Investigations and White Collar Defense

The Unfolding FIFA Scandal: Will the DOJ Show the Banks a Red Card?

Why it matters: The worldwide soccer community has for years decried the brazen corruption that permeated FIFA, international soccer’s governing organization, but FIFA remained seemingly impervious . . . until now. On May 27, 2015, the DOJ announced a 47-count indictment of nine FIFA officials and five sports marketing executives for racketeering conspiracy, wire fraud and money laundering in a bribery and kickback scheme carried out over a 24-year period. The days since the May 27 announcement have brought additional explosive revelations and damning developments, including the resignation on June 2 of newly reelected FIFA President Sepp Blatter. The DOJ said at the May 27 press conference that the indictment was only the beginning of its wide-ranging investigation, and gave U.S. banks a strong indication that they may be next given the millions of dollars in illegal payments that are alleged to have been funneled through U.S. bank accounts.

Detailed discussion: On May 27, 2015, top law enforcement officials, led by Attorney General Loretta Lynch, Acting U.S. Attorney for the Eastern District of New York Kelly T. Currie, and FBI Director James Comey, announced the unsealing of a 47-count indictment charging 14 defendants with racketeering, wire fraud and money laundering conspiracies in connection with their participation in a 24-year scheme to “enrich themselves through the corruption of international soccer.” Among those indicted or who had already pled guilty were high-ranking officials of the Federation Internationale de Football Association (FIFA), international soccer’s governing body headquartered in Zurich. Three of the most prominent were Jeffrey Webb, Jack Warner and Charles “Chuck” Blazer, current and former high-profile officers both of FIFA and of CONCACAF, the continental confederation of North/Central American and Caribbean soccer organizations under FIFA that was headquartered in New York and Miami during the time charged. In its May 27 press release, the DOJ announced that Blazer was one of four individual defendants who had already pled guilty, along with two of Warner’s sons, and that Warner was one of seven defendants that had been arrested earlier that morning in Zurich in a dramatic raid at a luxury hotel carried out by Swiss police. Interpol is aiding in the extradition of the remaining defendants. The indictment also names five U.S. and South American sports media and marketing executives who are alleged to have paid the exorbitant bribes and kickbacks to the defendants in order to obtain lucrative media and marketing rights to international soccer tournaments.

Briefly, the indictment alleged that FIFA, its six confederations (including CONCACAF) and the other regional soccer organizations operating under it, together with various national member associations and sports marketing companies, were acting as an “enterprise” for purposes of the federal racketeering laws. The indictment alleges that, from 1991 to the present, the defendants and their coconspirators “corrupted the enterprise” by engaging in criminal wire fraud and money laundering activities in connection with the solicitation and taking of bribes and kickbacks in excess of $150 million relating to the sale of media and marketing rights to flagship soccer tournaments such as the World Cup.

Acting U.S. Attorney Currie said at the May 27 press conference: “[l]et me be clear: this indictment is not the final chapter in our investigation” and it is the millions of dollars in illegal payments and how they were transacted that are giving U.S. banks cause for concern. Attorney General Loretta Lynch said at the same press conference that the defendants “abused the U.S. financial system” by using the “banking and wire facilities of the United States to distribute bribe payments.” Currie said that “[t]he bribes were often funneled through intermediaries ... using the U.S. banking system and transferring funds to the United States.” As one element establishing U.S. jurisdiction, Currie said that “[a] lot of the banking institutions and the way that these monies were funneled passed through the United States.” While not charged with any wrongdoing, the indictment names numerous banks and financial institutions located in the United States through which the illegal bribery and kickback payments were allegedly funneled, including Bank of America, JP Morgan Chase, HSBC, UBS and Citigroup. As Currie said in the Q&A part of the press conference, “[p]art of our investigation will look at the conduct of the financial institutions to see whether they were cognizant of the fact they were helping launder these bribe payments. It’s too early to say if there is any problematic behavior, but it will be part of our investigation.”

See here to read the DOJ press release dated 5/27/15, titled “Nine FIFA Officials and Five Corporate Executives Indicted for Racketeering Conspiracy and Corruption.”

