• When Regulatory Failings Turn Criminal: Car Edition Redux
• Three Significant FCPA Resolutions Straddle the New Year
• More FCPA, Bribery and Corruption, Oh My!
• End of Administration Financial Enforcement Round-Up
• Spotlight on the False Claims Act
• Whet Your Whistle—SEC Whistleblower Program Update
• Keeping an Eye Out—Updates and Briefly Noted

When Regulatory Failings Turn Criminal: Car Edition Redux

Why it matters: To paraphrase the famous quote from the film “All About Eve”: Fasten your seatbelts, it’s going to be a bumpy car ride. In the first part of January 2017, the automotive industry saw two high profile resolutions—with combined criminal and civil penalties exceeding $5 billion—resulting from severe regulatory failings. One of the resolutions was with Volkswagen in connection with what the DOJ said was a nearly ten-year conspiracy to defraud U.S. regulators and U.S. Volkswagen customers by installing software specifically designed to cheat U.S. emissions tests in hundreds of thousands of Volkswagen “clean diesel” vehicles. That resolution included the indictment of six Volkswagen executives, including VW’s then-U.S. compliance officer in charge of ensuring that VW’s vehicles fully complied with air quality and fuel economy government standards.

The other resolution was with Takata Corporation, an automotive safety-related equipment manufacturer, in connection with “fraudulent” conduct relating to its defective and unsafe air bag inflators that could (and did) cause serious injury and death. That resolution included wire fraud and conspiracy charges against three Takata executives. We previously covered criminal regulatory failings in the automotive industry in our October 2015 newsletter under “When Regulatory Failings Turn Criminal—The Car Edition,” where we focused on the criminal charges brought by the DOJ in September 2015 against General Motors arising from undisclosed, potentially deadly safety defects with its cars, which resulted in a $900 million criminal penalty and deferred prosecution agreement. Time for Part Two.

Detailed discussion: On January 11, 2017, the DOJ announced a global settlement in which Volkswagen agreed to plead guilty and pay over $4 billion in criminal and civil penalties relating to the ongoing investigation into its clean-air emissions scandal. Two days later, on January 13, 2017, the DOJ announced that Takata Corporation agreed to plead guilty and pay $1 billion in criminal penalties relating to the company’s “fraudulent” conduct in connection with defective airbag inflators. They are recapped below. For our previous coverage of high profile criminal regulatory failings in the automotive industry, see our October 2015 newsletter under “When Regulatory Failings Turn Criminal—The Car Edition.”

Volkswagen: On January 11, 2017, the DOJ announced a global settlement in which Volkswagen AG (VW) agreed to plead guilty to three criminal felony counts and pay a $2.8 billion criminal penalty as a result of VW’s “long-running scheme to sell approximately 590,000 diesel vehicles in the U.S. by using a defeat device to cheat on emissions tests mandated by the Environmental Protection Agency (EPA) and the California Air Resources Board (CARB), and lying and obstructing justice to further the scheme.” The DOJ also said that six VW executives—including a compliance officer—were criminally charged in the scheme. In addition, the DOJ said that VW agreed to pay a total of $1.5 billion to resolve three separate civil resolutions with the EPA (in connection with VW’s importation and sale of the vehicles), the U.S. Customs and Border Protection (CBP) (for customs fraud), and under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).

• Criminal resolution: The DOJ said that VW agreed to plead guilty to (1) “participating in a conspiracy to defraud the United States and VW’s U.S. customers and to violate the Clean Air Act by lying and misleading the EPA and U.S. customers about whether certain VW, Audi and Porsche branded diesel vehicles complied with U.S. emissions standards, using cheating software to circumvent the U.S. testing process and concealing material facts about its cheating from U.S. regulators,” (2) “obstruction of justice for destroying documents related to the scheme,” and (3) “importing these cars into the U.S. by means of false statements about the vehicles’ compliance with emissions limits.” The DOJ said that, under the terms of the plea agreement (which is still subject to court approval), VW “will be on probation for three years, will be under an independent corporate compliance monitor who will oversee the company for at least three years, and agrees to fully cooperate in the Justice Department’s ongoing investigation and prosecution of individuals responsible for these crimes.”
  
  The DOJ also said that a federal grand jury in the Eastern District of Michigan had that same day returned an indictment charging six VW executives—described by Attorney General Loretta Lynch as individuals who “held positions of significant responsibility at VW, including overseeing the company’s engine development division and serving on the company’s management board”—for their roles in the “nearly 10-year conspiracy” (collectively, the Co-Conspirators). One of the Co-Conspirators, Oliver Schmidt (Schmidt), was arrested on January 7, 2017 while temporarily in Miami (the other five individuals reside in Germany and as of the date of this writing are still “at large”—Schmidt also resides in Germany and is considered to be a flight risk). Schmidt is described in the DOJ’s press release as having been the “General Manager in charge of the Environment and Engineering Office” in VW’s Michigan offices until February 2015 and, according to an article in the L.A. times and other press reports, in that capacity was a compliance officer “responsible for ensuring that the vehicles built for sale within the U.S and Canadian markets fully comply with the past, present and future air quality and fuel economy government standards in both countries.”
  
  To briefly summarize the long and complicated Statement of Facts filed as part of the resolution, the DOJ said that, starting with the first model year 2009 of VW’s new “clean diesel” engine through model year 2016, VW and the Co-Conspirators caused the “defeat device software” to be installed into the vehicles imported and sold in the U.S., and then lied about the test-cheating software’s existence to the EPA, CARB, VW customers and the U.S. public. The DOJ said that the Co-Conspirators affirmatively falsely marketed the VW diesel vehicles containing the defeat device software to the U.S. public as “clean diesel” and environmentally-friendly, and continued their misrepresentations and falsehoods even as U.S. regulators began to notice—via studies conducted by regulatory agencies—discrepancies in emissions from the vehicles with the defeat device software as early as 2014. The DOJ said that, in response to increasingly pointed questioning, the Co-Conspirators provided EPA and CARB with “testing results, data, presentations and statements in an attempt to make it appear that there were innocent mechanical and technological problems to blame, while secretly knowing that the primary reason for the discrepancy was their cheating software that was installed in every VW diesel vehicle sold in the United States.” The DOJ said that the Co-Conspirators “continued this back-and-forth with the EPA and CARB for over 18 months, obstructing the regulators’ attempts to uncover the truth.”
• Civil resolutions: The DOJ described three simultaneous civil resolutions in its press release.
  • The first civil settlement resolved the EPA’s remaining claims against six “VW entities” (including Volkswagen, Audi AG and Porsche AG) pending in multidistrict litigation in the Northern District of California that involved allegations that VW violated the Clean Air Act by selling approximately 590,000 cars equipped with defeat devices that, during normal operation and use, emitted pollution significantly in excess of EPA-compliant levels. In that settlement, VW agreed to pay $1.45 billion to resolve the EPA’s civil penalty claims, which included the civil penalty claim in the CBP settlement described below. The DOJ said that the consent decree resolving the Clean Air Act claims also resolved the EPA’s remaining claim for injunctive relief to prevent future violations by requiring VW to “undertake a number of corporate governance reforms and perform in-use testing of its vehicles using a portable emissions measurement system of the same type used to catch VW’s cheating in the first place.” The DOJ said that this settlement was “in addition the historic $14.7 billion settlement that addressed the 2.0 liter cars on the road and associated environmental harm announced in June 2016, and a $1 billion settlement that addressed the 3.0 liter cars on the road and associated environmental harm announced in December 2016, which together included nearly $3 billion for environmental mitigation projects.”
  • The second civil settlement resolved civil fraud claims asserted by the CBP against the VW entities alleging that the VW entities “violated criminal and civil customs laws by knowingly submitting to CBP materially false statements and omitting material information, over multiple years, with the intent of deceiving or misleading CBP concerning the admissibility of vehicles into the United States.” The penalty under this settlement was paid by VW as part of the EPA settlement referenced above.
  • In the third civil settlement, VW agreed to pay $50 million in civil penalties for alleged violations of FIRREA having to do with allegations that a VW entity supported the sales and leasing of the defeat-device vehicles (among other VW vehicles) by offering competitive financing terms through the purchase from dealers of automobile retail installment contracts (i.e., loans) and leases entered into by customers that purchased or leased the VW vehicles. The DOJ said that these loans, primarily collateralized by the VW vehicles underlying the loan and lease transactions (including the “clean diesel” vehicles with defeat devices), were then improperly pooled together to create asset-backed securities as to which federally insured financial institutions purchased notes.

Takata Corporation: On January 13, 2017, the DOJ announced that Tokyo-based Takata Corporation (Takata), described as “one of the world’s largest suppliers of automotive safety-related equipment,” pleaded guilty to wire fraud and agreed to pay a total of $1 billion (consisting of $975 million in restitution and a $25 million criminal fine) “stemming from the company’s fraudulent conduct in relation to sales of defective airbag inflators.” In addition, three Takata executives were charged with wire fraud and conspiracy for the same conduct.

As part of the resolution, the DOJ said Takata admitted that, starting in 2000, it was aware that its ammonium nitrate-based airbag inflators were not “performing to the specifications required by the auto manufacturers” and that they were failing in some cases, including ruptures during testing. Takata further admitted that, “[n]evertheless, Takata induced its customers to purchase these airbag systems by submitting false and fraudulent reports and other information that concealed the true condition of the inflators.” According to Takata’s admissions, the fraudulent data “made the performance of the company’s airbag inflators appear better than it actually was, including by omitting that, in some instances, inflators ruptured during testing.” Furthermore, Takata employees—including a number of key executives—“routinely discussed the falsification of test reports being provided to Takata’s customers in email and in verbal communications.” Takata admitted that this fraudulent behavior by its executive and employees continued even after they became aware that the inflators were experiencing repeated problems in the field, “including ruptures causing injuries and deaths.” The DOJ noted that “Takata took no disciplinary actions against those involved in the falsification of test data until 2015, despite the fact that senior executives had been made aware of the fraudulent conduct years earlier.”

