FTC Secures Seven Figure Judgment Against Single Co-Defendant in Scareware Case more+ Embed To embed, copy and paste the code into your website or blog:
After the FTC secured a $163MM judgment against Kristy Ross in the US District Court of Maryland, the 4th Circuit affirmed, and so ends the FTC?s six-year ?scareware? enforcement action. From beginning to end, this odyssey has been quite colorful, to say the least. The nine-figure judgment against Ross is no exception. Originally, there were eight codefendants: Innovative Marketing, Inc., ByteHosting Internet Services, LLC, and five of the companies? officers and directors, including Ms. Ross. The case was based on FTC allegations that their massive ?scareware? scheme was deceptive in violation of Section 5 of the FTC Act. Specifically, the FTC alleged that the defendants falsely warned consumers that (imaginary) scans of their computers detected security or privacy issues (e.g., viruses, spyware, system errors, and pornography). After receiving the fraudulent security alerts, the consumers were prompted to purchase the Defendants? software to remedy the (imaginary) problems. More than one million consumers purchased the scareware ? of them, roughly three thousand filed complaints with the FTC. Ross was the only co-defendant remaining at trial, and the judgment was entered against her individually and as a member of Innovative Marketing, Inc. (IMI). Four of the eight original defendants settled with the FTC in February 2010. The same month, the trial court entered default judgments against the remaining three ? IMI, Mr. Jain, and Mr. Sundin ? for their failure to appear and participate in the litigation. Ross retained counsel but failed to file an answer, respond to the FTC?s discovery requests, or appear at trial. As such, the lone defendant Ross was tried in absentia. Though not explicitly expressed in the trial judge?s opinion, one can only imagine that the optics did not bode well for Ms. Ross at trial. Before trial, the FTC moved for summary judgment. In her opposition, Ross argued that she was just an employee at IMI (not a ?control person?) without requisite knowledge of the misconduct and that she could not therefore be held individually liable under the FTC Act. The court found there to be no issues of material fact with regard to whether the scareware scheme was deceptive in violation of the FTC Act. And a bench trial was ordered to determine the extent of Ross? control over, participation in, and knowledge of IMI?s deceptive practices. At trial, Judge Bennett found that Ross had actual knowledge of the marketing scheme, was fully aware of many of the complaints from customers, and was in charge of remedying the problems. The court issued a permanent injunction (as authorized by the FTC Act) and held her individually liable for the total amount of consumer injury (calculated by the FTC $163,167,539.95), finding that to be the proper measure for consumer redress. On appeal, Ross asked the court to apply the SEC standard for individual liability, which essentially requires a showing of specific intent/subjective knowledge. The Fourth Circuit declined, finding that such a standard would leave the FTC ?with a futile gesture of obtaining an order directed to the lifeless entity of a corporation, while exempting from its operation the living individuals who were responsible for the illegal practices in the first place.? The appeals court also rejected Ross? arguments that district courts do not have authority to award consumer redress, noting that ?[a] ruling in favor of Ross would forsake almost thirty years of federal appellate decisions and create a circuit split,? an outcome that it refused to countenance. The factual and procedural history of this case are pretty outlandish, and it is not clear why Ross opted to take the FTC to the mat (in absentia) on case with so much weighing against her. Had she settled with the others back in 2010, maybe she would have only been on the hook for the gross revenues she received from the alleged scam. Then, almost certainly the FTC would have followed its common practice of suspending all but the amount she was able to pay. But, alas, she did not.
