Investigations and White Collar Defense

Supreme Court Limits SEC’s Disgorgement Power

By John F. Libby, Partner, Corporate Investigations and White Collar Defense | Jacqueline C. Wolff, Partner, Corporate Investigations and White Collar Defense | Kenneth B. Julian, Partner, Litigation

Why it matters: On June 5, 2017, the Supreme Court held in Kokesh v. SEC that the five-year statute of limitations found in 28 U. S. C. §2462 with respect to actions for civil monetary penalties applies equally to actions for disgorgement. The ruling resolved a circuit split on the issue, and served to greatly curtail the SEC’s reach in enforcement actions seeking disgorgement of allegedly ill-gotten gains.

Detailed discussion: On June 5, 2017, the Supreme Court held in Kokesh v. SEC that the five-year statute of limitations found in 28 U. S. C. §2462 (Section 2462) with respect to any “civil fine, penalty, or forfeiture, pecuniary or otherwise,” also applies to actions for disgorgement. The ruling served to clarify the Supreme Court’s 2013 decision in Gabelli v. SEC, which had held that monetary penalties are subject to Section 2462’s five-year SOL without addressing whether this time limit extended to disgorgement or other forms of equitable relief.

Procedural background and circuit split: The SEC brought an enforcement action in the District of New Mexico against Charles Kokesh in 2009, alleging that he violated the federal securities laws by concealing the misappropriation of $34.9 million from four business-development companies from 1995 to 2009. In its enforcement action, the SEC sought monetary civil penalties, disgorgement and an injunction barring Kokesh from future securities law violations. Following a five-day jury trial in which Kokesh was found guilty of violating various securities laws, the district court ruled that Section 2462’s five-year SOL applied to the civil monetary penalties imposed by the jury, thereby limiting the SEC’s recovery to Kokesh’s misappropriations occurring after October 2004 (i.e., five years prior to the date the SEC filed its complaint). The district court found, however, that Section 2462’s five-year SOL did not apply to the $34.9 million disgorgement judgment because disgorgement is not a “penalty” or a “forfeiture” within the meaning of Section 2462, and thus Kokesh must disgorge the entire amount irrespective of when the SEC filed its complaint. The Tenth Circuit affirmed in August 2016. This created a split with the Eleventh Circuit, which had held in May 2016 in SEC v. Graham that disgorgement did qualify as a “penalty” or “forfeiture” within the meaning of Section 2462 such that its five-year SOL was applicable to SEC enforcement actions for disgorgement.

The Supreme Court granted certiorari in January 2017 to “resolve disagreement among the Circuits over whether disgorgement claims in SEC proceedings are subject to the 5-year limitations period of §2462.” The Court heard oral argument on April 18, 2017.

The Supreme Court’s opinion: In a unanimous opinion written by Justice Sonia Sotomayor, the Court reversed the Tenth Circuit and held that “[d]isgorgement, as it is applied in SEC enforcement proceedings, operates as a penalty under §2462. Accordingly, any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.”

In its analysis, the Court noted that it had “already held [in Gabelli v. SEC] that the 5-year statute of limitations set forth in 28 U. S. C. §2462 applies when the Commission seeks statutory monetary penalties.” In seeking to clarify Gabelli, the Court said that “[t]he question here is whether §2462 … also applies when the SEC seeks disgorgement.”

The Court reviewed the elements of what constitutes a “penalty” and concluded that “SEC disgorgement thus bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate. The 5-year statute of limitations in §2462 therefore applies when the SEC seeks disgorgement.”

The ruling served to greatly curtail the SEC’s reach in enforcement actions seeking disgorgement of allegedly illicit proceeds and, indeed, had an immediate effect. On June 9, 2017, the SEC Division of Enforcement sent a letter to the SEC administrative law judge presiding over the action titled In the Matter of Lynn Tilton, et al. stating that, in light of the Supreme Court’s decision in Kokesh, the Enforcement Division would no longer be seeking disgorgement of $45,447,417 in “ill-gotten gains” because that portion of “the Division’s requested disgorgement stems from misconduct that occurred more than five years prior to the initiation of this action.”

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DFS to BNP: FX “Illegal, Unsafe and Unsound”

By John F. Libby, Partner, Corporate Investigations and White Collar Defense | Jacqueline C. Wolff, Partner, Corporate Investigations and White Collar Defense | Kenneth B. Julian, Partner, Litigation

Why it matters: On May 24, 2017, the New York Department of Financial Services announced that it had fined BNP Paribas S.A. and its New York branch $350 million for “significant, long-term violations” of New York banking law in connection with the bank’s global foreign-exchange business, including “major deficiencies” in oversight that allowed “nearly unfettered misconduct” by bank employees.