The DOJ said that, under the terms of the plea agreement, in addition to the criminal penalties, two restitution funds will be established (to be overseen by a court-appointed special master): “a $125 million fund for individuals who have been physically injured by Takata’s airbags and who have not already reached a settlement with the company, and a $850 million fund for airbag recall and replacement costs incurred by auto manufacturers who were victims of Takata’s fraud scheme.” Takata also agreed to “implement rigorous internal controls, retain a compliance monitor for a term of three years and cooperate fully with the department’s ongoing investigation, including its investigation of individuals.” The DOJ said that it reached this resolution based on a number of factors, “including Takata’s extensive cooperation with the government’s investigation.” The DOJ noted however, that “the company did not receive more significant mitigation credit, either in the penalty or the form of resolution, because of the nature of the conduct to which the company is pleading guilty, including the approximate 15-year duration of the fraud, the pervasiveness of the scheme into the executive level of management and the potential risk the fraud posed to drivers and passengers.”

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Three Significant FCPA Resolutions Straddle the New Year

Why it matters: Three resolutions under the Foreign Corrupt Practices Act (FCPA) were recently announced, one in mid-January 2017 and two back-to-back in late December 2016, that are of such significance they deserve to be singled out. Two were hefty multicountry global settlements (one of which was deemed the “largest-ever global foreign bribery resolution”), and the other involved the “largest criminal fine imposed against a pharmaceutical company for violations of the FCPA.” Read on for a recap.

Detailed discussion: Here, we recap the three significant FCPA resolutions announced in the weeks straddling the New Year. As you will see, superlatives abound.

Rolls-Royce: On January 17, 2017, the DOJ announced that Rolls-Royce plc (Rolls-Royce), described as a “United Kingdom-based manufacturer and distributor of power systems for the aerospace, defense, marine and energy sectors,” agreed to pay the United States nearly $170 million as part of an $800 million global settlement with authorities in the United States, the United Kingdom and Brazil relating to “a long-running scheme to bribe government officials in exchange for government contracts.” As part of the “multinational” settlement, Rolls-Royce entered into parallel resolutions with the United Kingdom’s Serious Fraud Office (SFO) and Brazil’s Ministério Público Federal (MPF) pursuant to which it agreed to pay combined penalties in excess of $800 million and enter into deferred prosecution agreements (DPAs) with the DOJ and the SFO and a leniency agreement with the MPF.

In its press release, the DOJ said that:

• Rolls-Royce admitted that, between 2000 and 2013, it conspired to violate the FCPA by paying more than $35 million in bribes through third parties to foreign officials in Brazil, Iraq, Thailand, Kazakhstan, Angola and Azerbaijan in exchange for confidential information and contract awards to Rolls-Royce and affiliated entities.
• Rolls-Royce entered into the DPA with the DOJ in connection with a criminal information that was filed on Dec. 20, 2016 and unsealed on January 17, 2017 charging Rolls-Royce with conspiring to violate the anti-bribery provisions of the FCPA. Under the DPA, the DOJ said that Rolls-Royce agreed to pay a criminal penalty of $195,496,880 subject to a credit in connection with the leniency agreement it entered into with the MPF discussed below, and “to continue to cooperate fully with the department’s ongoing investigation, including its investigation of individuals.”
• As part of its resolution with the SFO, Rolls-Royce entered into a DPA and admitted to “paying additional bribes or failing to prevent bribery payments in connection with Rolls-Royce’s business operations in China, India, Indonesia, Malaysia, Nigeria, Russia and Thailand between in or around 1989 and in or around 2013, and Rolls-Royce agreed to pay a total fine of £497,252,645 ($604,808,392).”
• As part of its leniency agreement with the MPF, Rolls-Royce agreed to pay a penalty of approximately $25,579,170 for its role in “a conspiracy to bribe foreign officials in Brazil between 2005 and 2008.” The DOJ said that, “[b]ecause the conduct underlying the MPF resolution overlaps with the conduct underlying part of the department’s resolution, the department credited the $25,579,170 that Rolls-Royce agreed to pay in Brazil against the total fine in the United States. Therefore, the total amount to be paid to the United States is $169,917,710.”
• The DOJ said that it reached its resolution with Rolls-Royce taking into consideration the parallel resolutions with the SFO and MPF and based on a number of factors, including that Rolls-Royce did not disclose the criminal conduct to the DOJ until “after the media began reporting allegations of corruption and after the SFO had initiated an inquiry into the allegations and that the conduct was extensive and spanned 12 countries.” The DOJ said Rolls-Royce cooperated with the DOJ’s investigation and “has also taken significant remedial measures, including terminating business relationships with multiple employees and third-party intermediaries who were implicated in the corrupt scheme; enhancing compliance procedures to review and approve intermediaries; and implementing new and enhanced internal controls to address and mitigate corruption and compliance risks.” Based on all of these factors, the DOJ said that “the criminal penalty reflects a 25-percent reduction from the bottom of the U.S. Sentencing Guidelines fine range.”

Teva Pharmaceuticals: On December 22, 2016, the DOJ announced that the “world’s largest manufacturer of generic pharmaceutical products,” Teva Pharmaceuticals Ltd (Teva), and its wholly owned Russian subsidiary Teva Russia LLC (Teva Russia) agreed to pay a combined criminal and civil penalty of almost $520 million to the DOJ and the SEC—constituting what the DOJ referred to as “the largest criminal fine imposed against a pharmaceutical company for violations of the FCPA”—in connection with the bribery of government officials in Russia, Ukraine and Mexico in violation of the FCPA. In a parallel investigation, the SEC said that Teva agreed to pay more than $236 million in disgorgement and prejudgment interest to settle charges that it violated the anti-bribery provisions of the FCPA. The SEC alleged in its complaint that Teva made more than $214 million in illicit profits by making influential payments “to increase its market share and obtain regulatory and formulary approvals as well as favorable drug purchase and prescription decisions.”

In its press release describing the criminal resolution, the DOJ said that:

• Teva admitted that Teva executives and Teva Russia employees paid bribes to a high-ranking Russian government official intending to influence him to use his authority to increase sales of Teva’s multiple sclerosis drug, Copaxone, in annual drug purchase auctions held by the Russian Ministry of Health. Teva further admitted that between 2010 and 2012, pursuant to an agreement with a repackaging and distribution company owned by the Russian government official, Teva earned more than $200 million in profits on Copaxone sales to the Russian government and the Russian official earned approximately $65 million in corrupt profits through inflated profit margins granted to the official’s company.
• Teva also admitted to paying bribes to a senior government official within the Ukrainian Ministry of Health to influence the Ukrainian government’s approval of Teva drug registrations, which were necessary for Teva to market and sell its products in the country. Between 2001 and 2011, Teva admitted to engaging the official as the company’s “registration consultant,” paying him a monthly fee and providing him with travel and “other things of value” totaling approximately $200,000. In exchange, Teva admitted that the official used his official position within the Ukrainian government to influence the registration in Ukraine of Teva pharmaceutical products, including Copaxone.
• Finally, Teva admitted that it failed to implement an adequate system of internal accounting controls or enforce the controls it had in place at its Mexican subsidiary, which allowed bribes to be paid by the subsidiary to doctors employed by the Mexican government.
• Teva agreed to pay the DOJ a criminal penalty of over $283 million and plead guilty to one count each of conspiracy to violate the FCPA’s anti-bribery provisions and failing to implement adequate internal controls. As part of the resolution, Teva entered into a deferred prosecution agreement (DPA) with the DOJ under which it agreed to continue to cooperate with the DOJ’s investigation, enhance its compliance program, implement rigorous internal controls and retain an independent corporate compliance monitor for a term of three years.
• The resolution with Teva was reached based on a number of factors, including that Teva did not timely voluntarily self-disclose the conduct, although the DOJ said that it did cooperate with the DOJ’s investigation after the SEC served it with a subpoena. The DOJ said that Teva received a 20% discount off the low end of the U.S. Sentencing Guidelines fine range because of its substantial cooperation and remediation. The DOJ also said, however, that Teva did not receive full cooperation credit due to “issues that resulted in delays to the early stages of the Fraud Section’s investigation, including vastly overbroad assertions of attorney-client privilege and not producing documents on a timely basis in response to certain Fraud Section document requests.”
• As part of the resolution with the DOJ, Teva Russia separately pleaded guilty to conspiring to violate the antibribery provisions of the FCPA.

Odebrecht/Braskem: On December 21, 2016, in what it called the “largest-ever global foreign bribery resolution,” the DOJ announced that Odebrecht S.A. (Odebrecht), a global construction conglomerate based in Brazil, and Braskem S.A. (Braskem), a Brazilian petrochemical company, pleaded guilty and agreed to pay a combined total penalty of approximately $3.5 billion in a global settlement to resolve charges with authorities in the U.S., Brazil and Switzerland arising out of their schemes to pay hundreds of millions of dollars in bribes to government officials around the world. In a parallel investigation, the SEC announced that Braskem agreed to settle FCPA charges that it created “false books and records to conceal millions of dollars in illicit bribes paid to Brazilian government officials to win or retain business.” Under the settlement, Braskem agreed to pay $325 million in disgorgement, apportioned $65 million to the SEC and $260 million to Brazilian authorities.