For more on this matter, read (1) the DOJ press release dated 5/27/15, titled “Attorney General Loretta E. Lynch Delivers Remarks at Press Conference Announcing Charges Against Nine FIFA Officials and Five Corporate Executives” and (2) the transcript of the 5/27/15 Press Briefing Q&A on the Justice Department’s FIFA Indictments found at

back to top

Falling Short of the Gold: SEC Charges BHP Billiton with FCPA Violations Relating to its 2008 Summer Olympics Sponsorship Program

Why it matters: On May 20, 2015, the SEC announced that BHP Billiton had agreed to pay $25 million to settle charges that it violated the FCPA’s accounting provisions in connection with a global hospitality program it established with the head of its Global Ethics Panel for its sponsorship of the 2008 Summer Olympics in Beijing. Even though BHP Billiton had implemented vetting procedures and forms meant to address the FCPA and anticorruption risks inherent in the hospitality program, the SEC found them to be insufficient, primarily due to lack of training regarding the forms and the failure to require independent compliance approval. The SEC also found that BHP Billiton failed to keep accurate books and records because the forms required to be completed by employees before inviting government officials to the Olympics were filled out incorrectly.

Detailed discussion: On May 20, 2015, the SEC announced that it had charged Melbourne-based global resource companies BHP Billiton Ltd. and BHP Billiton Plc (collectively, BHPB) with violations of the accounting provisions of the Foreign Corrupt Practices Act (FCPA) for failing both to “devise and maintain sufficient internal controls” over its sponsorship hospitality program for the 2008 Summer Olympic Games in Beijing and to keep “accurate books and records” because employees had incorrectly filled out the hospitality application forms needed to be approved prior to inviting government officials to the Olympics. BHPB, without admitting any wrongdoing, agreed to pay a $25 million civil penalty to settle the charges and to report to the SEC for one year regarding its FCPA compliance programs. The SEC acknowledged BHPB’s cooperation and remedial efforts in reaching the settlement.

At the May 20 press conference, SEC Associate Director of Enforcement Antonia Chion said that “[a] ‘check the box’ compliance approach of forms over substance is not enough to comply with the FCPA. Although BHP Billiton put some internal controls in place around its Olympic hospitality program, the company failed to provide adequate training to its employees and did not implement procedures to ensure meaningful preparation, review, and approval of the invitations.”

The SEC’s May 20 Order details the facts: BHPB became an official sponsor of the 2008 Olympic Games in 2005 by paying a sponsorship fee to the Beijing Organizing Committee and agreeing to supply the raw materials used to make the Olympic medals. In exchange, BHPB received sponsorship perks such as the right to use the Olympic trademark and priority access to events and accommodations. BHPB established an Olympic Sponsorship Steering Committee (OSSC), the chair of which was also the head of BHPB’s Global Ethics Panel and reported directly to BHPB’s CEO. The OSSC planned and implemented a sponsorship program, one goal of which was to build strategic relationships with China and other countries where BHPB wanted to expand its operations. To that end, the OSSC created a global hospitality program through which it invited 650 people to attend the Olympics at the company’s expense. Of the 650 invited, 176 were government officials or employees of state-owned enterprises primarily from countries in Asia and Africa (where, the Order points out, there is a “known risk of corruption”). Many of the invited officials accepted the invitation but did not end up attending, so that BHPB ultimately treated 60 of them plus 24 spouses/other guests to three- and four-day hospitality packages each valued between $12,000-$16,000 that consisted of event tickets, luxury hotel accommodations and sightseeing excursions, and in some cases, round-trip business class airfare.

At the outset, the OSSC had identified the corruption risks inherent in inviting government officials to the Olympics under the FCPA and other anticorruption laws, as well as BHPB’s own Guide to Business Conduct. BHPB therefore relied on its “existing operating model” as well as an “Olympic-specific internal approval process” to specifically address these risks. The OSSC created a hospitality application form (Application) that business managers in BHPB’s various customer sector groups (CSGs) were required to fill out with respect to each individual, including any government official, they wanted to invite to the Olympics. The Application contained a series of questions that included the following:

       9. What business obligation exists or is expected to develop between
       the proposed invitee and BHP Billiton?

       10. Is BHP Billiton negotiating or considering any contract, license
       agreement or seeking access rights with a third party where the
       proposed invitee is in a position to influence the outcome of that

       11. Do you believe that the offer of the proposed hospitality would be
       likely to create an impression that there is an improper connection
       between the provision of the hospitality and the business that is
       being negotiated, considered or conducted, or in any way might be
       perceived as breaching the Company’s Guide to Business Conduct?

