holdings, Inc. et al. v. Sovereign Wealth Fund Samruk-Kazyna JSC, a/k/a National Welfare Fund Samruk-Kazyna that a sovereign fund owned by the Republic of Kazakhstan can be sued in the Southern District of New York because it made misrepresentations that had a "direct effect" on investors in the United States.

To briefly summarize the relevant facts, in December 2012, a group of U.S. investors (Plaintiffs) filed a complaint in the Southern District of New York against Sovereign Wealth Fund Samruk-Kazyna JSC ("SK Fund"), a sovereign wealth fund owned by the Republic of Kazakhstan. The Plaintiffs alleged that SK Fund had violated the U.S. securities laws by misrepresenting the value of certain notes issued by nonparty BTA Bank JSC, a Kazakhstani corporation majority-owned by SK Fund, in connection with a 2010 restructuring of the bank's debt. SK Fund filed a motion to dismiss, arguing that it was protected from prosecution in the United States under the Foreign Sovereign Immunities Act of 1976 (FSIA), which the district court denied.

The Second Circuit agreed to hear the case on interlocutory appeal to address a "question of first impression," namely, "whether the Foreign Sovereign Immunities Act of 1976 (FSIA) … immunizes an instrumentality of a foreign sovereign against claims that it violated federal securities laws by making misrepresentations outside the United States concerning the value of securities purchased by investors within the United States." The Court began its analysis by reviewing the applicable provisions of the FSIA, finding that a U.S. court will lack subject matter jurisdiction over a sovereign entity unless one of the specific exceptions enumerated in the FSIA applies. In this case, the Second Circuit found the "commercial activity" exception to be applicable, specifically the third clause thereof known as the "direct-effect" clause, which provides that a foreign sovereign entity will not be immune from prosecution in the United States in any case in which "the action is based … [3] upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States." The Court specifically upheld the district court's ruling that SK Fund is not protected by the FSIA based on the "direct-effect" clause, finding upon a review of the facts that "the relationship between SK Fund's alleged misrepresentations and the resulting financial loss suffered in this country by United States investors … is sufficiently direct to overcome FSIA immunity."

See here to read the 2/3/16 Second Circuit opinion in Atlantica Holdings, Inc. et al. v. Sovereign Wealth Fund Samruk-Kazyna JSC, a/k/a National Welfare Fund Samruk-Kazyna.

District Courts:

January 28, 2016—Eastern District of New York judge ruled that compliance monitor's report filed in connection with the DOJ's 2012 Deferred Prosecution Agreement with HSBC must be unsealed on First Amendment grounds: In 2012 HSBC bank entities (HSBC) agreed to pay almost $2 billion in fines and penalties and enter into a deferred prosecution agreement (DPA) with the DOJ in connection with admitted large-scale money laundering and sanctions violations. Under the DPA, HSBC agreed to be overseen by an independent compliance monitor. On January 28, 2016, Judge John Gleeson ruled in U.S. v. HSBC Bank that the 1,000-page progress report submitted by HSBC's compliance monitor was a judicial record that the public has a First Amendment right to see. He rejected arguments by the DOJ and HSBC that the report should stay out of the public domain, but agreed that confidential and sensitive information could be redacted and gave the parties until late February to submit their proposed redactions. On February 4, 2016, the DOJ filed a motion for interlocutory appeal to the Second Circuit on the issue and requested a stay in the proceedings pending appeal.

See here to read Judge Gleeson's 1/28/16 Memorandum and Order in U.S. v. HSBC Bank.