In its press release describing the criminal resolution, the DOJ said that:

• Odebrecht admitted to engaging in a “massive and unparalleled bribery and bid-rigging scheme” beginning in 2001 and continuing for over a decade. During that time, Odebrecht admitted to paying approximately $788 million in bribes to government officials, their representatives and political parties in a number of countries in order to win business in those countries. The DOJ said that the criminal conduct “was directed by the highest levels of the company,” with the bribes paid through a secret financial structure consisting of a “complex network” of shell companies, off-book transactions and off-shore bank accounts which, by 2006, had evolved into the “Division of Structured Operations.” The DOJ said that this division, which operated a “shadow” budget, “effectively functioned as a stand-alone bribe department within Odebrecht and its related entities” and resulted in corrupt payments and/or profits totaling approximately $3.336 billion.
• Braskem admitted to paying approximately $250 million into Odebrecht’s secret, off-book bribe payment system between 2006 and 2014, through which it authorized the payment of bribes to politicians and political parties in Brazil, as well as to an official at Petrobras, in exchange for various benefits resulting in corrupt payments and/or profits totaling approximately $465 million.
• Odebrecht pleaded guilty to one count of conspiracy to violate the antibribery provisions of the FCPA. Sentencing is scheduled for April 17, 2017. Odebrecht also settled with the Ministerio Publico Federal in Brazil and the Office of the Attorney General in Switzerland in parallel investigations. The DOJ said that Odebrecht agreed in the plea agreement that the appropriate criminal fine was $4.5 billion, subject to further analysis of the company’s ability to pay the total global penalties (to be completed by the DOJ and Brazilian authorities by March 31, 2017). Under the plea agreement, the U.S. will credit the amount paid by Odebrecht to Brazil and Switzerland over the full term of their respective agreements, with the U.S. and Switzerland receiving 10% each of the principal of the total criminal fine and Brazil receiving the remaining 80%.
• Braskem, whose American Depositary Receipts (ADRs) are publicly traded on the New York Stock Exchange, separately pleaded guilty to one count of conspiracy to violate the antibribery provisions of the FCPA and agreed to pay a total criminal penalty of $632 million. Sentencing has not yet been scheduled. Braskem also settled with the Ministerio Publico Federal in Brazil and the Office of the Attorney General in Switzerland in related proceedings. As part of its plea agreement with Braskem, the DOJ agreed to credit the criminal penalties paid by Brasken to Brazilian and Swiss authorities, amounting to 70% and 15%, respectively, of the total criminal penalty, resulting in the U.S. receiving the remaining 15%, equaling $94.8 million.
• Under their respective plea agreements with the DOJ, Odebrecht and Braskem are required to continue their cooperation with law enforcement, “including in connection with the investigations and prosecutions of individuals responsible for the criminal conduct.” Odebrecht and Braskem also each agreed to adopt enhanced compliance procedures and to retain independent compliance monitors for three years. The DOJ said that it reached its resolutions with Odebrecht and Braskem based on a number of factors, including their failure to voluntarily disclose their improper conduct and the long-running and widespread multicountry nature and seriousness of their offense, balanced against other factors such as the remedial measures taken by the companies which included “terminating and disciplining individuals who participated in the misconduct, adopting heightened controls and anti-corruption compliance protocols and significantly increasing the resources devoted to compliance.” The DOJ said that the criminal penalties imposed on the companies reflected reductions off of the bottom of the U.S. Sentencing Guidelines equal to 25% for Odebrecht based on full cooperation and 15% for Braskem based on partial cooperation.

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More FCPA, Bribery and Corruption, Oh My!

Why it matters: In addition to the three major Foreign Corrupt Practices Act (FCPA) resolutions discussed elsewhere in this newsletter (see “Three Significant FCPA Straddle the New Year”), there were other recent FCPA resolutions and matters that bear noting—including one corporate resolution with a “repeat offender” that was found to be in almost immediate breach before the ink was dry on a deferred prosecution agreement (DPA) it entered into with the DOJ in 2012—as well as a couple of non-FCPA bribery and corruption enforcement actions from December 2016 that caught our eye. We review them here.

Detailed discussion: Read on for a recap of recent FCPA, bribery and corruption matters that we found to be of interest.

FCPA: In addition to the three significant FCPA resolutions involving Rolls-Royce, Teva Pharmaceuticals, and Odebrecht and Braskem (discussed elsewhere in this newsletter under “Three Significant FCPA Resolutions Straddle the New Year”), here we recap a number of other noteworthy FCPA resolutions and matters that were announced in the weeks bridging the latter part of December 2016 and the first part of January 2017:

FCPA corporate resolutions:

• Sociedad Química y Minera de Chile: On January 13, 2016, the DOJ announced that Chilean chemicals and mining company Sociedad Química y Minera de Chile (SQM) agreed to pay a criminal penalty exceeding $15 million and enter into a DPA in connection with payments to politically-connected individuals in Chile in violation of the books and records and internal controls provisions of the FCPA. In a parallel investigation, the SEC announced that SQM agreed to pay the SEC a $15 million civil penalty to settle the same charges, amounting to a total aggregate payment to the DOJ and SEC of approximately $30 million.
  
  DOJ resolution: The DOJ said that, according to admissions made in the resolution documents, SQM knowingly failed to implement internal controls sufficient to ensure that almost $15 million in payments made from a fund under the control of one of its officers and high-level executives to vendors and foundations were for actual services received and in compliance with Chilean law. For example, SQM admitted that, from 2008 to 2015, it made “donations to dozens of foundations controlled by or closely tied to Chilean politicians” in order to advance its business interests in Chile. During that same time period, SQM also admitted to “falsifying its books and records to conceal payments to vendors associated with politicians, logging them as consulting and professional services SQM never received.”
  
  The DOJ said that SQM entered into a DPA under which, in addition to paying a criminal penalty of $15,487,500, SQM agreed to “continue to cooperate with the department’s investigation; enhance its compliance program; implement rigorous internal controls; and retain an independent corporate compliance monitor for a term of two years, with a third year of self-reporting to occur thereafter.” The DOJ said it reached this resolution with SQM based on a number of factors, including the fact that “SQM did not voluntarily disclosure (sic) the FCPA violations, but did cooperate with the department’s investigation after news of Chilean prosecutors’ investigation of the company surfaced in media reports.” The DOJ further said that SQM received a 25% reduction off the low end of the applicable U.S. Sentencing Guidelines fine range “because of its full cooperation and substantial and ongoing remediation.” The DOJ explained that, “[b]ecause many of SQM’s compliance enhancements were more recent, and therefore have been subjected to a relatively short period of testing, the DPA imposes an independent compliance monitor. However, due to the company’s size and risk profile, as well as the enhancements the company has already made, the term of the monitor will be two years and the company will be permitted SQM to self-report for the final year of the agreement.”
  
  SEC resolution: The SEC said that, for a seven-year period, “SQM made nearly $15 million in improper payments to Chilean political figures and others connected to them. Most of the payments were made based on fake documentation submitted to SQM by individuals and entities posing as legitimate vendors.” In addition to paying the civil penalty, the SEC said that SQM agreed to “retain an independent compliance monitor for two years and self-report to the SEC and Justice Department for one year after the monitor’s work is complete.”
• Zimmer Biomet: On January 12, 2016, the DOJ announced that Zimmer Biomet Holdings Inc. (Zimmer Biomet), an Indiana-based manufacturer of orthopedic and dental implant devices, agreed to pay a $17.4 million criminal penalty in order to resolve charges that it had violated the anti-bribery provisions of the FCPA in connection with the payment of bribes to government officials in Mexico, and the internal controls provisions of the FCPA involving the company’s operations in Mexico and Brazil. In a parallel investigation, the SEC announced that Zimmer Biomet agreed to pay a total of approximately $13 million dollars, consisting of $5.82 million in disgorgement plus $702,705 in interest and a $6.5 million penalty, to settle the same charges, amounting to a total aggregate payment to the DOJ and SEC of approximately $30 million.
  
  DOJ resolution: The DOJ noted that Zimmer Biomet was a “repeat offender,” having been in breach of a DPA entered into in 2012 (2012 DPA) between Biomet Inc. (Biomet, which became part of Zimmer Biomet in 2015) and the DOJ involving an earlier investigation into FCPA violations committed by Biomet in connection with bribes paid to government officials in Argentina, China and Brazil. The DOJ said that, according to admissions made in the resolution documents, even after the 2012 DPA between the DOJ and Biomet, Biomet “knowingly and willfully” continued to use a third-party distributor in Brazil known to have paid bribes to government officials on Biomet’s behalf. In addition, the DOJ said that Biomet also failed to implement an adequate system of internal accounting controls at its subsidiary in Mexico, “despite employees and executives having been made aware of red flags suggesting that bribes were being paid” by Biomet’s Mexican subsidiary to Mexican customs officials through customs brokers and sub-agents so that the Mexican subsidiary could import “contraband” dental implants into Mexico.
  
