Source: https://www.manatt.com/Insights/Newsletters/Investigations-White-Collar-Defense/Government-Officials-Pledge-Continued-White-Collar
Timestamp: 2019-04-18 14:46:15+00:00

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Why it matters: Recent pronouncements by Attorney General Jeff Sessions, Acting Principal Deputy Assistant Attorney General Trevor N. McFadden and recently confirmed SEC chair Jay Clayton have provided assurances that the DOJ and SEC will continue to "vigorously enforce" white collar laws as a high government priority.
"Congress enacted [the FCPA] 40 years ago, when some companies considered it a routine expense to bribe foreign officials in order to gain business advantages abroad. This type of corruption harms free competition, distorts prices, and often leads to substandard products and services coming into this country. It also increases the cost of doing business, and hurts honest companies that don't pay these bribes. Our department wants to create an even playing field for law-abiding companies. We will continue to strongly enforce the FCPA and other anti-corruption laws. Companies should succeed because they provide superior products and services, not because they have paid off the right people."
Sessions also said that the DOJ will continue to hold individuals accountable for corporate misconduct, because "[i]t is not merely companies, but specific individuals, who break the law. We will work closely with our law enforcement partners, both here and abroad, to bring these persons to justice." In addition, Sessions said that, when making charging decisions, the DOJ will "continue to take into account whether companies have good compliance programs; whether they cooperate and self-disclose their wrongdoing; and whether they take suitable steps to remediate problems." Although he did not mention it by name, Sessions was in effect describing the DOJ's FCPA Pilot Program, which had an initial 12-month trial period that ended on April 5, 2017. However, in a March 10, 2017, speech at the ABA National Institute on White Collar Crime in Miami, FL, Acting Assistant Attorney General Kenneth A. Blanco announced that the DOJ was extending the Pilot Program beyond its initial trial period so that the DOJ could "begin the process of evaluating the utility and efficacy of the 'Pilot Program,' whether to extend it, and what revisions, if any, we should make to it. The program will continue in full force until we reach a final decision on those issues." We summarized the Pilot Program in our April 6, 2016, newsletter alert titled "DOJ Launches New FCPA Voluntary Disclosure Pilot Program."
The week prior, on April 20, 2017, Acting Principal Deputy Assistant Attorney General Trevor N. McFadden spoke at the American Conference Institute's 19th Annual Conference on the Foreign Corrupt Practices Act in New York. McFadden began his remarks by saying that he wanted to "dispel the myth" that the DOJ "no longer is interested in prosecuting white collar crime." While acknowledging that, in the three months since the new administration took over, the DOJ had been primarily focused on prosecuting violent crimes, "the Criminal Division is fully engaged in combatting crime in all its forms, and no matter what color collar its perpetrators wear. … [crimes] such as: fraud, bribery, public corruption, organized crime, trade secret theft, money laundering, securities fraud, government fraud, healthcare fraud and computer and Internet fraud—to name a few."
"We recognize that business organizations are our partner in the fight against corruption, because they are in the best position to detect risk, to take preventative measures and to educate those who act on its behalf on best practices. We hope that, in this cooperative effort, we can reduce corruption with effective compliance programs that prevent nefarious conduct from happening and through effective prosecutions to resolve violations in a way that punishes the conduct and deters similar future misconduct."
McFadden said that "motivated as ever by the importance of ensuring a fair playing field for honest corporations doing business abroad, the department continues to vigorously enforce the FCPA," including holding individuals accountable for corporate misconduct. McFadden noted that in recent years there has been a "notable increase" in international cooperation with the DOJ's counterparts in other countries such that "cooperation with our foreign partners has become a hallmark of our work." In this regard, McFadden said that the DOJ will be looking to reach global resolutions that "apportion penalties between the relevant jurisdictions so that companies seeking to accept responsibility for their prior misconduct are not unfairly penalized for the same conduct by multiple agencies."
McFadden concluded that, above all else, the DOJ wanted to be "transparent about our expectations" with respect to FCPA enforcement, pointing to the recently extended Pilot Program as "one example of an effort to provide more transparency and consistency for our corporate resolutions." Echoing the sentiments of both Sessions and Blanco, McFadden said that "[w]e are now conducting a full assessment of the Pilot Program to consider how we can most effectively motivate companies and individuals to voluntarily comply with the law and how we can appropriately communicate our prosecutorial priorities and expectations to parties subject to the FCPA. The program will continue in full force as we evaluate it and until we reach a final decision regarding its permanence."
Finally, on April 4, 2017, Bloomberg BNA reported that then-nominee for SEC chair Jay Clayton (he was confirmed by the Senate on May 2, 2017) signaled in written answers to questions from the Senate Banking Committee that if confirmed he had every intention of enforcing the FCPA, calling it a "powerful and effective tool" and that fighting corporate corruption abroad is an "important government mission." Clayton's answers were in marked contrast to a 2011 New York City Bar Association paper he co-wrote that was critical of the FCPA.
The most recent announcement was by the SEC on April 24, 2017, and involved two former executives at the Hungarian-based telecommunications company Magyar Telekom that agreed to pay financial penalties of $250,000 and $150,000, respectively, and accept officer-and-director bars, to settle allegations that they violated the FCPA in connection with the 2011 parallel civil and criminal resolution in which MT paid $95 million to settle charges that it bribed officials in Macedonia and Montenegro to "win business and shut out competition in the telecommunications industry."
Before that, on Jan. 26, 2017, the DOJ announced that it had charged two former executives of hedge fund Och-Ziff Capital Management Group with being the "driving forces behind a far-reaching bribery scheme" that violated the FCPA. We reported on the DOJ's resolution with Och-Ziff, its first FCPA resolution with a hedge fund, in our November 2016 newsletter under "FCPA Focus—SEC Edition." For coverage of additional significant FCPA enforcement actions announced so far this year, see our February 2017 newsletter under "Three Significant FCPA Resolutions Straddle the New Year" and "More FCPA, Bribery and Corruption, Oh My!"
