Blowing the Whistle on Bribery Overseas: The SEC's New Bounty Program. Don Zarin and David Roth

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1 Blowing the Whistle on Bribery Overseas: The SEC's New Bounty Program Don Zarin and David Roth On July 21, 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Financial Reform Act" or the "Act"). 1 The Act is a by-product of the 2007 and 2008 United States financial crisis and institutes wide-ranging reforms, including the creation of new regulatory bodies; the provision of increased regulatory power to existing agencies, such as the Securities and Exchange Commission (SEC); the addition of new reporting requirements for certain financial sector entities; the enhancement of investor and consumer protections; and the revision of existing mortgage laws. One of the Act's lesser known provisions rewards whistleblowers who report securities law violations to the SEC. In 1989, the SEC instituted a similar program to reward whistleblowers for insider trading information 2 ; however, the expanded 2010 SEC whistleblower program provides rewards for original information leading to successful actions by the SEC for securities law violations that result in monetary sanctions exceeding $1 million. Moreover, under the expanded bounty program, whistleblowers must receive at least 10 percent and up to 30 percent of the monetary sanctions awarded in an enforcement action. This new whistleblower provision will have a very significant impact on the SEC's enforcement of the Foreign Corrupt Practices Act of 1977 (FCPA). The FCPA contains an antibribery provision that makes it unlawful for U.S. issuers 3 (e.g., public companies) to bribe foreign officials. In addition, the FCPA contains accounting provisions that require U.S. issuers to make and keep books, records and accounts that accurately and fairly reflect transactions and the disposition of assets and to devise and maintain a system of internal accounting controls. The U.S. Department of Justice enforces criminal violations of the FCPA, while the SEC enforces civil violations of the bribery provisions, as well as the accounting provisions. In recent FCPA enforcement actions, the SEC has required the disgorgement of profits in addition to any civil penalty. As a result, more than half of the SEC's recent FCPA enforcement actions have resulted in penalties exceeding $1 million. Many recent cases have seen the imposition of penalties in the hundreds of millions of dollars. FCPA whistleblowers are therefore eligible for potentially large cash rewards under the new SEC whistleblower program. Employees will have an incentive to bypass a company's internal reporting system in order to report information regarding foreign corruption directly to the SEC. Public companies trying to decide the difficult issue of whether they should make voluntary disclosures to the SEC will now have to confront the very real possibility that their own employees will report corrupt practices within their organizations to the SEC. 1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No , 124 Stat (2010). 2 Insider Trading and Securities Fraud Enforcement Act of 1988, Pub. L. No , 3, 102 Stat (codified at 15 U.S.C. 78u-1(e)). 3 An "issuer" is defined as "any person who issues or proposes to issue any security." Section 3(a)(8) of the Securities Exchange Act of 1934, 15 U.S.C. 78c(a)(8).

2 We set forth below some background information of the FCPA, describe how the new SEC whistleblower program became a part of the Financial Reform Act, and highlight the Act's most important whistleblower-related provisions. I. Background on the FCPA The FCPA was passed in the aftermath of the Watergate scandal. The SEC had initiated an investigation of undisclosed payments to domestic and foreign governments and politicians after the Watergate investigation revealed unreported campaign contributions. Under a voluntary disclosure program, more than 400 corporations made disclosures of questionable or illegal corporate payments of bribes and political contributions. More than 200 corporations, mostly Fortune 500 companies, admitted making questionable foreign payments totaling more than $300 million. As a result of these revelations and congressional testimony, a broad consensus developed in Congress that foreign bribes were not only unethical, but also bad business. Congress subsequently passed the FCPA, which entered into law on December 19, The FCPA makes it illegal for U.S. companies; U.S. citizens; issuers that have a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (Exchange Act) or that are required to file reports pursuant to Section 15(d) of the Exchange Act, including foreign companies listed on a U.S. stock exchange; or any entity or person acting within the territory of the United States to corruptly pay, promise to pay or authorize the payment, directly or indirectly, of anything of value to a foreign official to obtain or retain business. In addition, the FCPA requires every issuer to: (i) make and keep books and records that accurately and fairly reflect the transactions of the corporation, and (ii) devise and maintain an adequate system of internal accounting controls. The SEC and the U.S. Department of Justice brought relatively few FCPA enforcement actions for nearly 30 years following the FCPA's enactment; however, the agencies have increased their enforcement activities considerably within the last five years. From 2006 to 2009, the U.S. Department of Justice almost quadrupled the number of FCPA prosecutions brought against corporations. In late 2009, the U.S. Department of Justice had over 120 FCPA cases under investigation. Similarly, the SEC has nearly tripled the annual number of enforcement actions it brings. These increased enforcement efforts have led to a dramatic increase in penalties by both the SEC and the U.S. Department of Justice. Some of the largest enforcement actions have been against foreign corporations whose stocks are listed on a U.S. stock exchange and who are, therefore, subject to SEC and U.S. Department of Justice jurisdiction as an issuer. Some of the more notable recent settlements include: Siemens AG (2008): $350 million to the SEC and $450 million to the U.S. Department of Justice for bribes paid in connection with contracts in Argentina, Bangladesh, Greece, Iraq, Italy, Nigeria, Venezuela and other countries between 2001 and For additional background on the history of the FCPA, see DON ZARIN, DOING BUSINESS UNDER THE FOREIGN CORRUPT PRACTICES ACT (Practicing Law Institute 14th ed. 2009).