January 13, 2016—District of Minnesota judge ruled that the anti-money laundering (AML) provisions in the Bank Secrecy Act (BSA) apply to individuals: On January 13, 2016, in U.S. Department of Treasury v. Haider, a District of Minnesota judge denied the motion brought by Thomas Haider (Haider) to dismiss the complaint filed in December 2014 by the DOJ on behalf of the U.S. Department of the Treasury to enforce a $1 million civil money penalty assessed by FinCEN against Haider. The complaint alleged that, during the time that Haider was employed by MoneyGram International, Inc. (MoneyGram) as its chief compliance officer from 2003 to 2008, Haider failed to ensure that MoneyGram implemented and maintained an effective AML program and complied with Suspicious Activity Report (SAR) filing obligations under the BSA. In denying Haider's motion to dismiss, the judge ruled that individuals can be held responsible for AML control failures under the BSA, stating that "the plain language of the statute provides that a civil penalty may be imposed on corporate officers and employees like Haider." The court also rejected or declined to consider at this time several other arguments made by Haider, including one related to FinCEN's alleged improper use of grand jury materials and one asserting a violation of his right to due process.

See here to read the 1/13/16 Order in U.S. Department of Treasury v. Haider.

For more on this case, see the article in Manatt's 2/4 Financial Services Law newsletter entitled "Raising the Stakes for AML Compliance Officers: Court Refuses to Rule Out Potential Liability for Role in Employer's BSA Compliance Shortcomings."

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And Then There Were None: Six Individuals Acquitted by U.K. Jury in Yen LIBOR Manipulation Conspiracy Trial

Why it matters: On January 27, 2016, five former brokers were acquitted by a U.K. jury of conspiracy to defraud by manipulating LIBOR, and a sixth was acquitted the next day. The trial, which commenced in October 2015 in Southwark Crown Court in London, resulted from charges brought by the U.K.'s Serious Fraud Office that the six individuals had conspired with convicted LIBOR manipulator Tom Hayes to engineer Yen LIBOR rates to favor Hayes' trading positions. The jury's acquittal across the board was a blow to the Serious Fraud Office.

Detailed discussion: On January 27, 2016, after a four-month trial, a U.K. jury took one day to acquit five former brokers that the Serious Fraud Office (SFO—the U.K.'s version of the DOJ's white collar sections) claimed had conspired with convicted LIBOR manipulator Tom Hayes (Hayes) to illegally manipulate Yen LIBOR rates. The next day, the jury acquitted the sixth defendant in the case. The acquittal was a blow to the SFO, which in August 2015 had successfully prosecuted former UBS and Citigroup trader Hayes as the "ringmaster" of an elaborate LIBOR manipulation scheme conducted between 2006 and 2010; Hayes was found guilty of LIBOR manipulation after a jury trial and is currently serving an 11-year (reduced from 14-year) prison term.

According to The Wall Street Journal's press coverage of the four-month trial, the SFO argued to the jury that the six former brokers (with "colorful" nicknames such as "Lord Libor," "Big Nose," and "Danny the Animal") acted at the direction of and in concert with Hayes to illegally manipulate the Yen LIBOR rates to favor Hayes' positions and were rewarded with monetary kickbacks, meals, bottles of expensive champagne and other tangibles for their efforts. In turn, the defense argued that the low-level broker defendants didn't have the power to influence the Yen LIBOR rates and were simply conning the gullible Hayes, who was not the diabolical "criminal mastermind" portrayed by the SFO. The jury apparently agreed, voting to acquit all six defendants.

The Wall Street Journal reported that the acquittals were a "setback" for the SFO because David Green, the SFO's director, had made the LIBOR manipulation investigation his priority and was hoping that convictions in this trial would "pave the way" to convictions in upcoming related manipulation conspiracy trials and "improve the agency's international credibility." Moreover, "the acquittal of the brokers undermines a key plank of the government's conspiracy case against [Hayes], namely eight counts of conspiring to defraud with brokers and fellow traders." In the face of the acquittal, Director Green found himself on the defensive, stating that "[t]he key issue in this trial was whether these defendants were party to a dishonest agreement with Tom Hayes…. By their verdicts the jury have said that they could not be sure that this was the case. Nobody could sensibly suggest that these charges should not have been brought and considered by a jury." Representatives for Hayes released a statement that Hayes was "thrilled that the brokers can tonight return to their families and their lives" but was also "bewildered that he is now in a situation where he has been convicted of conspiring with nobody."

