Does it Still Make Sense to Self-Disclose Corporate Wrongdoing to the DOJ and SEC?

1. GOOD. SMART. BUSINESS. PROFIT.
TM

2. An Evolving Calculus: Does it Still
Make Sense to Self-Disclose
Corporate Wrongdoing to the DOJ
and SEC?
December 17, 2014

3. Chelsie Chmela
Events Manager
chelsie.chmela@ethisphere.com
847.293.8806
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4. 4
SPEAKING TODAY
Joan E. Meyer
Compliance & Investigations Group Chair, Partner, Baker & McKenzie
Washington, DC
Douglas M. Tween
Partner, Baker & McKenzie
New York
Trevor N. McFadden
Associate, Baker & McKenzie
Washington, DC

5. © 2014 Baker & McKenzie LLP
An Evolving Calculus: Does it Still
Make Sense to Self-Disclose
Corporate Wrongdoing to the DOJ and
SEC?
Ethisphere Webinar
December 17, 2014
Joan E. Meyer, Washington, DC
Douglas M. Tween, New York
Trevor N. McFadden, Washington, DC

6. © 2014 Baker & McKenzie LLP 6
Topics Covered
1. Background considerations: when disclosure of a
criminal violation is mandatory
2. What has changed?
 Part I: Evolving reasons to self-disclose
 Part II: Evolving reasons to avoid disclosure
3. Analytical framework for evaluating disclosure options

7. Background Considerations
7

8. © 2014 Baker & McKenzie LLP 8
Important Decision?
‒ Often the most challenging decision a company and its
lawyers will make
‒ Decision should be company’s, but made in
consultation with experienced criminal lawyers
‒ Disclosing when you should not - the company is
exposed to criminal liability and regulatory scrutiny for
no reason
‒ Not disclosing when you should - the company is
potentially exposed to more severe penalties

9. © 2014 Baker & McKenzie LLP 9
Mandatory Obligation to Report
1. The general rule in the US is there is no legal
obligation to self-disclose criminal conduct
2. May be legally required under certain circumstances –
always coordinate with securities disclosure counsel
 Sarbanes-Oxley Act may require disclosure of violations
that preclude management from certifying the
effectiveness of internal controls or involve fraud
 SEC public disclosure rules may require disclosure of
material violations
 Reporting requirements as a result of prior settlements
3. Non-US laws frequently require affirmative disclosure

10. © 2014 Baker & McKenzie LLP 10
Comparison of Criminal Antitrust and Other
US Criminal Enforcement
‒ Special leniency rules in the antitrust context
 US and over 50 jurisdictions now have corporate and
individual leniency programs, which provide amnesty to
the “first in the door” to cooperate
 Creates race to the government
‒ Contrast with the FCPA context
 Enforcers say they provide lenient treatment for self-
disclosure, but there is no certainty
• Always treated case-by-case

11. Evolving Reasons to Self-
Disclose
What has changed? Part I

12. © 2014 Baker & McKenzie LLP 12
Key Enforcement Trend: Increased
Likelihood of Disclosure by Whistleblowers
‒ Section 922 of the Dodd-Frank Act increases incentives for
whistleblowers who report violations to the SEC
 Bounty may be between 10% and 30% of the monetary
sanctions
‒ Enhanced anti-retaliation provisions also increase the
likelihood of retaliation litigation filed by whistleblowers
‒ These incentives significantly increase the risk that public
companies will be the target of US enforcement
investigations
‒ Reports may be made anonymously through an attorney
‒ In FY14 alone, the SEC received 3,620 whistleblower tips –
20% increase in two years

13. © 2014 Baker & McKenzie LLP 13
Record Award of $30 Million to Whistleblower
On September 22, 2014, the SEC announced an expected
award of more than USD $30 million to a whistleblower
Notable for several reasons:
 Largest award to date – previous
record was $14 million
 Fourth award to a whistleblower
outside the US
 Noted delay of whistleblower in
providing information (some of
which predated Dodd-Frank)
 Maintained anonymity of the
whistleblower

14. © 2014 Baker & McKenzie LLP 14
Whistleblower Concepts – Original Information and
Independent Knowledge and Analysis
“Original information” must be derived from the whistleblower’s
independent knowledge or independent analysis
 Information that is not already known to SEC from another
source (unless the whistleblower is the original source)
 Information that is not exclusively derived from an allegation in
a judicial or administrative proceeding
 Will suffice if the new information materially widens an already
existing investigation
“Independent knowledge” is factual information that is not obtained
from publicly available sources
“Independent analysis,” however, can be based upon the
whistleblower’s evaluation of publicly available sources
 Whistleblower must bring some independent thought to the issue

15. © 2014 Baker & McKenzie LLP
The following people are not eligible to receive bounties:
 Persons whose principal duties involve legal, compliance,
investigative or audit responsibilities (with exceptions
discussed on next slide)
 Persons who obtained information through attorney-client
privilege or as part of legal representation
 Persons who obtained the information by a means or in a
manner that violates federal or state criminal law
 Persons who obtained the information
from any of the above persons
15
Who Is Not Eligible to Receive a Bounty?

