During a recent webinar sponsored by the Washington Legal Foundation, we explored the impacts intensive individual-focused criminal enforcement can have on an industry, using the recent history of criminal enforcement of food safety laws as a case study. The individual prosecutions we discussed in that context were based in large part on application of the Park doctrine, a broad and powerful food safety-specific formulation of the responsible corporate officer doctrine that has returned to vogue over the last several years after sitting largely unused for decades. The discussion focused, in part, on predicting what tools like the Park doctrine may emerge in the coming years as means for regulators and law enforcement to hold individuals accountable for misconduct, particularly as federal prosecutors implement the Department of Justice’s (“DOJ’s”) Yates Memo. This post outlines those predictions.
We are still in the early stages of the DOJ’s operation under the requirements of the Yates Memo. Given the typically long gestation period for most white collar matters, it is reasonable to expect that we won’t be able to spot real post-Yates enforcement trends for some time. However, we know that regulators and law enforcement both in and beyond the DOJ are focused on bringing civil, regulatory and criminal enforcement actions against individuals. By examining the tools and techniques they might use against individuals—particularly ones that are new and novel—we can be better prepared to assist clients in avoiding issues on the front end through implementation of well-designed compliance programs, and to navigate enforcement actions on the back end. Here are a few for your consideration.
- Anticipatory Obstruction of Justice under 18 U.S.C. § 1519. Enacted as part of the Sarbanes-Oxley Act of 2002, Section 1519 substantially broadens the more familiar obstruction statutes by excluding any requirement that a proceeding be known to the accused or even pending in order for obstruction to have occurred. Violation only requires (1) knowingly (2) destroying or concealing a record or document (3) with the intent to impede or obstruct any matter (including those contemplated but not yet initiated) within the jurisdiction of the United States. There is no materiality requirement, and no need to prove any nexus between the allegedly obstructive conduct and the federal matter. This could prove to be a particularly powerful tool for pursuing individuals not for their underlying misconduct, but for mistakes they make in anticipation of or response to a federal investigation.
- FCPA Innovations. Like the Park doctrine, the FCPA laid largely fallow for over two decades before emerging to become a consistent enforcement prerogative of the DOJ and SEC. And in the decade-plus that it has been a preeminent corporate bogeyman, its enforcement has evolved and shown every sign that it will continue to do so. Some innovations that could see increasing application include:
- Advisers Act liability being used by the SEC’s to reach non-issuers. In its first significant FCPA settlement against a hedge fund earlier this year, the SEC included charges falling under the anti-fraud provisions of the Investment Advisers Act of 1940 (the “Advisers Act”) in its administrative order, along with charges under the FCPA. Section 206 of the Advisers Act makes it unlawful for covered investment advisers, directly or indirectly, to (1) “employ any device, scheme, or artifice to defraud any client or prospective client” or (2) “engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.” It prohibits fraudulent, deceptive or manipulative conduct, which the SEC included in its enforcement action based on the investment advisor allegedly engaging in self-dealing and the improper use of managed investor funds, failing to prevent the use and misuse of managed investor funds by its business partner in corrupt and self-dealing transactions, and by omitting material information regarding those transactions from its disclosures to its investors.
While this case involved an issuer, under the right facts and circumstances, the SEC could conceivably pursue what is essentially FCPA liability against non-issuers subject to the Advisers Act. Non-issuer registered investment advisers—particularly those with international activities such as the courting of sovereign wealth funds—would therefore be wise to heed this development.
- Commercial bribery charges being brought by the SEC against issuers under the accounting provisions. SEC officials have previously outlined their ability and intent—under the right facts and circumstances—to pursue FCPA enforcement actions grounded on commercial rather than official bribery, pursuant to the FCPA’s accounting provisions.
- Increasing use of control person liability in FCPA cases. To date, the SEC has been sparing in its reliance on control person liability under Section 20(a) of the Exchange Act in FCPA enforcement actions. However, it is a well-established doctrine that is commonly applied in non-FCPA contexts, and can be used to impose liability against high-level executives, even in circumstances where they had little to no direct involvement in violative conduct.
- Increased Use of Control Person or Responsible Corporate Officer Liability. As the rise of the Park doctrine illustrates in the food safety context, the ability to bring enforcement actions against individual executives under a control person or responsible corporate officer theory of liability can have a transformative effect on the enforcement field in a particular industry. These are not new liability concepts, but they are infrequently used in most white collar contexts. As a result, they are often not top of mind when individuals in leadership positions consider their potential exposure. The risk of their increasing use should be factored into their decision-making, particularly when it comes to the compliance tone they set as managers and senior executives.
- Increased Criminal Enforcement via the False Claims Act. Per a DOJ policy announced by Assistant Attorney General for the Criminal Division Leslie Caldwell in September 2014, criminal prosecutors from the Fraud Section now review all qui tam cases to determine whether to open a parallel criminal investigation, working in close coordination with the DOJ Civil Division as well as U.S. Attorney’s Offices. This policy turned previously discretionary review of such cases by criminal prosecutors to mandatory, and could have a significant impact on both individuals and companies facing False Claims Act matters via initiation of ancillary criminal investigations based on allegations raised in a civil qui tam
- Emergence of the Next FCPA. Predicting what will be the next hot area for regulatory or law enforcement focus can be fraught with peril. However, it is not difficult to observe when certain industries and areas receive more attention or come within reach of new laws or law enforcers. Financial services of all kind have clearly been under the gun since the housing crisis and Great Recession, including through the creation of regulators and investigative agencies such as the CFPB and SIGTARP. An increasing number have also come under the ever-broadening reach of FinCEN as it continues to expand the scope of anti-money laundering (“AML”) laws and regulations to cover institutions previously excluded from most AML requirements, its pending notice of proposed rulemaking to cover investment advisers being a prime example.
It should be noted, in closing, that if companies and their executives are concerned about the potential impact of the Yates Memo and what some may perceive as the over-criminalization of regulatory matters, they should be less focused on the back end of an enforcement issue, and more on the front end. They should be investing in compliance programs that in addition to preventing or forestalling violations of law and regulation, will provide both the company and the executives a demonstrable basis to show that if issues have arisen, they have done so in spite of reasonable best efforts to avoid them. In other words, they should use the Yates Memo as it was intended (and as it has been incorporated into the Principles of Federal Prosecution of Business Organizations in the U.S. Attorneys’ Manual), as a roadmap for cooperation and demonstration of a healthy corporate and management environment.