Why it matters: As discussed elsewhere in this newsletter, pronouncements by DOJ officials in April 2017 signaled that the DOJ will be "business as usual" with respect to pursuing white collar crime, including the False Claims Act. Read on for a recap of some of this year's FCA resolutions and actions.
Detailed discussion: Following is a recap of some of the FCA resolutions and actions announced this year that we found to be of interest. See our article in this newsletter titled "Eye on the Circuit Courts" for a discussion of a May 1, 2017, Third Circuit opinion where the court affirmed the district court's dismissal of an FCA qui tam lawsuit but on alternate grounds based on an analyses and application of the Supreme Court's materiality test established in the 2016 Escobar case.
"UHG knowingly disregarded information about beneficiaries' medical conditions, which increased the payments UHG received from Medicare. In particular, the lawsuit contends that UHG funded chart reviews conducted by HealthCare Partners (HCP), one of the largest providers of services to UHG beneficiaries in California, to increase the risk adjustment payments received from the Medicare Program for beneficiaries under HCP's care. However, UHG allegedly ignored information from these chart reviews about invalid diagnoses and thus avoided repaying Medicare monies to which it was not entitled."
We first discussed the Swoben case in our September 2016 newsletter under our regular feature "Spotlight on the False Claims Act." To briefly recap, in August 2016, the Ninth Circuit 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 had alleged that the defendant MAOs UHG and others submitted false certifications to the Centers for Medicare & Medicaid Services in connection with risk adjustment data, in violation of the FCA. The Ninth Circuit remanded the case with instructions to allow Swoben to file a proposed fourth amended complaint, finding that the fourth amended complaint sufficiently alleged that the defendants violated the FCA by using biased review procedures designed to not reveal erroneously reported diagnosis codes. Flash forward to December 2016, when the Ninth Circuit issued a largely "form over substance" amended opinion in Swoben (that is, the amended opinion spoke to the heightened pleading standards required by Rule 9(b) of the Federal Rules of Civil Procedure rather than to the "substance" of the ruling under the FCA, which was unchanged). Relevant here, and perhaps a foreshadower of the DOJ's decision to intervene in the case against UHG a few months later, the Ninth Circuit found that the relator's proposed fourth amended complaint satisfied Rule 9(b)'s heightened pleading standards solely with respect to UHG, and that the "broad" allegations contained in the fourth amended complaint against the other defendants were not sufficient under Rule 9(b) (although the court said that Swoben should still be afforded leave to amend against the other defendants) (see our discussion of the amended Swoben opinion in our February 2017 newsletter under "Spotlight on the False Claims Act").
In its press release, the DOJ said that its decision to intervene in Swoben against UHG followed its intervention in February 2017 in United State ex rel. Poehling v. UnitedHealth Group, Inc., a related lawsuit in the Central District of California with similar allegations that UHG defrauded the Medicare program. The DOJ filed its complaint in Poehling on May 16, 2017. These cases will be ones to watch.
The following are two other recent notable healthcare FCA resolutions that caught our eye because they also involve allegations concerning the violation of the federal Anti-Kickback Statute. We also wanted to draw readers' attention to an article by our Manatt colleagues in the April 2017 Health Update newsletter titled "CMS Issues Self-Referral Disclosure Protocol for Stark Law Violations," by Robert D. Belfort and Julia Smith.
On April 27, 2017, the DOJ announced that Indiana University Health Inc. and a health insurer agreed to pay a total of $18 million to resolve allegations that they violated the federal and state FCAs and the AKS by "engaging in an illegal kickback scheme" involving the referral of OB/GYN patients to IU Health's Methodist Hospital. The DOJ alleged (which allegations were neither admitted nor denied by IU Health) that from 2013 to 2016, IU Health provided a health insurance company "with an interest-free line of credit, the balance of which consistently exceeded $10 million." The DOJ further alleged that the health insurance company was "not expected to repay a substantial portion of this loan and that this financial arrangement was intended to induce [the insurer] to refer its OB/GYN patients to IU Health's Methodist Hospital." Under the settlement, IU Health and the health insurer each agreed to pay approximately $5.1 million to the DOJ and $3.9 million to the state of Indiana. Qui tam whistleblower to receive an award of $2.8 million.
On April 25, 2017, the DOJ announced that California-based Braden Partners, L.P., doing business as Pacific Pulmonary Services, agreed to pay $11.4 million to resolve allegations against it and its general partner, Teijin Pharma USA LLC, that they violated the FCA by "submitting claims for reimbursement to Medicare and other federal healthcare programs for oxygen and related equipment supplied in violation of program rules, and for sleep therapy equipment supplied as part of a cross-referral kickback scheme with sleep clinics." The DOJ alleged (which allegations were neither admitted nor denied by PPS) that, commencing in 2004, PPS "began submitting claims to the Medicare, TRICARE and Federal Employee Health Benefits programs for home oxygen and oxygen equipment without obtaining a physician authorization, as required by program rules." The DOJ also alleged that, starting in 2006, a number of the company's patient care coordinators agreed to make patient referrals to sleep testing clinics in exchange for those clinics' agreement to refer patients to PPS for sleep therapy equipment, in violation of the AKS. Qui tam whistleblower to receive an award of $1.8 million.
