On 7 January 2021, the Joint Committee of the European Supervisory Authorities (“ESAs”) wrote to the European Commission, requesting “urgent” clarification on several important areas of uncertainty in the application of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (the “SFDR”) prior to the application of the majority of its requirements on 10 March 2021.

One such area raised, which will be of particular importance to a number of fund managers, is whether the SFDR will apply to non-EU alternative investment fund managers (“AIFMs”) when marketing funds in the EU under applicable national private placement regimes.

Application to non-EU AIFMs

To date, the industry has generally taken the view that non-EU AIFMs will be caught by the product level disclosure requirements of the SFDR, when marketing their funds in the EU. This is primarily as a result of the cross-reference in the SFDR to Article 4(1)(b) of the Alternative Investment Fund Managers Directive (2011/61/EU), which itself includes non-EU AIFMs.

The posing of this question by the ESAs, however, casts doubt on the presumption by many non-EU AIFMs that they will fall within the scope of the SFDR. The industry will be watching very closely in the coming days and weeks to see how the European Commission responds. In the interim, this uncertainty clearly presents a challenge for non-EU AIFMs, which will need to think about whether to continue with implementation for now, on the assumption that they will be caught, so as not to be on the “back foot” should the European Commission confirm they are within scope.

Other key priority areas identified

The ESAs have also asked for clarification in relation to a further four areas (set out below at a high level):

• application of the 500-employee threshold for principal adverse impact reporting on parent undertakings of a large group – this is particularly significant in light of the fact that where the threshold is met, from 30 June 2021, firms will have to consider adverse impacts of their investment decisions on sustainability factors (rather than use a “comply or explain” approach);
• the meaning of “promotion” in the context of products promoting environmental or social characteristics – the ESAs noted that, in general, clarification on the level of ambition of the characteristics through the provision of examples of different scenarios that are within, and outside, the scope of Article 8 of the SFDR would assist with the orderly application of the SFDR. Fund managers will need to determine whether the fund falls within Article 8, as additional disclosure obligations apply where that is the case;
• the application of Article 9 of the SFDR – the ESAs asked for further clarification on what would constitute an Article 9 product. For example, they asked whether a product to which Article 9(1), (2) or (3) of the SFDR applies must only invest in sustainable investments as defined in Article 2(17) of the SFDR. If not, is a minimum share of sustainable investments required (or would there be a maximum limit to the share of “other” investments)? As above, in relation to Article 8 products, fund managers will need to make additional disclosures if the fund in question falls within Article 9 of the SFDR; and
• the application of the SFDR product rules to portfolios and dedicated funds – one question asked by the ESAs was whether, for portfolios, or other types of tailored financial products managed in accordance with mandates given by clients on a discretionary client-by-client basis, the disclosure requirements in the SFDR apply at the level of the portfolio only or at the level of standardised portfolio solutions. This is clearly another area in which further clarification from the European Commission would be very welcome.

Conclusion

It is, to say the least, far from ideal that there is so much uncertainty surrounding the application of the SFDR so close to 10 March. This is particularly the case given that these areas are by no means peripheral – there will, for instance, be a significant number of non-EU AIFMs holding their breath at the moment. The industry will be waiting with great interest to see how the European Commission responds.

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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  If you wish to discuss any of the matters set out above – whether issues raised or potential solutions – please contact the Gibson Dunn UK Financial Services Regulation team:

Michelle M. Kirschner (+44 (0) 20 7071 4212, [email protected])

Martin Coombes (+44 (0) 20 7071 4258, [email protected])

Chris Hickey (+44 (0) 20 7071 4265, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

The historic nationwide protests in response to systemic abusive police practices and racism have prompted painful reflection and renewed the long-standing question around the proper role of law enforcement in the US. This presentation will discuss the current landscape of reform efforts and political uncertainty; ideas for actions that can be taken by organizations to deliver a reform agenda and related ongoing Gibson Dunn projects.

View Slides (PDF)

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PANELISTS:

Marcellus McRae, Ben Wagner & Frances Waldmann

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This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.

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California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

On December 3, 2020, the Commodity Futures Trading Commission (“CFTC” or the “Commission”) Division of Enforcement (the “Division”) announced a settlement with Vitol Inc. (“Vitol”), an energy and commodities trading firm in Houston, Texas. This is the first public action coming out of the CFTC’s initiative to pursue violations of the Commodity Exchange Act (“CEA”) involving foreign corruption. The CFTC’s action rests on an aggressive theory that seeks to approach allegations of corruption through its historic ability to pursue fraud and manipulation, which has not yet faced a serious legal challenge. It is an enforcement area we expect will continue to be a priority for the CFTC. This settlement involved cooperation between U.S. and Brazilian regulators in what appears to be another significant corporate resolution associated with the Operation Car Wash corruption investigations in Brazil. We expect to see the continued convergence of enforcement by a variety of U.S. enforcement authorities and regulators approaching aspects of alleged foreign corruption from a range of angles corresponding to their primary focus of interest. Depending on the facts, the same conduct that the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”)—the principal FCPA investigation authorities—investigate for violations of the Foreign Corrupt Practices Act (“FCPA”) already may face scrutiny by DOJ’s Money Laundering and Asset Recovery Section (“MLARS”) on a money laundering basis (including its Kleptocracy Asset Recovery initiative where foreign plutocracy is involved and its Bank Integrity Unit where banks are involved), by the CFTC for violations of the CEA where commodities trading is involved, and by the Federal Reserve for violations of banking regulations. And in the Biden Administration, this convergence may accelerate as the Administration aligns with more vigorous corporate enforcement anticipated in the new era. Navigating the expanding investigations field will become more complex, even more so to the extent that agencies flexing their muscles do not coordinate their efforts.

Given the CFTC’s aggressive approach to bringing enforcement actions involving foreign corruption, and its stated intention to continue to do so, it is particularly important that companies regulated by the CFTC assess and update their compliance programs to meet the standards set forth in the guidance on evaluating compliance programs that the CFTC issued in September 2020.[1] Moreover, in light of the multi-agency targeting of conduct involving foreign corruption, such companies should also make sure that their compliance programs meet the standards of other agencies, such as DOJ.[2]

The Vitol Settlement

The CFTC asserted that from 2005 to early 2020, Vitol engaged in manipulative and deceptive conduct involving foreign corruption and physical and derivatives trading in the U.S. and global oil markets.[3] Specifically, the CFTC’s order found that Vitol violated the CEA [4] in a few different ways, using for the first time the alleged foreign corrupt conduct as a basis for a finding of manipulative or fraudulent acts cognizable under the statute.[5] First, it allegedly made corrupt payments, such as bribes and kickbacks, to employees and agents of certain state-owned entities (“SOEs”) in Brazil, Ecuador, and Mexico to obtain preferential treatment and access to trades with the SOEs to the detriment of the SOEs and other market participants.[6] Vitol, according to the CFTC, concealed this conduct by funneling the payments through offshore bank accounts or to shell entities, and by issuing deceptive invoices.[7] Second, it allegedly made corrupt payments to employees and agents of the Brazilian SOE in exchange for confidential information about trading in physical oil and derivatives, such as the specific price at which Vitol would win a supposedly competitive bidding or tender process.[8] Additionally, Vitol attempted to manipulate two Platts fuel oil benchmarks in order to benefit Vitol’s physical and derivatives positions.[9] If Vitol’s attempts to manipulate the benchmarks had been successful, charged the CFTC, it would have harmed those market participants who held opposing positions and those who rely on the benchmarks as an untainted price reference for U.S. physical or derivative trades.[10]

The same day, the Fraud Section of the DOJ and the United States Attorney’s Office for the Eastern District of New York announced a parallel action in which they entered a Deferred Prosecution Agreement (“DPA”) with Vitol on charges of conspiracy to violate the FCPA.[11] Vitol agreed to pay a criminal penalty of $135 million under the DPA, and the DOJ noted that it would credit $45 million against the amount Vitol agreed to pay to resolve an investigation by the Brazilian Ministério Público Federal (“MPF”) for conduct related to the company’s bribery scheme in Brazil.[12] Specifically, on December 3, 2020, the MPF entered into a leniency agreement with Vitol Inc. and Vitol do Brasil Ltda. in connection with Operation Car Wash. In a December 29, 2020 securities filing, Brazilian state-run oil company Petrobras announced that it received 232.6 million reais (or $44.65 million) as a result of this leniency agreement.[13]

The CFTC ordered Vitol to pay more than $95 million in civil monetary penalties and disgorgement.[14] Notably, it recognized Vitol’s cooperation during the investigation in the form of a reduced civil monetary penalty.[15] It also recognized and offset a portion of the criminal penalty that Vitol agreed to pay to the DOJ in the parallel criminal action.[16]

CFTC’s Foreign Corrupt Practices Initiative

The CFTC launched its foreign corrupt practices initiative on March 6, 2019, when the Division issued an advisory on self-reporting and cooperation for CEA violations involving foreign corrupt practices (the “Enforcement Advisory”).[17] It announced that it would apply a presumption, absent aggravating circumstances, that it would not recommend imposing a civil monetary penalty in a CFTC action involving foreign corrupt practices where a company or individual not registered or required to be registered with the CFTC (i) voluntarily discloses violations of the CEA involving foreign corrupt practices, (ii) provides full cooperation, and (iii) appropriately remediates.[18] The CFTC bolstered its initiative in May 2019 by issuing a whistleblower alert targeting foreign corrupt practices in the commodities and derivatives markets.[19] To date, this is only the fourth area of potential misconduct regarding which the CFTC has proactively sought tips from would-be whistleblowers.

Implications of Settlement

First, we expect the CFTC to continue pursuing more cases involving foreign corruption in the future. This is the first case brought by the CFTC involving foreign corruption, but it is unlikely to be the last. There are public reports of at least two additional foreign corruption investigations undertaken by the CFTC involving commodities traders. The Enforcement Advisory was issued on the heels of a voluntary disclosure by Switzerland-based mining company Glencore, in April 2019, that it was the subject of an investigation by the CFTC involving foreign corruption claims. Glencore also has announced anti-corruption investigations by the DOJ for potential violations of the FCPA and U.S. money laundering statutes, Brazilian authorities, and Swiss prosecutors,[20] and it disclosed that the CFTC’s investigation had a similar scope as the ongoing DOJ investigation.[21] No settlement or charges have been announced with respect to the Glencore investigations. News sources also report that Trafigura Group Pte. Ltd., a Singapore-based commodity trading company, is under investigation by the CFTC and Brazilian authorities for similar allegations.[22]

The CFTC’s 2019 issuance of a whistleblower alert soliciting tips about foreign corrupt practices further shows that it is serious about bringing enforcement actions in this area. The CFTC’s whistleblower program pays a qualified tipster 10 to 30 percent of any fine over $1 million levied against a firm for violations of CFTC regulations, and it has significantly enhanced the CFTC’s enforcement program. Whistleblowing is likely to increase, not just because there may be conduct to report, but because those aware of it and lawyers working to facilitate reporting will see the benefit of doing so through the CFTC’s initiative. Just as the Dodd-Frank whistleblowing award program has significantly increased FCPA tips to the SEC (and DOJ), we expect the CFTC’s whistleblowing push could significantly increase the amount of information the CFTC receives and, in turn, the CFTC’s ability to bring enforcement actions relating to foreign corruption.

With the announcement of the Vitol settlement, the CFTC has reaffirmed its interest in pursuing CEA violations involving foreign corruption. The CFTC has identified the following examples of foreign corrupt practices that could constitute violations of the CEA and thus be the focus of a CFTC enforcement action:

• The use of bribes to secure business in connection with regulated activities like trading, advising, or dealing in swaps or derivatives;
• Manipulation of benchmarks that serve as the basis for related derivatives contracts;
• Reporting prices that are the product of corruption to benchmarks; and
• Corrupt practices that might alter the prices in commodity markets that drive U.S. derivatives prices.[23]

Second, the CFTC will continue to coordinate closely with other regulators in its pursuit of foreign corruption. The CFTC frequently coordinates with the DOJ, SEC, and other law enforcement partners, often bringing parallel enforcement actions in areas such as spoofing, misappropriating funds, violations of registration provisions of the federal securities laws, and the manipulation of benchmark interest rates (e.g., the LIBOR cases).[24] The Vitol settlement underscores that this cooperation will continue in its foreign corruption initiative. We expect the CFTC to continue to utilize its partnerships with other regulators to pursue foreign corruption, with commodities trading serving as the CFTC’s entry point to police foreign corruption under the CEA. That Gary Gensler, formerly the CFTC Chair from 2009 to 2014, is expected to be nominated to serve as the next SEC Chair may smooth the way for the two regulators to collaborate more in foreign corruption (and other) investigations and bringing parallel enforcement actions.[25]

While the CFTC has stated publicly that it is not trying to enforce the FCPA or “pile on” when it comes to penalties,[26] if there is a commodities trading component to a foreign corruption scheme, the CFTC has made clear it has a role to play in investigating and charging such conduct. In announcing the CFTC’s foray into foreign bribery, the former Director of Enforcement emphasized the agency’s intention to coordinate closely with DOJ, SEC, and other regulators, including foreign authorities, so that it is “investigat[ing] in parallel with other enforcement authorities” to “avoid duplicative investigative steps,” account for penalties imposed by other authorities, and give “credit for disgorgement or restitution payments in connection with other related actions.”[27] But the CFTC’s involvement creates an added layer of liability and a potentially expanded universe of relevant conduct that companies with international operations must be mindful of going forward. As we have seen with navigating other multi-agency investigations where conflicting investigative approaches and duplicative penalty demands occur too frequently, early and careful coordination between investigations is critical to ensuring outcomes are proportionate.

Third, going forward, we expect that foreign corruption allegations involving commodities-related business will continue to be investigated and pursued by multiple agencies, domestic and foreign, approaching the issue from different angles. In other words, as the growing number of multi-jurisdictional and agency anti-corruption resolutions suggest, the FCPA units of the DOJ and SEC are not the only cops on the beat, and they have not been for quite some time. As a growing number of regulators in the U.S. and abroad get involved in anti-corruption enforcement, the enforcement landscape only becomes more complex. By way of domestic examples, DOJ’s Money Laundering and Asset Recovery Section (“MLARS”) has repeatedly teamed up with its FCPA colleagues to pursue foreign corruption through the lens of the anti-money laundering statutes, both to recover huge sums through its Kleptocracy Program and in prosecuting companies and individuals involved in moving tainted bribery proceeds. In the financial sector, the Federal Reserve has demonstrated its resolve to pursue banks for similar conduct under its authority to supervise banks’ financial controls and oversight functions.[28] Not to be outdone, the CFTC has joined the fray, making clear it will aggressively pursue foreign corruption under the CEA where commodities or related derivatives are involved.[29]

Finally, energy firms in particular should be aware of this development. Although they will not be the CFTC’s only focus, energy trading firms are squarely in the CFTC’s sights. They have historically engaged in transactions that fall under the CEA and often involve contact with risky counterparties. The Vitol settlement makes clear that energy is one industry the CFTC is monitoring with respect to foreign corruption. We expect to see the CFTC under the Biden Administration focus on energy trading cases involving foreign corrupt practices, including assertions that such conduct in energy pricing has disadvantaged the consumer.

In sum, the CFTC will likely become increasingly active in using the CEA as a tool to go after perceived foreign corruption in the commodities markets, claiming such conduct constitutes manipulation or even fraud, while working in parallel with the DOJ and possibly other domestic and foreign regulators intent on vindicating their particular enforcement mandate. Businesses that are involved in cross-border derivatives work should be prepared for potential scrutiny of their transactions, particularly those involving contact with foreign officials or sovereign wealth funds. The CFTC previously has launched broad industry initiatives (for example, with regard to LIBOR interest rate benchmarks), and it remains to be seen whether the CFTC will take such an approach, or pursue foreign corruption on a company-by-company basis as evidence surfaces. Either way, as the CFTC made clear in its 2020 compliance guidance, the CFTC expects companies to address potential corrupt behavior that may harm commodities markets through compliance program enhancements.

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   [1]   CFTC, Guidance on Evaluating Compliance Programs in Connection with Enforcement Matters (Sept. 10, 2020), https://www.cftc.gov/media/4626/EnfGuidanceEvaluatingCompliancePrograms091020/download.

   [2]   Dep’t of Justice, Evaluation of Corporate Compliance Programs (June 3, 2020), https://www.justice.gov/criminal-fraud/page/file/937501/download.

   [3]   CFTC Press Release Number 8326-20, CFTC Orders Vitol Inc. to Pay $95.7 Million for Corruption-Based Fraud and Attempted Manipulation (Dec. 3, 2020), https://www.cftc.gov/PressRoom/PressReleases/8326-20.