       If yes, please provide details.

       12. Are there other matters relating to the relationship between BHP
       Billiton and the proposed invitee that you believe should be
       considered in relation to the provision of hospitality having regard to
       BHP Billiton’s Guide to Business Conduct?

The Application was required to be signed by an employee of the CSG with knowledge about the invitee’s relationship to BHPB, and approved in writing by the relevant CSG president or BHPB country president. The blank Application forms came with cover letters that included a brief description of the antibribery provisions in the company’s Guide to Business Conduct and urged employees, prior to filling out the form, to reread the sections in the Guide concerning travel, entertainment and gifts.

The SEC found that the Application process did not “adequately address the anti-bribery risks associated with offering expensive travel and entertainment packages to government officials,” citing the following: (1) the Applications did not undergo any independent review by the OSSC or BHPB’s Global Ethics Panel; (2) some of the Applications were filled out inaccurately or were incomplete, and many had the same nonspecific “boilerplate” answers; (3) employees were not specifically trained to fill out the Application or to assess bribery risks, especially with respect to the treatment of spouses; (4) there was no way to update the Application or revisit the appropriateness of an invitation once made to reflect recent business developments; and (5) there was no process in place to cross-check the invitees among the various CSGs submitting the Applications.

As a result of BHPB keeping “inaccurate books and records” (i.e., the incorrectly filled-out Applications) and having “insufficient internal controls” over the hospitality program in violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the ‘34 Act, the SEC found that BHPB invited “a number” of government officials to the Olympics who were “directly involved with, or in a position to influence, pending negotiations, efforts by BHPB to obtain access rights, or other pending matters.” The SEC only cited to four specific cases in the Order, however, in the Republics of Burundi (official attended with his spouse), Philippines (official accepted but invitation withdrawn), Congo (official accepted but cancelled) and Guinea (individual accepted but cancelled). The SEC made no allegation that bribes had actually been paid to any officials—it was just the fact that they had been wrongfully invited due to the insufficiency of the internal controls surrounding BHPB’s hospitality program that triggered the charges.

At the May 20 press conference, SEC Enforcement Director Andrew Ceresney summed it up by saying that “BHP Billiton footed the bill for foreign government officials to attend the Olympics while they were in a position to help the company with its business or regulatory endeavors. BHP Billiton recognized that inviting government officials to the Olympics created a heightened risk of violating anti-corruption laws, yet the company failed to implement sufficient internal controls to address that heightened risk.”

See here to read the SEC’s press release dated 5/20/15, titled “SEC Charges BHP Billiton With Violating FCPA at Olympic Games.”

See here to read the SEC’s Order dated 5/20/15, In the Matter of BHP Billiton Ltd. and BHP Billiton Plc.

back to top

Delaware Courts Whittle Away at the Attorney-Client Privilege: Lululemon, Wal-Mart and the “Fiduciary Exception”

Why it matters: On April 30, 2015, the Delaware Chancery Court ruled that two shareholder pension funds seeking access to bona fide privileged attorney-client communications in a Section 220 “books and records” action were permitted to do so pursuant to the “fiduciary exception” to the privilege, which permits shareholder plaintiffs to “pierce” the corporation’s attorney-client privilege upon a sufficient showing of good cause. The fiduciary exception, which originated in nineteenth-century English law and was first recognized in the United States by the Fifth Circuit in 1970, appears to be gaining traction in the Delaware courts starting with the Delaware Supreme Court adopting and extending it to Section 220 actions in 2014.

Detailed discussion: The case of In re Lululemon Athletica Inc. involves separate shareholder actions (later consolidated) brought in the Delaware Chancery Court by two pension funds (Funds) against sports apparel retailer Lululemon Athletica, Inc. (Lululemon) under Section 220 of the Delaware General Corporation Law (Section 220), which governs a shareholder’s rights with respect to inspection of corporate books and records. On April 30, 2015, the Chancery Court held that the Funds were entitled to access privileged attorney-client communications pursuant to the “fiduciary exception” to the privilege, which permits shareholder plaintiffs to obtain documents protected by the attorney-client privilege upon a sufficient showing of “good cause.” The Chancery Court was relying on the Delaware Supreme Court’s July 2014 opinion in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW (Wal-Mart II), where the Court adopted the exception and extended it to Section 220 actions for the first time. The Delaware Supreme Court was in turn relying on the 1970 Fifth Circuit case of Garner v. Wolfinberger (Garner), which was the first U.S. court to recognize the exception that had its origins in nineteenth-century English law. More on this later.