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FCPA and Anti-Money Laundering Enforcement Review—"Follow the Money"

Why it matters: This month we highlight three recent instances where the federal enforcement agencies have announced settlements, prosecutions and orders in their continued efforts to "follow the money" down the twin rabbit holes of bribes payments and money laundering. The SEC announced settlements in three Foreign Corrupt Practices Act cases in the first week of February 2016 while the DOJ successfully prosecuted the founder of Liberty Reserve, a now defunct virtual currency service that was allegedly "once used by cybercriminals around the world to launder the proceeds of their illegal activity." In addition, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued "Geographic Targeting Orders" aimed at uncovering the identities of individuals who launder money through shell companies via all-cash high-end residential real estate deals in New York and Florida. Read on for a recap.

Detailed discussion: In the first two months of 2016, the SEC settled three Foreign Corrupt Practices Act (FCPA) cases and the DOJ successfully prosecuted the founder of the alleged cybercriminal money laundering service Liberty Reserve. In addition, FinCEN issued "Geographic Targeting Orders" aimed at uncovering the identities of individuals who launder money via anonymous, all-cash residential high-end real estate deals in New York and Florida. We recap these enforcement agencies' latest efforts to "follow the money" for you here.

SEC: In the first week of February 2016, the SEC announced three FCPA resolutions of note:

  • "Golf in the morning and beer-drinking in the evening"—SciClone Pharmaceuticals agreed to pay $12.8 million to settle FCPA charges in connection with bribes paid to healthcare professionals in China: On February 4, 2016, the SEC announced that California-based SciClone Pharmaceuticals, Inc. (SciClone) agreed to pay $12.8 million to settle charges that its Chinese subsidiaries paid bribes to healthcare professionals employed at state health institutions in China in order to increase sales. According to the SEC's order, an SEC investigation found that, between 2005 and 2010, employees of SciClone's China-based subsidiaries gave "items of value," including money, gifts, expensive trips and meals, golf expeditions and lavish hospitality, to the healthcare professionals (as one SciClone rep said, "luring them with the promise of profit"), which resulted in several million dollars in sales of SciClone's pharmaceutical products to China's state health institutions. Also, according to the SEC's order, when SciClone learned in 2008 of a potential FCPA issue relating to one of its third-party consultants, it conducted an internal investigation into that consultant. Yet, the SEC found, a broader investigation into its third-party hiring practices was not conducted. The SEC found that bribes were improperly reflected as legitimate business expenses in SciClone's books and records and that SciClone "failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anti-corruption compliance program." Without admitting or denying the SEC's findings, SciClone consented to the SEC's order and agreed to pay over $9.4 million in disgorgement of sales profits plus $900,000 in prejudgment interest and a $2.5 million penalty. In addition, the SEC's order states that SciClone has "taken steps to improve its internal accounting controls and to create a dedicated compliance function," including "(1) hiring a compliance officer for its China operations; (2) undertaking an extensive review of the policies and procedures surrounding employee travel and entertainment reimbursements; (3) substantially reducing the number of suppliers providing third-party travel and event planning services; (4) improving its policies and procedures around third-party due diligence and payments; (5) incorporating anti-corruption provisions in its third-party contracts; (6) providing anti-corruption training to its third-party travel and event planning vendors; (7) disciplining employees (and their managers) who violate SciClone's policies; and (8) creating an internal audit department and compliance department." SciClone further agreed in the Order to provide the SEC with status reports for the next three years on its remediation and implementation of anticorruption compliance measures. In a separate press release, SciClone announced that the DOJ had ended its related investigation and declined to pursue the matter further.