   [4]   The CFTC relied on allegations involving corruption to establish fraud under the CEA, even though corruption and fraud are distinct acts with different harms. The CFTC appears to believe that the corruption in this case was a form of deceptive practice and that it need only prove that such corruption infected the market. This is an aggressive theory to which there may be defenses.

   [5]   Order Instituting Proceedings, In re Vitol Inc., CFTC Docket No. 21-01 (Dec. 3, 2020), https://www.cftc.gov/media/5346/enfvitolorder120320/download.

   [6]   Id. at 4.

   [7]   Id.

   [8]   Id. at 5.

   [9]   Id. at 6-7.

[10]   Id.

[11]   Dep’t of Justice, Press Release, Vitol Inc. Agrees to Pay over $135 Million to Resolve Foreign Bribery Case (Dec. 3, 2020), https://www.justice.gov/opa/pr/vitol-inc-agrees-pay-over-135-million-resolve-foreign-bribery-case.

[12]   Id.

[13]   Petróleo Brasileiro S.A. – Petrobras Form 6-K (Dec. 29, 2020), here; see Petrobras receives $45 million in Vitol corruption settlement, Reuters (Dec. 29, 2020), https://www.reuters.com/article/us-petrobras-vitol-settlement/petrobras-receives-45-million-in-vitol-corruption-settlement-idUSKBN294043.

[14]   Id. at 11-12.

[15]   Id. at 3, 8.

[16]   Id. at 11, 12, 14.

[17]   See CFTC Enforcement Advisory: Advisory on Self-Reporting and Cooperation for CEA Violations Involving Foreign Corrupt Practices (Mar. 6, 2019) (“Enforcement Advisory”); CFTC Press Release Number 7884-19, CFTC Division of Enforcement Issues Advisory on Violations of the Commodity Exchange Act Involving Foreign Corrupt Practices (Mar. 6, 2019), https://www.cftc.gov/PressRoom/PressReleases/7884-19; Remarks of CFTC Director of Enforcement James M. McDonald at the American Bar Association’s National Institute on White Collar Crime (Mar. 6, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/opamcdonald2 (“McDonald Remarks”).

[18]   Registrants are not eligible for the presumptive recommendation of no penalty. However, registrants who self-report, cooperate, and remediate will continue to be eligible for a “substantial reduction in penalty” under the existing Enforcement Advisories. See McDonald Remarks.

[19]   CFTC Whistleblower Alert: Blow the Whistle on Foreign Corrupt Practices in the Commodities and Derivatives Markets (May 2019), https://www.whistleblower.gov/whistleblower-alerts/FCP_WBO_Alert.htm.

[20]   Glencore, Update on subpoena from United States Department of Justice (July 11, 2018), https://www.glencore.com/media-and-insights/news/Update-on-subpoena-from-United-States-Department-of-Justice; Jeffrey T. Lewis et al., Brazil’s Car Wash Probe Eyes Glencore, Vitol, Trafigura for Paying Millions in Bribes, The Wall Street Journal (Dec. 5, 2018), https://www.wsj.com/articles/brazils-car-wash-probe-eyes-glencore-vitol-trafigura-for-paying-millions-in-bribes-1544021378; Glencore, Investigation by the Office of the Attorney General of Switzerland (June 19, 2020), https://www.glencore.com/media-and-insights/news/investigation-by-the-office-of-the-attorney-general-of-switzerland.

[21]   Glencore, Announcement re the Commodity Futures Trading Commission (Apr. 25, 2019), https://www.glencore.com/media-and-insights/news/announcement-re-the-commodity-futures-trading-commission.

[22]   Rob Davies, Trafigura investigated for alleged corruption, market manipulation, The Guardian (May 31, 2020), https://www.theguardian.com/world/2020/may/31/trafigura-investigated-for-alleged-corruption-market-manipulation; Dave Michaels and Dylan Tokar, Energy Trader Vitol Paying $163 Million to Settle Corruption, Manipulation Charges, The Wall Street Journal (Dec. 3, 2020), https://www.wsj.com/articles/energy-trader-vitol-to-pay-90-million-to-settle-u-s-corruption-charges-11607023519.

[23]   McDonald Remarks.

[24]   See, e.g., CFTC Press Release Number 7884-19; CFTC Press Release Number 8074-19, CFTC Orders Proprietary Trading Firm to Pay Record $67.4 Million for Engaging in a Manipulative and Deceptive Scheme and Spoofing (Nov. 7, 2019), https://www.cftc.gov/PressRoom/PressReleases/8074-19; CFTC Press Release Number 8120-20, CFTC Charges Investment Firm and VP with Commodity Pool Fraud (Feb. 20, 2020), https://www.cftc.gov/PressRoom/PressReleases/8120-20; Press Release, Securities and Exchange Comm’n, SEC Charges Bitcoin-Funded Securities Dealer and CEO (Nov. 1, 2018), https://www.sec.gov/litigation/litreleases/2018/lr24330.htm; CFTC Press Release Number 7159-15, Deutsche Bank to Pay $800 Million Penalty to Settle CFTC Charges of Manipulation, Attempted Manipulation, and False Reporting of LIBOR and Euribor (Apr. 23, 2015), here.

[25]   See Andrew Ackerman and Dave Michaels, Biden Is Expected to Name Gary Gensler for SEC Chairman, Wall Street Journal, https://www.wsj.com/articles/biden-is-expected-to-name-gary-gensler-for-sec-chairman-11610487023.

[26]   McDonald Remarks.

[27]   Id.

[28]   See Board of Governors of the Federal Reserve System, Press Release, Federal Reserve Board orders JPMorgan Chase & Co. to pay $61.9 million civil money penalty (Nov. 17, 2016), https://www.federalreserve.gov/newsevents/pressreleases/enforcement20161117a.htm; Board of Governors of the Federal Reserve System, Press Release, Federal Reserve Board fines the Goldman Sachs Group, Inc. $154 million for failure to maintain appropriate oversight, internal controls, and risk management with respect to 1Malaysia Development Berhad (1MDB) (Oct. 22, 2020), https://www.federalreserve.gov/newsevents/pressreleases/enforcement20201022a.htm.

[29]   While it is difficult to predict whether other U.S. regulators will prioritize focusing on foreign bribery conduct, the statutory support may already be there for other banking regulators, as well as even FinCEN. For example, FinCEN has authority under the Bank Secrecy Act (“BSA”) and AML laws to hold U.S. financial institutions accountable for weak controls. And, notably, on January 1, 2020, the Senate passed the Anti-Money Laundering Act of 2020 (“AMLA”), which is the most comprehensive set of reforms to the AML laws in the United States since the USA PATRIOT Act in 2001. See William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, H.R. 6395. The AMLA has a number of provisions that could result in significantly increased civil and criminal enforcement of AML violations, including, among others, a significantly expanded whistleblower award program that parallels that of the CFTC. See AMLA, § 6314 (adding 31 U.S.C. § 5323(b)(1)). The AMLA is discussed in detail in a separate Gibson Dunn client alert: Gibson Dunn, The Top 10 Takeaways for Financial Institutions from the Anti-Money Laundering Act of 2020 (Jan. 1, 2021), https://www.gibsondunn.com/the-top-10-takeaways-for-financial-institutions-from-the-anti-money-laundering-act-of-2020/.

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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Derivatives, Securities Enforcement or White Collar Defense and Investigations practice groups, or the following authors:

Joel M. Cohen – New York (+1 212-351-2664, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
Patrick F. Stokes  – Washington, D.C. (+1 202-955-8504, [email protected])
Lawrence J. Zweifach – New York (+1 212-351-2625, [email protected])
Emily A. Cross – New York (+1 212-351-4068, [email protected])
Darcy C. Harris – New York (+1 212-351-3894, [email protected])

Please also feel free to contact any of the following practice leaders:

Derivatives Group:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])

Securities Enforcement Group:
Barry R. Goldsmith – New York (+1 212-351-2440, [email protected])
Richard W. Grime – Washington, D.C. (+1 202-955-8219, [email protected])
Mark K. Schonfeld – New York (+1 212-351-2433, [email protected])

White Collar Defense and Investigations Group:
Joel M. Cohen – New York (+1 212-351-2664, [email protected])
Nicola T. Hanna – Los Angeles (+1 213-229-7269, [email protected])
Charles J. Stevens – San Francisco (+1 415-393-8391, [email protected])
F. Joseph Warin – Washington, D.C. (+1 202-887-3609, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

In this update, we look back at the key developments in UK employment law over the course of 2020 and look forward to anticipated developments in 2021.

A brief overview of developments and key cases which we believe will be of interest to our clients is provided below, with more detailed information on each topic available by clicking on the links.

1.   Coronavirus Job Retention Scheme (“CJRS”) (click on link)

In this update we describe the current offering under the CJRS, which is set to remain operational until 30 April 2021.

2.   Vicarious Liability (click on link)

We consider two decisions of the UK Supreme Court in 2020, which consider vicarious liability in relation to: (i) the actions of a doctor who was found to be an independent contractor; and (ii) the criminal actions of an employee who leaked the personal data of almost 100,000 employees. The “employer” was not held to be vicariously liable in either case.

3.   Transfer of Undertakings (click on link)

We consider two important decisions from the last year related to the operation of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (“TUPE”) which protect the rights of employees in situations such as the sale of a business as a going concern.

4.   Post-termination Restrictive Covenants (click on link)

We consider two decisions looking at the enforceability of post-employment restrictive covenants, including a Court of Appeal decision which considered the circumstances in which a new employer would be liable for inducing a breach of contract by a new hire.

We also consider a recent High Court decision which considered the enforceability of restrictive covenants against a recent joiner who left during her probationary period.

5.   Forthcoming Changes (click on link)

We briefly outline changes to the off-payroll and IR35 system, designed to prevent workers from avoiding tax by operating as contractors, and report on developments in gender and ethnicity pay gap reporting and racial and ethnic diversity in business as well as notable government consultations for employment contracts.

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APPENDIX

1.   Coronavirus Job Retention Scheme (“CJRS”)

We have addressed the introduction of and updates to the UK government’s CJRS mechanism to support employment levels through the COVID-19 pandemic in past publications; these updates are available on the Gibson Dunn website – March 20, 2020, March 27, 2020, May 18, 2020, June 2, 2020, and webcast of December 1, 2020.

If employers cannot maintain their UK workforce because their operations have been affected by COVID-19, they can put their employees onto “furlough”, a temporary leave of absence, and apply for a government grant to cover a portion of the usual wages. There have been various alterations to the finer detail of the CJRS (including the level of contribution to be made by employers as opposed to under grant, changes which took place between August and October 2020) but the essential position at the time of writing is:

• Employees can be put on full-time furlough or “flexible furlough”, when employees work part-time and are regarded as being on furlough when they are not working.
• Employers have to pay for hours worked but can claim the grant for hours not worked.
• The grant amounts to the lower of 80% of wage costs or £2,500 per calendar month for those hours.
• Employers must pay for employer national insurance contributions and employer pension contributions on all amounts paid to the employee, including the amount paid by the grant.
• Employers are still free to top up wages, above the level of the grant, if they wish.
• Since 1 December 2020, the CJRS cannot be used for employees who are under notice of termination.

The CJRS is set to run until 30 April 2021. This month the government is due to determine whether employers should contribute more towards employee costs. The government will shortly begin publishing information about employers who claim under the CJRS, in order to deter fraudulent claims.

2.   Vicarious Liability

As reported previously, the boundaries to the law on vicarious liability, which determines the circumstances in which an employer will be deemed liable for the acts of its officers and employees, have been expanding. However, two decisions of the UK Supreme Court in 2020 signal limits to this expansion and some helpful clarity for employers.

2.1   Vicarious Liability and Employment Status

In Barclays Bank plc (Appellant) v Various Claimants (Respondents), a bank had engaged a doctor to conduct medical examinations of prospective employees as part of the bank’s recruitment process. The Supreme Court held that the doctor was acting as an independent contractor rather than an employee, therefore the bank was not vicariously liable for sexual assaults he was alleged to have committed during these examinations.

The key question for the court was whether the doctor was acting as an independent contractor, carrying on business on his own account, or if his relationship to the bank was akin to employment. In circumstances where the doctor had other clients, remained free to refuse examinations, did not receive a retainer from the bank and carried his own medical liability insurance, it was clear that he was an independent contractor.

2.2   Vicarious Liability and Data Protection

In WM Morrison Supermarkets plc (Appellant) v Various Claimants (Respondents), the UK Supreme Court held that Morrison was not liable for data breaches by an employee who leaked the personal data of almost 100,000 employees.

The employee was authorised to transmit payroll data for Morrison’s workforce to its external auditors. He did so, but kept a copy of the data on a USB stick, which he later shared online. The employee has since been criminally convicted for his actions. Some of the affected individuals brought claims against Morrison for misuse of private information, breach of confidence and breach of its statutory duty under the Data Protection Act 1998, for which they alleged Morrison was either primarily or vicariously liable.

The question for the Supreme Court was whether the employee’s wrongful disclosure of the data was so closely connected with the task(s) that he was authorised to do that it could fairly and properly be considered to have been done whilst acting in the course of his employment. The Court found that this was not so and that, as a consequence, the employer was not vicariously liable for his actions: the disclosure was part of a personal vendetta by the employee, and the employee was not furthering his employer’s business when he committed the wrongdoing.

What this means for employers

Employers will take some comfort from these Supreme Court decisions. The Barclays Bank decision confirms that employers are unlikely to be held vicariously liable for the actions of true third party contractors.

The Morrison Supermarkets decision also makes clear that employers are unlikely to be held liable for employees’ wrongful acts where they are the result of a personal vendetta; the mere opportunity to commit wrongful acts, provided by employment, is insufficient alone to render employers vicariously liable. However, employers should continue to be mindful of the potential vicarious liability under data protection legislation for employees’ activities that do satisfy the “close connection” test. Safeguarding personal data and keeping risk of data breaches to a minimum should remain a priority.

3.   Transfer of Undertakings

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) protect: (i) employees working in a business or undertaking that is in the UK, that is sold or transferred; (ii) employees in Great Britain who carry out activities that are subject to insourcing, outsourcing or transfer to a different outsourced contractor (a so-called “service provision change”); and (iii) those employees who are otherwise affected by that sale, transfer, insourcing or outsourcing. In essence, these employees’ contracts of employment are transferred to the recipient of the business, undertaking, or service provision change, who steps into the shoes of the previous employer and must, generally speaking, continue to employ them on their pre-transfer terms and conditions of employment. TUPE also provides other protections for affected employees, including the right to be informed and consulted in advance of a transfer.

3.1   Contractual Changes

Under regulation 4(4) of TUPE, variations to a contract of employment for which the sole or principal reason is the relevant transfer are void (unless certain specific exceptions apply). In Ferguson and others v Astrea Asset Management Ltd, the Employment Appeal Tribunal (“EAT”) held that regulation 4(4) applies to such variations, irrespective of whether they are beneficial or detrimental to the employee. In this case, two months prior to the transfer by way of service provision change from one property management company to another, the owner-directors of the first company varied their own employment terms to their advantage (in particular, guaranteed bonuses of 50% of salary, termination payments of a month’s salary for each year worked, and enhanced notice periods). The EAT held that regulation 4(4) rendered these variations void; the second company was not bound by them.

In arriving at its decision, the EAT cited the aim of the Acquired Rights Directive (2001/23/EC) (on which TUPE is based) as safeguarding employees’ rights, rather than improving them, and distinguished earlier case law on the bases that the variation occurred post-transfer and before regulation 4(4) was in force, and the Court of Appeal had not said that advantageous changes could not be declared void.

What this means for employers

In the context of TUPE transfers, the EAT decision provides helpful clarity to transferees on the enforceability of transfer-related contractual changes, confirming that where senior executives attempt tactical pre-transfer changes to their own terms and conditions, transferees will not be bound by the new terms. Difficult questions about whether such a variation is to the benefit or detriment of the employee are not necessary. However, outsourcing agreements should continue to contain provisions to render void any changes to terms and conditions made by the service provider once notice has been served to terminate the contract.

3.2   Long-term disability benefits

In ICTS (UK) Limited v Visram, the Court of Appeal considered whether an employee was entitled to benefit from a long-term disability benefits (“Disability Benefit”) policy when he could not restart his old job, as opposed to taking another appropriate role.

Under the terms of an insurance-backed Disability Benefit scheme, during periods of illness the employee was entitled to two thirds of his salary, with payment being conditional on the employee remaining employed, and to continue until the earlier of his return to work, death or retirement. The Court held that on closer inspection of the terms of the scheme, “return to work” was properly construed as return to the work the employee did before he became sick; had the parties intended that the benefit be available until the employee could return to any remunerated full-time work they could have specified this in the terms.