3 Halliburton/KBR (2009): $177 million to the SEC and $402 million to the U.S. Department of Justice for bribes paid to Nigerian officials between 1994 and 2004 to win a liquefied natural gas (LNG) project Snamprogetti Netherlands B.V. / ENI S.p.A. (2010): $125 million to the SEC and $140 million to the U.S. Department of Justice for bribes paid to Nigerian officials to win the same LNG project with Halliburton/KBR Technip S.A (2010): $98 million paid to the SEC and $240 million to the U.S. Department of Justice for bribes paid to Nigerian officials to win the same LNG project with Halliburton/KBR and Snamprogetti/ENI Daimler AG (2010): $91 million to the SEC and $94 million to the U.S. Department of Justice for bribes paid to officials in 22 countries between 1998 and 2008 to obtain government procurement contracts for Daimler vehicles Baker Hughes (2007): $33 million to the SEC and $11 million to the U.S. Department of Justice for bribes paid to Kazakh officials between 2001 and 2003 to obtain oil field service contracts Willbros (2008): $10 million to the SEC and $22 million to the U.S. Department of Justice for bribes paid to Nigerian, Bolivian and Ecuadorian officials to obtain contracts related to the oil and gas industry Chevron (2007): $3 million to the SEC, $25 million to the U.S. Department of Justice and $2 million to the U.S. Department of the Treasury for bribes to Iraqi officials in connection with the U.N. oil-for-food program II. History of the SEC's Bounty Program The SEC first established a whistleblower bounty program in 1989, in the wake of the October 1987 stock market collapse. The program offers rewards to whistleblowers who provide information about potential insider trading; rewards are discretionary and are capped at 10 percent of the amount recovered from a civil penalty pursuant to a court order. SEC Inspector General David Kotz stated that "the program's success has been minimal and its existence is practically unknown." 5 Until July 2010, the SEC had only awarded a total of $159,537 to five informants under the bounty program over the last 20 years 6 ; however, in July 2010, the SEC awarded $1 million to two individuals who provided key evidence that led to the filing of a settled enforcement action. 7 5 OFFICE OF INSPECTOR GENERAL, SECURITIES AND EXCHANGE COMMISSION, ASSESSMENT OF THE SEC'S BOUNTY PROGRAM, REP. NO. 474 (2010). 6 Id. 7 SEC Litigation Release No (July 23, 2010),