Through the Section 220 actions, the Funds were seeking to inspect Lululemon’s books and records in connection with certain stock trades made in June 2013 by Dennis Wilson (Wilson), Lululemon’s founder and ex-chairman of the board. Of particular interest to the Funds was the trade that occurred on June 7, 2013. The facts show that Lululemon’s then-CEO Christine Day (Day) informed Wilson and Lululemon’s board separately of her plans to resign on June 5 and June 7, respectively. On June 7, Wilson’s broker executed a trade on behalf of Wilson of 607,545 shares at a per-share sale price over the established $81.25 floor. On June 10, 2013, Lululemon publicly announced Day’s resignation, and the per-share price for Lululemon stock dropped by 22%. Two days later, on June 12, The Wall Street Journal emailed Lululemon seeking information about Wilson’s “incredibly well-timed” June 7 trade. There ensued an email chain (WSJ email chain) among Wilson, Swinton, Lululemon’s attorney, and Wilson’s personal attorney to formulate a coordinated response. Some of the emails in the WSJ email chain were authored either by Wilson’s personal attorney or by Lululemon’s outside counsel. In addition, on July 2, 2013, Erin Nicholas, Lululemon’s secretary and one of its in-house counsel, responded to an email from a board member seeking information about Wilson’s trades (Nicholas email).

On April 2, 2014, Vice Chancellor Donald F. Parsons issued an oral ruling finding that the Funds “had a proper purpose under Section 220 to seek books and records regarding Wilson’s June 7, 2013 trades because there was a credible basis to infer wrongdoing by Wilson and Lululemon . . . and possible mismanagement by the Company in connection with their oversight as to the questionable trading.” Vice Chancellor Parsons ordered Lululemon to produce all “documents” concerning Wilson’s June 7 trade and inquiries by any board member regarding Wilson’s trades during June 2013. On April 18, 2014, Lululemon produced 195 pages of documents, and on April 19, it produced a “privilege log” including the WSJ email chain and the Nicholas email.

On June 12, 2014, the Funds filed a motion contending that the WSJ email chain and the Nicholas email were improperly designated as privileged or the privilege had been waived. The following month, on July 23, 2014, the Delaware Supreme Court decided Wal-Mart II, and on August 26, the Funds filed a reply brief relying extensively on Wal-Mart II to argue that, even if the WSJ email chain and the Nicholas email were found to be privileged, the Funds could still gain access under the fiduciary exception. On November 24, 2014, Lululemon filed a “sur-reply” letter that addressed Wal-Mart II’s adverse implications.

In his April 30, 2015, opinion, Vice Chancellor Parsons began by establishing that the WSJ email chain and the Nicholas email were properly designated as attorney-client privileged, and that the privilege had not been waived with respect to either document. Notwithstanding this, however, he found that the “Plaintiffs have shown good cause to access those documents under the fiduciary exception as articulated in Garner and Wal-Mart [II].”

Vice Chancellor Parsons began his analysis of the applicable law by stating that “[i]n Wal-Mart II, the Delaware Supreme Court for the first time applied the Garner [fiduciary] exception in a Section 220 action.” In Garner, the Fifth Circuit established a “good cause” standard and factors for determining when a fiduciary exception applies to allow a shareholder access to corporate documents protected by the attorney-client privilege. Relying on the Garner opinion and extending it to Section 220 actions, the Delaware Supreme Court in Wal-Mart II identified the following as the relevant factors that would demonstrate “good cause” so as to justify the fiduciary exception: (1) the number of shareholders and the percentage of stock they represent, (2) the “bona fides” of the shareholders, (3) the nature of the shareholders’ claim and whether it is obviously “colorable,” (4) the apparent “necessity or desirability” of the shareholders having the information and whether it is available from other sources, (5) whether, if the shareholders are alleging wrongful action by the corporation, the action they are alleging is criminal, illegal (but not criminal) or of doubtful legality, (6) whether the communication is of advice concerning the litigation itself, (7) the extent to which the information is identified versus whether the shareholders are “blindly fishing,” and (8) the risk of revelation of trade secrets or other confidential information, independent from the shareholders’ claim. Noting that the plaintiff bears the burden of proof to demonstrate good cause, Vice Chancellor Parsons quoted from Wal-Mart II that the fiduciary exception is “narrow, exacting, and intended to be very difficult to satisfy.”