On April 24, 2017, the DOJ announced that Georgia-based Energy & Process Corp. agreed to pay $4.6 million to resolve allegations that it violated the FCA by "knowingly" failing to perform required quality assurance procedures and supplying defective steel reinforcing bars (rebar) in connection with a contract to construct a Department of Energy nuclear waste treatment facility. According to the DOJ's allegations (which were neither admitted nor denied by E&P), the DOE paid E&P a premium to supply rebar that met "stringent" regulatory standards for the Mixed Oxide Fuel Fabrication and Reactor Irradiation Services facility at the DOE's Savannah River site near Aiken, SC, but that "E&P failed to perform most of the necessary quality assurance measures, while falsely certifying that those requirements had been met." The DOJ further alleged that "one-third of the rebar supplied by E&P and used in the construction was found to be defective" and had to be replaced by E&P. Qui tam whistleblower award not yet determined.
On April 12, 2017, the DOJ announced that the Wisconsin Department of Health Services agreed to pay approximately $7 million to resolve allegations that it violated the FCA in its administration of the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp Program). As part of the settlement, WDHS admitted that, beginning in 2008, it utilized the services of Julie Osnes Consulting, a quality control consultant, to review the error cases identified by WDHS quality control workers. WDHS further admitted that, based on instructions from JOC, it implemented several "improper and biased" quality control practices which "improperly decreased WDHS's reported error rate, and as a result, WDHS earned performance bonuses for 2009, 2010, and 2011 to which it was not entitled." The DOJ said that the resolution with WDHS follows its similar resolution a week earlier on April 7, 2017, with the Virginia Department of Social Services, which also agreed to pay approximately $7 million to resolve allegations that it violated the FCA in its administration of SNAP to the extent that it also used JOC "to improperly reduce its reported error rate."
On March 10, 2017, the DOJ announced that New York-based information technology management software and services company CA Inc. (CA) agreed to pay $45 million to resolve allegations that it violated the FCA by making false statements and claims in the negotiation and administration of a General Services Administration contract. According to the DOJ's allegations (which were neither admitted nor denied by CA), CA failed to fully and accurately disclose its discounting practices to GSA contracting officers. In addition, the DOJ alleged that CA "provided false information about the discounts it gave commercial customers for its software licenses and maintenance services at the time the contract was negotiated in 2002 and was extended in 2007 and 2009." Finally, the DOJ alleged that "CA violated the price reduction clause in the contract by not providing government customers with additional discounts when commercial discounts improved." Qui tam whistleblower to receive award of almost $10.2 million.
Why it matters: This month, we highlight recent cases from the Third, Fifth and Ninth Circuits that caught our eye. The two cases from the Third Circuit are interesting because they are among the first to apply the tests established by the Supreme Court in the 2016 cases of Universal Health Services v. United States ex rel. Escobar (with respect to the test for materiality under the False Claims Act) and United States v. McDonnell (with respect to the test for what constitutes an "official act" in public corruption cases). The Fifth Circuit case dealt with a John Doe contractor who claimed that the government violated his Fifth Amendment due process rights by accusing him of a crime but not naming him as a defendant (and thus not giving him a way to vindicate himself in a public forum) during the course of a 2008 Foreign Corrupt Practices Act criminal proceeding. And the Ninth Circuit case widened the circuit split with respect to whether employees need to disclose information to the SEC in order to qualify for the whistleblower antiretaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Ninth Circuit sided with the Second Circuit and ruled that they do not).
Detailed discussion: Read on for a recap of recent cases from the Third, Fifth and Ninth Circuits that we found to be of interest.
The first case comes from the Ninth Circuit, where the court widened the split among the circuits as to whether employees have to specifically disclose information to the SEC in order to qualify for "whistleblower" status under the antiretaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. On March 12, 2017, the Ninth Circuit in Somers v. Digital Realty Trust Inc. followed the Second Circuit and ruled (with one dissent) that they do not. We last discussed the status of the circuit split on this issue in our October 2015 newsletter under "Do You Have to Whistle to the SEC to Get Protection Under Dodd-Frank? The Second Circuit Says No, Splits With Fifth Circuit." See also the discussion of Somers in Manatt's March 31, 2017, article titled "Ninth Circuit Permits Internal Whistleblower to Sue."
As the Ninth Circuit very succinctly put it in the first line of the Somers opinion, "[t]his appeal presents an issue of securities law that has divided the federal district and circuit courts." The court said that the issue resulted from a "last-minute addition" of the word "whistleblower" to the antiretaliation protections of Dodd-Frank to extend protection to those who make disclosures under the Sarbanes-Oxley Act. This last-minute addition, the court said, created the underlying issue of "whether, in using the term 'whistleblower,' Congress intended to limit protections to those who come within [Dodd-Frank's] formal definition, which would include only those who disclose information to the Securities and Exchange Commission ('SEC')."
To briefly summarize the facts, plaintiff Paul Somers was employed from 2010 to 2014 as a vice president at Digital Realty Trust Inc. In his complaint against Digital Realty filed in the Northern District of California, Somers alleged that, soon after he made several reports to senior management regarding possible securities law violations by Digital Realty, he was fired. Somers claimed that he was not able to report his concerns to the SEC before Digital Realty terminated his employment. The district court denied Digital Realty's motion to dismiss, which was based on the fact that Somers did not disclose to the SEC, and certified the issue for interlocutory appeal to the Ninth Circuit.
The court began its analyses by reviewing the nature of the circuit split, specifically between the Fifth Circuit and the Second Circuit, on this issue. The Fifth Circuit ruled in the 2013 case of Asadi v. G.E. Energy (USA) that making disclosure to the SEC was required in order to qualify for the antiretaliation protections of Dodd-Frank because the statutory language was clear on its face: a "whistleblower" under Dodd-Frank is defined as an employee who discloses information to the SEC. The Second Circuit ruled the opposite in the 2015 case of Berman v. Neo@Ogilvy LLC, finding the statutory language to be ambiguous and holding that Chevron deference must be given to the SEC's regulation issued on the matter (17 C.F.R. § 240.21F-2), which provides that the Dodd-Frank whistleblower provisions "extend protections to all those who make disclosures of suspected violations, whether the disclosures are made internally or to the SEC."