4 The insertion of a new whistleblower provision in the Financial Reform Act stemmed from the SEC's failure to prevent and detect crimes committed by hedge fund manager Bernard Madoff. In early 2009, the SEC came under enormous criticism for its handling of the whistleblower complaints of Harry Markopolos, who provided, on several occasions, the agency with evidence of Mr. Madoff's Ponzi scheme. On June 15, 2009, U.S. Rep. Paul Kanjorski (D-PA), the chairman of the U.S. House of Representatives' Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, sent a letter to SEC Inspector General Kotz asking for suggestions on how federal securities laws could be revised to address "shortfalls of the [SEC]," as manifested in the agency's failure to detect crimes committed by Mr. Madoff. 8 SEC Inspector General Kotz responded to Rep. Kanjorski's letter with a series of legislative recommendations, which included the strengthening of the agency's bounty program. Specifically, SEC Inspector General Kotz wrote, "We would recommend that the [Securities] Exchange Act be amended to authorize the SEC to award a bounty for information leading to the recovery of a civil penalty from any violator of the federal securities laws, not simply insider trading violations." 9 On October 15, 2009, Rep. Kanjorski introduced the Investor Protection Act of 2009, which included SEC Inspector General Kotz's recommendation to expand the SEC's bounty program. 10 Rep. Kanjorski's new whistleblower provisions were ultimately adopted as part of the Financial Reform Act, approved by the U.S. House of Representatives on June 30, 2010, and the U.S. Senate on July 15, III. The Act's Key Provisions A. Original Information Whistleblowers must provide "original information" to the SEC in order to be eligible for a monetary reward under the Act. Original information must be provided voluntarily, derived from the independent knowledge or analysis of the whistleblower, and cannot already be known by the SEC. Additionally, the information cannot be exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit or investigation, or from the news media, unless the whistleblower is a source of the information. 11 Of note, the original information may relate to misconduct that occurred prior to July 21, 2010, the statute's enactment date. Consequently, a whistleblower would be eligible for a reward if he provided original information to the SEC regarding an issuer's possible FCPA violations within the prior five year period (i.e., the statute of limitations period). 8 See Letter from Rep. Paul Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises to H. David Kotz, Inspector General, SEC (June 15, 2009). 9 See Letter from H. David Kotz, Inspector General, SEC, to Rep. Paul Kanjorski, Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises (June 30, 2009). 10 H.R. 3817, 111th Cong. 202 (2009). 11 Pub. L. No (2010), 922(a)(3).

5 B. Rewards Under the Act, a whistleblower shall receive an award only in SEC enforcement actions resulting in monetary sanctions exceeding $1 million. Monetary sanctions include penalties, disgorgement of profits gained from the bribe, and interest. In such cases, the whistleblower shall receive an award of at least 10 percent and up to 30 percent of the monies obtained in the enforcement action. The SEC has limited discretion in determining whether whistleblowers should be rewarded. The Act instructs the SEC to pay cash awards to all eligible whistleblowers but allows the agency to determine the amount of those awards, provided that the award cannot be less than 10 percent of the monetary sanction collected. The reward amount is based in part on the significance of the information provided to the SEC, the degree of the whistleblower's assistance and the programmatic interests of the SEC in deterring future violations. Whistleblowers cannot appeal the amount awarded by the SEC, but can appeal the denial of an award altogether. No award will be made if the whistleblower is convicted of a crime related to the action, if the whistleblower works in a regulatory agency or at the U.S. Department of Justice, or the whistleblower learned of the information through conducting an audit. The Act creates a SEC Investor Protection Fund (the "Fund") from which the rewards are drawn. The Fund will be established within the U.S. Department of the Treasury and will be financed with monetary sanctions collected by the SEC in securities laws actions. The SEC cannot take the Fund's balance into account when determining the size of a whistleblower's award. Rewards are not limited to actions brought by the SEC. Under the Act, whistleblowers are entitled to a reward from any "related action" stemming from the original information provided by the whistleblower to the SEC. The Act defines a "related action" as "any judicial or administrative action brought by [the U.S. Attorney General, an appropriate regulatory agency; a self-regulatory organization 12 ; or a state attorney general] that is based upon the original information provided by the whistleblower that led to the successful enforcement of the Commission action." 13 This definition indicates that a whistleblower may receive a reward for providing information that leads to a successful "related action," but only if that information also leads to a successful SEC enforcement action resulting in an SEC penalty exceeding $1 million. Related actions would include actions brought by the Department of Justice for violations of the FCPA. Thus, a whistleblower would be eligible to receive an award for the combined $800 million SEC/DOJ sanction in the Siemens case, the combined $599 million sanction to Halliburton/KBR, and so forth. Related actions may also include enforcement actions brought by the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC), tasked with administering and enforcing economic and trade sanctions; the U.S. Department of Commerce's 12 Examples of self-regulatory agencies include the Financial Industry Regulatory Authority ("FINRA") and the Municipal Securities Rulemaking Board ("MSRB"). 13 Pub. L. No (2010), 922(a)(5).

