Examination of US regulatory enforcement actions and criminal investigations and prosecutions in 2009 suggests that the Securities and Exchange Commission (SEC) and United States Department of Justice (DOJ) have intensified their focus on senior executives and are targeting them even in the absence of evidence of actual participation in any misconduct.
For example, the SEC recently settled cases finding the respondents liable as “control persons” – persons who directly or indirectly controlled the conduct of the wrongdoer – for misconduct that was committed by others, even though there was little to no showing of participation by the control person in the misconduct. Former AIG CEO Hank Greenberg settled with the SEC this past year on a control person liability basis agreeing to pay $15m in fines and disgorgement in connection with AIG’s violations of the antifraud and other provisions of the securities laws. Although the SEC stated that Greenberg was a “culpable participant” in the misconduct, it is notable that they did not charge him with either violating or aiding and abetting AIG’s violations. The SEC’s settlement with Nature’s Sunshine Products, Inc. went even further. In that settled action, the SEC charged the COO and CFO with violating the Foreign Corrupt Practices Act (FCPA) on the grounds that they were control persons who had failed to supervise the company personnel who were in charge of maintaining the company’s books and records and internal controls. The SEC did not suggest that the COO and CFO failed to address red flags that were brought to their attention, but rather that they should be held responsible solely by virtue of their positions in the company.
Recent cases have demonstrated that the US government may more aggressively exploit its ability to prosecute executives where there is evidence that they consciously avoided knowledge of misconduct. For example, in United States v. Kozeny, 643 F. Supp. 2d 415 (S.D.N.Y. 2009), the DOJ convicted an investor, Frederic Bourke, for conspiracy to violate the FCPA by demonstrating that Bourke consciously avoided knowledge of bribes paid to Azeri government officials in connection with privatisation of an oil company. It is particularly astounding that the evidence that led to Bourke’s conviction was merely that Azerbaijan was known to be a corrupt environment and that Bourke was concerned that the head of the investment consortium might have paid bribes. With the number of open FCPA investigations hitting a record high of 130 in 2009 (according to a speech by Mark Mendelsohn, Deputy Chief at the DOJ, Fraud Section), the conviction of Bourke should serve as a warning to investors operating in jurisdictions with a reputation for corruption that they must conduct thorough due diligence, monitor the activities of third parties, and document and remediate any FCPA concerns.
In sum, corporate entities, executives, and investors must remain vigilant in 2010 in investigating and remediating any lapses in internal controls and books and records that could expose them to regulatory liability.