FCPA Enforcement And Difficult Choices For Corporate Directors more+ Embed To embed, copy and paste the code into your website or blog:
Aggressive FCPA enforcement in recent years has presented corporate officials with difficult choices regarding compliance and cooperation. Crafting, implementing and maintaining an effective FCPA compliance system can be time consuming and costly, particularly since its ultimate effect if a difficulty or possible violation occurs cannot be ascertained with certainty. Cooperation and self-reporting are equally difficult issues. Both can result in extensive and costly investigations which continue for years. Yet the precise benefits are all but impossible to quantify at the time the decision is made. Enforcement officials, in contrast, point to the clear benefits from both choices. Crafting an effective compliance system does not mean that every new gadget in the FCPA market place must be purchased. The key is to implement a http://michaelhawkinsdui.com system based on the principles detailed in the DOJ-SEC FCPA Guide. While the system is not a defense, the Morgan Stanley case is a good illustration that such a system can lead to a declination or at least minimize liability. Cooperation and self-reporting also has clear benefits enforcement officials insist. They have identified instances in which a firm resolved serious FCPA charges with a deferred prosecution agreement and a fine. And, there are many examples of cases where the fine imposed is below the bottom end of the range calculated under the sentencing guidelines based on cooperation. Despite all this, there is no doubt that the decisions faced by corporate officials are difficult. Careful consideration of the resolution of the FCPA case for Marubeni Corporation may help clarify the options for corporate officials. U.S. v. Marubeni Corporation, Criminal No. 314 cr 00052 (D. Conn. Filed March 19, 2014). There the The Japanese trading company did not implement an effective FCPA compliance system. The company also chose not to self-report or cooperate with an FCPA investigation despite a prior deferred prosecution agreement from an FCPA case. The result: The parent company pleaded guilty to one count of conspiracy and seven counts of FCPA charges. It will also pay a criminal fine of $88 million, well within the range calculated under the sentencing guidelines. And, DOJ will impose a compliance system on the firm, all as part of the plea agreement. To be sure, the underlying conduct was significant. The case is based on a years long scheme which traces to at least 2002 when Marubeni, in conjunction with Alstrom, paid bribes to officials of the Indonesian government, included a high ranking member of Parliament and an official at the state owned utility. The bribes were paid to secure a $118 million contract for what was known as the Tarahan project which provides power related services for the citizens of Indonesia. To conceal the hundreds of thousands of dollars in bribes, two consultants were retained whose primary purpose was to pay the bribes. Portions of the bribe money were paid through the Maryland bank account of one consultant. The contract was secured. While the firm is a recidivist, having been involved in the TSKJ Nigeria joint venture FCPA cases, a key factor in the disposition of the case, according to enforcement officials, was the specific choices made by the company. Marubeni did not create and implement an effective compliance system; it chose not to self ?report; and it chose not to cooperate. Remarks of Acting Assistant AG Mythill Raman before the Global Anti-corruption Compliance Congress, Washington, D.C. (March 20, 2014). The result of the firm?s choices is thus eight felony guilty pleas; a significant criminal fine; and an obligation to build an implement a compliance system based on the following principles dictated by the DOJ: 1) High level commitment: The company will ?ensure that its directors and senior management provide strong, explicit, and visible support and commitment to its corporate . . .? FCPA policy. 2) Policies and procedures: The firm will develop and promulgate a ?visible corporate policy against violations of the FCPA . . .? 3) Development: The policies and procedures will be based on ?a periodic risk assessment addressing the individual circumstances of the Company, in particular the foreign bribery risks facing the Company . . .? 4) Inclusion: The policies and procedures will apply equally to all ?directors officers, and employees and, where necessary and appropriate, outside parties acting on behalf of the Company in a foreign jurisdiction . . .? 5) Comprehensive: The policy will be comprehensive, applying to gifts, hospitality, customer travel, political contributions, charitable donations and sponsorships, facilitation payments and solicitation and extortion.? 6) Internal controls: The procedures will ensure that there is an effective system of financial and accounting procedures that include a system of internal controls that is reasonably designed to ensure the maintenance of fair and accurate books, records, and accounts. 7) Oversight: The responsibility for the policies and procedures of the company shall be assigned to one or more ?senior corporate executives? who will have the authority to report directly to the board, audit committee or other appropriate board committee and who have autonomy from management and adequate resources. 8) Review and update: The company will review at least annually its policies and procures and update them, ?taking into account relevant developments in the field and evolving international and industry standards.? 9) Implementation: The firm will implement mechanisms designed to ensure compliance with its anticorruption and ethics policies and procedures including periodic training and corresponding ?certifications by all directors, officers, employees, agents, and business partners, certifying compliance with the training requirements.? The company will also establish and maintain an effective system for providing guidance and advise regarding its anticorruption policies and procedures. 10) Whistleblowers: The company will establish and maintain systems for the confidential reporting of possible violations of its anticorruption policies and for any necessary follow-up to respond and investigate and necessary. 11) Enforcement: The company will establish appropriate mechanisms to ensure effective enforcement and, as appropriate, disciplinary procedures which apply to all persons. 12) Third parties: The company will institute appropriate risk based due diligence and compliance requirements for the retention and oversight of all agents and business partners. Where necessary and appropriate the company will include standard provisions in agreements regarding compliance with anticorruption policies and permitting audits and the right to terminate the relationship. 13) Mergers and acquisitions: The firm will develop and implement policies and procedures for mergers and acquisitions requiring that the appropriate risk based due diligence be conduct. In addition, the firm?s anticorruption policies and procedures will be extended to any acquisition as quickly as possible. 14) Monitoring: Periodic testing will be conducted of the anticorruption policies and procedures taking into account developments in the field and evolving international and international standards. There is no doubt that corporate directors face difficult choices in view of the aggressive FCPA enforcement programs being conducted by the DOJ and the SEC. The result in Marubeni should provide clarity to those choices.