    See here to read the SEC's 2/4/16 Order entitled "In the Matter of SciClone Pharmaceuticals, Inc.," respectively.
  • Individual accountability under the FCPA—airline executive agreed to pay $75,000 to settle charges in connection with "potential" improper payments to Argentinean union officials: Also on February 4, 2016, the SEC announced that Ignacio Cueto Plaza (Cueto), the CEO of South America-based LAN Airlines, agreed to settle charges that he violated the FCPA when he authorized "improper payments to a third-party consultant who may have passed some money to union officials in the midst of a dispute between the airline and its unionized employees in Argentina." According to the SEC's order, an SEC investigation found that Cueto authorized a "sham" consulting agreement (never signed) pursuant to which $1.15 million was wired to a Virginia-based brokerage account in order for the "consultant" to "undertake a study of existing air routes in Argentina." The SEC found that Cueto "knew no such study would be performed" and that, instead, the "consultant" was hired to help settle a labor dispute in Argentina, using the $1.5 million if necessary to bribe union officials "to abandon their threats … and to get them to accept a wage increase lower than the amount asked for in negotiations." Without admitting or denying the SEC's findings, Cueto agreed to the SEC's order that he violated the internal accounting controls, books and records, and false records provisions of the Securities Exchange Act of 1934 and agreed to pay a $75,000 penalty. The order also requires Cueto to certify his compliance with the airline's policies and procedures by, among other things, attending anticorruption training.

    See here to read the SEC's 2/4/16 Order entitled "In the Matter of Ignacio Cueto Plaza," respectively.
  • Cooperation is key in the SEC's settlement with SAP SE—company agreed to disgorge $3.7 million in sales profits to settle FCPA charges of deficient internal controls that allowed executive to pay bribes to Panamanian officials: On February 1, 2016, the SEC announced that the Germany-based software manufacturer SAP SE (SAP) agreed to pay disgorgement of $3.7 million in profits (plus approximately $190,000 in prejudgment interest) from SAP's software sales to the Panamanian government to settle FCPA charges that it maintained deficient internal controls that allowed former SAP executive Vincente E. Garcia to pay $145,000 in bribes to a senior Panamanian government official in exchange for lucrative sales contracts (in our January 2016 newsletter, we reported on the separate DOJ and SEC enforcement actions against Garcia individually that resulted in him personally disgorging over $85,000 and being sentenced to 22 months in prison in December 2015). According to the SEC's order, the bribery scheme involved providing discounts of up to 82% to SAP's Panamanian partner, who used the excessive discounts to create a "slush fund" for paying bribes to Panamanian officials on Garcia's behalf as well as to pay Garcia kickbacks. The SEC also found that the slush fund monies were improperly recorded in SAP's books and records as legitimate discounts. Without admitting or denying the SEC's findings, SAP consented to the SEC's order that SAP violated the internal controls and the books and records provisions of the FCPA. The SEC's order makes clear that the settlement reflects the credit it afforded to SAP for extensively cooperating with the SEC in the investigation, which cooperation efforts included "(i) conducting an internal investigation; (ii) voluntarily producing approximately 500,000 pages of documents and other information quickly, identifying significant documents and translating documents from Spanish; (iii) conducting witness interviews, sharing Power-Point presentations and timelines; (iv) facilitating an interview of Garcia at work at SAPI offices in Miami without alerting him to the investigation into his conduct; and (v) initiating a third party audit of the local partner." SAP also got credit from the SEC for its substantial remedial efforts, such as terminating Garcia, auditing all recent public sector Latin American transactions (whether or not they involved Garcia), conducting regular anticorruption employee training and internal audits and implementing "new policies and procedures to detect and prevent similar issues from recurring in the future."

    See here and here to read the SEC's 2/1/16 press release entitled "SEC Charges Software Company With FCPA Violations" and the SEC's 2/1/16 Order entitled "In the Matter of SAP SE," respectively.