The case also raises the issue of liability for Disability Benefit where an employee has transferred to a new employer under TUPE. The claimant in this case had transferred to a new employer during his long-term sick leave; since employees who transfer under TUPE do so on their existing terms and conditions, including contractual benefits, the transferee employer was liable to provide the benefit until the employee’s return to his prior role, his death, or his retirement.

The transferee employer had dismissed the employee during his sickness absence. The employee then succeeded in claims for unfair dismissal and disability discrimination, hence the Employment Tribunal awarded compensation on the basis that benefits under the Disability Benefit plan should have continued until death or retirement. The EAT and Court of Appeal both upheld this finding.

What this means for employers

This case serves to remind employers and their advisors of the importance of specificity in drafting contractual benefit entitlement provisions, and the need to consider the nature of employee’s benefits and impact any termination may have on them prior to taking action. It is also a reminder of the full reach of contractual burden transferee employers take on in the context of TUPE transfers and the need to conduct full due diligence to identify potential liabilities around employees off sick and Disability Benefit.

4.   Post-Termination Restrictive Covenants

4.1   Restrictive Covenants and Breach of Contract

Post-termination restrictive covenants are commonly included in the contracts of employment of senior and other key employees. Should that employee commit a breach of their restrictive covenants, for example, by joining a competitor in breach of a non-compete covenant then the new (competitor) employer will not ordinarily be liable to the former employer in respect of that employee’s breach. However, should that new (competitor) employer induce that employee to breach the terms of their former contract of employment then both the new (competitor) employer and employee may be liable to the former employer.   To bring a claim for inducing a breach of contract, a claimant must show that the third party knowingly and intentionally induced and procured the breach without reasonable justification. The Court of Appeal in Allen t/a David Allen Chartered Accountants v Dodd & Co, held that an accountancy firm was not liable for inducing breach of contract when it recruited a tax adviser in breach of his 12-month contractual post-termination restrictions, where the firm had received legal advice in advance of the recruitment that the employee’s restrictive covenants were unlikely to be enforceable. The firm was advised that the covenants were unenforceable due to lack of consideration and an unreasonably long duration and that the non-solicitation and non-dealing restrictions “probably” and “on balance” failed, allowing the tax adviser to contact the clients of David Allen, his former employer.

In the High Court the judge found that parts of the restrictive covenants were enforceable and the employee had breached them. However, the accountancy firm had been entitled to rely on the legal advice it had received. David Allen appealed on the grounds that the legal advice received by the accountancy firm had been equivocal, and therefore the new employer was aware that there was a risk that the restrictive covenants would turn out to be enforceable.

In reaching its decision to dismiss the appeal, the Court of Appeal noted that the fact that the legal advice had been equivocal did not prevent the firm from honestly relying on it. It acknowledged that lawyers rarely provide unequivocal advice, and therefore responsibly sought legal advice should be able to be relied upon, even if it later turns out to be incorrect. Further, the required level of knowledge for inducement was that of knowledge of a legal outcome, not just knowledge of a fact. This level of knowledge could not be proven where the numerous breach of contract cases in the courts have shown that it is often difficult to predict legal outcomes. The Court did not opine on legal advice that merely states that it is arguable no breach will be committed, but advice that states it is more probable than not that there will be no breach is enough to rely upon.

What this means for employers

Employers can take comfort in this decision which confirms that they are entitled to rely on legal advice even where it is equivocal. Unless it can be proven that they knew their actions would breach the contract, as opposed to “might” breach the contract, liability for inducement to breach will not be made out.

4.2   Restrictive Covenants as Unlawful Restraint of Trade

Post-termination restrictive covenants will only be enforceable in the UK to the extent that they protect a legitimate business interest (such as an employer’s trade connections with customers or suppliers, confidential information and maintaining the stability of its workforce) and do so in a manner which is reasonable (lasting no longer and being no wider in scope than is reasonably necessary to protect the employer’s legitimate business interest). Restrictive covenants commonly take the form of “non-competes” (the most onerous form of restrictive covenant, which prevent the employee from working in a competing business for a restricted period of time), “non-solicit” and “non-dealing” restrictions which prevent an employee from soliciting and/or dealing with certain clients or customers of the business during a restricted period after leaving and “non-poaching” restrictions which prevent an employee from poaching or attempting to poach former colleagues during a restricted period after leaving.

In Quilter Private Client Advisers Ltd v Falconer and another, the High Court found that the non-compete, non-solicitation and non-dealing clauses in a financial adviser’s employment contract were an unreasonable restraint of trade and therefore invalid. Whilst the Court did find that the adviser had breached her employment contract in a number of ways, including via misuse of confidential information, her 9-month non-compete was unreasonable in the context of leaving employment within a six month probation period. In addition, her 12-month non-dealing and non-solicitation clauses, which covered anyone who had been a client of the employer at any time in the 18 months prior to termination, were held to be unreasonable and excessive given the nature of her client relationships during her period of employment.

What this means for employers

This case serves to highlight the importance of tailoring the drafting of restrictive covenants to both the circumstances of the business and the restricted employee. Particular care should be taken as to the scope and duration of restrictive covenants which an employer would seek to enforce against an employee who leaves during their probationary period.

5.   Forthcoming Changes

5.1   Off-payroll working and IR35

We have previously reported that changes to the IR35 legislation (which governs the payroll tax arrangements for certain individuals who supply services through an intermediary, usually a personal service company (“PSC”)) were due to take place in April 2020 (link). However, these changes have been postponed until April 2021 in recognition of the COVID-19 disruption. On 1 July 2020, MPs voted against a proposed amendment to the Finance Bill to delay the changes until 2023-2024. Should the changes now go ahead as expected in a matter of months, medium and large sized end-user clients will take over responsibility from the intermediary for assessing whether, but for the intermediary’s presence, the individual would be deemed an employee of the end-user client for tax purposes and, if so, for paying such taxes.

5.2   Gender Pay Gap

Similarly to the IR35 postponement, as we previously noted in March 2020 (link), the Government Equalities Office and the Equality and Human Rights Commission (EHRC) suspended enforcement of the gender pay gap deadlines for the reporting year 2019/20 due to the pressures of the COVID-19 pandemic. The requirement to report for 2020/21 has not yet been suspended, and on 14 December 2020 the government published a new set of guidance for employers, though the reporting requirements remain unchanged.

5.3   Ethnicity Pay Gap and racial and ethnic diversity in the boardroom

Amid a global surge in debate on racial equality, a petition to the UK Parliament calling for mandatory ethnicity pay gap reporting for UK firms with 250 or more staff has obtained enough signatures to mean it ought to be debated in Parliament. The government had said it would respond by the end of 2020 in light of the consultation it ran between 2018 and 2019, but we still await a response. In a leaked report obtained by the BBC in December from the government’s 2018 pay gap reporting consultation exercise, three quarters of employers (of 321 responders) wanted large firms to be forced to release ethnicity pay gap data.

Whilst gender pay gap reporting was enacted through regulations, the government would need to pass a new Act of Parliament to create any new ethnicity pay reporting scheme. Despite reporting not yet being mandatory, two in three UK companies surveyed recently by PwC (link) are now collecting data on ethnicity, with over one fifth now calculating their ethnicity pay gap; those not collecting data or calculating were concerned about data protection, systems capabilities, low response rates, or unease about posing the questions. Given how multifaceted information about ethnicity can be, it is not yet clear exactly what information would need to be provided under any new mandatory scheme.

Legal and General Investment Management (“LGIM”) has urged FTSE 100 boards to include at least one black, Asian or other minority ethnic member by January 2022 or suffer “voting and investment consequences” – LGIM would vote not to re-elect their nomination committee chair. It will also demand more transparency around race and ethnicity data, including ethnicity pay data and inclusive hiring policies. LGIM is the largest fund manager in the UK, holding an interest in most FTSE 100 companies.

Meanwhile, the Confederation of British Industry has announced a new campaign, “Change the Race Ratio”, in partnership with a number of firms and charitable and academic organisations. This incorporates commitments: (i) to ensure FTSE 100 and 250 boards have at least one racially and ethnically diverse member (by end 2021 and by 2024 respectively); (ii) to increase racial and ethnic diversity in senior leadership, by setting and publishing targets; (iii) to increase transparency, via published target action plans and progress reports and with ethnicity pay gaps disclosed by 2022; and (iv) to create an inclusive, open and supportive environment through recruitment, development and support processes, more diversity in suppliers/partners, and use of data. The campaign offers support to businesses to sign up to the commitments and thereby increase inclusion in business.

In December, Liz Truss MP, Minister for Women and Equalities, gave a speech at the Centre for Policy Studies setting out the government’s new approach to tackling inequality, consisting of the “biggest, broadest and most comprehensive equality data project yet”, to look across the UK and identify where people are held back and what the biggest barriers are. This will not be limited to the Equality Act 2010’s nine protected characteristics (which include sex and race). While Ms. Truss acknowledged that people in these groups suffer discrimination, she suggested that the focus on protected characteristics has led to a narrowing of the equality debate that overlooks socio-economic status and geographic inequality. Initial findings will be reported this summer.

5.4   Government consultations for employment contracts

On 4 December 2020, the government launched two consultations, both of which are expected to close on 26 February this year. One pertains to measures to extend the ban on exclusivity clauses in employment contracts for employees under the Lower Earnings Limit (currently £120 per week), which would prevent employers from contractually restricting low earning employees from working for other employers – it appears this stems from the fact low earners have been particularly adversely affected by the COVID-19 pandemic and many employers are currently unable to offer their employees sufficient hours. The second consultation relates to measures to reform post-termination non-compete clauses in employment contracts (previously discussed at section 4 of this update), including proposals to: (i) require employers to confirm in writing to employees the exact terms of a non-compete clause before their employment commences; (ii) introduce a statutory limit on the length of non-compete clauses; and (iii) ban the use of post-termination non-compete clauses altogether. We will report in due course on any developments following the government consultations.

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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these and other developments. Please feel free to contact the Gibson Dunn lawyer with whom you usually work or the following members of the Labor and Employment team in the firm’s London office:

James A. Cox (+44 (0)20 7071 4250, [email protected])

Georgia Derbyshire (+44 (0)20 7071 4013, [email protected])

Charlotte Fuscone (+44 (0)20 7071 4036, [email protected])

Heather Gibbons (+44 (0)20 7071 4127, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

The world changed significantly in 2020.  Amid the uncertainty wrought by COVID-19, however, the use of corporate non-prosecution agreements (“NPAs”) and deferred prosecution agreements (“DPAs”) by the U.S. Department of Justice (“DOJ”) proved to be a constant.[1]  The year 2020 proved to be a record-breaking year in terms of the sums recovered through corporate resolutions, and the busiest full year under this Administration’s Justice Department when measured by the number of agreements concluded.

In this client alert, the 23rd in our series on NPAs and DPAs, we: (1) report key statistics regarding NPAs and DPAs from 2000 through 2020; (2) analyze the possible effect of the upcoming change in presidential administrations on corporate enforcement; (3) discuss recent commentary from DOJ suggesting a possible increase in focus on compliance programs; (4) take an in-depth look at the increased use of DPAs by DOJ’s Antitrust Division; (5) summarize 2020’s publicly available federal corporate NPAs and DPAs; and (6) survey recent developments in DPA regimes abroad.

Chart 1 below shows all known corporate NPAs and DPAs from 2000 through 2020.  Of 2020’s 38 total NPAs and DPAs, 9 are NPAs and 29 are DPAs.  DOJ also entered into one public NPA addendum.  The SEC, consistent with its trend since 2016, did not enter into any NPAs or DPAs in 2020.

Chart 2 reflects total monetary recoveries related to NPAs and DPAs from 2000 through 2020.  At nearly $9.4 billion, recoveries associated with NPAs and DPAs in 2020 are the highest for any year since 2000, surpassing even the prior record-high recoveries in the year 2012.  As in 2012, the large recovery amount in 2020 was driven by a small number of settlements of over $1 billion apiece.  In fact, in 2020, approximately 53% of the total monetary recoveries were attributable to the two largest resolutions.  And enforcement in the financial sector was particularly active in 2020, with financial institutions accounting for the four largest resolutions.  At the same time, 2020 witnessed a record-breaking 13 resolutions each with total recoveries of $100 million or more—more agreements over the $100 million threshold than in any other year in the last two decades.  Together, these top 13 resolutions (which included the two largest ones discussed above) accounted for approximately 94% of total recoveries in 2020.  With recoveries in 2020 totaling nearly twice the average yearly recoveries from 2005 through 2020, it remains to be seen whether 2020 proves an outlier, or whether the overall trend towards more resolutions above the $100 million and $1 billion thresholds continues.

2020 in Context 

Twenty-nine of the 39 resolutions concluded in 2020 (including one declination and excluding an NPA addendum) have been DPAs.  As illustrated in Chart 3 below and discussed in our Mid-Year Update, a larger number of DPAs compared to NPAs signals a notable decline in the percentage of NPAs on an annual basis.  As we discussed in the mid-year update, this could signal a shift toward requiring self-disclosure to achieve an NPA, and reserving NPAs only for those cases that otherwise present unusual mitigating circumstances.[2]

Only nine companies received NPAs in 2020.  One, Patterson Companies Inc., appears to have received credit for voluntarily disclosing conduct “beyond [its subsidiary’s] conduct set forth in the [related] Information and Plea Agreement.”[3]  None of the remaining eight companies appear to have received voluntary self-disclosure credit, but many of the resolutions referenced unusual mitigating circumstances.  For example, the potential for significant collateral consequences likely factored into at least two of the NPAs.  Specifically, the NPA entered with Alutiiq International Solutions, LLC (“AIS”) cited the fact that AIS’s profits went directly to support Alaskan Native shareholders, who are residents of, or descendants of residents of, two Alaska Native villages that are severely economically disadvantaged.[4]  The NPA with Progenity, Inc. (“Progenity”) explicitly noted the “significant collateral consequences to health care beneficiaries and the public from further criminal prosecution of Progenity.”[5]  One NPA, for Bank Hapoalim B.M. (“BHBM”) and Bank Hapoalim (Switzerland) Ltd. (“BHS”), expressly involved extraordinary remedial measures or redress of the misconduct through other means.  In that agreement, BHBM substantially exited the private banking business outside of Israel and represented that it would close BHS.[6]  Conditions leading to concern that a company would go out of business may have weighed in favor of unusual leniency in the context of 2020’s agreements.  Power Solutions (“PSI”) entered an NPA after already settling a civil class action lawsuit related to the misconduct and paying the SEC a civil monetary fine.[7]  The resolution noted that PSI would not be able to pay a criminal penalty “without seriously jeopardizing the Company’s continued viability.”[8]  The successful prosecution of six individuals and their subsequent guilty pleas for conspiring to impede the lawful functions of the EPA and Department of Transportation and to violate the Clean Air Act was likely a factor in the government’s decision to enter an NPA with Select Energy Services, Inc. (“SES”)—DOJ has noted that the adequacy of prosecution of individuals is one consideration when making charging decisions.  Finally, substantial cooperation likely contributed to the government’s decision to not prosecute Jia Yuan USA Co., Inc.  Jia Yuan proactively provided the government with records located in China and also made the chairman available for an interview “while he was located outside the reach of U.S. law enforcement.”[9]

 2015 calculated including the 80 Swiss Bank Program NPAs.  With the Swiss Bank NPAs removed, the 2015 percentages are 59% DPAs and 41% NPAs.

Corporate Enforcement in the Biden Administration

Any changes to the DOJ enforcement landscape following the inauguration of Joseph R. Biden Jr. on January 20, 2021 are difficult to predict.  Historically, the overall level of corporate enforcement has remained largely steady with each change in administration and typically is not politicized in one direction or another—as evidenced most recently by the large recoveries under both the Obama and Trump Administrations.  Specific policies and priorities, however, including around corporate enforcement, do tend to shift when administrations change.  Corporate enforcement priorities under the Biden Administration will largely be driven by Attorney General nominee Merrick Garland, as well as by other officials such as Lisa Monaco, President-elect Biden’s nominee for Deputy Attorney General (“DAG”), the second highest ranking position in the Justice Department.  We have discussed in our prior updates instances in which then-current DAGs have articulated their corporate enforcement priorities in written guidance to DOJ prosecutors.  In the two most recent examples, then-DAG Rod Rosenstein in 2018 issued a memorandum (the “Rosenstein Memorandum”) promoting coordination of corporate resolution penalties among DOJ components and between DOJ and other agencies,[10] and then-DAG Sally Yates penned a memorandum (the “Yates Memorandum”) encouraging individual accountability in corporate enforcement.[11]  Typically, DAG memoranda have served to develop or emphasize particular aspects of corporate enforcement that DOJ leadership sees as priorities, rather than to effect top-to-bottom overhauls of DOJ’s approach to enforcement.  While Ms. Monaco, who was Homeland Security and Counterterrorism Advisor to President Obama and has served in a number of senior roles at DOJ,[12] may continue this trend, it remains to be seen what her precise priorities will be in the area of corporate enforcement.