Detailed discussion: On May 24, 2017, the New York Department of Financial Services announced that it has imposed a $350 million fine on BNP Paribas S.A. (BNP Paribas) and its New York branch for “significant, long-term violations” of New York banking law arising out of the BNP Paribas global foreign-exchange (FX) business. The DFS said that such violations included “major deficiencies in the Bank’s oversight that allowed nearly unfettered misconduct by more than a dozen BNPP traders and salespeople.”

As detailed in the DFS consent order, the misconduct and violations at issue occurred between 2007 and 2013 and involved numerous BNP Paribas employees in New York and other key FX trading hubs, including London and Tokyo. The DFS said that all such employees had to date “been terminated, resigned or otherwise disciplined” and BNP Paribas agreed in the consent order to not reemploy any such terminated employees in the future.

According to the DFS findings, a number of BNP Paribas FX traders participated in multiparty online chat rooms where they engaged in a variety of misconduct, including (1) “Collusive conduct … that involved fake trades designed to manipulate prices; [including ] collusion in setting spreads for customers trading in certain currencies, in order to widen the spreads and artificially increase profits;” (2) “Improperly exchanging information about past and impending customer trades in order to maximize profits at customers’ expense … [and] improper sharing of confidential customer information via personal e-mail—including through use of a sophisticated codebook that helped identify dozens of clients, central banks or important market participants and specified trading volumes;” (3) “Manipulation of the price at which daily benchmark rates were set—both from collusive market activity and improper submissions to benchmark-fixing bodies;” and (4) “Misleading customers by hiding markups on executed trades, including by using secretive hand signals when customers were on the phone; or by deliberately ‘underfilling’ a customer trades, in order to keep part of a profitable trade for the Bank’s own book.”

The DFS press release goes on to detail some of the most egregious of the employee collusive behavior, including secret hand gestures and the creation of secret trading groups (or “cartels”) and codebooks with the colorful monikers “ZAR Domination” and “We Reign,” respectively.

The DFS said that in addition to paying the $350 million fine, BNP Paribas will be obligated under the consent order to (1) “submit plans to improve senior management oversight of the company’s compliance with New York State laws and regulations relating to the company’s foreign exchange trading business;” and (2) “enhance internal controls and risk management, and improve its compliance risk management program with regard to compliance by BNPP with New York laws and regulations with respect to its foreign-exchange trading business across the firm.”

Financial Services Superintendent Maria T. Vullo said in the DFS press release that “[p]articipants in the foreign exchange market rely on a transparent and fair market to ensure competitive prices for their trades for all participants … Here the Bank paid little or no attention to the supervision of its foreign exchange trading business, allowing BNPP traders and others to violate New York State law over the course of many years and repeatedly abused the trust of their customers. DFS appreciates the Bank’s cooperation in resolving this matter and for the remedial measures taken to address some of the misconduct arising within the Bank’s FX Trading Business in connection with our investigation.”

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Spotlight on the False Claims Act

By John F. Libby, Partner, Corporate Investigations and White Collar Defense | Jacqueline C. Wolff, Partner, Corporate Investigations and White Collar Defense | Kenneth B. Julian, Partner, Litigation

Why it matters: Since our last newsletter, the DOJ has announced numerous resolutions under the False Claims Act with companies in the healthcare and other business sectors, but the one that caught our eye involved a large vendor of electronics health records software that agreed to pay $155 million and enter into an “innovative” corporate integrity agreement to resolve FCA allegations that it “misrepresented the capabilities of its software” in connection with obtaining necessary certifications under the Electronic Health Records (EHR) Incentive Program.

Detailed discussion: On May 31, 2017, the DOJ announced that Massachusetts-based eClinialWorks, described as “[o]ne of the nation’s largest vendors of electronics health records software,” agreed to pay $155 million to resolve allegations that it violated the FCA by “misrepresent[ing] the capabilities of its software.” The DOJ said that the settlement also resolved allegations that “ECW paid kickbacks to certain customers in exchange for promoting its product.”

The DOJ explained that its FCA settlement with ECW arises out of the EHR Incentive Program, which was established by the American Recovery and Reinvestment Act of 2009 “to encourage healthcare providers to adopt and demonstrate their ‘meaningful use’ of EHR technology.” The DOJ said that under the EHR Incentive Program, the U.S. Department of Health and Human Services “offers incentive payments to healthcare providers that adopt certified EHR technology and meet certain requirements relating to their use of the technology. To obtain certification for their product, companies that develop and market EHR software must attest that their product satisfies applicable HHS-adopted criteria and pass testing by an accredited independent certifying entity approved by HHS.”