  The DOJ said that Zimmer Biomet entered into a new three-year DPA in connection with a superseding criminal information under which, in addition to paying the $17.4 million criminal penalty, Zimmer Biomet also agreed to retain an independent corporate compliance monitor for three years. The DOJ said that it reached this resolution with Zimmer Biomet based on a number of factors, including that Zimmer Biomet was in breach of the 2012 DPA because (1) under the 2012 DPA, Biomet had been required to retain an independent compliance monitor, whose term was extended for one year in 2015 due to both the findings of bribery in Brazil and Mexico and the fact that the newly-formed Zimmer Biomet’s compliance program did not meet the requirements of the 2012 DPA, and (2) at the conclusion of the extended period, the independent monitor was unable to certify that Zimmer Bionet’s compliance program satisfied the requirements of the 2012. The DOJ said that Zimmer Biomet “fully cooperated with the current investigation and provided to the Fraud Section all relevant facts known to the company, including information about individuals involved in the misconduct.” Nevertheless, the DOJ said that “because Zimmer Biomet failed to implement an effective compliance program and committed additional crimes while under a DPA and monitorship, the current DPA requires Zimmer Biomet retain an independent compliance monitor for a term of three years.” The DOJ also said that an indirect Luxembourg subsidiary of Zimmer Biomet agreed to plead guilty to a one-count criminal information charging it with causing Biomet to violate the books and records provisions of the FCPA through the actions of the Mexican subsidiary (which it wholly owned).
  
  SEC resolution: The SEC said that, in addition to paying over $13 million in disgorgement and penalties, Zimmer Biomet agreed to retain an independent compliance monitor for three years to review its FCPA policies. The SEC explained Zimmer Bionet’s “repeat offender” status as follows: Biomet first faced FCPA charges from the SEC and entered into a DPA with the DOJ in March 2012, agreeing to pay more than $22 million to settle both cases. As part of its 2012 settlement, the SEC said that Biomet agreed to retain an independent compliance consultant to review its FCPA compliance program but that “[a]fter the settlement as Biomet was implementing recommendations from the independent monitor, the company learned about potential anti-bribery violations in Brazil and Mexico and notified the monitor and the SEC in 2013.” After investigating, the SEC found that even after the settlement Biomet continued to “interact and improperly record transactions with a known prohibited distributor in Brazil, and used a third-party customs broker to pay bribes to Mexican customs officials to facilitate the importation and smuggling of unregistered and mislabeled dental products.”
• Mondelēz/Cadbury: In the first FCPA corporate resolution of 2017, on January 6, 2017, the SEC said in an administrative order that both Mondelēz International, Inc. (Mondelēz) and Cadbury Limited (Cadbury) (which had been acquired by Mondelēz in 2010) agreed to pay a $13 million civil fine to resolve allegations that they violated the books and records and internal control provisions of the FCPA in connection with payments made by Cadbury’s Indian subsidiary to a local agent in 2010 in order to obtain government licenses and approvals for a chocolate factory in Baddi, India.
• General Cable: On December 29, 2016, the DOJ announced that Kentucky-based manufacturer and distributer of cable and wire General Cable Corporation (General Cable) entered into a non-prosecution agreement (NPA) and agreed to pay a penalty of nearly $20.5 million to resolve allegations that it violated the FCPA by making improper payments to government officials in Angola, Bangladesh, China, Indonesia and Thailand. In a parallel investigation, the SEC announced that General Cable agreed to pay nearly $55 million in disgorgement and pre-judgment interest to settle the same charges, such that General Cable will pay the DOJ and SEC a combined penalty of approximately $75 million.
  
  DOJ resolution: The DOJ said that General Cable admitted to the improper conduct, namely that “[b]etween 2002 and 2013, General Cable subsidiaries paid approximately $13 million to third-party agents and distributors, a portion of which was used to make unlawful payments to obtain business, ultimately netting the company approximately $51 million in profits.” Pursuant to the terms of the NPA, in addition to paying the financial penalty, General Cable is required to, for a period of three years, “continue to cooperate with the [DOJ] in any ongoing investigations and prosecutions relating to the conduct, including of individuals, to enhance its compliance program and to report to the [DOJ] on the implementation of its enhanced compliance program.”
  
  The DOJ said that it reached its resolution with General Cable based on a number of factors, including that “General Cable voluntarily and timely disclosed the conduct at issue, fully cooperated in the investigation and fully remediated.” The DOJ said that General Cable’s full cooperation included “conducting a thorough internal investigation; making regular factual presentations and proactively providing updates to the Fraud Section; voluntarily making foreign-based employees available for interviews in the United States; producing documents, including translations, to the Fraud Section from foreign countries in ways that did not implicate foreign data privacy laws; collecting, analyzing and organizing voluminous evidence and information for the Fraud Section; identifying, investigating and disclosing conduct to the Fraud Section that was outside the scope of its initial voluntary self-disclosure; and, by the conclusion of the investigation, providing to the Fraud Section all relevant facts known to it, including information about individuals and third parties involved in the misconduct.” In addition, the DOJ said that General Cable “also took extensive remedial measures, including taking employment action against 13 employees who participated in the misconduct, resulting in their departure from the company, and terminating its relationships with 47 third-party agents and distributors who participated in the misconduct.” The DOJ concluded that, “based on these actions and other considerations, the company received a non-prosecution agreement and an aggregate discount of 50 percent off of the bottom of the U.S. Sentencing Guidelines fine range.”
  
  SEC resolution: In its press release, the SEC said that General Cable agreed to pay $55 million in disgorgement and interest to resolve allegations that “General Cable’s overseas subsidiaries made improper payments to foreign government officials for a dozen years to obtain or retain business in Angola, Bangladesh, China, Egypt, Indonesia, and Thailand” in violation of the FCPA. Further, the SEC said that General Cable also agreed to pay an additional $6.5 million penalty to resolve separate accounting-related violations related to weak internal controls (General Cable neither admitted nor denied the SEC’s findings with respect to the accounting violations). The SEC said that it “considered General Cable’s self-reporting, cooperation, and remedial acts when determining the settlements.” The SEC also charged General Cable’s then-senior vice president responsible for sales in Angola, who agreed to pay a $20,000 penalty without admitting or denying the SEC’s findings “that he knowingly circumvented internal accounting controls and caused FCPA violations when he approved certain improper payment.”

FCPA individual resolutions

• On January 10, 2017, the DOJ announced that four individuals, including the brother and nephew of former United Nations Secretary General Ban Ki-Moon, were charged with FCPA violations and money laundering (and conspiracy to do the same) for their roles in a scheme to pay $2.5 million in bribes to a Middle Eastern official to get him to facilitate the $800 million sale of a commercial building in Vietnam to a Middle Eastern sovereign wealth fund.
• On January 10, 2017, the U.S. Attorney’s Office for the Southern District of Texas announced that two more businessmen, a former general manager and partial owner of a Florida-based energy company and an owner of multiple Texas-based energy companies, each pleaded guilty to one count each of conspiracy to violate the FCPA for their role in a scheme to corruptly secure contracts from Venezuela’s state-owned and state-controlled energy company, Petroleos de Venezuela S.A. (PDVSA). The DOJ said that, with the addition of these two businessmen, a total of eight individuals have pleaded guilty as part of a larger, ongoing FCPA investigation by the DOJ into bribery at PDVSA.
• On December 27, 2016, the DOJ announced that it had unsealed charges against six individuals—four businessmen and two Mexican government officials—all of whom pleaded guilty to conspiracy to violate the FCPA for their involvement in schemes to bribe the Mexican officials to secure aircraft maintenance and repair contracts with government-owned and controlled entities. The DOJ said that two of the individuals also pleaded guilty to conspiracy to commit money laundering. According to findings in the defendants’ plea agreements, the DOJ said that the four businessmen (who owned or were associated with companies in the U.S. that “provided aircraft maintenance, repair, overhaul and related services to customers from the U.S. and Mexico”) conspired to pay the Mexican officials over $2 million in bribes between 2006 and 2016.
• On December 9, 2016, the DOJ announced that the son of Gabon’s former prime minister pleaded guilty to violating the FCPA by conspiring to bribe officials in three African countries in order to help win mining rights for an Och-Ziff Capital Management Group, LLC (Och-Ziff) joint venture. We covered the criminal and civil FCPA resolutions entered into in September 2016 between Och-Ziff and the DOJ and SEC, respectively, in our November 2016 newsletter under “FCPA Focus – SEC Addition.”

FCPA general

• On December 9, 2016, Law 360 reported that the DOJ had been sued by a reporter for the trade publication Just Anti-Corruption seeking to obtain records the reporter maintained would demonstrate whether the DOJ “followed its own guidelines to prevent cronyism in monitorships.” Citing congressional concerns that the system by which FCPA monitors are selected “is vulnerable to corruption,” the reporter had originally filed a Freedom of Information Act (FOIA) request seeking documentation explaining the DOJ’s FCPA monitor appointment process and the identity of the DOJ personnel who participated in the decisions, as well as the names of the monitors who had been “in the running” for appointment with respect to 15 recent FCPA settlements including those involving Avon Products, Inc., Diebold Inc., Biomet Inc., Alstom SA and Daimler AG. In the complaint, the reporter cited to a 2008 internal DOJ memo that laid out guidelines for the manner in which the monitorships should be appointed so as to avoid any implication of impropriety or corruption, and alleged that the requested documentation would demonstrate whether the guidelines were being followed.

Non-FCPA bribery and corruption matters of note:

• On December 14, 2016, the U.S. Attorney’s Office for the Southern District of New York announced that the former Minister of Mines for the Republic of Guinea was arrested and charged with money laundering in connection with “his scheme to launder $8.5 million in bribes he received from senior representatives of a Chinese conglomerate.” The charges allege that the individual used his official position as Minister of Mines for the Republic of Guinea to facilitate the award to the Chinese conglomerate of “exclusive and highly valuable investment rights in various sectors of the Guinean economy, which funds were then laundered through banks in New York.”

