The Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) recently announced a $398 million settlement with Total S.A. (“Total”), a company organized and headquartered in France whose American Depositary Receipts trade on the NYSE.1 The settlement consisted of $153 million in disgorgement, as agreed in a settled SEC order, and a $245.2 million penalty, as agreed in a deferred prosecution agreement (“DPA”) with the DOJ.2
With the combined settlement figure reaching nearly $400 million, Total was the largest FCPA settlement in years. It represents the fourth largest FCPA settlement on record and the third largest FPCA-related disgorgement to date.3 Total is the third French company on the top 10 FCPA settlements list and the first new entry to the top 10 list since December 2011.4
As described in the SEC’s administrative order, Total entered into an agreement with the National Iranian Oil Company (“NIOC”) in 1995 to help develop multiple oil fields in Iran.5 Prior to signing this contract, Total allegedly entered into a sham consulting agreement with an intermediary designated by an Iranian official in order to induce the Iranian official to use his influence with the NIOC to help Total secure the development contract. According to the order, under the “consulting agreement,” Total paid the intermediary robughly $60 million from September 1995 to November 2004,6 mischaracterizing these payments as “business development expenses.”7 The development interests with the NIOC netted Total approximately $150 million in profits.8
Although the amount of the disgorgement and the overall settlement make the Total settlement noteworthy, it also highlights a potential trend in SEC FCPA enforcement—the increased use of administrative proceedings instead of civil court actions. After discussing a likely major driver of the use of administrative proceedings, i.e., the uncertainty of federal court action on court-filed settlements requiring judicial approval, this article outlines the different resolutions available to the SEC in FCPA cases and highlights the key distinctions between a court-ordered injunction and an administrative cease-and-desist order. We also point out what companies should keep in mind about FCPA settlements achieved via administrative orders. Finally, we examine recent trends in SEC FCPA settlements and explain why companies should expect, as in Total, to see more FCPA cases settle through administrative proceedings.
II. Recent Court Actions and Policy Changes at the SEC
The use of administrative proceedings is noteworthy in an environment in which federal judges are increasingly questioning the merits of proposed settlements submitted by the SEC and defendants for approval. This trend began with an opinion by United States District Court Judge Jed S. Rakoff in late 2011, refusing to approve a proposed consent judgment submitted by the SEC and defendant Citigroup.9 Judge Rakoff’s opinion focused on the defendant’s choice to neither admit nor deny the SEC’s allegations in the submitted judgment. As the court stated: “it does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified.…”10
Since Judge Rakoff’s opinion in the Citigroup matter (presently on appeal),11 several other federal district court judges have raised questions about proposed final judgments submitted by the SEC and defendants. A number of these judges have echoed Judge Rakoff’s concerns about the “neither admit nor deny” language commonly found in SEC settlements.12 Judges have also questioned the appropriateness of some equitable remedies sought—injunctions and disgorgement, in particular—imposing additional delays on the approval of settled orders.13
In the wake of these cases, SEC Chairman Mary Jo White announced on June 18, 2013, that the Commission intends to scale back its use of the “neither admit nor deny” policy in “certain cases.”14 This announcement expands upon changes made to the SEC’s “neither admit nor deny” policy in early 2012, which limited the policy’s use in certain cases involving criminal wrongdoing.15 Prior to the 2012 SEC policy changes, a “defendant could be found guilty of criminal conduct and, at the same time, settle parallel SEC charges while neither admitting nor denying civil liability.”16 In early 2012, Robert Khuzami, the then-Director of the SEC’s Division of Enforcement, announced that, when settling cases in which the defendant has admitted to violations of criminal law in related criminal proceedings, the SEC would no longer allow the defendant to neither admit nor deny wrongdoing.17
As judicial review continues to inject uncertainty into the once perfunctory settlement approval process, the use of administrative proceedings to resolve FCPA violations may become a preferred forum for SEC settlements.