Department of Justice Cites Poor Compliance Program and Lack of Cooperation in Extracting Significant FCPA Penalties in Marubeni Settlement more+ Embed To embed, copy and paste the code into your website or blog:
The importance of a company?s response to a Department of Justice (?DOJ?) investigation into possible violations of the Foreign Corrupt Practices Act (?FCPA?) was highlighted last week when Marubeni Corporation (?Marubeni?) pleaded guilty to FCPA violations and agreed to pay an $88 million fine. Two things in particular stand out about the Marubeni resolution: 1) there was a guilty plea by a parent company, rather than a deferred prosecution or non-prosecution agreement, and 2) the comments made by DOJ in its press release citing Marubeni?s lack of an effective compliance program and failure to cooperate and remediate as factors considered in reaching the resolution. Marubeni?s guilty plea (and $88 million fine, when the bribe payments by Marubeni totaled around $350,000) demonstrates the real consequences companies can face for neglecting to implement an effective FCPA and anti-corruption compliance program and for a poorly calculated response to a government investigation. On March 19, 2014, Japanese trading company Marubeni admitted its guilt to a criminal information charging one count of conspiracy to violate the FCPA?s anti-bribery provisions and seven counts of substantive anti-bribery violations. Marubeni and its subsidiaries partnered with a French power company (unnamed in the court filings but thought to be Alstom SA) to bid on a contract to install boilers at the Tarahan power plant in Indonesia. The project was contracted by Indonesia?s state-owned electricity company, Perusahaan Listrik Negara (?PLN?). According to the court filings, Marubeni and its partner retained two consultants to pay bribes to three Indonesian officials, two of whom worked for PLN and one of whom was a Member of Parliament with influence over the award of the Tarahan contract. In 2004, the consortium was awarded the Tarahan Project, worth approximately $118 million. Altogether, the guilty plea cites $2,091,681 in payments by the consortium to the consultants, $357,793 of which were made by Marubeni. Corporate guilty pleas are unusual in the FCPA enforcement arena, and guilty pleas by parent companies, rather than the responsible subsidiary, are more uncommon still. Between 2012 and 2013, only three companies pleaded guilty to FCPA charges, and all three were foreign subsidiaries. The parent companies of those subsidiaries?Archer Daniels Midland, Tyco International, and Weatherford International?entered non-prosecution or deferred prosecution agreements with DOJ. In its press release announcing the Marubeni resolution, DOJ noted: The plea agreement cites Marubeni?s decision not to cooperate with the department?s investigation when given the opportunity to do so, its lack of an effective compliance and ethics program at the time of the offense, its failure to properly remediate and the lack of its voluntary disclosure of the conduct as some of the factors considered by the department in reaching an appropriate resolution. The Marubeni plea vividly demonstrates that, after almost 10 years of rigorous FCPA enforcement, the government has come to expect companies operating abroad to have comprehensive anti-corruption compliance programs and to demonstrate their commitment to compliance by cooperating with agency investigations and swiftly remediating when misconduct is uncovered. Certainly a company?s response to an FCPA investigation by DOJ or the Securities and Exchange Commission will be calibrated based on the particular circumstances at issue. There is no one-size-fits-all response to a government investigation, and DOJ would not suggest there is. Nonetheless, the Marubeni resolution highlights the importance of thinking early and carefully about what that response will be and taking a course designed to minimize the impact on the company and its employees, customers, and shareholders. Companies have been on notice, and this case drives the point home, that they are now expected by the government to be proactive in detecting and preventing FCPA violations. A company?s response to the risk of foreign bribery must begin before a problem arises or government investigation commences. The first page of the criminal information against Marubeni notes that Marubeni engaged in transactions worth $74 billion annually, all over the world. It had 24,000 employees working in over 70 countries. Yet, according to the plea agreement, at the time of the improper payments in Indonesia, it lacked an effective anti-corruption compliance and ethics program. DOJ has long broadcasted its position that failure to implement compliance policies, procedures, and controls commensurate with the risks of operating in foreign nations will lead to significant sanctions. The Marubeni settlement demonstrates the department?s willingness to enforce that policy. On the same day that Marubeni pleaded guilty, another company that had been under investigation for possible FCPA violations, SL Industries, announced in its 10-K that DOJ had closed its investigation without taking enforcement action. According to the filing, SL Industries conducted an internal investigation into the possible violations, notified DOJ of the investigation, and offered the government its full cooperation. The company remediated by hiring outside consultants to help implement a mandatory FCPA compliance program for all employees and to conduct annual FCPA compliance tests at the company?s operations in China and Mexico. The juxtaposition of Marubeni?s guilty plea with DOJ?s decision not to prosecute SL Industries speaks volumes for any company facing an FCPA investigation now or in the future.