What we can glean from public statements by President-elect Biden regarding corporate misconduct suggests that enforcement efforts by DOJ will remain robust.  After 1985, when Mr. Biden asked, “[H]ow long can a democratic society dependent upon the confidence of its people afford to tolerate legal and corporate standards that deviate significantly from traditional expectations for honesty and accountability among power-holders?,”[13] Mr. Biden authored a number of “tough on crime” provisions throughout his time in the Senate, including the 1994 Crime Bill, and a provision of the Sarbanes-Oxley Act that increased penalties on individual corporate officers for misleading their companies’ pension funds about the value of the companies’ stocks and for failing to sign off on financial reports to the SEC.[14]  History suggests that DOJ’s approach to corporate resolutions is unlikely to change significantly with a new administration, but President-elect Biden’s consistently strong stance on corporate accountability is a reminder of the perspective he will bring to what are already deeply ingrained approaches to investigating and prosecuting white-collar crime.

Judge Garland, a sitting judge on the U.S. Court of Appeals for the D.C. Circuit, became a household name as the president’s choice to replace the late Associate Justice Antonin Scalia on the U.S. Supreme Court prior to the 2016 election.  Earlier in his career, Judge Garland served as Deputy Assistant Attorney General for the Criminal Division and as Principal Associate Deputy Attorney General in the Clinton Administration.[15]  Given his background, Judge Garland is likely to continue DOJ’s sharp focus on white-collar enforcement.  And, given the central role NPAs and DPAs have come to play both in securing large recoveries for the government and in influencing companies’ approach to compliance, we can expect that these resolution vehicles will continue to feature prominently in the new administration.

In the coming year, we may also expect to see increased involvement by Congress in overseeing DOJ’s use of NPAs and DPAs, at least in certain areas of corporate enforcement.  The bipartisan National Defense Authorization Act,[16] which became law despite President Trump’s veto,[17] contains (among other provisions regarding the Bank Secrecy Act (“BSA”)) a provision specific to corporate resolutions concerning violations of the BSA.  The provision requires DOJ to submit to Congress an annual report of all “deferred prosecution agreements and non-prosecution agreements that [DOJ] has entered into, amended, or terminated during the year covered by the report with any person [or corporate entity] with respect to a violation or suspected violation of the [BSA],” including the justifications for the decision and a list of factors considered in making that determination.[18]  Although this provision is specific to one area of corporate enforcement and as such may represent at most an incremental step towards increased congressional oversight, it may show a willingness by both sides of the aisle to wade into aspects of the enforcement process over which DOJ has historically had significant discretion.

Focus on Corporate Compliance Programs 

Since DOJ’s June 2020 updates to the Criminal Division’s guidance on the “Evaluation of Corporate Compliance Programs”—which Gibson Dunn addressed in a prior client alert—the defense bar and DOJ alike have increasingly focused on corporate compliance program health in resolving investigations.  In September 2020, the then-Acting Assistant Attorney General emphasized the importance of this focus, stressing the importance of “corporate rehabilitation” through compliance program improvements.[19]  He further explained that the Criminal Division had “moved away from simply seeking ever-larger fine payments from corporations, and [was] in every case taking great care to achieve the maximum public benefit available using all of the tools at [DOJ’s] disposal, be they fines, other monetary payments, improvements to internal processes such as compliance or reporting functions, or any number of oversight and assurance mechanisms.”[20]  Though the Acting Assistant Attorney General did not specifically discuss DPAs or NPAs, his remarks indicated that DOJ will continue to scrutinize compliance programs—and improvements to them or lack thereof—when negotiating DPAs and NPAs.  DOJ’s DPA with JPMorgan Chase reflected DOJ’s focus on compliance program improvements by highlighting, over more than two pages, the company’s compliance program enhancements implemented since the time of the alleged conduct.[21]  The DPA noted a “systematic effort to reassess and enhance [JPMorgan Chase’s] market conduct compliance program and internal controls,” listing seven specific improvements such as: adding hundreds of compliance officers and internal audit personnel, with significant increases in compliance and internal audit spending; improving the company’s anti-fraud and manipulation training and policies; and increasing its electronic communications surveillance program, with ongoing updates to the list of monitored employees and regular updates to the terminology used.[22]

Developments in Antitrust Division Attitudes

In the last 18 months we have seen significant developments in DOJ Antitrust Division’s attitudes toward DPAs, including a new stated policy and a subsequent string of novel agreements entered into by the Antitrust Division.  Entering 2021, the availability of DPAs to resolve Antitrust investigations represents a potentially exciting opportunity for practitioners, but many questions remain as to how the Antitrust Division will navigate its various programs going forward.

Under long-standing DOJ Antitrust Division policy, the first company or individual to self-report an antitrust violation can qualify for leniency.  The Antitrust Division has historically required others involved in an alleged conspiracy to plead guilty or face indictment.  To further incentivize self-reporting, the Division has historically expressed that it disfavors the use of NPAs and DPAs to resolve antitrust investigations for companies that do not qualify for leniency.  Consistent with that stance, the Division has entered into NPAs associated with only two investigations since 2006, and, prior to 2019, had entered into only three DPAs.

Then, in July 2019, the Antitrust Division announced a policy shift to allow prosecutors to more actively consider resolving antitrust investigations with Deferred Prosecution Agreements, as we covered in our client alert here.  According to the policy announcement by Assistant Attorney General Makan Delrahim, the Antitrust Division would begin to consider the “four hallmarks” of “good corporate citizenship” in evaluating a potential DPA, specifically whether the company has: (i) implemented an effective compliance program, (ii) self-reported wrongdoing, (iii) cooperated with investigations, and (iv) remedied past misconduct.[23]  Delrahim noted that the Antitrust Division would continue to disfavor NPAs.[24]

With the announcement of this significant departure from traditional policy still fresh, we entered 2020 with open questions as to how the program would operate in practice.  Specifically, the announcement caused some to ask what incentives remain for companies to be first-movers for leniency purposes.  Because self-reporting was indicated as a potential factor to be considered in negotiating a DPA, seemingly for any company facing Antitrust charges, there was uncertainty whether the leniency program, which strongly incentivized self-reporting first, remained as attractive.  So, in February 2020, Deputy Assistant Attorney General Richard Powers addressed the question, remarking that the Antitrust Division had heard that “companies uncovering cartel conduct may no longer feel the need to seek leniency as quickly as possible, but may instead sit tight and later advocate for a DPA if leniency is no longer available.”[25]  Powers explained that such a wait-and-see approach could be a “costly mistake,” noting that “[l]eniency’s exclusive benefits include complete immunity from criminal prosecution for the company and its covered cooperating employees,” in addition to other benefits.[26]

Open questions remain, however, including how and to what extent the “four hallmarks” of good corporate citizenship will be considered in negotiating potential DPAs without intruding on the incentives of leniency.  Although the Antitrust Division has entered into seven DPAs since June 2019, including four in 2020, none of those agreements explicitly references the new policy, and it is not clear to what extent consideration of the “four hallmarks” influenced the Antitrust Division to enter into the agreements.

Five of these DPAs have been with companies connected to a common conspiracy investigation into anticompetitive conduct in the generic drug industry, with two more companies currently facing unresolved charges in the same investigation.[27]  Multiple of these agreements referenced potential collateral consequences, such as mandatory exclusion from federal healthcare programs resulting from a conviction, as primary factors motivating pre-trial resolution, rather than any of the “four hallmarks” of corporate citizenship.  The Antitrust Division has also entered into a DPA with private oncology practice Florida Cancer Specialists to resolve allegations of anticompetitive conduct in the oncology industry, an agreement which also noted potential exclusion from Federal healthcare programs as the Antitrust Division’s foremost consideration.[28]  Then, most recently, in early 2021 the Antitrust Division announced an agreement with concrete company Argos USA LLC to resolve Antitrust conspiracy charges.[29]  This agreement did not implicate either (1) potential disbarment or exclusion from Federal programs, or (2) robust consideration of the “four hallmarks” such as self-reporting or existing compliance efforts.  Thus, the Argos agreement could signal the Antitrust Division’s widespread openness to DPAs going forward, or be an outlier as we approach a change in administration.

Collectively, these seven DPAs represent the first examples of the Antitrust Division using these agreements to resolve purely antitrust-based charges, as opposed to charges brought in conjunction with other enforcement divisions or agencies.  So, while the contours of the Antitrust Division’s approach to DPA negotiations is still being developed, especially as they relate to self-reporting and leniency, what is clear is that DPAs are now on the menu for practitioners navigating Antitrust investigations.

We will continue to monitor if and how the Antitrust Division develops its use of DPAs.

Year-End 2020 Agreements

The following summarizes agreements concluded in 2020 that were not otherwise summarized in our Mid-Year Update.

5D Holdings Ltd. (“5Dimes”)

On September 25, 2020, 5D Holdings Ltd. (operating under the brand name “5Dimes”), an offshore internet sports betting company, and Laura Varela, the wife of former 5Dimes owner, operator, and founder, William Sean Creighton, entered into an NPA with the United States Attorney’s Office for the Eastern District of Pennsylvania (“E.D. Pa.”).[30]  E.D. Pa. alleged that 5Dimes, which operated in Costa Rica, allowed American gamblers to place bets through its website, www.5Dimes.eu.[31]  5Dimes allegedly used third-party payment processors to process credit card transactions from American gamblers, hiding the nature of the transactions from credit card companies.[32]  From 2011 to September 2018, 5Dimes allegedly hid more than $46.8 million in illegal gambling proceeds.[33]  In September 2018, Mr. Creighton was kidnapped and murdered; subsequently, Ms. Varela assumed responsibility for 5Dimes’ assets but did not take operational control of the company.[34]  E.D. Pa. began its investigation in 2016, and after Mr. Creighton’s death Ms. Varela sought to resolve the investigation and bring the operations of the company into compliance with U.S. law.[35]

Ms. Varela and 5Dimes “each have cooperated fully and actively” with the investigation, including by identifying criminal assets from 5Dimes, overseeing a new compliance program, reorganizing the corporate structure of the company, and bringing 5Dimes into compliance with U.S. law.[36]  Ms. Varela’s and 5Dimes’ cooperation “did not include information about the identities of individual U.S.-based customers.”[37]  Ms. Varela also temporarily suspended all of 5Dimes’ U.S. operations so that it could “emerge[]” from the NPA ready to lawfully operate in the United States.[38]  E.D. Pa. considered the following conduct in choosing to pursue an NPA:  5Dimes’ “willingness to acknowledge and accept responsibility for its conduct”; Varela’s and 5Dimes’ “extraordinary cooperation”; 5Dimes’ “commitment to agree to the forfeiture of the proceeds”; Varela’s “lack of involvement in the criminal conduct or operations” of 5Dimes; “the changing legal climate of sports betting and its legality in many states in the U.S.”; and “5Dimes’ commitment—as directed by Varela—to becoming compliant with U.S. law.”[39]

5Dimes and Varela must pay $46,817,880.60, which includes forfeiting $3,376,189 in cash, gold, sports memorabilia, and other assets belonging to Creighton; forfeiting $26,441,691.60 in additional assets; forfeiting $2,000,000 that was seized in Costa Rica by Costa Rican law enforcement; and paying $15,000,000 in additional proceeds of the criminal conduct.[40]  E.D. Pa. agreed—at Varela’s request—to “answer inquiries made by gaming regulators, potential investors, and/or financial institutions regarding her cooperation in [E.D. Pa.’s] investigation and lack of involvement in the operations” of 5Dimes.[41]  The 5Dimes agreement does not include an express term of length, but most of 5Dimes’ obligations were required to be satisfied by the effective date of the agreement, which was September 30, 2020.

The Bank of Nova Scotia (DPA)

On August 19, 2020, The Bank of Nova Scotia (“Scotiabank”) and the DOJ Fraud Section, as well as the U.S. Attorney’s Office for the District of New Jersey, entered into a three-year DPA to resolve criminal charges of wire fraud and attempted price manipulation.[42]  The DPA imposes an independent compliance monitor and requires payment of over $60.4 million, composed of a criminal penalty ($42 million), criminal disgorgement ($11.8 million), and victim compensation ($6.6 million).[43]  A portion of the criminal penalty will be credited against payments made to the Commodity Futures Trading Commission (“CFTC”) under a separate agreement.[44]

The Scotiabank DPA resolved allegations that between approximately January 2008 and July 2016, four traders located in New York, London, and Hong Kong placed thousands of unlawful orders in the precious metals futures contracts markets.[45]  One of the traders pleaded guilty to attempted price manipulation in July 2019, with sentencing scheduled for January 2021.[46]

Scotiabank received credit for its cooperation, including (1) voluntarily making an internationally based employee available for interview in the United States, (2) producing documents from foreign countries without implicating foreign data privacy laws, and (3) proactively identifying important documents and information, even when unfavorable.[47]  The DPA also acknowledges Scotiabank’s remedial measures, including increasing the budget, headcount, expertise, and infrastructure of the compliance function.[48]  As part of the DPA, the bank committed to continuing the enhancement of its compliance program and internal controls.[49]  Scotiabank did not receive credit for self-reporting.[50]

This DPA illustrates the importance of compliance programs and the obligation of compliance personnel to address allegedly unlawful behavior.  Although DOJ credited Scotiabank for remediation, the DPA emphasizes the alleged failure of the bank’s “compliance function, especially as it related to trade surveillance function . . . to detect and deter the four traders’ unlawful practices.”[51]  Furthermore, the DPA alleges that for almost a three-year period, three compliance officers had “substantial information” regarding unlawful practices by one trader, yet “failed to stop that activity and thus contributed to the offense conduct.”[52]  Based principally on these considerations, DOJ imposed a fine at the top of the applicable Sentencing Guidelines fine range in calculating the criminal penalty of $42 million,[53] and determined that an independent monitor was necessary.[54]

Contemporaneous with the DOJ resolution, Scotiabank entered into two settlements with the CFTC.  First, Scotiabank consented to a CFTC order, which amended a prior 2018 resolution, resolving allegations of spoofing by the individual traders.[55]  Under the terms of the resolution, Scotiabank agreed to pay approximately $60.4 million, including a civil monetary penalty of $42 million, as well as restitution and disgorgement.[56]  Second, Scotiabank consented to a CFTC order related to false statements made by Scotiabank to the CFTC, Commodity Exchange Inc., and the National Futures Association.[57]  Under the terms of the second resolution, Scotiabank agreed to pay a civil monetary penalty of approximately $17 million.[58]

Beam Suntory Inc. (DPA)

On October 23, 2020, Beam Suntory Inc. (“Beam”), a Chicago-based company that produces and sells distilled beverages, agreed to enter into a three-year DPA with the U.S. Attorney’s Office for the Northern District of Illinois and the DOJ Fraud Section for violating the Foreign Corrupt Practices Act (“FCPA”).[59]  According to the DPA, Beam engaged in a scheme to pay a bribe to an Indian government official in exchange for approval of a license to bottle a line of products that Beam sought to market and sell in India.[60]  Beam also allegedly violated the internal controls and books and records provisions of the FCPA.[61]  For example, a former member of Beam’s legal department allegedly was willfully blind to information related to improper activities and practices by third parties engaged by Beam in India.[62]

Pursuant to the DPA, Beam agreed to pay a $19.5 million criminal fine.[63]  Additionally, Beam agreed to enhance its compliance and ethics program and to review its internal accounting controls, policies, and procedures in connection with the FCPA and other applicable anti-corruption laws.[64]  Beam has also agreed to submit annual reports to DOJ for the three-year term of the DPA regarding the remediation and implementation of these compliance measures.[65]

In a related matter with the SEC, Beam agreed in July 2018 to pay the SEC disgorgement and prejudgment interest totaling approximately $6 million and a civil monetary penalty of $2 million.[66]  However, DOJ did not credit this SEC settlement towards the criminal penalty because, according to DOJ, Beam did not seek to coordinate a parallel resolution with DOJ.[67]  This is noteworthy, as the FPCA Resource Guide advises DOJ and SEC to “strive to avoid imposing duplicative penalties, forfeiture, and disgorgement for the same conduct.”[68]  This policy was articulated by former Deputy Attorney General Rod Rosenstein in May 2018, when he announced the policy against “piling on,” which instructs DOJ attorneys “when possible, to coordinate with other federal, state, local, and foreign enforcement authorities seeking to resolve a case with a company for the same misconduct.”[69]  Nevertheless, the policy provides that DOJ should weigh all relevant factors when determining whether coordination between DOJ and other enforcement agencies is appropriate, including “the adequacy and timeliness of a company’s disclosures and its cooperation with the Department, separate from any such disclosures and cooperation with other relevant enforcement authorities.”[70]  In this case, Beam received only “partial credit” from DOJ for its cooperation and remediation.[71]  Accordingly, this may be a situation where DOJ’s view of Beam’s cooperativeness may have frustrated clean application of the “piling on” policy.