"[the anti-retaliation provisions of Dodd-Frank] should be read to provide protections to those who report internally as well as to those who report to the SEC. We also agree with the Second Circuit that, even if the use of the word 'whistleblower' in the anti-retaliation provision creates uncertainty because of the earlier narrow definition of the term, the agency responsible for enforcing the securities laws has resolved any ambiguity and its regulation is entitled to deference. In 2011, the SEC issued Exchange Act Rule 21F-2 … [which] in our view accurately reflects Congress's intent to provide broad whistleblower protections under [Dodd-Frank]. The Rule says that anyone who does any of the things described in subdivisions (i), (ii), and (iii) of the anti-retaliation provision of [Dodd-Frank] is entitled to protection, including those who make internal disclosures under Sarbanes-Oxley. They are all whistleblowers. The Rule is quite direct. … The regulation accurately reflects congressional intent that [Dodd-Frank] protect employees whether they blow the whistle internally, as in many instances, or they report directly to the SEC."
The dissent in Somers would have followed the Fifth Circuit's approach in Asadi and limited Dodd-Frank's antiretaliation provisions to those employees who disclose to the SEC. It seems like it won't be long before the issue will go before the Supreme Court for a decision.
Moving on to the Third Circuit, we found two recent cases to be of interest because both involved applications of tests established in recent Supreme Court cases. In the first, U.S. ex rel. Petratos v. Genentech, Inc. et al., the Third Circuit on May 1, 2017, affirmed a District of New Jersey court's dismissal of a qui tam case filed pursuant to the False Claims Act, but on different grounds than those relied on by the district court. Whereas the district court had relied on a "reasonable and necessary" analysis in dismissing the lawsuit, the Third Circuit found instead that the relator failed to meet the FCA's materiality requirement pursuant to the test established by the Supreme Court in the 2016 case of Universal Health Services v. United States ex rel. Escobar. We discussed the Escobar decision in our June 2016 newsletter alert titled "False Claims Act: Supreme Court Decides Implied Certification Case."
The Petratos case involved a qui tam lawsuit that was filed by Gerasimos Petratos (relator), the former head of healthcare data analytics at Genentech Inc., in connection with Genentech's multibillion-dollar cancer drug Avastin. In his qui tam lawsuit, the relator claimed that Genentech "suppressed data that caused doctors to certify incorrectly that Avastin was 'reasonable and necessary' for certain at-risk Medicare patients." After an analysis of the "reasonable and necessary" test, the district court dismissed the relator's lawsuit for failure to state a claim.
The Third Circuit affirmed, but on the alternate grounds that the relator failed to establish materiality as required by the FCA. As the court said, "[a]lthough we disagree with the District Court's reasoning, we may affirm its judgment on any ground supported by the record. … Our review of the record leads us to conclude that Petratos cannot establish materiality, which the False Claims Act defines as 'having a natural tendency to influence, or be capable of influencing, the payment or receipt of money.'" The court pointed to Escobar as establishing the "demanding" and "rigorous" test for materiality under the FCA, quoting from the Supreme Court's opinion that "[a] misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government's payment decision in order to be actionable under the False Claims Act."
"Materiality may be found where 'the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement.' … On the other hand, it is 'very strong evidence' that a requirement is not material 'if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated.'… Finally, materiality 'cannot be found where noncompliance is minor or insubstantial.'"
Applying the Escobar test, the court found that the relator's "allegations do not meet this high standard." Noting that there were no facts in the underlying record that showed that the Centers for Medicare & Medicaid Services would not have reimbursed the claims had the alleged reporting deficiencies not been cured—and that the relator did not dispute this—"dooms his case. Simply put, a misrepresentation is not 'material to the Government's payment decision,' when the relator concedes that the Government would have paid the claims with full knowledge of the alleged noncompliance." After considering and rejecting the relator's other arguments, the court concluded that the relator's "allegations may be true and his concerns may be well founded—but a False Claims Act suit is not the appropriate way to address them. He concedes that Genentech followed all pertinent statutes and regulations. If those laws and regulations are inadequate to protect patients, it falls to the other branches of government to reform them."
For an analyses of recent cases in the Ninth Circuit that have addressed the issue of materiality under the FCA post-Escobar, see the article titled "Escobar's Impact: Recent Application of 'Materiality' in Ninth Circuit" by our colleagues John M. LeBlanc, Andrew H. Struve and Katrina Dela Cruz in Manatt's March 2017 Healthcare Litigation newsletter.
In the second Third Circuit case that drew our attention, United States v. Repak, the court on March 28, 2017, affirmed a Western District of Pennsylvania jury verdict against Ronald Repak for public corruption, a decision based in part on the two-step test for what constitutes an "official act" that was established by the Supreme Court in the 2016 case of United States v. McDonnell. See our discussion of the McDonnell decision in our June 2016 newsletter under "'Official Acts'—What They Are … and Are Not."
The facts of Repak show that from late 1977 through early 2013, Repak served as the executive director of the Johnstown Redevelopment Authority, an agency that receives federal and state funding to assist in economic development for the city of Johnstown. While a voluntary board of directors is the ultimate decision-maker, the executive director runs the day-to-day operations and, via recommendations to the board, "plays a vital role in the process of selecting who receives JRA contracts and grants." The opinion goes into great detail on the factual record, but for purposes of this discussion, the relevant facts are that Repak and his assistant (with whom he was having an affair) routinely solicited items from contractors who had been awarded contracts, such as "requests for concert tickets, sporting event tickets, and golf outings." JRA contractors testified that they acquiesced to Repak's solicitations because if they didn't, they understood that they would not be awarded future contracts. Of particular importance on appeal were two solicitations from Repak that had nothing to do with JRA projects and were the subject of the grand jury indictment against him, namely "a new roof on [Repak's] house and excavating services for his son's gym." The jury convicted Repak on these two charged offenses, and Repak was sentenced to restitution and 42 months in jail.