After applying the Garner and Wal-Mart II analyses to the facts of the Lululemon case before him, Vice Chancellor Parsons found that the Funds had successfully met their burden of proof for each of the factors—albeit some more strongly than others—and “on balance” had demonstrated good cause to access the Nicholas email and the WSJ email chain. Thus, notwithstanding his finding that they were legitimately covered by an unwaived attorney-client privilege, Vice Chancellor Parsons held that “Plaintiffs are entitled to review the Nicholas email and the WSJ email chain under Garner’s fiduciary exception to privilege.”

A cautionary tale for in-house and outside counsel everywhere…

See here to read the Delaware Chancery Court opinion in In re Lululemon Athletica, Inc. (220 Litigation), C.A. No. 9039-VCP (4/30/15).

See here to read the Delaware Supreme Court opinion in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014).

For more on this topic, see Garner v. Wolfinberger, 450 F.2d 1093 (5th Cir. 1970).

back to top

False Claims Act: What Do the Trial of Socrates, Marbury v. Madison, and the Iraq War Have in Common?

Why it matters: In a May 26, 2015, opinion, the U.S. Supreme Court ruled on two “tolling and timing” questions under the whistleblower provisions of the False Claims Act, namely (1) whether the statute of limitations (SOL) for qui tam claims tolls by operation of the Wartime Suspension of Limitations Act (short answer: it doesn’t); and (2) once a qui tam suit has been filed, at what point can a second lawsuit alleging the same fraudulent acts be filed under the FCA’s “first-to-file” rule (short answer: the second suit is barred only for so long as the first suit remains “pending”).

Detailed discussion: On May 26, 2015, the U.S. Supreme Court issued its opinion in Kellogg Brown and Root Services, Inc. v. U.S. ex rel. Carter, resolving two “tolling and timing” questions that had arisen under the whistleblower, or qui tam, provisions of the False Claims Act (FCA). The first question addressed by the Court was whether the Wartime Suspension of Limitations Act (WSLA), which tolls SOLs for fraud offenses against the government during wartime, applies to FCA civil claims. The Court concluded that it does not. The second question addressed by the Court was one of timing under the whistleblower statute’s “first-to-file” rule, which provides that, once a qui tam suit has been filed against a defendant, later qui tams against that same defendant alleging the same fraud are barred so long as the first action is “pending.” The Court defined the term “pending” in the traditional sense, and held that a dismissal of the first qui tam case means that it is no longer pending for purposes of the first-to-file rule.

First, a brief recap of the underlying case: Kellogg Brown and Root Services, Inc. (KBR) is a defense contractor that provided logistical services to the U.S. military during the armed conflict in Iraq. During the time in question, KBR was a subsidiary of Halliburton Co. (Halliburton). From January through April 2005, Benjamin Carter (Carter) worked in Iraq for KBR as a water purification operator. In February 2006, Carter filed a qui tam complaint under seal in the Central District of California against Halliburton for fraudulent billing practices. That complaint was unsealed in 2008 and transferred to the Eastern District of Virginia, where it went through a couple of rounds of amendments and refilings. In 2010, shortly before trial was to commence, the government informed Carter and KBR about an earlier qui tam lawsuit against Halliburton, filed in December 2005 in the Central District of California, which contained claims similar to those in Carter’s complaint (Thorpe suit). The Virginia district court held that Carter’s lawsuit was related to the Thorpe suit, and dismissed Carter’s case without prejudice under the “first-to-file” rule. Carter appealed to the Fourth Circuit, and while his appeal was pending, the Thorpe suit was dismissed in California for failure to prosecute. Carter quickly refiled a second qui tam complaint against Halliburton in the Eastern District of Virginia, which was again dismissed by the district court under the first-to-file rule because his first complaint was still pending on appeal. Carter then voluntarily dismissed the Fourth Circuit appeal and filed a third qui tam complaint (third Carter complaint) against Halliburton in June 2011, more than six years after most of the alleged fraudulent conduct occurred. It is this third Carter complaint that was at issue before the Supreme Court in this case.