For a discussion of this and other FCPA resolutions in 2020, please refer to our 2020 Year-End FCPA Update.

Catholic Diocese of Jackson (DPA)

On July 15, 2020, the U.S. Attorney for the Northern District of Mississippi (“N.D. Miss.”) entered into a twelve-month DPA with the Catholic Diocese of Jackson, a Mississippi non-profit corporation.[72]  The agreement resolved allegations that the Diocese committed misprision of a felony, stemming from the fraudulent fundraising activities of one of the Diocese’s former priests, Lenin Vargas, who subsequently fled the country to Mexico.[73]  The DPA stated that the Diocese had cooperated with the N.D. Miss. investigation; identified all payments made to Vargas; begun refunding parishioners’ donations made in relation to Vargas’s fraudulent charitable solicitations; and had no prior criminal history.[74]

As part of the terms of the DPA, the Diocese was required to complete “prior remedial measures” including: (1) returning donations made by parishioners related to Vargas’s fraudulent solicitation of charitable donations; (2) undertaking staff changes in the Diocese’s Accounting and Chancery Offices; (3) undertaking improvements in accounting for donations in priest spending; (4) forming a new review board focusing on ethical conduct; (5) establishing a fraud prevention hotline; (6) revising collection practices; and (7) initiating a formal disciplinary process for Vargas, including revocation of his priest privileges by the Catholic Diocese of Jackson, notification regarding Vargas’s activities to his home diocese in Mexico, and initiation of Vargas’s laicization.[75]  The Diocese agreed to cooperate fully with N.D. Miss. as “a material condition of the DPA” and agreed to implement an effective financial compliance program, including a compliance review board and designation of a compliance officer responsible for monitoring the effectiveness of the program.[76]  Additional measures included, among others, an “open[ness] to monitoring/reporting on additional measures taken and the results of its changes to the parish and priest financial reporting,” reconciliation with those impacted by the priest’s conduct without retaliation for participation in N.D. Miss.’s investigation, and a commitment to undertake steps to remove the offending priest’s rights under Canonical law.[77]

Commonwealth Edison Company (DPA)

On July 17, 2020, Commonwealth Edison Company (“ComEd”), an electric utility provider, entered into a DPA with the United States Attorney’s Office for the Northern District of Illinois (“N.D. Ill.”).[78]  N.D. Ill. alleged that ComEd arranged “jobs, vendor subcontracts, and monetary payments associated with those jobs and subcontracts” for associates of “Public Official A,” in exchange for passing favorable legislation.[79]  Media outlets have reported that “Public Official A” is Michael Madigan, the Speaker of the Illinois House of Representatives and the Chairperson of the Democratic Party of Illinois.[80]  ComEd allegedly paid associates of Mr. Madigan—who performed “little or no work” for ComEd—over $1.3 million between 2011 and 2019.[81]  N.D. Ill. also alleged that Mr. Madigan arranged for ComEd to appoint his associate to its Board of Directors, retain a certain law firm, despite not having “enough appropriate legal work” to give to the firm, and award internships to students from Mr. Madigan’s ward in Chicago.[82]  In return, N.D. Ill. alleged that Mr. Madigan supported two bills—the Energy and Infrastructure and Modernization Act of 2011 and the Future Energy Jobs Act of 2016—the “reasonably foreseeable anticipated benefits” of which to ComEd exceeded $150,000,000.[83]

N.D. Ill. acknowledged that ComEd “provided substantial cooperation,” including “conducting a thorough and expedited internal investigation” and “making regular factual presentations to” N.D. Ill. at which ComEd “shar[ed] information that would not have been otherwise available to the government.”[84]  ComEd also created a new position—Executive Vice President for Compliance and Audit—which maintains “a direct reporting line to the Audit Committee of the Exelon [ComEd’s parent company] Board of Directors and Chief Executive Officer.”[85]  Additionally, ComEd drafted and implemented new compliance policies, which require careful review of ComEd’s ongoing relationships with third-party lobbyists and political consultants.[86]  ComEd did not receive voluntary self-disclosure credit.

The DPA has a three-year term, which may be extended up to one year if N.D. Ill. finds that ComEd breached the agreement.[87]  ComEd must pay a criminal penalty of $200,000,000, which ComEd can make in two installments:  $100,000,000 within 30 days of the filing of the DPA and the remaining $100,000,000 within 90 days of the filing of the DPA.[88]  Over the course of the three years, ComEd must conduct and submit reports on compliance reviews at least annually.[89]

CSG Imports and KG Imports

On August 14, 2020, the U.S. Attorney’s Office for the District of New Jersey (“D.N.J.”) entered into DPAs with CSG Imports LLC and KG Imports LLC, both of Lakewood, New Jersey, to resolve violations of the Defense Production Act of 1950 for allegedly price-gouging consumers of personal protective equipment (“PPE”) during the COVID-19 pandemic.[90]  The resolutions arise out of law enforcement’s April 22, 2020, seizure of over 11 million items of PPE—predominantly N-95 respirator face masks and three-ply disposable face masks—owned by CSG Imports and KG Imports from three warehouses in Lakewood.[91]  Law enforcement seized the PPE after learning that the companies were offering for sale and selling scarce PPE at prices in excess of prevailing market prices for those items.[92]

CSG Imports entered into a one-year DPA with D.N.J., and KG Imports entered into a two-year DPA.[93]  Under the terms of its DPA, CSG Imports has committed to selling the seized PPE at cost and compensating two entities that purchased PPE from CSG Imports in excess of prevailing market prices in the amount of $400,000.[94]  The agreement provides that CSG Imports must pay a minimum of $200,000 to each entity directly (in amounts proportionate to CSG Imports’ profits), and that it may compensate the remaining portion of the $400,000 by transferring PPE to these entities at no cost.[95]  Pursuant to its DPA, KG Imports also agreed to sell the seized PPE at cost.[96]

Additionally, CSG Imports agreed that it would cease, for the term of the DPA, obtaining PPE of any kind for the purpose of resale.[97]  If CSG Imports does not comply with this requirement, the term of the agreement will be extended to two years.[98]

D.N.J. cited the following factors as relevant to both DPAs:

• Both CSG Imports and KG Imports accepted responsibility for the conduct described in their respective Statements of Facts;
• Each entity cooperated with D.N.J.’s investigation;
• Each entity agreed to the sale and disposition of PPE previously seized by the government at prices not to exceed reasonable costs; and
• Neither entity voluntarily self-disclosed the conduct at issue to D.N.J.[99]

In the case of CSG Imports, D.N.J. also cited its agreement to compensate particular entities $400,000 for their purchase of PPE during the relevant time period.[100]

Both entities are required to report to D.N.J. at six-month intervals regarding all transactions involving the sale of the seized PPE until the last of the seized PPE has been sold or otherwise transferred.[101]

Essentra FZE (DPA)

On July 16, 2020, Essentra FZE Company Limited (“Essentra FZE”), a global supplier of cigarette products incorporated in the United Arab Emirates (UAE), entered into a three-year DPA with the United States Attorney’s Office for the District of Columbia and the DOJ National Security Division for conspiring to violate the International Emergency Economic Powers Act (“IEEPA”) and defrauding the United States in connection with evading sanctions on North Korea.[102]  According to the DPA, Essentra FZE conspired to violate the North Korea Sanctions Regulations by causing a U.S. financial institution, including its foreign branch, to export financial services to North Korea, in violation of 31 C.F.R. § 510.101 et seq.[103]  In particular, Essentra FZE allegedly conspired with a front company to export cigarette products to North Korea by establishing false end-user information for shipments to North Korea and addressing commercial invoices to financial cutouts.  The DPA alleges that this was done in an effort to conceal the North Korean nexus of these transactions and deceive U.S. financial institutions into processing Essentra FZE’s U.S. dollar transactions.[104]  Notably, this is the first-ever DOJ corporate resolution for violations of the sanctions regulations placed on North Korea in March 2016.[105]

As part of the DPA, Essentra FZE agreed to pay a $665,112 fine, which represents twice the value of the transactions at issue in the DPA.[106]  In addition, Essentra FZE has implemented and will continue to implement a sanctions compliance program, including global sanctions training covering the United States, the United Nations, United Kingdom, and European Union sanctions and trade control laws.[107]  Finally, Essentra FZE is required to provide quarterly reports describing the status of the company’s continued improvements to its sanctions compliance program, as required by the DPA, in addition to other reporting requirements.[108]

Essentra FZE also entered into a settlement agreement with the Treasury Department’s Office of Foreign Assets Control (“OFAC”) in connection with these violations, and was assessed a $665,112 fine.[109]  OFAC credited Essentra FZE’s DOJ penalty, and therefore its obligation to pay OFAC was deemed satisfied.[110]

Goldman Sachs Group, Inc. (DPA)

On October 22, 2020, the Goldman Sachs Group, Inc. (“Goldman Sachs”), the U.S. Attorney’s Office for the Eastern District of New York (“E.D.N.Y.”), and DOJ’s Criminal Division, Fraud Section and Money Laundering and Asset Recovery Sections (together, “the Offices”) entered into a DPA as part of a $2.9 billion global settlement for alleged conspiracy to violate the anti-bribery provisions of the FCPA related to three bond offerings the firm had structured and arranged for Malaysia’s state development fund 1MDB.[111]  The DPA term is three years, with the option for an extension of one year if the Offices, in their sole discretion, determine Goldman Sachs has knowingly violated any provision of the DPA.[112]  Additionally, a Malaysian subsidiary of Goldman Sachs pleaded guilty to one count of conspiracy to violate the anti-bribery provisions of the FCPA.[113]

The DPA states that the Offices reached this resolution with Goldman Sachs based on a number of factors, including Goldman Sachs’s remedial measures and commitment to enhancing its compliance controls.  Relevant measures identified in the DPA included: (i) implementing heightened controls and additional procedures and policies relating to electronic surveillance and investigation, due diligence on proposed transactions or clients, and the use of third-party intermediaries across business units; and (ii) enhancing anti-corruption training for all management and relevant employees.[114]  Goldman Sachs received partial credit for cooperation with the investigation and did not receive voluntary disclosure credit.

The company agreed to report to the Offices annually during the term of the DPA regarding its remediation and implementation of the compliance measures.

Herbalife Nutrition Ltd. (DPA)

On August 28, 2020, Herbalife Nutrition, Ltd. (“Herbalife”), a global nutrition company, agreed to enter into a three-year DPA with the DOJ Fraud Section and the U.S. Attorney’s Office for the Southern District of New York (“S.D.N.Y.”) for conspiring to violate the books and records provisions of the FCPA.[115]  According to the DPA, from 2007 to 2016, Yangliang Li, an executive at one of Herbalife’s wholly owned subsidiaries based in China (Herbalife China), and other employees at Herbalife China, engaged in a scheme to falsify books and records and provide improper payments and benefits to Chinese government officials, for the purpose of obtaining, retaining, and increasing Herbalife’s business in China.[116]  Li and others at Herbalife China, according to the DPA, maintained false account records that did not accurately reflect the transactions and dispositions of Herbalife’s assets by, for example, falsely recording certain payments and benefits as “travel and entertainment expenses.”[117]

As part of the DPA, Herbalife agreed to pay a criminal fine of over $55 million.  In addition, Herbalife has implemented and will continue to implement a compliance and ethics program related to the FCPA and other applicable anti-corruption laws, as well as undertake a review of its internal accounting controls, policies, and procedures regarding compliance with the FCPA and other applicable anti-corruption laws.[118]  Further, Herbalife will submit annual reports for the term of the DPA regarding the remediation and implementation of these compliance measures.[119]

In November 2019, DOJ unsealed related criminal charges against Li and another former Herbalife China executive involved in the criminal conduct.[120]  Finally, in a related matter with the SEC, Herbalife agreed to pay disgorgement and prejudgment interest totaling over $67 million.[121]

Jia Yuan USA Co. (NPA)

On October 5, 2020, Jia Yuan USA Co., Inc., the subsidiary of China-based hotel group Shenzhen Hazens, entered into a three-year NPA with the U.S. Attorney’s Office for the Central District of California (“C.D. Cal.”) to resolve an investigation into the company’s conduct with Los Angeles municipal officials, including alleged bribery, honest services fraud, and foreign and conduit campaign contributions.[122]  The company agreed to pay a criminal monetary penalty of $1,050,000 as part of the resolution.[123]

To advance the company’s efforts to operate and redevelop a Los Angeles hotel which it purchased in 2014 for more than $100 million, Jia Yuan admitted a series of acts including: providing concert tickets to a city councilman soon after that individual and the city’s deputy mayor for economic development intervened in a compliance issue on behalf of the hotel group; making campaign contributions to several U.S. political candidates despite being prohibited from doing so; providing several in-kind contributions to political candidates by hosting reduced-cost fundraising events at the hotel in question; and providing indirect bribe payments and a family trip to China for the city councilman.[124]

The company’s substantial cooperation appears to have contributed to DOJ’s decision to enter the NPA in lieu of prosecution.  According to the NPA, relevant considerations included the company’s “extensive internal investigative actions in connection with the collection, analysis and organization of vast amounts of relevant data and evidence, including providing C.D. Cal. records located in China and in the personal possession of its Chairman.”[125]  The company also timely accepted responsibility for its conduct and took several remedial measures, including the termination of an outside consultant involved in the alleged bribery (who separately pleaded guilty and will be sentenced in early 2021) and various enhancements to its ethics, compliance, and internal controls programs.[126] The NPA also specifically noted the company’s agreement to “continue to cooperate with the USAO and the FBI during the pendency of any prosecution the USAO has instituted and may institute” based on related conduct.[127]

JP Morgan Chase & Co. (DPA)

On September 29, 2020, JPMorgan Chase & Co. (“JPMorgan”) and the DOJ Fraud Section, as well as the U.S. Attorney’s Office for the District of Connecticut (“D. Conn.”), entered into a three-year DPA to resolve criminal charges of wire fraud.[128]  Under the terms of the DPA, JPMorgan paid over $920 million in a criminal monetary penalty ($436.4 million), criminal disgorgement ($172 million), and victim compensation ($311.7 million).[129]  The monetary penalty and disgorgement will be credited for separate agreements with the CFTC and SEC, respectively.[130]

The JPMorgan DPA resolved allegations related to two fraudulent schemes spanning eight years.  First, from about March 2008 to August 2016, traders and sales personnel working in New York, London, and Singapore allegedly unlawfully traded in the markets for precious metals futures contracts.[131]  Two individual traders located in New York pleaded guilty to related charges in 2018 and 2019; to date, neither has been sentenced.[132]  DOJ also obtained a superseding indictment against three former traders and one former salesperson in the Northern District of Illinois in 2019; to date, the charges have not been resolved.[133]  The second alleged scheme occurred from about April 2008 to January 2016.[134]  Traders in New York and London allegedly unlawfully traded in the markets for U.S. Treasury futures contracts and in the secondary cash market for U.S. Treasury notes and bonds.[135]

As part of the DPA, JPMorgan and its subsidiaries, JPMorgan Chase Bank, N.A. (“JPMC”) and J.P. Morgan Securities LLC (“JPMS”), agreed to “cooperate fully” with the Fraud Section and D. Conn. in any matters relating to the conduct at issue in the DPA or other conduct under investigation.[136]  JPMorgan and its subsidiaries also must report evidence or allegations of conduct that may constitute a violation of the wire fraud statute or other enumerated laws governing securities, commodities, and trading.[137]  Furthermore, the entities agreed to enhance their compliance programs and report to the government regarding those enhancements.[138]

DOJ credited JPMorgan for its cooperation and remedial efforts.[139]  The DPA highlights that JPMorgan suspended and ultimately terminated employees involved in the conduct and provided all relevant facts known to it, including information regarding individual participants.[140]  The DPA also describes JPMorgan’s efforts to improve its compliance program and internal controls, including: (1) hiring hundreds of compliance officers and internal audit personnel, with significant increases in compliance and internal audit spending; (2) improving anti-fraud and manipulation training and policies; (3) revising its trade surveillance program, with continuing modifications to the parameters used to detect potential spoofing in response to lessons learned; (4) increasing its electronic communications surveillance program, with ongoing updates to the universe of monitored employees and regular updates to the lexicon used; (5) implementing tools to facilitate closer supervision of traders; (6) considering employees’ commitment to compliance in promotion and compensation decisions; and (7) implementing independent quality assurance testing of surveillance alerts.[141]  Based on the remedial efforts, state of the compliance program, and reporting obligations, DOJ did not require an independent compliance monitor.[142]