DOJ—Founder of Liberty Reserve pleaded guilty to money laundering through "premier" criminal virtual currency enterprise: On January 29, 2016, the DOJ announced that Arthur Budovsky (Budovsky), the founder of Liberty Reserve—alleged to be "a virtual currency once used by cybercriminals around the world to launder the proceeds of their illegal activity"—pleaded guilty to one count of conspiring to commit money laundering in the Southern District of New York. He is scheduled to be sentenced on May 6, 2016. According to the indictment filed by the DOJ against Budovsky and six other defendants, as well as Budovsky's admissions at the January 29 hearing, Budovsky specifically created Liberty Reserve in 2006 "to help users conduct anonymous and untraceable illegal transactions and launder the proceeds of their crimes." In order to evade the "scrutiny and reach" of U.S. law enforcement, Budovsky emigrated to Costa Rica (where he became a citizen in 2011 after renouncing his U.S. citizenship) and operated the service from there with the help of the codefendants. Liberty Reserve quickly became one of the "principal money-transmitting services used by cybercriminals around the world to amass, distribute, store and launder the proceeds of their illegal activity, including proceeds of investment fraud, credit card fraud, identity theft and computer hacking." By the time the U.S. government shut down Liberty Reserve in 2013, it had more than 5 million user accounts worldwide, including more than 600,000 accounts associated with U.S. users, and had processed millions of transactions through which more than $250 million in criminal proceeds was laundered. To date, four of Budovsky's codefendants have pleaded guilty, with two sentenced to prison and two awaiting sentencing. Charges remain pending against Liberty Reserve and the remaining two individual defendants who are fugitives. U.S. Attorney for the Southern District of New York Preet Bharara said in the DOJ's press release that "Arthur Budovsky founded and operated Liberty Reserve, an underworld cyber-banking system that laundered hundreds of millions of dollars in illicit proceeds for criminals around the world. The only liberty that Budovsky and Liberty Reserve promoted was the freedom to commit and profit from crime. Thanks to this truly global investigation that included cooperation from 17 countries, Liberty Reserve has been shut down, and its founder Arthur Budovsky stands convicted in an American court of law, facing the loss of his own liberty."

See here to read the DOJ's 1/29/16 press release entitled "Founder of Liberty Reserve Pleads Guilty to Laundering More Than $250 Million Through His Digital Currency Business."

FinCEN: In order to better "understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money" and boost efforts to "combat money laundering in the real estate sector," on January 13, 2016, FinCEN issued Geographic Targeting Orders (GTO) that would temporarily require certain U.S. title insurance companies to identify the "natural persons" behind the shell companies used to pay "all cash" (i.e., without bank financing) for high-end residential real estate purchases in the Borough of Manhattan in New York City, New York, and Miami-Dade County, Florida. FinCEN said in its release announcing the GTOs that it is concerned that such all-cash purchases "may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures." FinCEN explained that the GTOs will require specified title insurance companies in certain circumstances to record and report to FinCEN "the beneficial ownership information of legal entities purchasing certain high-value residential real estate without external financing." FinCEN will then make the information available to law enforcement investigators as part of FinCEN's database. FinCEN said it is seeking this information through title insurance companies because title insurance is a "common feature in the vast majority of real estate transactions" and thus title insurance companies "can provide FinCEN with valuable information about real estate transactions of concern." FinCEN made clear that the "GTOs do not imply any derogatory finding by FinCEN with respect to the covered companies" and that it "appreciates the assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors." The GTOs will be in effect for 180 days from March 1 to August 27, 2016.

See here to read FinCEN's 1/13/16 press release entitled "FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami."

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Spotlight on the False Claims Act … Redux

Why it matters: As we predicted in last month's "Spotlight on the False Claims Act" article, the DOJ has continued to use the False Claims Act as an effective civil tool to combat fraud in calendar year 2016. As of the date of this writing, the DOJ had announced additional significant False Claims Act resolutions in January and February, bringing the total number of such resolutions to 18 since the start of fiscal year 2016 last October. In addition, there are two more court cases to report—both from the Fourth Circuit—one dealing with whether the whistleblower's attorney's knowledge can serve as the basis of a public disclosure bar and the other with whether statistical sampling can be used to establish fraud.