III. Resolutions Available to the SEC
FCPA violations are pursued by the SEC through civil actions and by the DOJ through both civil and criminal proceedings.18 Although this article focuses on resolutions available to the SEC, the SEC and the DOJ frequently cooperate on FCPA matters through parallel civil and criminal proceedings. The DOJ also has exclusive criminal and civil enforcement authority with respect to violations of those provisions of the FCPA that relate to domestic concerns as well as to matters as to which the FCPA applies solely by reason of conduct committed in U.S. territory.19
After an FCPA inquiry or investigation, the SEC may choose not to pursue an enforcement action. In such situations, FCPA matters can be resolved in three ways: (1) a deferred prosecution agreement (“DPA”), (2) a non-prosecution agreement (“NPA”), or (3) a declination.20 If the SEC chooses to file an enforcement action for FCPA-related violations, it has two options: (1) filing an enforcement action in United States District Court, or (2) bringing an administrative proceeding before the Commission.21 In bringing FCPA charges, both methods allow the SEC to seek disgorgement of illegal profits, and now, as a result of the Dodd-Frank Act, civil monetary penalties.22 Additionally, the SEC can pursue remedies that prohibit future violations of the law in both forums. This is accomplished through an injunction in federal court and through a cease-and-desist order in an administrative proceeding.23 Below we discuss the differences between an administrative action and a federal court proceeding and the implications of the Commission’s ability to obtain civil money penalties in administrative actions.
A. Elements of a Cause of Action
A key distinction between injunctions and cease-and-desist orders is the required showing by the SEC to obtain each form of relief. This distinction is most important when a defendant intends to contest the FCPA action instead of negotiating a settlement with the SEC.
“[In contrast to injunction proceedings in federal court,] cease-and-desist orders…require a less stringent showing than reasonable likelihood of a future violation.”
The SEC may bring an action to enjoin from committing future violations any person who engaged, or is about to engage, in any violations of federal securities laws.24 To succeed in obtaining an injunction, the SEC is required to show that there is a “reasonable likelihood that the defendant will violate the securities laws in the future.”25 In determining whether a future violation is likely, courts typically consider several factors: (1) the isolated or recurrent nature of the conduct, (2) the degree of scienter exhibited by defendant, (3) the ability to violate the law in the future, and (4) the degree to which the wrongfulness of the conduct has been recognized.26 To defend against an injunction in a contested FCPA action a defendant may argue either that there was no securities law violation or that there is no likelihood of future violation. Additionally, a few courts have become increasingly uncomfortable with “obey-the-law” injunctions that broadly direct defendants to refrain from any future violations of securities laws.27
Cease-and-desist orders, on the other hand, require a less stringent showing than reasonable likelihood of a future violation. Section 21C of the Exchange Act gives the Commission the power to enter cease-and-desist orders against a person who is violating, has violated, or is about to violate the federal securities laws.28 This has been interpreted as requiring a showing of likelihood of a future violation that is considerably less stringent than that required to issue an injunction.29
The differences in the two avenues of resolution also affect how defendants may appeal an unfavorable decision. At the conclusion of an SEC administrative proceeding, the administrative law judge (“ALJ”) issues an “initial decision.” To appeal, a defendant may file a petition for the Commission to review the decision.30 The Commission renders judgment based on the submitted materials and issues a final order.31 Only after entry of a final Commission order may the defendant appeal to a regional United States Court of Appeals.32
C. Rules in Proceedings
If the parties anticipate litigation instead of settlement, then the procedural rules in an administrative proceeding, which are distinct from those in federal court, are an important consideration.33 If the SEC is seeking monetary penalties in a civil proceeding, then the defendant would have the right to a jury trial.34 An administrative proceeding, on the other hand, proceeds in the manner of a non-jury trial.35 In addition, although both sides are able to present evidence and testimony and cross-examine witnesses in administrative proceedings, the defendant does not have the protection of the Federal Rules of Civil Procedure and the Federal Rules of Evidence. Discovery is limited in administrative proceedings and the actions tend to proceed more quickly, giving defendants less time to prepare.36
D. Consequences of a Later Violation
Violating an injunction can lead to a finding of contempt and can result in fines, imprisonment or other remedial orders.37 If a defendant violates a cease-and-desist-order, the SEC can move a federal court to enter an injunction directing compliance with the order or seek a civil penalty for violation of such order.38 If an injunction is obtained, contempt proceedings are available to secure compliance with the injunction.