DOJ also considered a number of other factors when determining the type and scope of the resolution, including the number of instances of unlawful trading (tens of thousands) and duration of the alleged misconduct (over nearly eight years),[143] as well as a guilty plea on May 20, 2015, for similar conduct.[144]  The company did not receive credit for timely and voluntary self-disclosure.[145]

In a separate but parallel resolution with the CFTC, JPMorgan and its subsidiaries agreed to pay approximately $920 million, including a civil monetary penalty of approximately $436 million, as well as restitution and disgorgement, credited to any such payments made to DOJ.[146]  Similarly, JPMS resolved an investigation by the SEC into trading activity in the secondary cash market.[147]  JPMS agreed to pay $10 million in disgorgement and a civil monetary penalty of $25 million.[148]

Natural Advantage LLC (DPA)

On June 10, 2020, Natural Advantage LLC, a Louisiana-based chemical manufacturer, entered into a three-year DPA and agreed to forfeit $1,938,650 to resolve charges that it distributed and exported regulated List 1 chemicals (those which, in addition to legitimate uses, can be precursor chemicals for the production of methamphetamine and ecstasy) without proper registration.[149] Two executives were simultaneously charged in a criminal information with failure to appropriately report the manufacture of such chemicals under 21 U.S.C. § 843(a)(9).[150]

Natural Advantage allegedly distributed and exported 1,550 kilograms of List 1 chemicals domestically and internationally without obtaining the proper registration from the U.S. Drug Enforcement Administration.[151]  The DEA had previously warned the company not to distribute these chemicals without authorization, and the charged executives allegedly concealed their conduct by failing to file annual manufacturing reports.[152]  However, the DPA and information do not allege that the chemicals were diverted to narcotics traffickers.[153]

The company received credit for its acceptance of responsibility, cooperation with law enforcement, and commitment to enhance its regulatory compliance measures.[154]  As part of the latter factor, the company agreed to retain an independent auditor to oversee compliance with List 1 chemical distribution and associated accounting requirements.[155]  Relevant considerations also included the potential collateral consequences to employees and the absence of any prior criminal history.[156]  However, the DPA also noted the seriousness of the misconduct that spanned multiple jurisdictions and was known by company management.[157]

Patterson Companies, Inc. (NPA) 

On February 14, 2020, Patterson Companies, Inc. (“Patterson”) entered into an NPA in coordination with the simultaneous guilty plea of its corporate subsidiary, Animal Health International, Inc. (“AHI”), a Colorado veterinary and agricultural prescription distributor, for introducing misbranded drugs into interstate commerce.[158]  The allegations centered on AHI’s distribution of veterinary drugs from unlicensed veterinarians and to individuals not authorized or licensed to receive such drugs.[159]  AHI was required to pay $52 million in penalties as a result of its plea, and Patterson committed to enhance its compliance program.[160]

The NPA highlighted Patterson’s cooperation in the investigation in the decision not to prosecute the company.[161]  This cooperation included proactively bringing information to the prosecutor’s attention, remediation of non-compliant activity and implementation of control enhancements (including as it related to licensing, dispensing, distribution, and related sales practices), and entering into tolling agreements.[162]  Patterson also voluntarily disclosed additional non-compliant conduct at the company beyond that described in the information against AHI.[163]  The NPA noted that the company “has since taken extensive proactive steps to enhance its regulatory function, capabilities and support to guide the business and other control functions on regulatory compliance matters.”[164]

Power Solutions International, Inc. (NPA)

On September 24, 2020, Power Solutions International, Inc. (“PSI”), an engine manufacturing company, entered into an NPA with N.D. Ill.[165]  N.D. Ill. alleged that from 2014 through 2016, PSI over-reported its revenue figures by millions of dollars in representations to the SEC.[166]  The same day, PSI also resolved a parallel SEC investigation through a settlement agreement in which PSI agreed to pay a $1.7 million civil fine and remedy deficiencies in its internal controls.[167]  PSI senior executives, including the CEO, allegedly agreed to special terms—which included rights to “return products,” “exchange products,” “discounts,” and “extended and indefinite periods in which to pay”—for certain transactions but did not report the special terms to PSI’s Accounting Department, effectively inflating the recognized revenue for those transactions.[168]  N.D. Ill. also alleged that PSI shipped products without customers’ knowledge and consent to further inflate its revenue and made misrepresentations to its auditor to conceal the inflated revenue.[169]

N.D. Ill. recognized that PSI promptly hired outside counsel and a forensic accounting firm to conduct an independent investigation after allegations of inflating revenue were raised to the company’s Board of Directors.[170]  Upon learning of N.D. Ill.’s and the SEC’s investigations into the same allegations, PSI took several steps, including apprising N.D. Ill. of its internal investigation, removing employees involved in the conduct, and “implementing extensive remedial measures and operational improvements.”[171]  N.D. Ill. gave PSI full credit for cooperating with its investigation, including “voluntarily waiving the attorney-client privilege and work product protection to provide additional information to [N.D. Ill.], including the results of its independent investigation.”[172]  PSI’s remedial measures included “removing certain executives and employees” involved in the conduct; “retaining a new leadership team,” including a new CEO, CFO, Chairman of the Board, and others; compensating shareholder victims through an $8.5 million class action settlement; “full remediation of the deficiencies in its internal control over financial reporting”; the $1.7 million fine paid to the SEC; and “extensive operational improvements,” including creating the new position of Vice President of Internal Audit.[173]  Given PSI’s cooperation, N.D. Ill. agreed to an NPA, although PSI did not receive voluntary self-disclosure credit.[174]

The NPA has a three-year term, which may be extended up to one year if N.D. Ill. finds that PSI breached the agreement.[175]  N.D. Ill. did not impose a criminal monetary penalty, recognizing that given PSI’s “current financial condition,” “even with the use of a reasonable installment schedule,” it would be unable to pay a criminal monetary penalty on top of the $8.5 million civil class action settlement and $1.7 million civil fine to the SEC without “seriously jeopardizing the Company’s continued viability.”[176]  N.D. Ill. also required PSI to conduct and submit reports on compliance reviews at least annually over the course of the three-year agreement.[177]

Progenity, Inc. (NPA)

On July 21, 2020, Progenity, Inc., a San Diego-based clinical laboratory, entered into a one-year NPA with the U.S. Attorney’s Office for the Southern District of California (“S.D. Cal.”) as part of a $49 million multi-jurisdictional settlement.[178]  Concurrently with the NPA to resolve criminal allegations, Progenity entered into civil settlements with S.D. Cal. and S.D.N.Y., as well as multiple states.[179]  Although the NPA carried no separate monetary penalty, Progenity agreed to pay a total of $49 million to resolve federal and state civil allegations that Progenity had fraudulently billed and submitted false claims to federal healthcare programs by using incorrect Current Procedural Terminology (“CPT”) codes for its noninvasive prenatal testing (“NIPT”) for pregnant women and provided kickbacks to physicians to induce to them to order Progenity tests for their patients.[180]

The criminal investigation, which was brought only by S.D. Cal., related to the company’s practices for billing its NIPT tests to government healthcare programs and were resolved via an NPA based on a number of factors, including: the company’s extensive remedial efforts, including termination of employees responsible for the payments, its compliance program, creating a Compliance Committee independent from the Board composed of senior personnel, instituting third-party review of Progenity’s CPT code selection, and conducting regular audits of claims to government payors; cooperation with S.D. Cal.’s investigation; and the payment of restitution to the relevant federal healthcare programs.[181]  S.D. Cal. also noted the significant collateral consequences to healthcare beneficiaries and the public from further prosecution of Progenity.[182]

Under the terms of the NPA, S.D. Cal. may, upon notice to Progenity, extend the term of the NPA in six-month increments, for a maximum total term of two years (that is, the one-year NPA term plus two six-month extensions).[183]

Schneider Electric Buildings Americas, Inc. (NPA)

On December 16, 2020, Schneider Electric Buildings Americas, Inc. (“Schneider Electric”), an electricity services company, entered into an NPA with the United States Attorney’s Office for the District of Vermont (“D. Vt.”).[184]   D. Vt. alleged that Schneider Electric made and submitted false claims and false statements material to false claims regarding eight “Energy Savings Performance Contracts” made with the Department of the Navy, the Department of Homeland Security, the General Services Administration, the Department of Agriculture, and the Department of Veterans Affairs.[185]   According to D. Vt., these false claims included “hiding or burying” costs from one project in separate construction estimates, inflating line item construction cost estimates, and improperly allocating risk, which inflated the cost of the contracts.[186]  D. Vt. also alleged that a former Schneider Electric Senior Project Manager solicited and received kickbacks for six of those contracts.[187]

Schneider Electric received partial cooperation credit for, among other things, voluntarily disclosing the findings of its internal investigation, voluntarily disclosing additional wrongdoing not previously known to the government, and producing 1.9 million pages of documents before they were fully reviewed by counsel.[188]  Schneider Electric also “engaged in extensive remedial measures, including enhancing its compliance program and internal controls”; terminated two employees responsible for the alleged wrongdoing and “admonished” two more employees who were involved; voluntarily made employees available for interviews; and agreed to cooperate in the government’s ongoing investigation.[189]  That said, D. Vt. did not give credit to Schneider Electric for timely accepting responsibility for its conduct (though it did ultimately admit responsibility for the actions of its direct and indirect agents), voluntary self-disclosure, identifying any individuals (with one exception) not previously known to the government, or calculating certain loss amounts.[190]

The NPA has a three-year term, which may be extended up to one year if D. Vt. finds that Schneider Electric breached the agreement.[191]  The NPA provides for $1,630,700 in criminal forfeiture.[192]   In addition, under a separate civil settlement agreement with the DOJ Civil Division and D. Vt. (on behalf of the Department of the Navy, the Department of Homeland Security, the General Services Administration, the Department of Agriculture, and the Department of Veterans Affairs), Schneider Electric agreed to pay a civil fine of $9,369,000, of which $4,625,546.44 (nearly half) is restitution and interest.[193]  Schneider Electric must submit reports to the government of annual compliance reviews undertaken over the course of the three-year agreement.[194]

Select Energy Services, Inc. (NPA)

On September 28, 2020, Select Energy Services, Inc. (“SES”), a water management company, entered into an NPA with the United States Attorney’s Office for the Middle District of Pennsylvania (“M.D. Pa.”).[195]  SES is the successor in interest to Rockwater Energy Solutions, Inc. (“Rockwater Energy”), which is the parent company of Rockwater Northeast LLC (“Rockwater Northeast”).  Rockwater Northeast entered into a plea agreement with M.D. Pa.[196]  As a condition of that plea agreement, SES agreed to entered into an NPA.[197]  Six individuals also pleaded guilty, four of whom were Rockwater Northeast employees and two of whom were third-party contractors—DOJ has noted that the adequacy of prosecution of individuals is a factor when making charging decisions.

M.D. Pa. alleged that Rockwater Northeast and Rockwater Energy violated the Clean Air Act by installing “defeat devices” on 60 heavy-duty diesel trucks, which are designed to foil annual safety inspections by the Department of Transportation.[198]

The NPA has a three-year term, and SES must pay a monetary penalty of $2.3 million.[199]  SES agreed to continue cooperating with M.D. Pa. and implement an environmental compliance program.[200]  Over the course of the agreement, SES must conduct annual audits over the course of the three-year NPA to ensure compliance with the Clean Air Act.[201]

Taro Pharmaceuticals (DPA)

On July 23, 2020, Taro Pharmaceuticals U.S.A., Inc. (“Taro”) entered into a DPA to resolve allegations that the company participated in two criminal antitrust conspiracies to fix prices, allocate customers, and rig bids for generic drugs.[202]  The company agreed to pay a $205,653,218 criminal penalty and admitted that its sales affected by the charged conspiracies exceeded $500 million.[203]  Taro additionally agreed to cooperate fully with the Antitrust Division’s ongoing criminal investigation into the generic drug industry.[204]

Among the factors motivating the Antitrust Division to agree to a pre-trial resolution was that a conviction for Taro could result in severe collateral consequences in the form of mandatory exclusion from federal healthcare programs.[205]  This consideration has been noted in other DPAs entered into by the Antitrust Division, discussed above.

Taro’s resolution with the Antitrust Division is the latest in a series of five DPAs entered into in connection with a common investigation into price fixing in the generic drug industry, which we began to cover in our 2019 Year-End Update and again in our 2020 Mid-Year Update.  In addition to the five DPAs associated with this investigation, four executives have been charged for their roles in the alleged price fixing schemes, and three of those individuals have pleaded guilty.  Former Taro U.S.A. executive Ara Aprahamian was indicted in February 2020 and is awaiting trial.[206]

The generic drug industry agreements reflect the Antitrust Division’s recent shift toward using DPAs to resolve charges, which is covered in further detail above.

Ticketmaster LLC (DPA)  

On December 30, 2020, Ticketmaster LLC (“Ticketmaster”), an online event ticket retailer and distributor, entered into a three-year DPA with E.D.N.Y. and agreed to pay $10,000,000 to resolve Computer Fraud and Abuse Act, computer intrusion, and fraud charges stemming from its alleged repeated accessing of the computer systems of a competitor without authorization.[207]  The former head of Ticketmaster’s Artist Services division pleaded guilty in a related case to conspiracy to commit computer intrusions and wire fraud in October 2019.[208]

The alleged scheme centered on Ticketmaster’s use of information derived from a former employee of the company’s competitor, which offered artists the ability to sell presale tickets in advance of the general tickets that Ticketmaster provided.[209]  The employee shared with Ticketmaster employees unique URLs used by the competitor for drafting ticketing web pages.  Ticketmaster used this information to retrieve information from these nonpublic websites to “benchmark” Ticketmaster’s prices against those of its competitor, thereby granting it a competitive advantage.[210]

Ticketmaster received only partial credit for cooperation, in part because it disclosed the conduct to the government only after it was identified in civil litigation.[211]  Ticketmaster agreed to implement remedial measures, including those specific to the use and misuse of computer systems and passwords, along with enhancements to its compliance and internal controls programs.[212]  Other relevant considerations to the form of agreement included the duration of the scheme, alleged repeated instances of misconduct by employees and executives, and the resulting benefits for the company from the misconduct.[213]  The DPA further requires Ticketmaster to submit an annual report regarding remediation and implementation of the agreed-upon compliance measures, but does not require an independent compliance monitor in light of the company’s remediation and the effectiveness of its compliance program.[214]

Vitol Inc. (DPA) 

On December 3, 2020, DOJ Fraud and E.D.N.Y. entered into a three-year DPA with Vitol Inc. (“Vitol”), the U.S. affiliate of one of the largest oil distributors and energy commodities traders in the world, for conspiring to violate the anti-bribery provisions of the FCPA between 2005 and 2020.[215]  The DPA alleged that Vitol made improper payments to foreign officials at state-owned oil companies in Brazil, Ecuador, and Mexico.[216]

As part of the resolution, Vitol agreed to pay a total criminal penalty of $135 million, $45 million of which DOJ credited against the amount the company will pay to resolve a parallel investigation by the Brazilian Ministério Público Federal for the same conduct relating to Brazil.[217]  Vitol also settled related charges via cease-and-desist proceedings brought by the CFTC, which included “attempted manipulation of S&P Global Platts physical oil benchmarks.”[218]  This case was the first CFTC action involving foreign corruption, and, as part of the CFTC settlement, Vitol agreed to pay $12.7 million in disgorgement and a civil penalty of $16 million related to Vitol’s trading activity not covered by the DOJ settlement.[219]

Vitol and its parent company, Vitol S.A.,[220] received full credit for cooperation, which included: (1) making factual presentations to DOJ Fraud and E.D.N.Y.; (2) voluntarily facilitating an interview in the U.S. of a former foreign-based employee; (3) promptly producing relevant documents, including documents outside of the United States and translations of documents; and (4) timely accepting responsibility for the conduct and reaching a prompt resolution.[221]  Vitol and Vitol S.A. also provided DOJ with “all relevant facts known to them, including information about the individuals involved” in the alleged misconduct.[222]  The DPA further acknowledged that Vitol, Vitol S.A., and their affiliates engaged in remedial measures, including enhancing their compliance programs and internal controls, making personnel changes, conducting internal investigations and risk assessments, and enhancing their training and internal reporting programs.[223]  Vitol did not receive voluntary self-disclosure credit.[224]

The DPA did not impose a corporate monitor due to Vitol and Vitol S.A.’s remediation efforts and annual reporting requirements during the term of the DPA.[225]

International DPA Developments

We continue to track the global trend of countries adopting and developing DPA regimes.  As prior Mid-Year and Year-End Updates have discussed (see, e.g., our 2020 Mid-Year Update), Canada, France, Singapore, and the United Kingdom currently allow for DPA or DPA-like agreements, although prosecutors in Canada and Singapore have yet to enter into such an agreement since both countries passed legislation authorizing the practice in 2018.[226]  Additional countries, including Australia,[227] Ireland,[228] Poland,[229] and Switzerland,[230] have also considered adopting DPAs or similar agreements, but little progress has been made on the proposals in all four countries since 2018.  France and the United Kingdom therefore continue to be the frontrunners in developing DPA-like regimes in the international landscape, as the United Kingdom has allowed DPAs since 2013, France has allowed DPA-like agreements since 2016, and both announced agreements and issued related guidance in 2020.