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End of Administration Financial Enforcement Round-Up

Why it matters: What do RMBS, faulty algorithms, the FX spot market, law firm email hacks, “Hail Mary Time” and dark pools have in common? All were involved in enforcement actions, both criminal and civil, brought by the DOJ, SEC and state agencies against banks and related institutions—and their officers and employees—for financial misconduct in the weeks leading up to the Obama administration’s end. Read on for a recap of the three recent significant resolutions involving Deutsche Bank, Credit Suisse, Moody’s and Residential Mortgage-Backed Securities (RMBS) in connection with what the DOJ referred to “the worst financial crisis since the Great Depression,” as well as a round-up of other resolutions that caught our eye in the end of administration settlement push.

Detailed discussion: In the weeks leading up to the end of the Obama administration, numerous resolutions were announced by the DOJ and SEC involving banks and related institutions—and their officers and employees—for financial offenses, both criminal and civil. We found the resolutions discussed here to be especially noteworthy, starting with the three significant resolutions announced almost back-to-back by the DOJ in mid-January having to do with the housing market fall-out from what the DOJ referred to as the “worst financial crisis since the Great Depression.”

On January 17, 2017, in what it called “the single largest RMBS resolution for the conduct of a single entity,” the DOJ announced a $7.2 billion settlement with Deutsche Bank AG (Deutsche Bank) that resolved federal civil claims that Deutsche Bank misled investors in “the packaging, securitization, marketing, sale and issuance” of RMBS between 2006 and 2007. Under the terms of the settlement, Deutsche Bank is required to pay a $3.1 billion civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)—described as “one of the largest FIRREA penalties ever paid”—and will also provide “$4.1 billion in relief to underwater homeowners, distressed borrowers and affected communities.”

The DOJ said that Deutsche Bank agreed to a detailed Statement of Facts as part of the settlement, including admissions that “Deutsche Bank knowingly made false and misleading representations to investors about the characteristics of the mortgage loans it securitized in RMBS worth billions of dollars issued by the bank between 2006 and 2007.” The DOJ said that the settlement “does not release any individuals from potential criminal or civil liability” and that Deutsche Bank agreed to fully cooperate with ongoing investigations “related to the conduct covered by the agreement.”

In addition to the $3.1 billion civil penalty under FIRREA, the DOJ said that Deutsche Bank also agreed to provide $4.1 billion “in the form of relief to aid consumers harmed by its unlawful conduct,” which relief includes “loan modifications, including loan forgiveness and forbearance, to distressed and underwater homeowners throughout the country … [as well as] financing for affordable rental and for-sale housing throughout the country.” The DOJ said that “Deutsche Bank’s provision of consumer relief will be overseen by an independent monitor who will have authority to approve the selection of any third party used by Deutsche Bank to provide consumer relief.”

A day later, on January 18, 2017, the DOJ announced that Credit Suisse Securities (America) LLC and “its current and former U.S. subsidiaries and U.S. affiliates” (collectively, Credit Suisse) agreed to a slightly smaller $5.28 billion settlement “related to Credit Suisse’s conduct in the packaging, securitization, issuance, marketing and sale of [RMBS] between 2005 and 2007.” The DOJ said that “[i]nvestors, including federally-insured financial institutions, suffered billions of dollars in losses from investing in RMBS issued and underwritten by Credit Suisse between 2005 and 2007.” Similar to the Deutsche Bank resolution, the settlement required Credit Suisse to pay a civil penalty under FIRREA of $2.48 billion and to provide $2.8 billion in “other relief, including relief to underwater homeowners, distressed borrowers and affected communities, in the form of loan forgiveness and financing for affordable housing.”

The DOJ said that Credit Suisse admitted to a detailed Statement of Facts that “describes how Credit Suisse made false and misleading representations to prospective investors about the characteristics of the mortgage loans it securitized.” Similar to the settlement with Deutsche Bank, the Credit Suisse settlement “expressly preserves the government’s ability to bring criminal charges against Credit Suisse or any of its employees. The settlement does not release any individuals from potential criminal or civil liability.” Credit Suisse further agreed to “fully cooperate with any ongoing investigations related to the conduct covered by the agreement.”

Preceding both of the Deutsche Bank and Credit Suisse announcements by a few days was the DOJ’s January 13, 2017 announcement that the DOJ, 21 states, and the District of Columbia reached a nearly $864 million civil settlement with Moody’s Investors Service Inc., Moody’s Analytics Inc., and their parent, Moody’s Corporation (Moody’s) to resolve allegations under FIRREA and state law arising from “Moody’s role in providing credit ratings for [RMBS] and Collateralized Debt Obligations (CDO), contributing to the worst financial crisis since the Great Depression.” The DOJ said that approximately 50% of the $864 million aggregate civil penalty—$437.5 million—will go to the federal government, making it “the second largest payment of this type ever made to the federal government by a ratings agency,” with the remainder to be distributed among the settlement member states.

The DOJ said that “[t]he multi-faceted settlement includes a Statement of Facts in which Moody’s acknowledges key aspects of its conduct,” including with respect to “Moody’s representations to investors and the public generally about: (1) its objectivity and independence; (2) its management of conflicts of interest; (3) its compliance with its own stated RMBS and CDO rating methodologies and standards; and (4) the analytic integrity of certain rating methodologies.” As part of the settlement, Moody’s also agreed to “maintain a host of [compliance] measures designed to ensure the integrity of its credit ratings,” including, among other things: (a) “[s]eparation of Moody’s commercial and credit rating functions by excluding analytical personnel from any commercial related discussions and excluding personnel responsible for commercial functions from determining credit ratings or developing rating methodologies;” (b) “[i]ndependent review and approval of changes to rating methodologies by maintaining separate groups to develop and review rating methodologies;” (c) “[c]hanges to ensure that specified personnel are not compensated on the basis of the company’s financial performance;” and (d) “[c]ertifications of compliance by the President/CEO of Moody’s with these commitments for at least five years.”

Also in connection with RMBS, on December 22, 2016, the DOJ announced that it filed a civil complaint in the Eastern District of New York against Barclays Bank PLC and several of its U.S. affiliates (Barclays), alleging that Barclays engaged in a fraudulent scheme to sell RMBS supported by defective and misrepresented mortgage loans. The DOJ alleged in its complaint that, from 2005 to 2007, Barclays personnel repeatedly misrepresented the characteristics of the loans backing securities they sold to investors throughout the world, who incurred “billions of dollars in losses as a result of the fraudulent scheme. The suit also names as defendants former Barclays executives Paul K. Menefee, who served as Barclays’ head banker on its subprime RMBS securitizations, and John T. Carroll, who served as Barclays’ head trader for subprime loan acquisitions.

Following are other recent resolutions involving financial misconduct—intentional or not—that caught our eye in the end of administration settlement push:

• On January 18, 2017, the DOJ announced that Massachusetts-based global financial services company State Street Corporation (State Street) entered into a deferred prosecution agreement (DPA) and agreed to pay a $32.3 million criminal penalty to resolve charges that it conspired to commit wire and securities fraud by engaging “in a scheme to defraud a number of the bank’s clients by secretly applying commissions to billions of dollars of securities trades.” In a parallel investigation, State Street agreed pay an equal amount to the SEC as a civil penalty, resulting in an aggregate criminal and civil settlement of $64.6 million. The DOJ said that State Street admitted in the resolution documents that its “bank employees conspired to add secret commissions to fixed income and equity trades performed for at least six clients of the bank’s ‘transition management’ business.” In addition, the DOJ said that State Street admitted that its “employees took steps to hide the commissions from the clients … [and] misrepresented its performance to one of these clients in order to conceal a trading loss.” Under the terms of the DPA, in addition to paying the criminal penalty, State Street agreed to “continue to cooperate with the department and with foreign authorities in any ongoing investigations and prosecutions relating to the conduct (including of individuals); to enhance its compliance program; and to retain an independent corporate compliance monitor for a period of three years.”The DOJ said that it reached the resolution with State Street based on a number of factors, “including that State Street has already fully repaid the clients who were victims of the scheme,” although “State Street did not receive credit for voluntarily disclosing the misconduct and received only partial cooperation credit because the company did not fully cooperate with the investigation from the start and also because inadequacies in its initial internal investigation prevented it from being able to timely disclose all relevant facts.” The DOJ noted that two of State Street’s employees were arrested in April 2016 in connection with this same conduct, and that their trial is currently scheduled to commence in October 2017.
• On January 13, 2017, the SEC announced that Citadel Securities LLC (Citadel) agreed to pay $22.6 million (consisting of $5.2 million in disgorgement plus interest of approximately $1.4 million and a $16 million penalty) to settle charges that “its business unit handling retail customer orders from other brokerage firms made misleading statements to them about the way it priced trades.” According to the findings in the SEC’s order, which were neither admitted nor denied by Citadel, Citadel’s business unit Citadel Execution Services suggested to its broker-dealer clients that, upon receiving retail orders they forwarded from their own customers, they should “internalize” the trade—which is the process of taking the other side of the trade in retail orders—and either provide the best price observed on various market data feeds or obtain that price in the marketplace. The SEC found, however, that two faulty algorithms used by the business unit in the internalization process “did not internalize retail orders at the best price observed nor [did they seek] to obtain the best price in the marketplace,” thereby causing Citadel to make misleading statements about how trades were priced. As part of the resolution, Citadel discontinued the use of the two algorithms and, in addition to paying $22.6 million, agreed to be censured.
• Also on January 13, 2017, the SEC announced that Morgan Stanley Smith Barney (MSSB) agreed to pay $13 million to settle civil charges that it overbilled investment advisory clients due to coding and other billing system errors and violated the custody rule pertaining to annual surprise examinations. According to the findings in the SEC’s order, which were neither admitted or denied by MSSB, from 2002 to 2016 MSSB received more than $16 million in excess fees when it overcharged more than 149,000 advisory clients by failing “to adopt and implement compliance policies and procedures reasonably designed to ensure that clients were billed accurately according to the terms of their advisory agreements.” The SEC also found that MSSB “failed to validate billing rates contained in the firm’s billing system against client contracts, fee billing histories, and other documentation.” The SEC said that MSSB reimbursed the full amount of the overcharge plus interest to affected clients. In addition to the $13 million civil penalty, MSSB also agreed to be censured and to perform various undertakings related to its fee billing and books and records practices. Previously, on December 20, 2016, the SEC announced that Morgan Stanley & Co. LLC (Morgan Stanley) agreed to pay $7.5 million to settle charges it used trades involving customer cash to lower the firm’s borrowing costs in violation of the SEC’s Customer Protection Rule. According to the findings in the SEC’s order (which were neither admitted or denied by Morgan Stanley), from 2013 to 2015, Morgan Stanley’s U.S. broker-dealer used transactions with an affiliate to reduce the amount it was required to deposit in its customer reserve account in violation of the Customer Protection Rule, which prohibits broker-dealers from using affiliates to reduce their customer reserve account deposit requirements. In addition to the $7.5 million civil penalty, Morgan Stanley agreed to cease and desist from committing or causing any similar violations in the future, and to be censured
• On January 12, 2017, the SEC announced that broker ITG agreed to pay more than $24.4 million (consisting of $15 million in disgorgement plus approximately $1.8 million in interest and a penalty of more than $7.5 million) to settle charges that it violated federal securities laws when it prompted the issuance of American Depository Receipts (ADRs) without possessing the underlying foreign shares. According to the SEC’s findings, which were neither admitted or denied by ITG, from 2011 to 2014 ITG facilitated transactions known as “pre-releases” of ADRs to its counterparties “without owning the foreign shares or taking the necessary steps to ensure they were custodied by the counterparty on whose behalf they were being obtained” such that “[m]any of the ADRs obtained by ITG through pre-release transactions were ultimately used to engage in short selling and dividend arbitrage even though they may not have been backed by foreign shares.”
• On January 9, 2017, the DOJ announced that it had charged the three traders with conspiring to fix prices and rig bids for U.S. dollars and euros exchanged in the foreign currency exchange (FX) spot market: Richard Usher (former Head of G11 FX Trading-UK at an affiliate of The Royal Bank of Scotland plc (RBS), as well as former Managing Director at an affiliate of JPMorgan Chase & Co. (JPMorgan Chase)), Rohan Ramchandani (former Managing Director and head of G10 FX spot trading at an affiliate of Citicorp) and Christopher Ashton (former Head of Spot FX at an affiliate of Barclays PLC (Barclays)). The DOJ said that the indictment of the three traders was done in connection with the May 2015 agreements of Barclays, Citicorp, JPMorgan, and RBS to plead guilty to conspiring to fix prices and rig bids for U.S. dollars and euros exchanged in the FX spot market, and to pay criminal fines totaling more than $2.5 billion (the guilty pleas for which were accepted in federal district court on January 5, 2017). In addition, on January 12, 2016, the DOJ announced in a related prosecution that Christopher Cummins, “a foreign currency exchange (FX) dealer of Central and Eastern European, Middle Eastern and African (CEEMEA) currencies on the FX desk of a New York-based financial institution” became the second individual to plead guilty to conspiring to fix prices on the FX market. The DOJ alleged that, from 2007 to 2013, Cummins and FX dealers at competing institutions “conspired to suppress and eliminate competition by fixing prices in CEEMEA currencies.”
• On January 6, 2017, the DOJ announced that it had charged Joseph A. Kostelecky, the former vice president of U.S. operations for Poseiden Concepts Corporation (Poseiden), a now-defunct Canadian oil-services company, with wire fraud and securities fraud for “orchestrating a scheme to fraudulently inflate the company’s reported revenue by approximately $100 million.” The DOJ alleged that between November 2011 and December 2012, Kostelecky, the sole executive in Poseidon’s U.S. division, “engaged in conduct that caused the company to falsely report approximately $100 million in revenue from purported contracts with oil and natural gas companies.” According to the SEC, Kostelecky’s conduct resulted in Poseiden being forced into bankruptcy when the inflated revenue was exposed at the end of 2012 and the company’s shares lost more than $1 billion in value.
• On December 27, 2016, the SEC announced that it had charged three Chinese traders with fraudulently trading on hacked nonpublic market-moving information stolen from two prominent New York-based law firms, earning almost $3 million in illegal profits. The SEC said that “this enforcement action marks the first time the SEC has charged hacking into a law firm’s computer network.” According to allegations in the SEC’s complaint, the three Chinese traders executed a scheme to hack into the networks of two law firms and steal confidential information pertaining to firm clients that were considering mergers or acquisitions. The SEC alleged that the scheme was accomplished by installing malware on the law firms’ networks, compromising accounts that enabled access to all email accounts at the firms, and copying and transmitting dozens of gigabytes of emails to remote internet locations. The SEC further alleged that the traders then used the stolen confidential information contained in the emails to purchase shares in at least three public companies ahead of public announcements about the companies entering into merger agreements. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal insider trading and hacking charges against the three Chinese traders.
• December 19, 2016, the SEC announced that it had charged the founder of Platinum Partners, Mark Nordlicht (Nordlicht), and two of its flagship hedge fund advisory firms, Platinum Management (NY) LLC, and Platinum Credit Management LP, with conducting a fraudulent scheme to inflate asset values and illicitly move investor money to cover losses and liquidity problems. In its complaint, the SEC alleged, among other things, that Nordlicht and the Platinum funds overstated the value of an oil company that was among their largest assets, and concealed a growing liquidity crisis by transferring money between the funds, making preferential redemptions to favored investors and using misrepresentations to attract new investors to the struggling funds during what internal documents described as “Hail Mary time.” In addition, the SEC alleged in the complaint that Nordlicht schemed with two colleagues and an executive at the Platinum funds’ other major oil investment (all three individuals, among others, also charged in the complaint) to divert almost $100 million from that company to help boost the Platinum funds. The SEC said that, in a parallel investigation, criminal charges had been brought by the U.S. Attorney’s Office for the Eastern District of New York and that a court-appointed receiver was being sought to oversee funds managed by Platinum Credit Management and other Platinum-related entities currently in a liquidation proceeding in the Cayman Islands.
• In addition to the significant January 17, 2016 settlement with the DOJ involving RMBS, on December 16, 2016, the SEC announced that Deutsche Bank agreed to pay a combined total of $37 million in penalties ($18.5 million each) to the SEC and the Office of the New York Attorney General (NYAG) in order to settle federal and state charges that it misled clients about the performance of a core feature of its automated order router that primarily sent client orders to dark pools. Deutsche Bank admitted to the findings set forth in the SEC’s order, which involved Deutsche Bank making misleading statements and omissions concerning the Dark Pool Ranking Model feature of one of its order routers, known as SuperX+. The SEC found, among other things, that for a period of two years, from 2012-2014, a coding error caused at least two dark pools to receive inflated rankings resulting in millions of orders that SuperX+ would have sent elsewhere if the system was operating the way Deutsche Bank had described to clients. In a press release also dated December 16, 2016, the NYAG said its parallel investigation into the matter arose from “Attorney General [Eric T.] Schneiderman’s Insider Trading 2.0 initiative, first announced in September 2013, and his Investor Protection Bureau’s investigation into the practices of electronic market makers, broker-dealers, and dark pool operators.”

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Spotlight on the False Claims Act

Why it matters: The False Claims Act (FCA) continued to prove itself a powerful tool to combat fraud on the government in 2016. In December 2016, the DOJ released figures showing that, for fiscal year 2016, it had collected over $4.7 billion, its “third highest annual recovery in False Claims Act history.” Fiscal year 2017 has started off with a bang, with numerous FCA resolutions announced in October through early December 2016 (as noted in our newsletters for those months), as well as in the second half of December 2016 and to date in January 2017 (discussed here). Also of note, on December 16, 2016, the Ninth Circuit issued a largely “form over substance” amendment to its high profile FCA decision from August 2016, United States ex rel. Swoben v. United Healthcare Ins. Co. Read on for a recap of the amended Swoben opinion as well as recent FCA resolutions we found to be of interest.

Detailed discussion: On December 14, 2016, the DOJ announced that, for the fiscal year ended September 30, 2016 (FY2016), it had recovered over $4.7 billion from FCA judgments and settlements, making it “the third highest annual recovery in False Claims Act history.” The DOJ elaborated that the $4.7 billion collected for FY2016 brought “the fiscal year average to nearly $4 billion since fiscal year 2009, and the total recovery during that period to $31.3 billion.” Of the amount collected in FY2016, the DOJ said that “$2.5 billion came from the health care industry, including drug companies, medical device companies, hospitals, nursing homes, laboratories, and physicians,” with the second largest recoveries—totaling nearly $1.7 billion—coming from the “financial industry in the wake of the housing and mortgage fraud crisis.”

We recap the latest FCA resolutions of note below (the amounts collected for which will go to the next fiscal year’s bottom line), but we first wanted to highlight an interesting action taken by the Ninth Circuit on December 16, 2016, when it issued an amended opinion in United States ex rel. Swoben v. United Healthcare Ins. Co., its high profile FCA decision from August 2016 (we covered the Ninth Circuit’s opinion in Swoben in our September 2016 newsletter under “Spotlight on the False Claims Act”). The amended opinion addresses heightened pleading standards required by Rule 9(b) of the Federal Rules of Civil Procedure (Rule 9(b)), rather than to the “substance” of the ruling under the FCA, which was unchanged.