6 Bureau of Industry and Security and the U.S. State Department's Directorate of Defense Trade Controls (DDTC), both tasked with administering and enforcing export controls. 14 D. Anonymity For Whistleblowers The new SEC provisions allow whistleblowers to provide information to the SEC anonymously; however, if the whistleblower provides information to the SEC anonymously, he must be represented by counsel. In addition, the whistleblower must identify himself to the SEC prior to the receipt of payment. E. Protection for Whistleblowers The new SEC provisions also offer some significant protections to whistleblowers. The SEC must protect the identity of whistleblowers, with very few exceptions, unless otherwise required in a public proceeding (e.g., grand jury). In addition, employers may not "discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower" for information provided to the SEC that leads to an investigation or for assisting the SEC with an investigation initiated based on that information. 15 A whistleblower who has faced retaliation may bring an action against an employer in U.S. District Court and the action must be filed within 10 years from the date of the retaliation. 16 Relief for prevailing whistleblowers includes reinstatement; two times the amount of back pay owed, plus interest; and compensation for litigation costs, including reasonable attorneys' fees. 17 F. Citizenship of Whistleblowers The Act does not require that award recipients be U.S. residents or citizens. It is therefore possible for foreign national employees of a foreign subsidiary of a U.S. company or of a foreign company listed on a U.S. stock exchange (and therefore subject to SEC jurisdiction under the FCPA as an issuer) to be eligible for the award. Similarly, a foreign national employee of a foreign sales representative or consultant entity would be eligible to collect the whistleblower award. Such a possibility substantially increases the likelihood that improper conduct will be brought to the attention of the SEC. G. Immunity Whistleblowers are ineligible for rewards under the Act if they are convicted of a criminal violation related to the information provided. 18 Thus, an employee could not bribe a foreign official, blow the whistle on his employer, and collect a reward for his own malfeasance; however, the Act does not explicitly address the scenario where a whistleblower is given 14 Settled Enforcement Action, SEC v. Titan Corporation, No (D.D.C. Mar. 1, 2005); In the Matter of L3 Communications Corporation, Consent Agreement ( 15 Pub. L. No (2010), 922(h)(1)(A). 16 Generally, the action must be brought within six years of the retaliation or within three years of the date when facts material to the action are known or reasonably should have been known by the employee. 922(h)(1)(B). 17 Id. 922(h)(1)(C). 18 Id. 922(c)(2)(B).

7 immunity in connection with providing information to government agencies. The Act states only that information must be provided "voluntarily." 19 This leaves open the possibility for an employee to take part in a bribery scheme, receive immunity in exchange for information regarding that scheme, and ultimately collect a cash reward. H. Regulations and Congressional Reports The Act imposes several deadlines on the SEC. The agency has until April 17, 2011, to pass regulations that implement the Act's whistleblower provisions. 20 Also, the SEC's inspector general must deliver a report to the U.S. Senate's Banking, Housing, and Urban Affairs Committee and the U.S. House of Representatives' Financial Services Committee by December 21, The report will include information on whether the SEC is sufficiently publicizing and effectively administering the whistleblower program, whether the program is successfully inducing whistle blowing, and whether the program is adequately funded. Most importantly, the report will include the SEC's recommendation on whether Congress should allow SEC whistleblowers to have a private right of action to bring suit against persons who have committed securities fraud. 21 In addition to the SEC inspector general's report, the SEC office charged with administering the whistleblower program must report annually to the aforementioned congressional committees on its activities, whistleblower complaints and its response to such complaints. 22 IV. Implications and Recommendations This new provision increases the likelihood that information regarding improper payments will come to the attention of the SEC. Moreover, when combined with recent enforcement actions by the SEC that have held U.S. parent companies strictly liable under the accounting provisions of the FCPA for the improper payments made by their foreign subsidiaries without the knowledge or participation of the U.S. parent company, the compliance and enforcement risks for U.S. public companies engaged in overseas business activities cannot be overstated. Foreign companies listed on a U.S. stock exchange are equally at risk. Indeed, five of the six largest FCPA settlements have been with foreign companies. We strongly urge these companies to take immediate steps to adopt and implement an FCPA compliance program or to strengthen their existing FCPA compliance programs and to conduct training of their employees, sales agents and distributors. In addition, we recommend that each company undertake FCPA compliance audits of their international operations. 19 Id. 922(b)(1). 20 Id. 924(a). 21 Id. 922(d)(1). 22 Id. 924(d).

8 About the authors: Don Zarin is a partner in the Washington, D.C., office of Holland & Knight LLP. He is co-head of the firm's International Trade Practice Group and head of the Foreign Corrupt Practices Act Team. He was recently appointed by the U.S. Department of Justice to serve as an FCPA compliance monitor in a major enforcement case. He is the author of Doing Business Under the Foreign Corrupt Practices Act, a leading textbook on this subject. David Roth is an associate in the Washington, D.C., office of Holland & Knight LLP and a member of the firm's Foreign Corrupt Practices Act Team. Mr. Roth's practice focuses on a wide range of international trade and FCPA-related matters.