The United Kingdom led the international DPA scene in terms of number of agreements in 2020, with the Serious Fraud Office (“SFO”) entering into three new DPAs.  As discussed in our 2020 Mid-Year Update, the SFO entered into DPAs with Airbus SE[231] and G4S Care and Justice Services (UK) Ltd[232] in the first half of the year.  In October, the SFO also entered into a third DPA with Airline Services Limited and released comprehensive guidance on the office’s approach to DPAs, both discussed below.  France’s Ministry of Justice entered into two Conventions Judiciaire d’Intérêt Public or Judicial Public Interest Agreements (“CJIPs”)—and released a circular concerning CJIPs in 2020, discussed in our 2020 Mid-Year Update.

Airline Services Limited (United Kingdom)

On October 22, 2020, the SFO announced that it reached a DPA with Airline Services Limited (“ASL”),[233] and the DPA was approved by the Southwark Crown Court a week later.[234]  The DPA resolved allegations that ASL, an airlines services company based in the United Kingdom, failed to prevent bribery by an associated person in violation of the U.K. Bribery Act.[235]  ASL, as described in the agreement, engaged an agent to assist in procuring contracts from airlines that was at the same time engaged by Deutsche Lufthansa AG as a project manager responsible for assessing bids received.  Between 2011 and 2013, the agent assisted ASL in submitting three winning bids to Lufthansa by sharing confidential information with ASL about the bidding process.  ASL self-reported the conduct to the SFO in July 2015, but the SFO did not announce its investigation until the DPA was reached in October 2020.[236]

Pursuant to the DPA, ASL agreed to pay disgorgement in the amount of £990,971.45.[237]  ASL also agreed to pay a financial penalty of £1,238,714.31, which included a 50% discount to reflect ASL’s early self-report and cooperation with the SFO, and a contribution to the SFO’s costs of £750,000.[238]

SFO Guidance on DPAs

In October 2020, the SFO also updated the SFO Operational Handbook to include a chapter on DPAs.[239]  The Director of the SFO described the chapter as “comprehensive guidance” on how the SFO approaches DPAs, as well as how the office engages with companies where a DPA is a prospective outcome.[240]  The guidance echoes much of the same content as the DPA Code of Practice that has been in place since 2014,[241] and the Code of Practice is cited frequently throughout the guidance.  The guidance provides an overview of the two tests that must be applied by a prosecutor in considering a DPA: the evidential test, which assesses whether there is sufficient evidence to provide a realistic prospect of conviction, and the public interest test, which asks whether the public interest would be properly met by entering into a DPA rather than proceeding with prosecution.[242]  The guidance also outlines many of the key factors that the SFO will consider when deciding whether to enter into a DPA, including cooperation and voluntary self-reporting.  Similar to DOJ policy in the United States, the guidance also encourages prosecutors to consider parallel investigations by other agencies, either overseas or in the U.K.[243]  Although the guidance is consistent with SFO’s Code of Practice, it provides greater clarity on the mechanics of negotiating a DPA with the SFO.  For additional information on the SFO guidance, please refer to our October 2020 client alert.

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APPENDIX:  2020 Non-Prosecution and Deferred Prosecution Agreements

The chart below summarizes the agreements concluded by DOJ in 2020.  The SEC has not entered into any NPAs or DPAs in 2020.  The complete text of each publicly available agreement is hyperlinked in the chart.

The figures for “Monetary Recoveries” may include amounts not strictly limited to an NPA or a DPA, such as fines, penalties, forfeitures, and restitution requirements imposed by other regulators and enforcement agencies, as well as amounts from related settlement agreements, all of which may be part of a global resolution in connection with the NPA or DPA, paid by the named entity and/or subsidiaries.  The term “Monitoring & Reporting” includes traditional compliance monitors, self-reporting arrangements, and other monitorship arrangements found in settlement agreements.

5D Holdings Ltd.	E.D. Pa.	Illegal gambling / wire fraud	NPA	$46,817,881	No	Not specified(a)
Airbus SE	DOJ Fraud; DOJ NSD; D.D.C.	FCPA; AECA; ITAR	DPA	$582,628,702	Yes	36
Alcon Pte Ltd	DOJ Fraud; D.N.J.	FCPA	DPA	$8,925,000	Yes	36
Alutiiq International Solutions, LLC	DOJ Fraud	Major fraud against the United States	NPA	$1,259,444	Yes	36
Apotex Corporation	DOJ Antitrust	Antitrust	DPA	$24,100,000	No	36
Bank Hapoalim B.M.	DOJ Tax; S.D.N.Y.	Tax	DPA	$874,270,533	Yes	36
Bank Hapoalim B.M. and Hapoalim (Switzerland) Ltd.	DOJ MLARS; E.D.N.Y.	AML	NPA	$30,063,317	Yes	36
Bank of Nova Scotia	DOJ Fraud; D.N.J.; CFTC	Wire fraud; price manipulation	DPA	$77,451,102	Yes	36
Beam Suntory Inc.	N.D. Ill.; DOJ Fraud	FCPA	DPA	$19,572,885	Yes	36
Bradken Inc.	W.D. Wash.; DOJ Civil	Major fraud against the United States	DPA	$10,896,924	No	36
CSG Imports LLC	D.N.J.	Defense Production Act	DPA	$400,000	Yes	12
Catholic Diocese of Jackson, Miss.	N.D. Miss.	Fraud	DPA	$0	Yes	12
Chipotle Mexican Grill Inc.	C.D. Cal.; DOJ CPB	FDCA	DPA	$25,000,000	Yes	36
Commonwealth Edison Company (ComEd)	N.D. Ill.	Bribery of a Public Official	DPA	$200,000,000	Yes	36
Essentra FZE	DOJ NSD; D.D.C.	Sanctions	DPA	$666,544	Yes	36
Florida Cancer Specialists & Research Institute LLC	DOJ Antitrust	Antitrust	DPA	$100,000,000	No	44
Goldman Sachs	E.D.N.Y.; DOJ Fraud; DOJ MLARS	FCPA	DPA	$1,967,088,000	Yes	36
Herbalife Nutrition Ltd.	DOJ Fraud; S.D.N.Y.	FCPA	DPA	$123,056,591	Yes	36
Industrial Bank of Korea	S.D.N.Y.	BSA	DPA	$86,000,000	Yes	24
Jia Yuan USA Co., Inc.	C.D. Cal.	Federal program bribery	NPA	$1,050,000	No	36
JPMorgan Chase & Co.	DOJ Fraud; D. Conn.	Wire Fraud	DPA	$920,203,609	Yes	36
KG Imports LLC	D.N.J.	Defense Production Act	DPA	$0	Yes	24
Natural Advantage LLC	M.D. Pa.	Unlicensed chemical distribution and exportation	DPA	$1,938,650	Yes	36
NiSource, Inc. / Columbia Gas of Massachusetts	D. Mass.	Natural Gas Pipeline Safety Act	DPA	$53,030,116	No	36
Novartis Hellas S.A.C.I.	DOJ Fraud; D.N.J.	FCPA	DPA	$337,800,000	Yes	36
Patterson Companies	W.D. Va.	FDCA	NPA	$52,802,203	Yes	42
Pentax of America, Inc.	D.N.J.; DOJ CPB	FDCA	DPA	$43,000,000	Yes	36
Power Solutions International	N.D. Ill.	Securities fraud	NPA	$1,700,000	Yes	36
Practice Fusion Inc.	D. Vt.; DOJ Civil	AKS	DPA	$145,000,000	Yes	36
Progenity, Inc.	S.D. Cal.; S.D.N.Y.	Healthcare fraud	NPA	$49,000,000(b)	Yes	12
Propex Derivatives Pty Ltd	DOJ Fraud	Commodities violations (7 U.S.C. §§ 6c and 13)	DPA	$1,000,000	Yes	36
Sandoz Inc	DOJ Antitrust; E.D. Pa.	Antitrust	DPA	$195,000,000	No	36
Schneider Electric Buildings America, Inc.	D. Vt.; DOJ Civil	Anti-Kickback Act; wire fraud	NPA	$10,999,700	Yes	36
Select Energy Services, Inc.	M.D. Pa.	Clean Air Act	NPA	$2,300,000	No	36
Taro Pharmaceuticals	DOJ Antitrust; E.D. Pa.	Antitrust	DPA	$205,653,218	No	36
Ticketmaster LLC	E.D.N.Y.	Computer Fraud and Abuse Act; wire fraud	DPA	$10,000,000	Yes	36
Union Bancaire Privée, UBP SA	DOJ Tax	Tax	NPA addendum	$14,000,000	No	48 (in original NPA)
Vitol S.A.	DOJ Fraud; E.D.N.Y.; CFTC	FCPA	DPA	$163,791,000	Yes	36
Wells Fargo & Company / Wells Fargo Bank, N.A.	C.D. Cal; W.D.N.C.	Falsification of bank records; identity theft	DPA	$3,000,000,000	No	36
(a) The effective date of the 5D Holdings Ltd. agreement, by which most of 5Dimes’ obligations were required to have been satisfied, was September 30, 2020. (b) The amount paid by Progenity was attributable entirely to the parallel civil resolutions; the NPA itself imposed no penalties.

____________________

   [1]   NPAs and DPAs are two kinds of voluntary, pre-trial agreements between a corporation and the government, most commonly DOJ.  They are standard methods to resolve investigations into corporate criminal misconduct and are designed to avoid the severe consequences, both direct and collateral, that conviction would have on a company, its shareholders, and its employees.  Though NPAs and DPAs differ procedurally—a DPA, unlike an NPA, is formally filed with a court along with charging documents—both usually require an admission of wrongdoing, payment of fines and penalties, cooperation with the government during the pendency of the agreement, and remedial efforts, such as enhancing a compliance program and—on occasion—cooperating with a monitor who reports to the government.  Although NPAs and DPAs are used by multiple agencies, since Gibson Dunn began tracking corporate NPAs and DPAs in 2000, we have identified approximately 570 agreements initiated by DOJ, and 10 initiated by the U.S. Securities and Exchange Commission (“SEC”).

   [2]

   [3]   Non-Prosecution Agreement, Patterson Companies, Inc. (Feb. 14, 2020), at 1 (hereinafter “Patterson NPA”).

   [4]   Non-Prosecution Agreement, Alutiiq International Solutions, LLC (June 8, 2020), at 3.

   [5]   Non Prosecution Agreement, Progenity, Inc. (July 2, 2020), at 1 (hereinafter “Progenity Inc. NPA”).

   [6]   Non-Prosecution Agreement, Bank Hapoalim B.M. and Hapoalim (Switzerland) Ltd. (Apr. 30, 2020), at 2.

   [7]   Non-Prosecution Agreement, Power Solutions Int’l, Inc. (Sept. 24, 2020), at 3 (hereinafter “PSI NPA”).

   [8]   Id. at 4.

   [9]   Non-Prosecution Agreement, Jia Yuan USA Co. (Oct. 5, 2020), at 2 (hereinafter “Jia Yuan NPA”).

[10]   Memorandum from Rod J. Rosenstein, Deputy Attorney General, U.S. Dep’t of Justice, to Heads of Department Components, et al., Policy on Coordination of Corporate Resolution Penalties (May 9, 2018), https://www.justice.gov/opa/speech/file/1061186/download (hereinafter Rosenstein Memorandum).

[11]   Memorandum from Sally Quillian Yates, Deputy Attorney General, U.S. Dep’t of Justice, to Assistant Attorney General, Antitrust Division, et al., Individual Accountability for Corporate Wrongdoing (Sept. 9, 2015), http://www.justice.gov/dag/file/769036/download (hereinafter Yates Memorandum).

[12]   See Jackson Cole, Massachusetts Native Lisa Monaco Picked as Deputy Attorney General Under Joe Biden. (Jan. 7, 2021) MassLive, https://www.masslive.com/boston/2021/01/massachusetts-native-lisa-monaco-picked-as-deputy-attorney-general-under-joe-biden-served-in-key-homeland-security-role-under-obama-during-boston-marathon-bombing.html.

[13]   Joseph R. Biden Jr., History and the Hutton Affair, Chi. Trib. (Sept. 30, 1985), https://www.chicagotribune.com/news/ct-xpm-1985-09-30-8503060345-story.html.

[14]   See James Kuhnhenn, Senate OKs Stiff Corporate Fraud Penalties, Miami Herald (July 11, 2002), 2002 WLNR 4621664; Elaine S. Povich, Senate Fights Accounting Abuse, Newsday (July 11, 2002), 2002 WLNR 533094.

[15]   Background on Judge Merrick Garland, The White House (March 16, 2016), https://obamawhitehouse.archives.gov/the-press-office/2016/03/16/background-judge-merrick-garland.

[16]   The William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub. L. No. 116-283, https://www.congress.gov/116/bills/hr6395/BILLS-116hr6395enr.pdf.

[17]   See Andrew Duehren, Senate Overrides Trump’s Veto of NDAA Defense Bill, Wall St. J. (Jan. 1, 2021), https://www.wsj.com/articles/senate-overrides-trumps-veto-of-defense-bill-11609529894.

[18]   See supra, note 9 § 6311.

[19]   Brian C. Rabbitt, Acting Assistant Attorney General, “Rabbitt Delivers Remarks at the Practicing Law Institute’s White Collar Conference” (Sept. 23, 2020), https://www.justice.gov/opa/speech/acting-assistant-attorney-general-brian-c-rabbitt-delivers-remarks-practicing-law.

[20]   Id.

[21]   Deferred Prosecution Agreement, United States v. JPMorgan Chase & Co., Case No. 3:20-cr-00175-RNC (Sept. 29, 2020) (hereinafter “JPMorgan DPA”).

[22]   Id. at 5-8.

[23]   Press Release, U.S. Dep’t of Justice, Assistant Attorney General Makan Delrahim, Wind of Change: A New Model for Incentivizing Antitrust Compliance Programs (July 11, 2019), https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-new-york-university-school-l-0.

[24]   Id.

[25]   Press Release, U.S. Dep’t of Justice, Deputy Assistant Attorney General Richard Powers, A Matter of Trust: Enduring Leniency Lessons for the Future of Cartel Enforcement (Feb. 19, 2020), https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-richard-powers-delivers-remarks-13th-international.

[26]   Id.

[27]   See Press Release, U.S. Dep’t of Justice, Seventh Generic Drug Manufacturer Is Charged In Ongoing Criminal Antitrust Investigation (Aug. 25, 2020), https://www.justice.gov/usao-mdpa/pr/louisiana-chemical-company-agrees-pay-over-19-million-and-company-executives-charged.  Gibson Dunn navigated negotiation of the first of these agreements, which carried a criminal penalty of $225,000.  Criminal penalties associated with this investigation have since ranged as high as $205 million.

[28]   Deferred Prosecution Agreement, United States v. Florida Cancer Specialists & Research Institute, LLC, No. 2:20-cr-00078-TPB-MRM (M.D. Fla. Apr. 30, 2020) (hereinafter “Florida Cancer Specialists DPA”).

[29]   Deferred Prosecution Agreement, United States v. Argos USA, LLC, 4:21-CR-0002-RSB-CLR (S.D. Ga. Jan. 4, 2021).

[30]   Non-Prosecution Agreement, 5D Holdings Ltd. (Sept. 30, 2020) (hereinafter “5Dimes NPA”).

[31]   Press Release, U.S. Dep’t of Justice, Offshore Internet Sports Betting Company Agrees to Forfeit Over $46.8 Million in Proceeds to Resolve Criminal Investigation (Sept. 30, 2020), https://www.justice.gov/usao-edpa/pr/offshore-internet-sports-betting-company-agrees-forfeit-over-468-million-proceeds (hereinafter “5Dimes DOJ Press Release”).

[32]   Id.

[33]   Id.

[34]   Id.

[35]   Id.

[36]   5Dimes NPA, supra note 23 at 4, 8.

[37]   Id. at 8.

[38]   Id. at 4-5.

[39]   Id. at 5.

[40]   Id. at 9-15.

[41]   Id. at 6.

[42]   Deferred Prosecution Agreement, United States v. The Bank of Nova Scotia, No. 20-707 (D.N.J. Aug. 19, 2020), at 1-2 (hereinafter Scotiabank DPA).