Original opinion: Briefly, in its August 10, 2016 opinion, the Ninth Circuit had vacated a Central District of California court’s judgment that had dismissed without leave to amend the third amended complaint of qui tam relator James Swoben (Swoben)—which had alleged that the defendant Medicare Advantage organizations United Healthcare, Aetna, WellPoint and Health Net (Defendants) submitted false certifications to the Centers for Medicare & Medicaid Services (CMS) in violation of the FCA—and remanded with instructions to allow Swoben leave to file a proposed fourth amended complaint. In so doing, the Court said that the district court had abused its discretion in denying Swoben leave to amend on the grounds of “futility of amendment,” holding that Swoben’s proposed fourth amended complaint sufficiently alleged facts under Rule 9(b) to support Swoben’s claims that the Defendants designed their retrospective review procedures to not reveal erroneously reported diagnosis codes in violation of the FCA.

Amended opinion: In the amended opinion issued on December 16, 2016, the Ninth Circuit concluded that the allegations in Swoben’s proposed fourth amended complaint sufficiently and with specificity stated a cause of action under Rule 9(b) only with respect to United Healthcare and an independent practice association (IPA) with which United Healthcare contracted, because there were detailed factual allegations about how United Healthcare had instructed the IPA to review its medical charts for additional diagnosis codes. By contrast, the Court concluded that the “broad” allegations contained in the fourth amended complaint against Aetna, WellPoint and Health Net did not satisfy the heightened pleading standard required by Rule 9(b), but said that Swoben should still be afforded leave to amend. The amended opinion also contained an order denying the petition for rehearing en banc that had been filed by the appellee health companies.

Now, we turn to the recent healthcare and nonhealthcare FCA resolutions we found to be of interest:

Healthcare resolutions:

• On January 13, 2017, the DOJ announced that Massachusetts-based Medstar Ambulance Inc., including four subsidiary companies and its two owners, Nicholas and Gregory Melehov (collectively Medstar), agreed to pay $12.7 million to resolve allegations that it knowingly submitted false claims to Medicare in violation of the FCA. As part of the settlement, Medstar also entered into a corporate integrity agreement with the U.S. Department of Health and Human Services (HHS). According to the DOJ’s allegations, which were neither admitted nor denied by Medstar, “Medstar routinely billed for services that did not qualify for reimbursement because the transports were not medically reasonable and necessary, billed for higher levels of services than were required by patients’ conditions, and billed for higher levels of services than were actually provided.” Qui tam whistleblower to receive award of $3.5 million.
• On January 11, 2017, the DOJ announced that Ireland-based multinational pharmaceutical firm Shire Pharmaceuticals LLC and other subsidiaries of Shire plc (Shire) agreed to pay $350 million to settle federal and state FCA allegations that Shire and the company it acquired in 2011, Advanced BioHealing, employed kickbacks and other unlawful methods to induce clinics and physicians to use or overuse its former product “Dermagraft” (a bioengineered human skin substitute approved by the FDA for the treatment of diabetic foot ulcers). Principal Deputy Assistant Attorney General Benjamin C. Mizer said that “[t]his settlement represents the largest False Claims Act recovery by the United States in a kickback case involving a medical device.” According to the DOJ’s findings (which were neither admitted nor denied by Shire), Dermagraft salespersons unlawfully induced clinics and physicians with “lavish dinners, drinks, entertainment and travel; medical equipment and supplies; unwarranted payments for purported speaking engagements and bogus case studies; and cash, credits and rebates” in order to induce them to use Dermagraft. The DOJ said that the settlement resolved allegations brought in six qui tam lawsuits, the awards for which have not yet been determined.
• On December 28, 2016, the U.S. Attorney’s Office for the Northern District of California announced that Bay Sleep Clinic, its related businesses—Qualium Corporation and Amerimed Corporation—and their married-couple owners and operators (Defendants) agreed to pay $2.6 million to settle allegations that they violated the FCA by fraudulently billing Medicare for diagnostic sleep tests and medical devices in violation of Medicare payment rules. The Defendants neither admitted nor denied liability. Qui tam whistleblower to receive award of $545,000.
• On December 15, 2016, the DOJ announced that New York–based Forest Laboratories LLC and its subsidiary Forest Pharmaceuticals Inc. (collectively Forest) agreed to pay $38 million to resolve allegations that they violated the FCA and Anti-Kickback Statute by paying kickbacks consisting primarily of illegal speaking fees to physicians in order to induce them to prescribe three drugs. Forest neither admitted nor denied the allegations. Qui tam whistleblower to receive award of $7.8 million.
• On December 13, 2016, the U.S. Attorney’s Office for the Eastern District of Texas announced that Texas-based Elite Lab Services, LLC (Elite Lab) and its husband-and-wife owners Gerard and Suzanne Dengler agreed to pay $3.75 million to resolve FCA charges that Elite Lab billed Medicare for “tens of thousands of miles” that were never driven by Elite Lab’s personnel. The government said that, as part of the settlement, the Denglers and Elite Lab admitted that they submitted false claims to Medicare that contained inflated mileage calculations beyond those actually driven by Elite Lab’s employees. Qui tam whistleblower to receive award of $787,500.

Non-healthcare resolution: On December 28, 2016, the DOJ announced that Michigan-based United Shore Financial Services LLC (USFS) agreed to pay $48 million to resolve allegations that it violated the FCA by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) that did not meet applicable requirements. The DOJ said that the settlement resolved allegations that between 2006 and 2011, USFS failed to comply with certain FHA origination, underwriting and quality control requirements. As part of the settlement, USFS admitted to, among other things, (a) improperly pressuring underwriters to approve FHA mortgages, and its compensation plan used a formula expressly tying underwriter compensation to the percentage of loans approved by the underwriter and closed by USFS, and (b) falsely certifying that direct endorsement underwriters personally reviewed appraisal reports prior to USFS approving and endorsing mortgages for FHA insurance. The DOJ said that USFS also was deficient in self-reporting requirements and keeping senior management apprised of quality control issues. Last, the DOJ said that, after it had commenced its investigation in January 2014, USFS made “certain discretionary distributions” to one of its shareholders. The DOJ said that, as a result of this conduct, “HUD insured hundreds of loans approved by USFS that were not eligible for FHA mortgage insurance under the Direct Endorsement program, and that HUD would not otherwise have insured. HUD subsequently incurred substantial losses when it paid insurance claims on those loans.” No qui tam suit referenced.

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Whet Your Whistle—SEC Whistleblower Program Update

Why it matters: Since our last newsletter, there have been numerous interesting developments related to the SEC’s whistleblower program, from a court ruling involving the ability of an attorney whistleblower’s use at federal trial of otherwise attorney-client protected documents to a petition for review filed with the D.C. Circuit relating to the SEC’s denial of a “zombie” whistleblower’s claim. Read on for the latest installment in our ongoing SEC whistleblower program coverage.

Detailed discussion: Below, we discuss the latest (as of press time) developments in connection with the SEC’s whistleblower program that we found worthy of note, including two particularly interesting court matters. We last covered the SEC’s whistleblower program in depth—including outgoing SEC Director of Enforcement Andrew Ceresney’s “state of the union” speech about the program—in our November 2016 newsletter under “Give a Little Whistle—SEC Whistleblower Program Update.”

SEC whistleblower program in the courts:

• On December 20, 2016, in Wadler v. Bio-Rad Laboratories Inc., Northern District of California Magistrate Judge Joseph C. Spero ruled that federal common law permits the plaintiff whistleblower attorney to use otherwise attorney-client privileged information at trial, and that the federal Sarbanes-Oxley Act preempts California's ethical rules regarding attorney-client privilege. This case was brought by Sanford Wadler, the former general counsel of Bio-Rad Laboratories Inc. (Bio-Rad). Wadler sued Bio-Rad in 2015, claiming it terminated him for reporting potential FCPA violations by Bio-Rad’s operations in China to Bio-Rad’s audit committee. Bio-Rad filed a motion asking the judge to prevent Wadler from using documents at trial that he gained access to in his position as general counsel, arguing that all such documentation could be subject to attorney-client privilege, and that federal evidence rules barred use of privileged materials at trial. The judge rejected Bio-Rad’s argument, stating that "[t]o the extent that one of the methods Congress chose for [protecting whistleblowers] was to afford protection from retaliation to those who comply with these reporting requirements, an ethical rule that deprives an attorney of such protection interferes with the methods by which Sarbanes-Oxley was designed to achieve its objective." The judge further noted that "[o]ther federal cases [specifically the 2009 Ninth Circuit opinion in Van Asdale v. International Gaming Technology] … seem to support the conclusion that privileged communications and confidential information may be used, with appropriate protections [such as sealing orders], to establish whistleblower retaliation claims under the federal common law." The SEC had filed an amicus brief in support of Wadler’s use of the documentation at trial.
  
  Editors’ Note: After a three-week trial, a California jury last week awarded Wadler $8 million in his whistleblower retaliation lawsuit. Approximately $3 million of the award is for back pay and about $5 million is for punitive damages.
• On December 5, 2016, a petition for review was filed with the D.C. Circuit by a “zombie” whistleblower (e.g., a person who provided information to the SEC before the institution of the 2010 Dodd-Frank whistleblower protection laws) seeking the Court’s review of the SEC’s denial of his “timely filed” whistleblower claim. The “John Doe” whistleblower’s petition included a copy of the SEC’s denial, which denied the claim because the whistleblower was basing it in part on information provided before July 2010—when Dodd-Frank was enacted—and that “none of the original” information provided after Dodd-Frank’s enactment led to the successful enforcement action at issue. This will be the second time that an appellate court will rule on this issue. In March 2015, the Second Circuit in Striker v. SEC upheld the SEC’s denial of the “zombie” whistleblower’s claim (which also had been based on information provided to the SEC pre-Dodd Frank) because it owed the SEC “Chevron deference” on the matter and the SEC has interpreted the Dodd-Frank whistleblower provisions to apply only to information received after the enactment of Dodd-Frank.