Detailed discussion: Here, we briefly recap two of the significant False Claims Act (FCA) resolutions announced by the DOJ in the weeks since we last covered the topic in our January 2016 newsletter. But first, we discuss two important FCA cases before the Fourth Circuit, one decided and the other pending (up from the district court on interlocutory appeal):

  • United States ex rel. May v. Purdue Pharma L.P.: On January 29, 2016, the Fourth Circuit upheld the district court's dismissal of the relators' qui tam action for lack of subject matter jurisdiction resulting from the application of the pre-2010 version of the FCA's "public disclosure bar." The Court began its analysis by stating that "[t]he FCA allegations at issue have enjoyed a long though not particularly fruitful life, having reached this court now for the third time." The Court pointed out that the FCA allegations against Purdue Pharma L.P. (Purdue) in connection with the pain medication OxyContin were first alleged a decade ago in a qui tam action filed by former district sales manager Mark Radcliffe (Radcliffe) that was dismissed by the Court in 2010 because he had signed a release that barred the action. Later that year, Radcliffe's wife "took up the baton" and, together with another former Purdue employee (relators), filed another qui tam action against Purdue based on "nearly identical" claims with facts and information provided by the same attorney who filed the first qui tam on behalf of Radcliffe. It was this second qui tam action that was the subject of the Court's ruling.

    First, the applicable law: Prior to 2010 (when it was amended by Congress), the "public disclosure bar" contained in the FCA provided that "[n]o court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing … unless the action is brought by the Attorney General or the person bringing the action is an original source of the information." As the allegations in the second qui tam suit stem from activities conducted between 1995 and 2005, the Court ruled that this pre-2010 version of the bar was governing. The Court acknowledged that it interprets the phrase "based upon" in the bar more narrowly than other circuits, holding that the language "precludes actions 'only where the relator has actually derived from [a public] disclosure the allegations upon which his qui tam action is based.' " According to the Court, "[t]his test is satisfied if a relator's claim is 'even partly' derived from prior public disclosure." The relator bears the burden of proof that the public disclosure bar does not apply, and if he fails to do so, the court is divested of subject matter jurisdiction to hear the claim.

    Applying the law to the facts of this case, the Fourth Circuit affirmed the district court's dismissal. Even though the relators argued that they had never looked at the public documents filed in Radcliffe's qui tam action, and thus their knowledge of the case was not derived from public disclosure, the Court found the fact that they had the same attorney as Radcliffe to be compelling. The question presented was "whether the Relators can sidestep the public disclosure bar when their allegations—though not directly stemming from the docket entries in Mr. Radcliffe's lawsuit—are derived from the facts their attorney learned while representing Mr. Radcliffe and preparing the public filings in his case." The Court held that they couldn't and that the bar precluded their suit, because "the Relators' claims are based on facts their counsel learned in the course of making the prior public disclosure of Purdue's allegedly fraudulent scheme."
  • United States ex rel. Michaels v. Agape: On October 6, 2015, the Fourth Circuit agreed to hear an interlocutory appeal involving the issue of whether statistical sampling can be used as a means of proving large-scale fraud under the FCA. The underlying case concerned allegations that a network of 24 nursing homes throughout South Carolina submitted fraudulent claims to Medicare, Medicaid and Tricare for care that was not medically necessary. Due to the large volume of potentially fraudulent claims (over 50,000 claims were submitted during the relevant time period), the relators sought to prove liability by using statistical sampling—i.e., its experts would review a small percentage of the claims, determine the percentage of those claims that were fraudulent, and extrapolate that determination over the entire universe of submitted claims. The District of South Carolina judge rejected the approach but certified the question for interlocutory appeal. In addition to the question of whether statistical sampling can be used in FCA cases to prove large-scale fraud, the Fourth Circuit also agreed to decide whether the DOJ has absolute veto power over FCA settlements in cases where it has not intervened. Opening briefs were filed with the Fourth Circuit on January 15, 2016, and as of the time of this writing, oral argument had not yet been set. As always, we will be watching and report back.

