Stirring Up Whistle-Blower Concerns

Wall Street's reliance on sovereign wealth funds ("SWF's") for capital during the credit crisis opened the door to possible violations of the Foreign Corrupt Practices Act.  As expected, the SEC accepted the invitation and launch an investigation into such dealings.  As Professor Peter Henning writes in NYT Dealbook, this is another expansion in the use of the anti-bribery law.

Historically, most the FCPA cases have involved contracts with foreign governments, mineral extraction or manufacturing facilities.  But with capital for financial companies drying up amid the financial meltdown, Richard Cassin, author of the FCPA Blog, noted in 2008 that interactions with sovereign wealth funds might trigger problems with the Foreign Corrupt Practices Act. 

The SEC’s inquiry is in the early stages, with the agency simply asking firms to retain documents related to their dealings with SWF's.  When there is the specter of an Foreign Corrupt Practices Act investigation, companies under the microscope naturally get very nervous about the course of the inquiry.

    Scrutinizing Wall Street’s Ways.  Gift-giving to potential and existing investors and customers may be an accepted practice on Wall Street, but dealing with a foreign official triggers the proscriptions of the Foreign Corrupt Practices Act.  The law prohibits any “offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value” related to obtaining or retaining business. 

Like most criminal and regulatory statutes, the FCPA broadly defines the conduct that violates it.  So while the law primarily aims at bribery, it also covers gratuities and promises of benefits that might not be tied to a specific contract or investment.

The law does allow for a “facilitating payment” to be made.  But that's limited to circumstances where there is a need “to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official.”  Mr. Henning doubts that exemption would apply to any benefits provided to SWF officials to secure investments.

    'Foreign Official' Defined.   What makes interactions with an SWF subject to the FCPA is the fact that the officers responsible for making investment decisions are likely to be employees of the government that sponsors the fund.  The statute defines a foreign official as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.”  If the fund operates under the direct supervision of the country’s leaders, then it is likely to be an “instrumentality” of the government, so any dealings with its representatives could come under the law.

Some sovereign wealth funds use outside advisers as part of their investment process, and whether dealings with them also falls under the law is not as clear.  The law includes in its definition of foreign official “any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality.”  The SEC and Justice Department usually take an expansive view of the Foreign Corrupt Practices Act.  So even private advisers may come within the law when they assist sovereign wealth fund officials who are government employees.

    Why an Inquiry Now;  Whistle-Blower Impact on Wall Street.   The current SEC investigation was likely "inspired" by the head of the Justice Department’s fraud section - which handles FCPA cases - who predicted in October 2008 that the SWF investments (in Wall Street banks, like Morgan Stanley) could result in violations of the statute. 

The SEC letter of inquiry, or "request for information" (or "RFI") will likely spur the initial recipient firms, and perhaps others worried they too will receive an RFI in the future, to conduct internal investigations to determine whether there were any improprieties in dealings with SWF's. 

One significant concern for the firms contacted by the SEC is the potential that a whistle-blower has provided – or will provide – information to the government about possible violations.  The Dodd-Frank Act offers whistle-blowers who disclose significant information about securities law violations a reward ranging from 10% - 30% of any recovery of more than $1 million in a case.  That change could attract corporate employees to reveal information about questionable practices.

The SEC’s letter is a clear signal to whistle-blowers to respond quickly if they want to secure a portion of any disgorgement or penalty that might be assessed.  That puts even more pressure on firms to quickly conduct their internal investigations and furnish information to the S.E.C. as soon as possible, at the risk of having a whistle-blower disclose information that puts the firm in a negative light.

    Potential Criminal Charges.   The possibility that a white-collar case might involve criminal charges will attract criminal authorities - like the Justice Department - which means that companies receiving the SEC’s letter should not view this as simply a preliminary civil investigation.  Any information generated in the inquiry can – and, in all likelihood will – be provided to the Justice Department.  The pattern in FCPA cases has been for the SEC and the Justice Department to reach a joint settlement with the companies involved. 

For example, Alcatel-Lucent agreed to pay more than $137 million to settle charges brought by the Justice Department and the SEC.  More ominously, however, is the greater attention being paid to individuals involved in any such questionable transactions.  In this day and age, they're more likely to be charged in civil and criminal proceedings. 

Which should make this a busy time for white-collar attorneys, as Wall Street gears up to deal with yet another wide-ranging investigation of its practices.

For a complete read, go to:   [NYT Dealbook, 1/18, Peter J. Henning's White Collar Watch]