16. © 2014 Baker & McKenzie LLP 16
Legal, Compliance, Audit Personnel as Whistleblowers
In the following limited circumstances, legal, compliance, audit,
and other personnel may be considered whistleblowers eligible
for bounties:
 If the whistleblower believes disclosure may prevent substantial injury
to the financial interest or property of the company or its investors
 If the whistleblower has a reasonable basis to believe that the
company is engaging in conduct that will impede an investigation of
the misconduct
 If 120 days have elapsed after the whistleblower provided the
information to the appropriate company representative (e.g., audit
committee,
chief legal or compliance officer, supervisor)

17. © 2014 Baker & McKenzie LLP 17
Key Enforcement Trend – Third Parties and How
This Affects the Disclosure Calculus
Actions of third parties are likely to be attributable to companies
engaging such third parties; disclosure of actions by third
parties on behalf of companies is expected; due diligence and
training of third parties are essential
 The majority of FCPA cases brought in 2013 and 2014
involve allegations of a third party’s involvement in the
alleged improper conduct

18. Evolving Reasons Not to
Disclose
What has changed? Part II

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Key Enforcement Trend - Global Enforcement and
How It Affects the Disclosure Calculus
Increased global enforcement and cooperation
 Sharing information
 Joint and follow-on prosecutions and investigations
 More countries are active: UK, Canada, Australia, Russia, China,
Brazil
• Competition investigations frequently lead to precisely coordinated dawn
raids in US, EU, Canada, Japan, China, and elsewhere
If disclosure in US, more likely to face prosecution by other agencies
and in other countries
 November 2014 DOJ Assistant Attorney General Leslie Caldwell: “If
the company makes a decision not to disclose out of fear of what
might happen to it in jurisdictions like China, and we find out about it
in the many ways that we can – whistleblowers, foreign regulars or
others – the fact that did not disclose to us because you were afraid
of what might happen in China is not going to help you.”

20. © 2014 Baker & McKenzie LLP 20
Key Enforcement Trend – Focus on Individuals
and How It Affects the Disclosure Calculus
‒ Both the SEC and DOJ have promised more individual
prosecutions
 Marshall Miller, US Principal DAAG for the Criminal Division,
DOJ (September 2014): “The prosecution of individuals –
including corporate executives – for white collar crimes is at
the very top of the Criminal Division’s priority list under
Assistant Attorney General Caldwell.”
‒ Cooperation includes providing evidence against individuals
‒ Proactive government enforcement, e.g. active pursuit by SEC,
FBI and DOJ agents of witness interviews including overseas
‒ Potential ramifications of disclosure in terms of individual
exposure to criminal liability must be considered for any company
contemplating voluntary disclosure

21. © 2014 Baker & McKenzie LLP 21
Key Enforcement Trend – Compliance Programs
And How It Affects the Disclosure Calculus
‒ The SEC and DOJ remain keenly interested in the state of a
Company’s compliance program as well as remediation made in
the wake of investigation findings
 Morgan Stanley declination: credit for preexisting compliance program
 Ralph Lauren SEC and DOJ non-prosecution agreements (first NPA for SEC)
‒ Companies receive credit for their compliance program
enhancements. Cooperation and remediation go hand-in-hand
with voluntary disclosure; companies may receive significant credit
even if they do not self-disclose but cooperate and remediate, and
demonstrate that their compliance program and internal controls
are adequate
 But compare DOJ Antitrust Division, which gives no credit for
preexisting compliance efforts
• Violation of law means compliance program was by definition ineffective

22. © 2014 Baker & McKenzie LLP 22
Key Enforcement Trend – Increased Risk in M&A
Context and How It Affects the Disclosure
Calculus
‒ The SEC and DOJ exhibited low tolerance for FCPA risk in
mergers and acquisition context
 Emphasis on pre-acquisition due diligence
 If pre-acquisition due diligence precluded in certain circumstances,
prompt post-acquisition risk assessment and integration of acquired
company and training of new employees
‒ DOJ opinion released in November 2014: a US company
acquiring a foreign target whose controls and records are so
deficient that it is not possible to determine whether tainted assets
are being acquired; but DOJ indicated it did not intend to take any
enforcement action
‒ The mere acquisition of a foreign company will not create FCPA
liability for the acquiring issuer, if the target was not previously
subject to FCPA