"First, the Government must identify a 'question, matter, cause, suit, proceeding or controversy' that 'may at any time be pending' or 'may by law be brought' before a public official.' … The Supreme Court made two key clarifications as to this required showing. First, the Court defined a 'question' or 'matter' as 'similar in nature to a cause, suit, proceeding, or controversy.' … The Court further clarified that the 'question' or 'matter' must 'involve a formal exercise of governmental power that is similar in nature to a lawsuit before a court, a determination before an agency, or a hearing before a committee.' … Second, the Court observed that the 'question' or 'matter' must also be 'something specific and focused' that is 'pending' or 'may by law be brought.' … It described a 'question' or 'matter' that is 'pending' as 'something that is relatively circumscribed—the kind of thing that can be put on an agenda, tracked for progress, and then checked off as complete.' The second part of the showing to prove an 'official act' requires the Government to 'demonstrate that the public official made a decision or took an action "on" that question, matter, cause, suit, proceeding, or controversy, or agreed to do so.'"
The court said that Repak's argument that the first step for proving an "official act" was not met in his case was "off the mark," stating "[t]he awarding of a JRA contract is not only akin to an agency determination—it is an agency determination." The court also found "unpersuasive" Repak's argument that the award of JRA contracts is not a "specific and focused [question or matter] that is 'pending,'" stating that "[i]n the language of McDonnell, the award of JRA contracts is 'specific and focused.' It is a concrete determination made by the JRA's Board of Directors and 'the kind of thing that can be put on an agenda, tracked for progress, and then checked off as complete.'" Finally, the court found the facilitation of the award of the JRA contracts to be a decision or action "on" a question or matter as required by McDonnell. The court thus concluded that "[t]herefore, the facilitation of the award of JRA contracts is an 'official act' as defined by McDonnell."
The final case we want to highlight comes from the Fifth Circuit. On April 13, 2017, in John Doe v. United States, the Fifth Circuit affirmed a ruling by a Southern District of Texas court that had dismissed the plaintiff John Doe's due process claims in connection with a 2008 Foreign Corrupt Practices Act enforcement action in which Doe was not the target and only generically referred to as a "consultant."
The FCPA action at the heart of John Doe involved the former CEO of KBR Inc., who was criminally charged in 2008 and eventually pleaded guilty to conspiracy to violate the FCPA in connection with bribes paid to land liquefied natural gas projects in Nigeria. In each of the criminal information, the subsequent plea agreement and the 2012 sentencing of the KBR CEO, plaintiff Doe was referred to as "LNG Consultant" and described as a person with dual U.S. and foreign citizenship. Doe alleged that enough details were provided about his companies and the projects he worked on where the kickbacks allegedly took place that, by the 2012 sentencing of the KBR CEO, "the Government's description of the Consultant identified him 'in all respects except by name' because 'there are few contractors and customers that comprise' the particular industry in which he worked, and 'no other person in the industry possesses these same personal and biographical characteristics.'" Doe further alleged that "his clients were able to identify him from this description, causing some clients to cease engaging Doe and his companies for consulting and ultimately costing him 'many millions of dollars in consulting fees.'" Doe also alleged that he "was unable to obtain further consulting work[,] … which was a direct result of the prosecutor's public statements during the [Doe] plea hearing and elsewhere that the [Government's] investigation of the  Consultant and others was 'ongoing.'"
Doe filed a lawsuit against the U.S. in 2015 in the Southern District of Texas, claiming that the government "violated his Fifth Amendment due process rights by accusing him of a crime during the course of a criminal proceeding in which he was not named as a defendant," which affirmatively denied him a forum for vindication. As relief, Doe sought a declaration from the government that his Fifth Amendment due process rights had been violated as well as the expungement of all references to him from court and DOJ records.
The district court judge granted the government's motion to dismiss with prejudice. With respect to Doe's claims relating to statements made in 2008, the judge found that Doe's lawsuit was barred by the statute of limitations found in 28 U.S.C. § 2401(a) ("every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues.") Moreover, with respect to Doe's claims relating to statements made at the 2012 sentencing hearing, the judge found that Doe did not "allege a viable due process violation" because the statements were devoid of "potentially identifying information" and were made in furtherance of the government's legitimate interests in the sentencing of the KBR CEO.
"Doe argues that he did not have a complete and present cause of action until he 'was affirmatively denied a forum for vindication,' that is, until either the Government notified him that he would not be indicted for his alleged involvement in the kickback scheme or the Government would be barred by limitations from prosecuting Doe for his alleged criminal activity. … The 2008 records that Doe seeks to expunge have been public for many years, and the harm to Doe commenced in 2008. … The statute of limitations is not deferred until the power to indict is legally beyond the Government's reach or the Government affirmatively states that it will not indict. Doe's claim that the Fifth Amendment was violated … accrued when the Government purportedly accused him of criminal activity without indicting him."
"The references to a 'consultant' during the sentencing hearing contained minimal identifying information. To the extent that Doe contends it was only in conjunction with the 2008 statements that the 2012 reference to a 'consultant' made him identifiable, he seeks to expand the limitations period to include the 2008 statements. That is impermissible. We therefore consider only the 2012 references, standing alone, and conclude that references as nondescript as those to which Doe objects do not violate due process. Doe has not alleged a plausible due process violation."
Why it matters: A tale of two compliance officers: one held personally accountable for admitted egregious compliance failures, for which he agreed to a civil penalty and injunction; the other sentenced to jail for failures that were found to be intentional and as to which he pleaded guilty and agreed to pay criminal penalties and forfeiture. Both cases are cautionary tales and indicative of the high standards to which compliance officers are currently held.