The Virginia district court once again dismissed the third Carter complaint, this time with prejudice, holding that it was barred under the first-to-file rule because by then there were qui tam complaints pending against Halliburton in both Maryland and Texas alleging the same fraudulent misconduct. Also supporting dismissal was the district court’s finding that all but one of the claims alleged in the third Carter complaint were barred as untimely by the qui tam provision’s six-year SOL. Carter argued that the SOL had been tolled under the WSLA and, as there had been no formal proclamation declaring the cessation of hostilities in Iraq, was still tolled with respect to his claims. The district court rejected this argument, finding that the WSLA only applies to criminal offenses against the government.

The Fourth Circuit reversed and remanded the case in 2013, finding that the WSLA does apply to civil claims and thus the qui tam SOL had been tolled and Carter’s claims in the third Carter complaint were still timely. The Fourth Circuit also rejected the district court’s analysis of the first-to-file rule and its dismissal of the third Carter complaint with prejudice, holding that the bar ceases to apply once a first-filed action is dismissed . . . which the Maryland and Texas cases were by the time of the Fourth Circuit’s decision. Thus, the Fourth Circuit remanded the third Carter complaint to the district court, with instructions that it be dismissed without prejudice so that Carter could refile. Carter subsequently did file a fourth complaint, but the district court again dismissed it on the grounds that the third Carter complaint was the subject of a pending writ of certiorari to the Supreme Court, which was granted in 2014.

On May 26, 2015, the Supreme Court unanimously reversed in part and affirmed in part the Fourth Circuit’s opinion. Writing for the Court, Justice Alito began by analyzing the “text, structure and history” of the WSLA and found that, based on such analysis, the WSLA only applies to criminal offenses. Thus, the Court held that “because this case involves civil claims, the WSLA does not suspend the applicable statute of limitations” and reversed the Fourth Circuit decision on this point.

The Court next analyzed the first-to-file rule with respect to the single claim in the third Carter complaint left standing after the Court’s WSLA ruling, and found that the district court’s dismissal of the third Carter complaint “with prejudice” was improper. KBR had argued that the term “pending” in the first-to-file rule should be interpreted so as to mean that the first-filed action remains “pending” indefinitely, thus barring all additional claims against the defendant for the same fraud. The Court found this reading to be “very peculiar” and stated that “[u]nder this interpretation, Marbury v. Madison, 1 Cranch 137 (1803), is still ‘pending.’ So is the trial of Socrates.” The Court concluded that “[w]e see no reason not to interpret the term ‘pending’ in the FCA in accordance with its ordinary meaning,” thus holding that “a qui tam suit under the FCA ceases to be ‘pending’ once it is dismissed. We therefore agree with the Fourth Circuit that the dismissal with prejudice of respondent’s one live claim was error.”

The Court found “some merit” to KBR’s argument that defendants will be reluctant to settle first-filed qui tam actions for the full amount if they know that settlement will lift the first-to-file bar and bring later-filed suits asserting the same claims. The Court noted, however, that that particular issue was not before it in this case and would thus have to be addressed at a later date, stating that “[t]he False Claims Act’s qui tam provisions present many interpretive challenges, and it is beyond our ability in this case to make them operate together smoothly like a finely tuned machine.”

See here to read the U.S. Supreme Court’s opinion in Kellogg Brown and Root Services, Inc. v. U.S. ex rel. Carter, No. 12-1497(5/26/15).

back to top

Wherefore Art Thou Due Process? The Sequel

Why it matters: Since we reported on the constitutional challenges to SEC administrative proceedings in our April newsletter (“Wherefore Art Thou Due Process? SEC Administrative Hearings Under Attack”), things have heated up and may soon reach the boiling point with one district court judge in Atlanta granting an injunction on June 8, 2015, on the grounds that SEC administrative proceedings are “likely unconstitutional” and the Seventh Circuit, D.C. Circuit and even the SEC Commissioners recently hearing oral argument on the issue. We update you here.