According to the allegations in the DOJ’s complaint-in-intervention filed in the District of Vermont, which were neither admitted nor denied by ECW, ECW “falsely obtained certification for its EHR software when it concealed from its certifying entity that its software did not comply with the requirements for certification.” The DOJ gave the following as examples of ECW’s software noncompliance:

“[I]n order to pass certification testing without meeting the certification criteria for standardized drug codes, the company modified its software by ‘hardcoding’ only the drug codes required for testing. In other words, rather than programming the capability to retrieve any drug code from a complete database, ECW simply typed the 16 codes necessary for certification testing directly into its software. ECW’s software also did not accurately record user actions in an audit log and in certain situations did not reliably record diagnostic imaging orders or perform drug interaction checks. In addition, ECW’s software failed to satisfy data portability requirements intended to permit healthcare providers to transfer patient data from ECW’s software to the software of other vendors.”

The DOJ concluded that “[a]s a result of these and other deficiencies in its software, ECW caused the submission of false claims for federal incentive payments based on the use of ECW’s software.”

Under the terms of the settlement agreements, the DOJ said that ECW and three of its founders (the CEO, the CMO and the COO) jointly and severally agreed to pay approximately $155 million. In addition, an individual developer agreed to pay $50,000, and two project managers agreed to pay $15,000 each.

Moreover, the DOJ said that ECW entered into an “innovative” five-year Corporate Integrity Agreement with the HHS Office of Inspector General (HHS-OIG) that requires, among other things, that ECW must (1) “retain an Independent Software Quality Oversight Organization to assess ECW’s software quality control systems and provide written semi-annual reports to OIG and ECW documenting its reviews and recommendations;” (2) “provide prompt notice to its customers of any safety related issues and maintain on its customer portal a comprehensive list of such issues and any steps users should take to mitigate potential patient safety risks;” (3) “allow customers to obtain updated versions of their software free of charge and to give customers the option to have ECW transfer their data to another EHR software provider without penalties or service charges;” and (4) “retain an Independent Review Organization to review ECW’s arrangements with health care providers to ensure compliance with the Anti-Kickback Statute.”

The DOJ intervened in the qui tam lawsuit filed by a former ECW employee software technician, who will receive a whistleblower award of approximately $30 million.

Special Agent in Charge Phillip Coyne of HHS-OIG said of the settlement that “[e]lectronic health records have the potential to improve the care provided to Medicare and Medicaid beneficiaries, but only if the information is accurate and accessible. Those who engage in fraud that undermines the goals of EHR or puts patients at risk can expect a thorough investigation and strong remedial measures such as those in the novel and innovative Corporate Integrity Agreement in this case.”

Added Acting U.S. Attorney for the District of Vermont Eugenia A.P. Cowles, “[t]his settlement is the largest False Claims Act recovery in the District of Vermont and we believe the largest financial recovery in the history of the State of Vermont ... This resolution demonstrates that EHR companies will not succeed in flouting the certification requirements.”

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Focus on the FCPA—Holdovers Edition

By John F. Libby, Partner, Corporate Investigations and White Collar Defense | Jacqueline C. Wolff, Partner, Corporate Investigations and White Collar Defense | Kenneth B. Julian, Partner, Litigation

Why it matters: This past month saw resolutions in a few Foreign Corrupt Practices Act enforcement actions, all of which were holdovers from the prior administration. In the first, on June 16, 2017, the Russian subsidiary of Teva Pharmaceuticals Ltd. pled guilty to conspiracy to violate the FCPA in connection with the overall resolution of parallel DOJ and SEC FCPA investigations announced in December 2016. In the second, also on June 16, 2017, the DOJ quietly released a declination letter closing its investigation into possible FCPA violations by Linde North America Inc. and related companies in the Republic of Georgia from 2006 through 2009. In connection with the declination, the Linde companies agreed to pay aggregate disgorgement and forfeiture amounts exceeding $11 million. In the third, the DOJ released another “declination and disgorgement” letter on June 21, 2017, this time involving engineering/construction firm CDM Smith Inc. with respect to possible FCPA violations by its Indian subsidiary—pursuant to which CDM Smith agreed to disgorge approximately $4 million.

Detailed discussion: This past month saw resolutions on the same day in two Foreign Corrupt Practices Act enforcement actions.