The General Motors Scandal: Risky Issues more+ Embed To embed, copy and paste the code into your website or blog:
The GM scandal is unfolding and provides important reminders for everyone involved in compliance and how to respond to a corporate scandal. GM faces a significant set of challenges. A faulty ignition device has been linked to a number of crashes resulting in over 10 deaths. GM decided not to recall automobiles to fix the faulty ignition. GM is now the focus of a Justice Department http://www.akduidefense.com investigation, congressional inquiries, regulatory investigations, civil litigation, and many more challenges to come. Once thing is clear ? the prior bankruptcy proceeding in 2008-2009 will provide no protection against potential criminal and/or civil liability. Bankruptcy cannot wipe clean criminal exposure. GM is facing the usual process ? conduct a comprehensive internal investigation, identify the responsible actors who failed to alert company officials or who intentionally decided to ignore the serious safety risks involved in GM?s vehicles. At the same time, GM has to manage public relations, political investigations, litigation, and a host of related risks. Corporate actors who ignored these risks will be investigated for criminal offenses. The stakes will be high for the company and the individuals. Interestingly, GM has called in two law firms to assist in the handling of this matter. Both firms have significant existing relationships with GM. The Justice Department, politicians and others are sure to ask the question ? Are they sufficiently independent from GM to conduct a fair and impartial internal investigation? I am assuming GM considered this issue and resolved it in favor of the law firms. The Justice Department is sure to review that question. GM has to act fast and with care ? a wrong turn on its initial internal investigation could set them back again. GM?s quick reliance on its existing law firms could be a serious mistake. The Justice Department has become more demanding over the independence of an internal investigation. They are inherently suspect when a company conducts its own investigation. However, the Justice Department has a level of professionalism where they can build trust with a company when it demonstrates its willingness to let the chips fall where they may. Aside from its significant external risks, GM has a lot of difficult questions to resolve internally ? how did GM ignore this significant safety risk, especially when it resulted in the killing of a number of individuals? Forget the issue of foreign bribery for a moment, but if your business has serious health and safety risks, those risks have to be managed aggressively. Corporate governance issues take on a different complexion when failures result in harm to innocent consumers. Companies recognize this and have to make sure their controls and procedures are designed to match those risks. We do not know what happened inside GM yet, but we will eventually learn how this happened. It will be interesting.