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Is Self-Disclosure Worth It? Are
Companies Appropriately Awarded?
Controversial 2012 NYU Law School study found no
empirical evidence that voluntary disclosures affect FCPA
penalty amount
 Professors’ review of enforcement actions from 2004-
2011 found that “current enforcement practices are not
creating clear incentives”
 This study contradicts frequent claims by DOJ and SEC
officials that self-disclosures are treated more leniently
in charging and penalty decisions

24. Analytical Framework for
Evaluating Disclosure
Options

25. © 2014 Baker & McKenzie LLP 25
Both an Art and a Science
‒ Given imperfect information, impossible to predict
‒ But it is possible to conduct a systematic analysis and
doing so will protect you down the road
‒ Considerations:
 Likelihood of discovery
 Likelihood of prosecution
• DOJ principles
• Analysis of comparable cases
• Prosecutorial appeal
 Other

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I. Likelihood of Discovery
‒ Whistleblowers?
‒ Disgruntled current or former employees?
‒ Press reports?
 If so, what media and what language?
‒ Competitors?
‒ Political issues?
‒ Other investigations/reporting obligations of company?

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II. Likelihood of Prosecution: DOJ Criteria
(Principles of Federal Prosecution of Business
Organizations)
1. Nature and seriousness of the offense/risk of harm
2. Pervasiveness of wrongdoing within the corporation
3. History of similar misconduct
4. Timely and voluntary disclosure
5. Existence and effectiveness of compliance program
6. Remedial actions
7. Collateral consequences to shareholders
8. Adequacy of prosecution of individuals
9. Adequacy of civil remedies

28. © 2014 Baker & McKenzie LLP 28
Likelihood of Prosecution:
Analysis of Comparable Cases
Systematic comparison to other prosecuted cases in
industry by same agency
 Nature of violations
 Extent of violations
 Amount of loss
 Nature of evidence
Beware other cases do not necessarily define the current
minimum requirements for prosecution

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Likelihood of Prosecution:
Prosecutorial Appeal
‒ If source is a whistleblower, how likely is he/she to be
taken seriously?
‒ Market intelligence:
 Is the company an “attractive target”?
 Are competitors being prosecuted?
 Are competitors cooperating?
 What are prosecutorial resources/priorities?
 Are there prosecutorial personnel and resource issues?

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III. Other Considerations
1. Advocacy considerations/how good a “story” does the
company have to tell?
2. Likely penalties
3. Collateral Consequences
 Debarment
 Prosecution in other jurisdictions
 Civil litigation
 PR/reputational damage

31. © 2014 Baker & McKenzie LLP 31
If Disclosing
‒ Disclose timely
‒ Begin investigation promptly
‒ Start remediation early
‒ Be ready to cooperate fully
‒ Be prepared to report on your compliance program
‒ Be ready to handle parallel investigations by foreign
authorities and shareholder litigation
‒ Be prepared that company employees may be targeted

32. © 2014 Baker & McKenzie LLP 32
If Not Disclosing
‒ Stop misconduct immediately
‒ Investigate thoroughly
 Involve competent independent professionals
 Reconsider the issue of disclosure as the investigation
progresses
‒ Retain investigation files
‒ Conduct remediation and upgrade your compliance
program (address controls failures, discipline)
‒ Conduct periodic risk assessments to ensure no repeat
misconduct

33. © 2014 Baker & McKenzie LLP 33
Follow ongoing developments in global
enforcement trends at:
‒ http://globalcompliancenews.com/
‒ Baker & McKenzie FCPA Newsletter
http://www.bakermckenzie.com/insidethefcpa/

34. © 2014 Baker & McKenzie LLP 34
Thank you!
Any questions?

35. © 2014 Baker & McKenzie LLP 35
Contact information
Joan E. Meyer, Compliance & Investigations Group Chair,
Partner, Baker & McKenzie, Washington, DC
• Email: joan.meyer@bakermckenzie.com
• Phone: + 1 202 835 6119
Douglas M. Tween, Partner, Baker & McKenzie, New York
• Email: douglas.tween@bakermckenzie.com
• Phone: + 1 212 626 4355
Trevor N. McFadden, Associate, Baker & Mckenzie,
Washington DC
• Email: trevor.mcfadden@bakermckenzie.com
• Phone: + 1 202 835 1869

36. © 2014 Baker & McKenzie LLP
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