Following is a brief recap of two recent healthcare and non-healthcare FCA resolutions announced by the DOJ.

  • January 15, 2016—California hospital agreed to pay more than $3.2 million to settle FCA and Stark Law allegations: Oceanside, California-based Tri-City Medical Center (Tri-City) agreed to pay $3,278,464 to resolve allegations that it maintained 97 financial arrangements with community-based physicians and physician groups that violated both the Stark Law and the FCA. As a refresher, the Stark Law prohibits a hospital from billing Medicare for services referred by physicians who have a financial relationship with the hospital unless that relationship falls within enumerated exceptions requiring, among other things, that the financial arrangements do not exceed fair market value, do not take into account the volume or value of any referrals and are commercially reasonable. Additionally, the Stark Law requires that a hospital's contracts with nonemployee physicians be in writing and meet other specified requirements. In this case, Tri-City "self-reported" to the DOJ, voluntarily identifying five arrangements with its former chief of staff from 2008 until 2011 that, in the aggregate, were commercially unreasonable and/or didn't reflect fair market value. The hospital also identified 92 financial arrangements with community-based physicians and practice groups in place between 2009 and 2010 that did not satisfy the Stark Law because, among other things, the written agreements were expired, missing signatures or could not be located. Benjamin C. Mizer, director of the DOJ's Civil Division, gave Tri-City credit for self-reporting, stating that "[t]he settlement of this matter reflects … our willingness to work with providers who disclose their own misconduct." As the hospital self-reported, there is no mention of a qui tam whistleblower.
  • February 1, 2016—Centerra Services International Inc. (formerly Wackenhut Services LLC) agreed to pay $7.4 million to settle FCA allegations related to a wartime contract involving services provided in Iraq: The Florida-based company agreed to pay $7.4 million to resolve allegations (neither admitted nor denied) that its predecessor company violated the FCA by double-billing and inflating labor costs in connection with a contract for firefighting and fire protection services in Iraq. Qui tam whistleblower to receive $1.3 million.

See here to read the 1/29/16 Fourth Circuit opinion in United States ex rel. May v. Purdue Pharma L.P.

See here to read the 6/25/15 District of South Carolina order entitled "Order Resolving Two Interrelated Issues and Certification for Interlocutory Appeal Pursuant to 28 U.S.C. § 1292(b)" in United States ex rel. Michaels v. Agape.

See here to read the DOJ's 1/15/16 press release entitled "California Hospital to Pay More Than $3.2 Million to Settle Allegations That It Violated the Physician Self-Referral Law."

See here to read the DOJ's 2/1/16 press release entitled "Florida-Based Centerra Services International Inc. Agrees to Pay $7.4 Million to Settle False Claims Act Allegations Related to Wartime Contract."

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Bank Executives, Board Members Hit With SEC Fraud Charges

Why it matters: A group of bank executives and board members were hit with fraud charges by the Securities and Exchange Commission (SEC), with the agency accusing the defendants of engaging in a scheme to mislead investors and bank regulators prior to the bank's failure in 2011. The 11 individuals associated with Superior Bank used straw borrowers, bogus appraisals, and insider deals to prop up the bank's financial condition, the SEC alleged, and the defendants extended, renewed, and rolled over bad loans to avoid impairment and the need to report losses in its financial accounting. The tactics used by the Alabama-based bank were an effort to conceal the extent of its losses as the bank faltered during the financial crisis and resulted in the bank overstating its net income in public filings by about 99 percent for 2009 and 50 percent in 2010, the SEC said. Nine of the defendants reached a deal with the agency, although the former president and a senior vice president are contesting the Florida federal court complaint. The individuals that settled neither admitted nor denied the SEC charges and are permanently banned from serving as officers or directors of a public company, with financial penalties ranging from $100,000 (for outside directors of the bank) up to $250,000 (assigned to the former CEO and chairman of the bank's holding company).