In the first, on June 16, 2017, the wholly owned Russian subsidiary (Teva Russia) of Teva Pharmaceuticals Ltd. (Teva) pled guilty to FCPA violations in connection with the overall resolution of parallel DOJ and SEC FCPA investigations announced on December 22, 2016. At that time, the DOJ announced that Teva, the “world’s largest manufacturer of generic pharmaceutical products,” and Teva Russia agreed to pay a combined criminal and civil penalty of almost $520 million to the DOJ and the SEC (in a parallel investigation)—including what the DOJ referred to as “the largest criminal fine imposed against a pharmaceutical company for violations of the FCPA”—in connection with the bribery of government officials in Russia, Ukraine and Mexico in violation of the FCPA. See our February 2017 newsletter under “Three Significant FCPA Resolutions Straddle the New Year” for a detailed discussion of the government’s FCPA resolution with Teva and Teva Russia.

As part of the resolution with the DOJ, Teva Russia agreed to plead guilty to one count of conspiracy to violate the anti-bribery provisions of the FCPA in connection with bribes paid to Russian officials, which was what was transpiring in a Southern District of Florida court on June 16, 2017. According to press accounts, at the hearing District Court Judge Kathleen M. Williams indicated that she was inclined to accept a sentence proposed by federal prosecutors and lawyers that involved a “state of the art, progressive” monitoring program for both Teva Russia and Teva that also involved letting Teva Russia off the hook for paying any part of the $520 million in criminal and civil penalties imposed as part of the December 2016 settlement, but she expressed some uncertainty about what such a resolution would ultimately look like because the case was many-pronged and had the court “traveling into new areas.” The judge thus postponed the imposition of a final judgment until a later date.

In the second FCPA resolution, also on June 16, 2017, the DOJ released a declination letter (Declination) in connection with its investigation into possible FCPA violations by Linde North America Inc. and Linde Gas North America LLC (collectively, Linde) involving “corrupt” payments via subsidiary Spectra Gases, Inc. (Spectra Gases) to “high level” government officials at the “100% state-owned and –controlled” National High Technology Center (NHTC) in the Republic of Georgia from 2006 through 2009. The improper payments were allegedly made by Spectra Gases via a complicated scheme laid out in the Declination in connection with the purchase by Spectra Gases of “certain income-producing assets from the NHTC.”

The Declination stated that “consistent with the FCPA Pilot Program announced on April 5, 2016,” the DOJ was closing its investigation of Linde “concerning violations of the FCPA.” After giving a detailed account of Linde and Spectra Gases’s activities in the Republic of Georgia that gave rise to the FCPA investigation, the DOJ said that:

“The Department’s decision to close its investigation into this matter is based on a number of factors, including but not limited to: (1) Linde’s timely, voluntary self-disclosure of the matter; (2) the thorough, comprehensive and proactive investigation undertaken by Linde; (3) Linde’s full cooperation in this matter (including its provision of all known relevant facts about the individuals involved in or responsible for the misconduct) and its agreement to continue to cooperate in any ongoing investigations of individuals; (4) Linde’s agreement to disgorge the profits Spectra Gases and it received from the improper conduct and forfeit to the United States the corrupt proceeds it withheld from companies owned or controlled by the NHTC Officials; (5) the steps Linde has taken and continues to take to enhance its compliance program and its internal accounting controls; and (6) Linde’s full remediation (including terminating and/or taking disciplinary action against the employees involved in the misconduct, including the Spectra Executives and lower-level employees involved in the misconduct; terminating the agreement with the ‘management company’ owned by the NHTC Officials; withholding ‘Earn-Out’ payments attributable to the corrupt conduct from the Spectra Executives; and withholding payments due to companies owned or controlled by the NHTC Officials.”

The DOJ said that in connection with the Declination, Linde agreed to pay a “Total Disgorgement Amount” of approximately $8 million and a “Total Forfeiture Amount” of approximately $3.4 million. The DOJ also made clear that the Declination did not “provide any protection against prosecution” of any individuals “regardless of their affiliation” with Linde, nor did it “provide any protection for individuals against forfeiture claims by the Department,” and that the DOJ reserved the right to “reopen their inquiry” based on information subsequently learned that “changes any of the factors outlined above.”

In the third FCPA resolution in a matter of days, on June 21, 2017, the DOJ released a declination letter (Declination) regarding its investigation into approximately $1.18 million in bribes paid to government officials in India from 2011 through 2015 by the Indian subsidiary of engineering and construction firm CDM Smith Inc. in exchange for multiple highway construction and a water project contract that the DOJ alleged resulted in approximately $4 million in illicit profits.

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