Two Thoughts about Dewey LeBoeuf and Parallel Proceedings more+ Embed To embed, copy and paste the code into your website or blog:
You?ve probably read about the Manhattan district attorney?s office?s indictment of executives at former Big Law giant Dewey LeBoeuf. According to the WSJ Law Blog , the crux is this: ?[F]ormer Dewey Chairman Steven Davis, former executive director Stephen DiCarmine, and former Chief Financial Officer Joel Sanders misrepresented expenses and falsely claimed revenue to hide a cash flow shortfall stemming from the financial crisis. The scheme allegedly ran from November 2008 to early March 2012, shortly before Dewey fell into bankruptcy court and dissolved, and was designed to create the illusion that the firm had weathered the financial crisis and was set to grow, according to the indictment. The three former leaders are charged with a number of crimes including grand larceny, securities fraud, conspiracy, and falsifying business records. A former client-relations manager at the firm, Zachary Warren, was also charged with crimes related to the alleged fraud.? In a devastating New York Times story over the weekend, James Stewart zeroed in on that last sentence. Client relations manager? Who? Apparently it wasn?t obvious to ?longtime Dewey insiders? who Zachary Warren even is. Warren graduated from Stanford in 2006, and applied to be a Dewey paralegal. ?Instead, he was offered a $40,000-a-year job helping partners collect client debts. His hard work so impressed his colleagues that he was promoted to ?client relations manager? in June 2008, earning a salary of $100,000 a year.? In 2009 he moved on to law school at Georgetown, and then to federal clerkships on the U.S. District Court in Baltimore and then the U.S. Court of Appeals for the Sixth Circuit, where he is currently working. A job offer, apparently still open, awaits him at Williams & Connolly in Washington. In the meantime, though, the SEC called and asked that he come to Washington, D.C., last November to discuss what he knew about the Commission?s investigation into a bond offering at Dewey LeBoeuf. As Stewart writes: In late October, an http://michaelhawkinsdui.com S.E.C. lawyer investigating the bond offering contacted him. Mr. Warren had had nothing to do with it and, because he had not been subpoenaed, was under no obligation to testify. But he wanted to be helpful and cooperative, and he agreed to take time off from work in Memphis and travel to Washington to provide what he continued to think was just background information in a civil investigation. Then, in a subsequent call, an S.E.C. lawyer told him that a lawyer from the district attorney?s office would be sitting in. Did Mr. Warren mind? Mr. Warren arrived at the S.E.C. offices on Nov. 15. After the S.E.C. lawyer asked some introductory questions, [Peirce] Moser, the assistant district attorney, took over. An F.B.I. agent was also present, and other prosecutors were listening from New York. By all accounts, the interview was a disaster for Mr. Warren. He had trouble remembering details from his time at the firm, which prosecutors interpreted as evasion or, worse, lying. They showed him emails and documents, most of which he did not recall. He was not prepared for the hostile tone and became defensive. Prosecutors thought that Mr. Warren was arrogant, even that he was ?playing them? by trying to ferret out what they knew, rather than offering to help the investigation. At one point, it occurred to Mr. Warren that he might be a target, and he asked Mr. Moser if that was the case. The prosecutor did not answer directly, but said, ?This is a serious matter.? As Stewart acknowledges, this is Warren?s side of the story. Maybe it happened differently. Two Thoughts But I have two quick thoughts here. First, if this is what happened, I don?t think this is a great moment for the SEC?s Enforcement Division. Calling a witness in for a voluntary interview and then later changing the terms by (1) asking if it would be okay for a criminal prosecutor to sit in, (2) allowing an FBI agent to sit in as well, (3) letting other prosecutors listen in from New York and (4) after an introduction, turning over the questions to the prosecutor, seems, I don?t know . . . unseemly if not unethical. And yet, the SEC staff?s conduct here appears to have been legally defensible. United States v. Stringer, 521 F.3d 1189 (9th Cir. 2008), is a decent guide for what is appropriate in parallel proceedings such as these. The SEC appears not to have made any affirmative misrepresentations to Warren, and he was certainly aware at all points that a criminal investigation was ongoing as well. It?s odd, though. I don?t know what Warren could have added to the SEC?s investigation of the bond offering. If the staff called Warren knowing that they were not interested in his information about that offering ? and that they would merely be a vehicle to allow his questioning by criminal authorities ? that is not a good practice. Also, the SEC?s case against the Dewey executives was filed in the Southern District of New York and is being handled by staff in the SEC?s New York Regional Office. Why was he being interviewed in the SEC?s Home Office in Washington? He didn?t live there at the time. Second, Stewart?s story quotes a spokesperson for the Manhattan D.A.?s office reacting to the notion that Warren was tricked into speaking to prosecutors without a lawyer. Erin Duggan Kramer said, ?The claim that an attorney with a federal clerkship could have any misunderstanding of what it means to speak with and agree to meet with the D.A.?s office is preposterous.? Let me tell you a little secret. Federal law clerks may know about the federal sentencing guidelines and Bluebooking and other law nerd things, but not many of them know anything useful about dealing with criminal investigations or SEC investigations. They certainly don?t know much about the similarities and differences between the two. The volumes of their ignorance would fill an ocean. Kramer?s comment sounds like someone protesting too much to me. I?ll be very interested to see how this plays out. <br>For the original version including any supplementary images or video, visit http://www.jdsupra.com/legalnews/two-thoughts-about-dewey-leboeuf-and-par-02493/