For a detailed discussion, please click here to read the full article in Manatt's 2/16 Financial Services Law newsletter.

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Keeping an Eye Out—Updates and Briefly Noted

January 27, 2016—DOJ announced final resolution with a Category 2 bank under the Swiss Bank Program: The DOJ announced that it had reached its final non-prosecution agreement under Category 2 of the Swiss Bank Program with HSZH Verwaltungs AG (HSZH). The DOJ said that it has executed agreements with 80 banks since March 30, 2015, when it announced the first Swiss Bank Program non-prosecution agreement with BSI SA and has imposed more than $1.36 billion in Swiss Bank penalties, including $49 million in penalties from HSZH. On February 4, 2015, the DOJ also announced that it had reached a resolution with Zurich-based Bank Julius Baer & Co. pursuant to which the bank agreed to enter into a deferred prosecution agreement requiring payment of $547 million as well as guilty pleas of two of its bankers. For more on this subject, see the article in our April 2015 newsletter entitled "First Swiss Bank Reaches Resolution with the DOJ Under Its Swiss Bank Program."

SEC actions:

  • January 19, 2016—SEC modified its order in connection with its 2014 consent decree with Barclays Capital Bank (Barclays) to allow the sale of the unit that was being overseen by a compliance monitor: The SEC agreed to allow Barclays to sell the business wealth management unit that an independent consultant was overseeing in connection with the 2014 consent decree it entered into with Barclays. The SEC thus modified the order to "relieve" Barclays of the responsibility to retain the consultant and make the compliance reforms.
  • January 15, 2016—SEC announced that, for the first time, it had awarded a "company outsider"—i.e., someone not employed by the company—more than $700,000 under its whistleblower program for providing a "detailed analysis": The SEC stated that the award was granted to "a company outsider who conducted a detailed analysis that led to a successful SEC enforcement action." Three other whistleblowers connected with the same matter were denied awards. For more on the SEC's whistleblower program, see the article in our May 2015 newsletter entitled "Whistle While You Work: April Showers Bring Big Whistleblower Awards, Some to Compliance Officers."
  • January 13, 2016—SEC's Office of Compliance Inspections and Examinations (OCIE) announced its annual list of "examination priorities" for 2016: The OCIE stated that its examination priorities are organized around the same "three thematic areas" as 2015, namely (i) examining matters of importance to retail investors, including investors saving for retirement; (ii) assessing issues related to market-wide risks; and (iii) using the OCIE's evolving ability to analyze data to identify and examine registrants that may be engaged in illegal activity. The OCIE said that, to accomplish these priorities, its examinations will focus on the cybersecurity and AML programs a company has in place, among other things.

January 17, 2016—New sanctions imposed by OFAC on 11 individuals and companies in connection with Iran's ballistic missile program: OFAC announced the sanctions against 11 people and companies allegedly involved in Iran's ballistic missile program, which "poses a significant threat to regional and global security and will continue to be subject to international sanctions." The action came one day after President Obama lifted sanctions on Iran's nuclear program and hours after a prisoner swap between Washington and Tehran.

January 10, 2016—Derivatives marketplace CME Group proposed new requirements prohibiting exchange access by persons subject to economic sanctions: The proposals, which impose new obligations on clearing members, add one new rule and amend two others to minimize the likelihood that its exchanges might be used for illicit money laundering. Absent objection from the CFTC, the new provisions will become effective on February 29, 2016.

Talks about town: (a) on January 26, 2016, SEC Chair Mary Jo White participated in a keynote session Q&A at the 43rd Annual Securities Regulation Institute, and (b) on January 25, 2016, Deputy Attorney General Leslie Caldwell spoke at the 12th Annual State of the Net Conference about the DOJ's efforts, working with other law enforcement partners, to combat cybercrime.

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