Detailed discussion: Two recent resolutions with compliance officers—one civil, the other criminal and civil—reflect the high standards to which such officers are held. We recap them here.
"(1) failing to terminate specific MoneyGram outlets after being presented with information that strongly indicated the outlets were complicit in consumer fraud schemes, (2) failing to implement a policy for terminating outlets that presented a high risk of fraud, and (3) structuring MoneyGram's AML [anti-money laundering] program such that information that MoneyGram's Fraud Department had aggregated about outlets, including the number of reports of consumer fraud that particular outlets had accumulated over specific time periods, was not generally provided to the MoneyGram analysts who were responsible for filing SARs [suspicious activity reports]."
In the settlement, Haider agreed to a $250,000 civil penalty and to a three-year injunction "barring him from performing a compliance function for any money transmitter." The settlement was approved by District of Minnesota Judge David S. Doty, who, as we reported in our February 2016 newsletter under "Eye on the Courts—Recent Opinions and Rulings of Note," ruled in early proceedings in the case of U.S. Department of Treasury v. Haider that, contrary to Haider's argument, individuals can be held personally responsible for AML control failures under the Bank Secrecy Act, stating that "the plain language of the [Bank Secrecy Act] statute provides that a civil penalty may be imposed on corporate officers and employees like Haider."
The quotes from the DOJ and FinCEN in the press release reflect the high standards to which compliance officers are held by those agencies. Acting U.S. Attorney Kim said that "[c]ompliance officers perform an essential function, serving as the first line of defense in the fight against fraud and money laundering. Unfortunately, as today's settlement shows, Thomas Haider violated his obligations as MoneyGram's chief compliance officer. By failing to terminate MoneyGram outlets that presented a high risk for fraud and to take other actions clearly required of him, Haider allowed criminals to use MoneyGram to defraud innocent consumers. We are committed to working with FinCEN to enforce the requirements of the Bank Secrecy Act and to hold individuals like Haider accountable."
Added Acting Director of FinCEN Jamal El-Hindi, "FinCEN relies on compliance professionals from every corner of the financial industry. FinCEN and our law enforcement partners need their judgment and their skills to effectively fight money laundering, fraud, and terrorist financing. Compliance professionals occupy unique positions of trust in our financial system. When that trust is broken, it is important that we take action so that the reputations of thousands of talented compliance officers are not diminished by any one individual's outlying egregious actions. Holding [Haider] personally accountable strengthens the compliance profession by demonstrating that behavior like this is not tolerated within the ranks of compliance professionals."
Trident Partners/William Quigley: On March 24, 2017, the SEC announced a settlement with William Quigley, the former chief compliance officer of Long Island, New York-based Trident Partners Ltd. By way of background, Quigley had been indicted by the DOJ in May 2015 for conspiracy to commit wire fraud and money laundering conspiracy in connection with a fraudulent investment scheme in which Quigley and his co-conspirator brothers would, among other things, tell overseas investors that their funds would be invested in blue chip companies/funds such as Dell and Berkshire Hathaway, when in reality the money was transferred to accounts in the Philippines for personal use. Quigley pleaded guilty to the charges in March 2016 and was sentenced in November 2016 to six months in jail (plus three years of supervised release and one year of home confinement) and forfeiture of almost $357,000.
In its administrative order, the SEC said that Quigley served as chief compliance officer and AML officer of Trident for two periods of time between 2004 and 2014. While serving in this capacity, Quigley reportedly, among other things, "opened three brokerage accounts that he and his brothers used to misappropriate investor funds, including one account at Trident; kept Trident from learning about the account that was located there; funneled money from the accounts to his brothers; and even, on at least one occasion, gave his brother Michael Quigley an idea for a phony sales pitch to investors." Moreover, the SEC said that when Quigley "became aware of investor concerns, he falsely claimed to have no knowledge of the relevant accounts or the subject of the investor's complaints."
"[a]s Director of Compliance, it was William Quigley's obligation to report violations and suspected violations of the securities laws, rules and regulations. This included reporting a transaction if he knew or suspected that it involved funds derived from illegal activity, or was intended or conducted to hide or disguise funds derived from illegal activity or has no business or apparent lawful purpose. Despite this obligation and his knowledge of the relevant facts, William Quigley failed to report or file required reports regarding, inter alia, wire transfers of the stolen investor funds, his improper diversion and deposits of the commission checks, his inappropriate designation of an account as a house account, or the diversion of investors' stolen funds through various accounts. … It was also William Quigley's obligation to help ensure that all the books and records of Trident were accurate and not to engage in conduct that would render them inaccurate. Despite this obligation and his responsibilities as Director of Compliance, William Quigley failed to, among other things, preserve receipts and disbursements of cash and all other debits and credits in connection with his theft of firm checks, to keep proper records regarding the beneficial owners of accounts, and to preserve originals of all communications received and sent relating to the business of Trident."
The SEC ordered Quigley to pay disgorgement of approximately $357,000 (which payment was deemed satisfied by Quigley's forfeiture payment in the parallel criminal case). Because Quigley had been sentenced to serve jail time in the parallel criminal case, the SEC waived any civil penalty but barred Quigley from all aspects of the securities business going forward.
Why it matters: What connects (1) an almost billion-dollar multi-federal agency resolution involving Iran sanctions violations where the district court judge in the case took the unprecedented action of rewriting the plea agreement to appoint his own independent monitor; (2) a major law firm insider trading conviction where the tip was allegedly passed by a slightly intoxicated partner over dinner; (3) a multibillion-dollar accounting fraud in the Mexican housing industry that was uncovered by the novel use of high-resolution satellite imagery; and (4) gatekeeper failures in connection with a multimillion-dollar fraudulent municipal bond offering? All figured significantly in recent enforcement and court matters that caught our eye.