E. Other Considerations
The posture of the adjudicator should also be considered. ALJs are full-time Commission employees, and, as a result, are perceived by some to be less independent than federal judges. Commentators have expressed concerns about ALJs’ independence, particularly when the Commission is conducting a proceeding that, had it been brought in federal court, would have been protected by the right to a jury trial.39
Parties should also consider the risk that findings of fact in an administrative proceeding may be admissible as evidence in subsequent private litigation. Under the Federal Rules of Evidence, evidence relating to settlement of claims and the fact that a compromise was reached is not admissible.40 While the plain language of this rule prevents most settlement-related information from being introduced, at least one court has found that the SEC’s factual findings, opinions, and conclusions in settled orders are not governed by that rule. The court held that this information, contained in administrative orders, was admissible through an exception to the hearsay rule that allows into evidence records or statements of a public office of factual findings of a legally authorized investigation.41 While other courts have disagreed42 or chosen to allow admission of SEC orders in only very limited circumstances,43 parties must be cognizant of the risk that administrative findings of fact could be admitted as evidence in private litigation.
IV. SEC Administrative Proceeding Trends in FCPA Cases
A. Use Prior to 2011
Prior to the passage of the Dodd- Frank Act in July 2010, the SEC filed administrative proceedings in FCPA cases in only limited circumstances. Because the SEC did not have the ability to assess civil monetary penalties in administrative actions, it frequently adopted a bifurcated approach in FCPA actions, typically filing an action in federal court solely for civil penalties, while pursuing a simultaneous administrative action for a cease-and-desist order along with disgorgement.44 In other FCPA cases, the SEC initiated only an administrative action against a company for a cease-and-desist order, without filing an action in federal court. However, in these cases the SEC often pursued a related FCPA action against a top executive of the company in federal court for civil penalties.45 In earlier years of FCPA enforcement, when enforcement activity was less robust than today, the Commission appears to have sought cease-and-desist orders instead of injunctions as a form of leniency granted in cases in which there had been genuine cooperation and remediation.46 Even so, the use of an administrative order without concurrently seeking civil money penalties was employed only a few times.
B. 2011 through Present
The use of administrative proceedings increased after passage of the Dodd-Frank Act in 2010 empowered the SEC with the ability to assess civil monetary penalties in these proceedings. In 2011, four of the five FCPA cases that the SEC pursued alone (that is, without a parallel criminal case being filed by the DOJ) were resolved through administrative actions.47
Use of administrative enforcement actions declined, however, in 2012, when only one of the three enforcement actions pursued by the SEC in the absence of parallel criminal proceedings was resolved through an administrative order. Settlements through administrative action appear to have picked up again in 2013, with the SEC having pursued two of its four cases through administrative actions.48
The Total agreement marks the first time since the passage of the Dodd-Frank Act that the SEC pursued an administrative proceeding at the same time that the DOJ pursued a related criminal action. In the other instances since 2011, the SEC has reserved the use of the administrative proceeding for FCPA violations that it pursued in the absence of parallel criminal proceedings.
Although the practical differences between settlement through court order versus an administrative action have become less distinct, a court-ordered injunction—the hallmark of a judicial resolution—still carries a certain stigma that a cease-and-desist order does not. As the members of the Commission have long made clear, “[we choose] the forum of a federal district court to bring cases involving more serious violations.” 49 Nonetheless, with the passage of Dodd-Frank, the SEC now has the ability to achieve, through an administrative proceeding, what it could once obtain only by filing an action in federal court—civil monetary penalties, disgorgement, interest, and an order prohibiting future violations of the securities laws.50
“[W]ith the passage of Dodd-Frank, the SEC now has the ability to achieve, through an administrative proceeding, what it could once obtain only by filing an action in federal court[.]”
This development has eased the burden on Commission staff in securing an end result that used to require greater time and effort.51 It would not be surprising to see a distinct trend toward use of administrative proceedings as the resolution method of choice for the SEC in the future, particularly as long as Article III federal judges, notwithstanding the SEC’s recent policy changes regarding “neither admit nor deny” settlements, may continue to express concerns about various features of SEC settlements that come before them, reducing the certainty of federal court settlement processes.
Nicholas P. Peterson