Recent SEC announcements—another whistleblower award, the SEC’s first “retaliation” action and two more severance agreements with improper “chilling” provisions:

• On January 6, 2016, the SEC announced that it had awarded $5.5 million under its whistleblower program to a whistleblower “who provided critical information that helped the SEC uncover an ongoing scheme” at the company at which the whistleblower was employed and “reported the information directly to the SEC, which brought a successful enforcement action to end the scheme.”
• On December 20, 2016, the SEC announced that Oklahoma City-based oil-and-gas company SandRidge Energy Inc. (SandRidge) agreed to pay a $1.4 million penalty to settle charges that it used illegal separation agreements and retaliated against a whistleblower who expressed concerns internally about how its reserves were being calculated. Jane Norberg, Chief of the SEC’s Office of the Whistleblower, said that “[t]his is the first time a company is being charged for retaliating against an internal whistleblower, and the second enforcement action this week against a company for impeding employees from communicating with the SEC.” According to the SEC’s findings, which were neither admitted nor denied by SandRidge, Sandridge conducted multiple reviews of its separation agreements after the Dodd-Frank whistleblower protection rule became effective in August 2011, yet continued to regularly use restrictive language that prohibited outgoing employees from participating in any government investigation or disclosing information potentially harmful or embarrassing to the company. In addition, the SEC found that SandRidge improperly fired an internal whistleblower who repeatedly raised concerns about the process used by SandRidge to calculate its publicly reported oil-and-gas reserves.
• On December 19, 2016, the SEC announced that Virginia-based tech company NeuStar, Inc. (NeuStar) agreed to pay a $180,000 penalty to settle charges that language in its severance agreements impeded at least one former employee from communicating information to the SEC in violation of “the federal securities laws that protect whistleblowers.” According to the SEC’s findings, which were neither admitted or denied by NeuStar, from 2011 to 2015, NeuStar entered into severance agreements with at least 246 departing employees that contained a clause forbidding the former employees from engaging with the SEC and other regulators “in any communication that disparages, denigrates, maligns or impugns” the company. The SEC said that, for breaching the clause, former employees could be compelled to forfeit all but $100 of their severance pay. The SEC said that NeuStar voluntarily revised its severance agreements promptly after the SEC began investigating, and agreed to make reasonable efforts to inform those who signed the severance agreements that “NeuStar does not prohibit former employees from communicating any concerns about potential violations of law or regulation to the SEC.”

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Keeping an Eye Out—Updates and Briefly Noted

Updates:

• DOJ’s Swiss Bank Program: On December 29, 2016, the DOJ announced that it had reached final resolutions with banks that had met the requirements of its Swiss Bank Program, which program “provided a path for Swiss banks to resolve potential criminal liabilities in the United States, and to cooperate in the Department’s ongoing investigations of the use of foreign bank accounts to commit tax evasion.” We first covered the DOJ’s Swiss Bank Program in our April 2015 newsletter under “First Swiss Bank Reaches Resolution with the DOJ Under Its Swiss Bank Program.”
• Effective date of new New York Department of Financial Services (DFS) Cybersecurity Regulation delayed until March 1, 2017: On December 28, 2016, the DFS announced that the effective date of its “first-in-the-nation” Cybersecurity Regulation, previously January 1, 2017, had been delayed until March 1, 2017 to give DFS regulated companies more time to review the regulation and come into compliance with its requirements (an additional 30-day comment period was also opened up). The DFS stated in its press release that, once in effect, the regulation “will require banks, insurance companies, and other financial services institutions regulated by DFS to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry.” We covered the DFS Cybersecurity Regulation in our November 2016 newsletter in our updates section under “New rulemaking and advisories.” For a detailed discussion of the regulation, see here to read the October 3, 2016, newsletter alert authored by Manatt financial services partner David Gershon entitled “New York’s DFS Proposed Cybersecurity Regulations for Financial Institutions.”
• Constitutional challenges to SEC “in-house” administrative hearings: In a decision that caused a direct circuit split with (among others) the Second and DC Circuits, effectively guaranteeing Supreme Court review of the issue, on December 27, 2016, the Tenth Circuit in Bandimere v. SEC ruled that the SEC administrative law judge (ALJ) presiding over Belvedere’s case was an “inferior officer” under the Appointments Clause of the U.S. Constitution who was not constitutionally appointed as required by “the President, a court of law, or a department.” Thus, the Court held that the SEC ALJ held his office in violation of the Appointments Clause and set aside his ruling against Belvedere. Of the three person panel, there was one concurrence and one dissent. Update to our ongoing “Wherefore Art Thou, Due Process” coverage, most recently in our July 2016, January 2016 and October 2015 newsletters.

Briefly noted:

• On January 12, 2017, the SEC announced the 2017 priorities for its Office of Compliance Inspections and Examinations (OCIE). The SEC said that “[a]reas of focus include electronic investment advice, money market funds, and financial exploitation of senior investors. The priorities also reflect a continuing focus on protecting retail investors, including individuals investing for their retirement, and assessing market-wide risks.” The SEC said that one of the areas the OCIE will specifically focus on is cybersecurity, stating that the “OCIE will continue its ongoing initiative to examine for cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls at broker-dealers and investment advisers.”
• On January 4, 2017, the SEC published its new “Code of Corporate Governance for Publicly-Listed Companies.” Adopted in November 2016, the new code took effect on January 1, 2017 and all publicly-listed companies are required to submit to the SEC a new “Manual of Corporate Governance” evidencing their compliance with the new code by May 31, 2017. The SEC said the new code, which updates and replaces earlier codes and pronouncements, is intended to “promote the development of a strong corporate governance and keep abreast of recent developments in corporate governance.”
• On December 16, 2016, the Financial Industry Regulatory Authority (FINRA) announced that it fined Deutsche Bank Securities Inc. (Deutsche Bank) $3.25 million for failing to provide the same information to all clients of its Alternative Trading System (ATS) relating to certain ATS services and features. In agreeing to the settlement, Deutsche Bank neither admitted nor denied FINRA’s findings.
• On December 15, 2016, the Financial Crimes Enforcement Network (FinCEN) announced that it had assessed a $500,000 civil monetary penalty against now-defunct Bethex Federal Credit Union for “failures to manage high-risk international financial activity.” FinCEN said that the Bronx-based credit union, which was liquidated by the National Credit Union Administration in December 2015, engaged in “significant violations of anti-money laundering (AML) regulations.”
• On December 14, 2016, the DOJ announced that it collected more than $15.3 billion in civil and criminal actions in the fiscal year ended September 30, 2016. The DOJ said that the amount collected represented “more than five times the approximately $3 billion appropriated budget for the 94 U.S. Attorneys’ offices and the main litigating divisions of the Justice Department combined in that same period.” The DOJ said that over $12 billion of the amount collected related to “affirmative civil enforcement cases, in which the United States recovered government money lost to fraud or other misconduct or collected fines imposed on individuals and/or corporations for violations of federal health, safety, mortgage, financial, civil rights or environmental laws.” The DOJ also said that the largest settlements “[d]erived from cases related to the financial crisis,” such as the resolutions with Goldman Sachs Group ($2.96 billion) and Morgan Stanley & Company ($2.6 billion) related to the residential mortgage lending activities. The DOJ said that over $3 billion of the amount collected came from criminal resolutions, citing to the $772 million FCPA criminal penalty assessed against Alstom S.A.
• Cert petitions granted:
  1. On January 13, 2017, the Supreme Court granted certiorari in Kokesh v. SEC, where it will consider the question presented of “[w]hether the five-year statute of limitations in 28 U.S.C. § 2462 applies to claims for ‘disgorgement.’” The case, which arose from a circuit split, will clarify the Supreme Court’s 2013 decision in Gabelli v. SEC, which held that monetary penalties are subject to 28 USC § 2462’s five-year statute of limitations on any “civil fine, penalty, or forfeiture, pecuniary or otherwise,” without addressing whether this time limit extended to various forms of equitable relief, such as disgorgement (which is characterized by the SEC as an equitable remedy). On May 26, 2016, the Eleventh Circuit in SEC v. Graham held that 28 USC § 2462’s five-year statute of limitations did apply to disgorgement because it was a form of penalty or forfeiture within the meaning of the statute. Oral argument has not yet been scheduled.
  2. On December 9, 2016, the Supreme Court granted certiorari in Honeycutt v. U.S., where it will consider the question presented of “[w]hether 21 U.S.C. § 853(a)(1) mandates joint and several liability among co-conspirators for forfeiture of the reasonably foreseeable proceeds of a drug conspiracy.” The case came up from the Sixth Circuit, which had held that criminal forfeiture was appropriate for the convicted co-conspirator in a meth distribution ring under 21 U.S.C. § 853(a)(1) because he had conspired with his brother to sell the meth and his participation in that conspiracy made him jointly and severally liable for the forfeiture of the illicit proceeds, even though he never actually collected any of them. The Sixth Circuit’s ruling is consistent with the Second, Third, Fourth and Eighth circuits but the D.C. Circuit held the opposite, creating the circuit split to be resolved by the Supreme Court. Oral argument has not yet been scheduled.

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