Sanctions violations: On March 22, 2016, the DOJ announced that China-based telecommunications company ZTE Corp. pleaded guilty to conspiring to violate the International Emergency Economic Powers Act by "illegally shipping U.S.-origin items to Iran, obstructing justice and making a material false statement." The DOJ said that the plea agreement with ZTE ended a five-year joint investigation into ZTE's export practices that was being conducted by the DOJ's National Security Division, the U.S. Attorney's Office for the Northern District of Texas, the FBI, the U.S. Department of Commerce's Bureau of Industry and Security (BIS), the Department of Homeland Security, and U.S. Immigration and Customs Enforcement's Homeland Security Investigations.
To briefly summarize the facts (detailed in the press release), between 2010 and 2016, ZTE conducted business with Iran and either directly or indirectly (through improper third-party arrangements) shipped approximately $32 million of U.S.-origin items to Iran without obtaining the proper export licenses from the U.S. government. The facts show that when Reuters published an article regarding ZTE's sale of equipment to Iran in March 2012, ZTE temporarily ceased its dealings with Iran; however, ZTE resumed doing business with Iran by late 2013 and had recommenced illegal shipping to Iran by mid-2014.
According to the plea documents, ZTE took several affirmative steps to conceal relevant information from and mislead the U.S. government despite its knowledge of an ongoing jury investigation into its Iran exports. These affirmative steps included (1) requiring employees who were involved in the Iran sales to sign nondisclosure agreements in which the employees agreed to keep confidential all information related to ZTE's U.S. exports to Iran; (2) knowingly communicating false statements directly (or indirectly via outside counsel that had unknowingly been lied to) to the DOJ and federal enforcement agents as to whether ZTE was continuing to do business with and shipping items to Iran; and (3) knowingly hiding data related to ZTE's resumed illegal sales to Iran from a forensic accounting firm hired by defense counsel to conduct an internal investigation into ZTE's Iran sales.
As part of the plea agreement, ZTE agreed to pay a criminal fine of $286,992,532 and a criminal forfeiture of $143,496,266, and submit to a three-year period of corporate probation, "during which time an independent corporate compliance monitor will review and report on ZTE's export compliance program." Interestingly, according to a March 31, 2017, Inside Counsel article written by Sue Reisinger, the Northern District of Texas judge overseeing the case, Judge Ed Kinkeade, took the "unprecedented step" of ignoring the usual protocol involved in appointing independent monitors and rewrote the plea agreement to appoint his own independent monitor, a Dallas-based civil and personal injury lawyer with special master experience but no experience in cases such as this. In addition, Reisinger reported that Judge Kinkeade rewrote the plea agreement in several places—such as in the dispute resolution and ongoing reporting requirements provisions—to substitute his court's authority for the DOJ's.
The DOJ said that, simultaneously with its agreement to plead guilty on March 7, 2017, ZTE reached settlement agreements with the BIS and the Treasury Department's Office of Foreign Assets Control, with total payments to the U.S. government aggregating almost $900 million. The DOJ also said that BIS had "suspended" an additional amount of $300 million, "which ZTE will pay if it violates its settlement agreement with the BIS."
Big law insider trading: On March 15, 2017, Reuters reported that a partner in a major U.S. law firm was convicted of insider trading by a federal jury in Brooklyn, NY. The jury found that the partner tipped an investment adviser friend, who then tipped a stockbroker friend, about Pfizer Inc.'s $3.6 billion plan to buy King Pharmaceuticals Inc. in 2010, which resulted in approximately $400,000 in illegal profits.
According to Reuters, the SEC filed a civil complaint against the investment adviser and stockbroker tippees—but not the law partner tipper—in 2013 (subsequently put on hold pending resolution of the criminal case for conspiracy brought against the stockbroker), in which the SEC alleged that the law firm partner "became intoxicated on several glasses of wine while dining at home with his wife and [investment advisor friend] in August 2010 and blurted out, 'It would be nice to be King for a day.'" Reuters continued that the investment advisor "took the hint" and purchased tens of thousands of King shares on the next trading day, including hundreds for himself and his stockbroker friend. Testimony to this effect before the jury was presumably a significant factor leading to the partner's conviction.
Accounting fraud: On March 3, 2017, the SEC announced that the Mexico-based homebuilding company Desarrolladora Homex S.A.B. de C.V. agreed to settle charges that it reported fake sales of more than 100,000 homes to boost revenues in its financial statements during a three-year period from 2009–11. Specifically, the SEC alleged that Homex "inflated the number of homes sold during the three-year period by approximately 317 percent and overstated its revenue by 355 percent (approximately $3.3 billion)."
Notably, the SEC used high-resolution satellite imagery to prove that Homex had not even broken ground on many of the homes for which it reported revenues during the three-year period. For example, the SEC alleged in its complaint that Homex "reported revenues from a project site in the Mexican state of Guanajuato where every planned home was purportedly built and sold by Dec. 31, 2011" but, to the contrary, "satellite images of the project site on March 12, 2012, show[ed] that it was still largely undeveloped and the vast majority of supposedly sold homes remained unbuilt." Said Melissa Hodgman, associate director of the SEC's Enforcement Division, "We used high-resolution satellite imagery and other innovative investigative techniques to unearth that tens of thousands of purportedly built-and-sold homes were, in fact, nothing but bare soil."
Homex declared bankruptcy in 2014 and is under new management, and the SEC said that "Homex has since undertaken significant remedial efforts and cooperated with the SEC's investigation." Stephanie Avakian, acting director of the SEC's Enforcement Division, said that "[t]he settlement takes into account that the fraud occurred entirely under the watch of prior ownership and management, the company's new leaders provided critical information regarding the full scope of the fraudulent conduct, and the company continues to significantly cooperate with our ongoing investigation."