Detailed discussion: The attacks on the SEC’s administrative proceedings continue and, at least in one recent case, are making headway. Some notable recent developments:

Hill v. SEC, 15-cv-01801 (N.D. Ga.): On June 8, 2015, District Court Judge Leigh Martin May of the Northern District of Georgia (Atlanta Division) granted plaintiff Charles L. Hill, Jr.’s (Hill) motion for preliminary injunction in connection with his complaint challenging the constitutionality of the SEC administrative proceeding initiated against him in an insider trading case. The injunction halted the administrative proceeding “to allow the court sufficient time to consider this matter on the merits.” This is the first case where a district court sided with the plaintiff and appeared to embrace the argument that SEC administrative proceedings are unconstitutional.

A brief background: On February 17, 2015, the SEC served Hill with an Order Instituting Cease-And-Desist Proceedings after a nearly two-year investigation, from March 2013 to February 2015, into Hill’s alleged insider trading activities that earned him illegal profits of approximately $744,000. Hill immediately moved for summary disposition before James E. Grimes, the administrative law judge (ALJ) that had been assigned to his proceeding. In his motion, Hill argued, among other things, that the proceeding violated Article II of the Constitution (Appointments Clause) because ALJs are “inferior officers” that had not been constitutionally appointed as dictated by Article II and could not be easily removed because they were protected by at least two layers of tenure protection. When denying Hill’s motion on May 14, 2015, ALJ Grimes specifically denied Hill’s Appointments Clause claim on the merits (after, however, noting his doubts that he even had the authority to address the issue or, for that matter, Hill’s entire motion). Hill then filed a complaint and motion for preliminary injunction in the Northern District of Georgia on May 19, 2015, once again challenging the constitutionality of SEC administrative proceedings based, among other things, on the same Appointments Clause argument.

Judge May heard oral argument on May 27, 2015, and on June 8 granted Hill’s motion for preliminary injunction, finding that “SEC ALJs are inferior officers” for purposes of Article II of the Constitution and, because of this, Hill “established a likelihood of success on the merits on his Appointments Clause claim.” Noting that ALJ Grimes was not appointed by the President or an SEC Commissioner as required by Article II, “his appointment is likely unconstitutional in violation of the Appointments Clause.” Judge May found that Hill had satisfied the two remaining factors justifying the preliminary injunction, noting that if it were not granted, Hill would be irreparably harmed because he “will be subject to an unconstitutional administrative proceeding, and he would not be able to recover monetary damages for this harm because the SEC has sovereign immunity.” Moreover, Judge May found that the public interest and balance of equities favored her granting the preliminary injunction because “[t]he public has an interest in assuring that citizens are not subject to unconstitutional treatment by the Government, and there is no evidence the SEC would be prejudiced by a brief delay to allow this Court to fully address Plaintiff’s claims.”

Another case challenging the constitutionality of SEC administrative proceedings that we previously reported on, Gray Financial Group, Inc. v. SEC, No. 1:15-cv-0492, is also pending in the Northern District of Georgia. The SEC filed a motion to dismiss for lack of subject matter jurisdiction in Gray on April 20, 2015, that the court has not yet ruled on. Query whether Judge May’s June 8 decision in Hill will affect that outcome.

In the Matter of Timbervest LLC, et al., No. 3-15519: Also on June 8, 2015, Reuters reported that the SEC Commissioners heard oral argument before a standing-room-only crowd about the constitutionality of administrative hearings in In the Matter of Timbervest LLC. The oral argument “for and against” by Enforcement Division prosecutors, on the one hand, and attorneys for Timbervest LLC (Timbervest), on the other, was in connection with the appeal by Timbervest of an “Initial Decision” by ALJ Cameron Elliot on August 20, 2014, that found the Georgia-based investment firm and its executives liable for fraud and conflict of interest violations under the Advisers Act and ordered them to disgorge nearly $2 million. Timbervest filed a Petition for Review of the Initial Decision with the SEC on September 10, 2014, arguing, among other things, that the administrative procedure was unconstitutional and also that ALJ Elliot was biased with a proven track record of ruling against defendants. The SEC called for additional briefing of the constitutionality issue on January 20, 2015, and oral argument was scheduled before the SEC Commissioners and heard on June 8. Interestingly, in connection with Timbervest’s argument that ALJ Elliot is biased, Reuters reported that the Enforcement Division issued an “unusual” order on June 4, 2015, inviting ALJ Elliot to file an affidavit under seal saying whether he feels pressure from the Enforcement Division to rule in favor of the SEC in administrative proceedings before him (he politely declined on June 9). The SEC has, of late, been doing its part to limit damage control and mollify its critics. In response to SEC Enforcement Chief Andrew Ceresney’s grilling before a House subcommittee on March 19, 2015, regarding the due process fairness of SEC administrative proceedings and the lack of transparency in the SEC’s venue selection (previously reported on in our April newsletter), the SEC released guidelines titled “Division of Enforcement Approach to Forum Selection in Contested Actions” on May 8, 2015.

Oral arguments on appeal in Bebo v. SEC, No. 15-1511 (7th Cir.) and Jarkesy et al. v. SEC, No. 14-cv5196 (D.C. Cir.): On June 4, 2015, the Seventh Circuit heard oral argument in Bebo, and on April 13, the D.C. Circuit heard oral argument in Jarkesy. No decisions yet. As we previously reported, both cases raise constitutional challenges to SEC administrative proceedings and both were dismissed by the lower courts for lack of subject matter jurisdiction.

We will continue to monitor all of these cases with avid interest and report back on new developments.

See here to read the decision in Charles L. Hill, JR. v. SEC, No. 1:15-CV-1801-LLM (N.D. Ga.) (6/8/15).

See here to read the Reuters article titled “U.S. SEC Weighs Constitutional Challenge to Its In-House Courts” by Sarah N. Lynch (6/8/15).

back to top

Keeping an Eye Out: Updates and Briefly Noted

Joseph Sigelman, former CEO of oil and gas company PetroTiger Ltd., pleaded guilty to conspiring to pay bribes to foreign government officials in violation of the FCPA. Sigelman had been on trial for the charges since 6/1/15. Sigelman is the third former executive to plead guilty in the PetroTiger scandal (6/15/15).

Eight more Swiss banks reached resolution with the DOJ under its Swiss Bank Program (6/9/15, 6/3/15 and 5/28/15).

South Africa-based payment processor Net 1 UEPS Technologies said in a securities filing that the SEC declined to commence an enforcement action after conclusion of an FCPA investigation (6/8/15).

Deutsche Bank AG co-CEOs Anshu Jain and Jurgen Fitschen resigned (6/7/15).

Brazilian prosecutors investigating the Petrobas scandal reportedly notified the DOJ about units/affiliates of four foreign companies (Samsung Heavy Industries, Co., Skanska AB, AP Moeller-Maersk A/S and Toyo Engineering Corp.) involved in the payment of bribes to win Petrobas contracts in violation of the FCPA (6/2/15).

First Tennessee Bank N.A. agreed to pay $212.5 million to resolve FCA violations relating to federally insured mortgage loans it underwrote (6/1/15).

Garden State Cardiovascular Specialists P.C. agreed to pay $3.6 million to resolve FCA violations, qui tam whistleblower to receive $648,000 award (5/28/15).

Two durable medical equipment suppliers (Orbit Medical Inc. and Rehab Medical Inc.) agreed to pay $7.5 million to resolve FCA violations, two qui tam whistleblowers to split $1.5 million award (5/27/15).

Houston-based oil and gas company Hyperdynamics Corporation announced that the DOJ declined to prosecute after the conclusion of an FCPA investigation (5/21/15).

Medco Health Solutions Inc. agreed to pay $7.9 million to resolve FCA violations, two qui tam whistleblowers to split yet-to-be-determined award (same two whistleblowers that split a $1.4 million reward in connection with the 1/15 AstraZeneca FCA settlement, for the same misconduct) (5/20/15).

In a Q&A session after her remarks at the Compliance Week conference in Washington, D.C., Assistant Attorney General Leslie Caldwell said that the Criminal Division is now requiring its prosecutors to get a supervisor’s permission to obtain statute of limitations tolling agreements in FCPA investigations (5/19/15).

PharMerica Corporation agreed to pay $31.5 million to resolve FCA and Controlled Substances Act violations, qui tam whistleblower to receive $4.3 million award (5/14/15).

back to top



pursuant to New York DR 2-101(f)

© 2024 Manatt, Phelps & Phillips, LLP.

All rights reserved