The SEC said that, without admitting or denying the allegations in the SEC's complaint filed in the Southern District of California, "Homex consented to the entry of a final judgment permanently enjoining the company from violating the antifraud, reporting, and books and records provisions of the federal securities laws, and the company agreed to be prohibited from offering securities in the U.S. markets for at least five years."
Gatekeeper failures: On April 5, 2017, the SEC announced that Arizona-based brokerage firm Lawson Financial Corp.; its CEO, Robert Lawson; and its former underwriter's counsel, John T. Lynch Jr., agreed to settle charges for due diligence gatekeeping failures "related to municipal bond offerings they were underwriting that turned out to be fraudulent." Director of the SEC's New York Regional Office Andrew M. Calamari said in the press release that "[u]nderwriters are critical gatekeepers relied upon by investors to ensure that accurate information is being provided in municipal bond offering documents."
According to the SEC's findings (which were neither admitted nor denied by the defendants), LFC specifically "failed in its role as a gatekeeper to conduct reasonable due diligence when underwriting bond offerings to purchase and renovate nursing homes and senior living facilities." In this regard, the SEC found that LFC failed to ensure that the offering manager, Christopher F. Brogdon (who was himself charged in the same matter by the SEC in 2015 and has been ordered by a court to repay $85 million to investors), and his related borrowers were in compliance with their continuing disclosure undertakings as required by the securities rules and regulations relating to the purchase and sale of municipal securities. LFC's founder and CEO Lawson and then-underwriter's counsel Lynch were also charged with failing to conduct reasonable due diligence (Lynch was further charged with failing to disclose that he was not authorized to practice law, contrary to what was represented to investors in the bond offering documents).
In the settlement, LFC and Lawson agreed to pay a combined amount in disgorgement of nearly $200,000, as well as penalties of nearly $200,000 for LFC and $80,000 for Lawson, who was barred from the securities industry for three years. The SEC said that LFC ended up paying a penalty that was approximately double what it would have paid had it been eligible for more lenient remedies under the SEC's Municipalities Continuing Disclosure Cooperation Initiative. Lynch agreed to pay $45,000 and was permanently barred from practicing before the SEC or representing or advising clients in SEC matters.
On April 27, 2017, news outlets reported that a Southern District of New York judge had issued an injunction in the SEC's "Hamilton" Ponzi scheme case. Update to "Ponzi Schemers Promise Illusory 'Hamilton' Tickets" in our March 2017 newsletter.
On May 2, 2017, the SEC announced that it had awarded a company insider a whistleblower award of more than $500,000 for "reporting information that prompted an SEC investigation into well-hidden misconduct that resulted in an SEC enforcement action."
On April 25, 2017, the SEC announced that it had awarded a whistleblower award of more than $4 million to "a whistleblower whose original information alerted the agency to a fraud."
On April 18, 2017, news outlets reported that the SEC's insider trading case against Charles Hill was dismissed for lack of evidence by the administrative law judge overseeing the matter. Hill had unsuccessfully challenged the constitutionality of the SEC's "in house" administrative hearings in the Eleventh Circuit. Update to our "Wherefore Art Thou Due Process" series covering the various constitutional challenges to the SEC's administrative hearings, most recently in our October 2015 newsletter under "'Wherefore Art Thou, Due Process?' Part III."
On April 21, 2017, the DOJ announced that Volkswagen AG had been sentenced in connection with the conspiracy to cheat on U.S. emissions tests.
On March 17, 2017, news outlets reported that German authorities had raided the Munich offices of Jones Day, counsel to Volkswagen AG.
On Feb. 27, 2017, the DOJ announced that Takata Corp. had pleaded guilty and was sentenced to pay $1 billion in criminal penalties for its airbag scheme.
On March 22, 2017, the DOJ announced that the owner of the New England Compounding Center was convicted of a racketeering scheme that led to a nationwide fungal meningitis outbreak. Update to "Criminal RICO Indictment for Pharma Execs in Alleged Second-Degree Murder for Improper Drug Production Leading to Fungal Meningitis Deaths" in our March 2015 newsletter.
On March 15, 2017, the SEC announced that it had obtained a judgment against former investment adviser Michael J. Breton, who had been charged in a cherry-picking scheme. Breton also pleaded guilty in the parallel criminal action and is awaiting sentencing. Update to our coverage of this case under "SEC—Data Analytics Key to Unlocking Fraud Schemes" in our March 2017 newsletter.
On March 10, 2017, the Federal Reserve Board announced that it was seeking to fine and prohibit two former managing directors at J.P. Morgan Securities (Asia Pacific) from employment in the banking industry in connection with "Princelings" government resolutions. Update to "'Sons and Daughters' Are the New 'Princelings'" in our December 2016 newsletter.
On March 3, 2017, news outlets reported that the whistleblower in the Jan. 13, 2017, Moody's ratings settlement with the DOJ was denied a whistleblower award. Update to our coverage of the Moody's settlement under "End of Administration Financial Enforcement Round-Up" in our February 2017 newsletter.
On Feb. 6, 2017, the DOJ issued a press release titled "An Important Court Opinion Holds Lawful Warrants Can be Used to Obtain Evidence from U.S. Internet Service Providers When Those Providers Store Evidence Outside the U.S." in connection with the Feb. 3, 2017, opinion by a magistrate judge in the Eastern District of Pennsylvania in In re Search Warrant to Google, which we covered in our March 2017 newsletter under "Eye on the Courts—Recent Decisions of Note."
On April 18, 2017, Acting Principal Deputy Assistant Attorney General Trevor N. McFadden spoke at the Anti-Corruption, Export Controls & Sanctions 10th Compliance Summit in Washington, D.C.
On March 29, 2017, Acting Assistant Attorney General for National Security Mary B. McCord spoke at the Second Annual Billington International Cybersecurity Summit Dinner in Washington, D.C.

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