[43]   Id. at 6, 9.

[44]   Id. at 9.

[45]   Press Release, U.S. Dep’t of Justice, The Bank of Nova Scotia Agrees to Pay $60.4 Million in Connection with Commodities Price Manipulation Scheme (Aug. 19, 2020), https://www.justice.gov/opa/pr/bank-nova-scotia-agrees-pay-604-million-connection-commodities-price-manipulation-scheme (hereinafter “Scotiabank Press Release”).

[46]   Id.

[47]   Scotiabank DPA supra note 35, at 5.

[48]   Id.

[49]   Id.

[50]   Id.

[51]   Id. at 3-4.

[52]   Id. at 4.

[53]   Id. at 5-6.

[54]   Id. at 6.

[55]   Scotiabank Press Release, supra note 38.

[56]   Id.

[57]   Id.

[58]   Id.

[59]   Deferred Prosecution Agreement, Beam Suntory Inc. (October 23, 2020) , https://www.justice.gov/criminal-fraud/file/1341831/download (hereinafter “Beam DPA”).

[60]   Id.

[61]   Press Release, U.S. Dep’t of Justice, Beam Suntory Inc. Agrees to Pay Over $19 Million to Resolve Criminal Foreign Bribery Case (Oct. 27, 2020), https://www.justice.gov/opa/pr/beam-suntory-inc-agrees-pay-over-19-million-resolve-criminal-foreign-bribery-case (hereinafter “Beam Press Release”).

[62]   Beam DPA, supra note 52, at 5.

[63]   Id. at 6.

[64]   Id. at 11.

[65]   Id. at 12.

[66]   Beam Press Release, supra note 54.

[67]   Id.

[68]   U.S. Dep’t of Justice & U.S. Securities and Exchange Comm’n, A Resource Guide to the Foreign Corrupt Practices Act (2020) at 71, available at https://www.justice.gov/criminal-fraud/file/1292051/download (hereinafter “FCPA Resource Guide”).

[69]   U.S. Dep’t of Justice, Deputy Attorney General Rod Rosenstein Delivers Remarks to the New York City Bar White Collar Crime Institute, May 9, 2018, available at https://www.justice.gov/opa/speech/deputy-attorney-general-rod-rosenstein-delivers-remarks-new-york-city-bar-white-collar.

[70]   FCPA Resource Guide, supra note 61, at 71.

[71]   Beam Press Release, supra note 54.

[72]   See Press Release, Catholic Diocese of Jackson, Catholic Diocese of Jackson Agrees to Resolve Investigation (July 15, 2020), https://jacksondiocese.org/2020/07/catholic-diocese-of-jackson-agrees-to-resolve-investigation/.

[73]   Id.

[74]   Deferred Prosecution Agreement, United States v. The Catholic Diocese of Jackson, No. 1:20-mj-00009 (N.D. Miss. July 15, 2020) (hereinafter “Catholic Diocese of Jackson DPA”).

[75]   Id. at 2-5.

[76]   Id. at 5-8.

[77]   Id. at 5.

[78]   Deferred Prosecution Agreement, United States v. Commonwealth Edison Co. (N.D. Ill. July 16, 2020) (hereinafter “ComEd DPA”).

[79]   Id. at A-3–A-4.

[80]   Jason Meisner & Ray Long, Madigan confidant, three others indicted in ComEd bribery scheme allegedly aimed at influencing speaker, Chi. Trib. (Nov. 19, 2020), https://www.chicagotribune.com/news/criminal-justice/ct-jay-doherty-comed-bribery-charges-madigan-20201119-xs4xyhulvrhs7elkiuslkutr64-story.html.

[81]   ComEd DPA, supra note 71, at A-4, A-8.

[82]   Id. at A-9–A-12.

[83]   Id. at A-12.

[84]   Id. at 3.

[85]   Id. at 9.

[86]   Id.

[87]   Id. at 2.

[88]   Id. at 7­-8.

[89]   Id. at C-1.

[90]   Press Release, U.S. Dep’t of Justice, Two Ocean County Companies Agree to Resolve Price-Gouging Charges Involving 11 Million Items of Scarce Personal Protective Equipment by Selling Them at Cost and Disgorging Illicit Profits, (August 14, 2020) https://www.justice.gov/usao-nj/pr/two-ocean-county-companies-agree-resolve-price-gouging-charges-involving-11-million-items (hereinafter “CSG Imports and KG Imports Press Release”).

[91]   Id.

[92]   Id.

[93]   Deferred Prosecution Agreement, CSG Imports LLC (August 12, 2020) (hereinafter “CSG Imports DPA”); Deferred Prosecution Agreement, KG Imports, LLC (August 12, 2020) (hereinafter “KG Imports DPA”).

[94]   CSG Imports DPA, supra note 86.

[95]   Id.

[96]   KG Imports DPA, supra note 86.

[97]   Prior to the COVID-19 pandemic, CSG Imports had never imported PPE or health-care equipment or products of any kind. KG Imports was formed after the pandemic began specifically to import PPE into the United States. See CSG Imports and KG Imports Press Release, supra note 83.

[98]   CSG Imports DPA, supra note 86.

[99]   CSG Imports DPA, KG Imports DPA, supra note 86.

[100]   CSG Imports DPA, supra note 86.

[101]   CSG Imports DPA, KG Imports DPA, supra note 86.

[102]   Press Release, U.S. Dep’t of Justice, Essentra Fze Admits to North Korean Sanctions and Fraud Violations, Agrees to Pay Fine (July 16, 2020), https://www.justice.gov/opa/pr/essentra-fze-admits-north-korean-sanctions-and-fraud-violations-agrees-pay-fine
#:~:text=Essentra%20FZE%20Company%20Limited%20(Essentra
,the%20International%20Emergency%20Economic%20Powers (hereinafter “Essentra Press Release”).

[103]   Deferred Prosecution Agreement, Essentra FZE Company Limited (July 16, 2020) (hereinafter “Essentra DPA”).

[104]   Id.

[105]   Essentra Press Release, supra note 95.

[106]   Essentra DPA, supra note 96.

[107]   Id.

[108]   Id.

[109]   Essentra Press Release, supra note 95.

[110]   Settlement Agreement, Essentra FZE Company Limited (July 16, 2020), https://home.treasury.gov/system/files/126/20200716_essentra_fze_settlement.pdf.

[111]   Press Release, U.S. Dep’t of Justice, Goldman Sachs Resolves Foreign Bribery Case and Agrees To Pay Over $2.9 Million (Oct. 22, 2020), https://www.justice.gov/opa/pr/goldman-sachs-charged-foreign-bribery-case-and-agrees-pay-over-29-billion (hereinafter “Goldman Sachs Press Release”).

[112]   Deferred Prosecution Agreement, United States v. Goldman Sachs, No. 20-437 (E.D.N.Y.Oct. 22, 2020), https://www.justice.gov/criminal-fraud/file/1329926/download (hereinafter “Goldman Sachs DPA”).

[113]   Goldman Sachs Press Release, supra note 104.

[114]   Goldman Sachs DPA, supra note 105, at 4-6.

[115]   Press Release, U.S. Dep’t of Justice, Herbalife Agrees To Pay $123 Million To Resolve Foreign Corrupt Practices Act Case (August 28, 2020), https://www.justice.gov/usao-sdny/pr/herbalife-agrees-pay-123-million-resolve-foreign-corrupt-practices-act-case (hereinafter “Herbalife Press Release”).

[116]   Deferred Prosecution Agreement, United States v. Herbalife Nutrition Ltd., No. 1:20-cr-00443-GHW (S.D.N.Y. Aug. 24, 2020) (hereinafter “Herbalife DPA”).

[117]   Id.

[118]   Id.

[119]   Id.

[120]   Herbalife Press Release, supra note 108.

[121]   Id.

[122]   Press Release, U.S. Dep’t of Justice, Chinese Company’s SoCal Subsidiary Agrees to Pay More than $1 Million to Resolve Criminal Investigation into Bribe Payments to Jose Huizar and Illegal Contributions to Other Political Figures (Oct. 7, 2020), https://www.justice.gov/usao-cdca/pr/chinese-company-s-socal-subsidiary-agrees-pay-more-1-million-resolve-criminal (hereinafter “Jia Yuan Press Release”).

[123]   Id.

[124]   Jia Yuan NPA, supra note 9, Attach. A at 3.

[125]   Id. at 1-2.

[126]   Id. at 2.

[127]   Id.

[128]   JPMorgan DPA, supra note 14.

[129]   Id. at 11-12.

[130]   Id. at 12.

[131]   Press Release, U.S. Dep’t of Justice, JPMorgan Chase & Co. Agrees to Pay $920 Million in Connection with Schemes to Defraud Precious Metals and U.S. Treasuries Markets (Sept. 29, 2020), https://www.justice.gov/opa/pr/jpmorgan-chase-co-agrees-pay-920-million-connection-schemes-defraud-precious-metals-and-us (hereinafter “JPMorgan Press Release”).

[132]   Id.

[133]   Id.

[134]   Id.

[135]   Id.

[136]   JPMorgan DPA, supra note 14, at 9.

[137]   Id. at 11.

[138]   Id. at 16-17.

[139]   Id. at 4-5.

[140]   Id. at 5.

[141]   Id. at 5-8.

[142]   Id. at 8.

[143]   Id. at 3-4.

[144]   Id. at 5.

[145]   Id. at 4.

[146]   JPMorgan Press Release, supra note 124; see Press Release, Commodity Futures Trading Comm’n, CFTC Orders JPMorgan to Pay Record $920 Million for Spoofing and Manipulation (Sept. 29, 2020), https://www.cftc.gov/PressRoom/PressReleases/8260-20.

[147]   JPMorgan Press Release, supra note 124.

[148]   Id.

[149]   Press Release, U.S. Dep’t of Justice, Louisiana Chemical Company Agrees to Pay Over $1.9 Million and Company Executives Charged in Investigation of the Unlicensed Distribution and Exportation of Regulated List 1 Chemicals (June 10, 2020), https://www.justice.gov/usao-mdpa/pr/louisiana-chemical-company-agrees-pay-over-19-million-and-company-executives-charged.

[150]   Id.

[151]   Id.

[152]   Id.

[153]   Id.

[154]   Deferred Prosecution Agreement, United States v. Natural Advantage LLC, No. 3:20-cr-00112-RDM (M.D. Pa. June 10, 2020), at 4-5 (hereinafter “Natural Advantage DPA”).

[155]   Id. at 12, 40.

[156]   Id. at 5.

[157]   Id.

[158]   Press Release, U.S. Dep’t of Justice, Animal Health International Sentenced on Federal Misbranding Charge (May 4, 2020), https://www.justice.gov/usao-wdva/pr/animal-health-international-sentenced-federal-misbranding-charge.

[159]   Id.

[160]   Id.

[161]   Patterson NPA, supra note 3, at 1.

[162]   Id.

[163]   Id.

[164]   Id. at 1-2.

[165]   PSI NPA, supra note 7, at 1.

[166]   Id. at A-4, A-6–A-7.

[167]   Press Release, U.S. Sec. and Exch. Comm’n., Engine Manufacturing Company to Pay Penalty, Take Remedial Measures to Settle Charges of Accounting Fraud (Sep. 24, 2020), https://www.sec.gov/news/press-release/2020-222.

[168]   PSI NPA, supra note 7, at A-4, A-6–A-7.

[169]   Id. at A-5–A-6.

[170]   Id. at 2.

[171]   Id.

[172]   Id.

[173]   Id. at 2-3.

[174]   Id. at 1.

[175]   Id. at 5.

[176]   Id. at 4.

[177]   Id. at C-1–C-2.

[178]   Press Release, U.S. Dep’t of Justice, https://www.justice.gov/usao-sdca/pr/san-diego-laboratory-admits-fraudulent-tricare-billing-agrees-pay-49-million (July 23, 2020) (hereinafter Progenity Inc. Press Release).

[179]   Id.

[180]   Progenity Inc. NPA, supra note 5.

[181]   Id.

[182]   Id.

[183]   Id.

[184]   Non-Prosecution Agreement, Schneider Electric Buildings Americas Inc. (Dec. 16, 2020) (hereinafter “Schneider Electric NPA”).

[185]   Settlement Agreement, Schneider Electric Buildings Americas Inc. (Dec. 17, 2020) (hereinafter “Schneider Electric Settlement Agreement”), at 1–2.

[186]   Id. at 2-3.

[187]   Id. at 2.

[188]   Schneider Electric NPA, supra note 177, at 2.

[189]   Id. at 2-3.

[190]   Id. at 1-2.

[191]   Id. at 4.

[192]   Id. at 5.

[193]   Schneider Electric Settlement Agreement, supra note 178, at 3.

[194]   Schneider Electric NPA, supra note 177, at 5.

[195]   SES Press Release, U.S. Dep’t of Justice, Water Management Companies Enter Resolutions to Pay $4.3 Million in Monetary Penalties for Clean Air Act Violations (Sept. 28, 2020),  https://www.justice.gov/usao-mdpa/pr/water-management-companies-enter-resolutions-pay-43-million-monetary-penalties-clean (hereinafter “SES Press Release”)

[196]   Plea Agreement, United States v. Rockwater Northeast LLC, No. 4:20-cr-00230-MWB (M.D. Pa. Sept. 24, 2020).

[197]   Id. at 3-4.

[198]   SES Press Release, supra note 188.

[199]   Id.

[200]   Id.

[201]   Id.

[202]   Deferred Prosecution Agreement, United States v. Taro Pharmaceuticals U.S.A., Inc., No. 20-CR-213 (E.D.P.A. July 23, 2020) (hereinafter “Taro DPA”).

[203]   Id. at 8.

[204]   Id. at 4.

[205]   Id. at 3-4.

[206]   Press Release, U.S. Dep’t of Just., Sixth Pharmaceutical Company Charged In Ongoing Criminal Antitrust Investigation (July 23, 2020), https://www.justice.gov/opa/pr/sixth-pharmaceutical-company-charged-ongoing-criminal-antitrust-investigation.

[207]   Press Release, U.S. Dep’t of Justice, Ticketmaster Pays $10 Million Criminal Fine for Intrusions into Competitor’s Computer Systems (Dec. 30, 2020), https://www.justice.gov/usao-edny/pr/ticketmaster-pays-10-million-criminal-fine-intrusions-competitor-s-computer-systems-0.

[208]   Id.

[209]   Id.

[210]   Id.

[211]   Deferred Prosecution Agreement, United States v. Ticketmaster L.L.C., Cr. No. 20-563 (MKB) (E.D.N.Y. Dec. 29, 2020), at 4 (hereinafter “Ticketmaster DPA”).

[212]   Id.

[213]   Id. at 5.

[214]   Id. at 5, 11.

[215]   Press Release, U.S. Dep’t of Justice, Vitol Inc. Agrees to Pay over $135 Million to Resolve Foreign Bribery Case (Dec. 3, 2020), https://www.justice.gov/opa/pr/vitol-inc-agrees-pay-over-135-million-resolve-foreign-bribery-case (hereinafter “Vitol Press Release”); Deferred Prosecution Agreement, United States v. Vitol Inc., No. 20-539 (ENV) (E.D.N.Y. Dec. 3, 2020) (hereinafter “Vitol DPA”).

[216]   Vitol Press Release, supra note 208; Vitol DPA, supra note 208, at A-3, A-5, A-6.

[217]   Vitol Press Release, supra note 208.

[218]   Press Release, CFTC, CFTC Orders Vitol Inc. to Pay $95.7 Million for Corruption-Based Fraud and Attempted Manipulation (Dec. 3, 2020), https://www.cftc.gov/PressRoom/PressReleases/8326-20.

[219]   Id.; Vitol Press Release, supra note 208.

[220]   Although not a defendant, Vitol S.A., a Swiss company that directly owned and controlled Vitol from approximately 2004 through 2009, also agreed to certain terms and obligations as part of the DPA.

[221]   Vitol DPA, supra note 208, at 4.

[222]   Id.

[223]   Id. at 4-5.

[224]   Id. at 4.

[225]   Id. at 5, 12.

[226]   Lawrence F. Ritchie & Sonja Pavic, Canada’s Deferred Prosecution Agreements: Still Waiting for Takeoff, Osler (Dec. 11, 2020), https://www.osler.com/en/resources/regulations/2020/canada-s-deferred-prosecution-agreements-still-waiting-for-takeoff; Criminal Justice Reform Act 2018 (Act. No. 19/2018) (Sg.), https://sso.agc.gov.sg/Acts-Supp/19-2018.

[227]   Australian Gov’t: Attorney-General’s Dep’t, Deferred Prosecution Agreement Scheme Code of Practice Consultation (June 8, 2018), https://www.ag.gov.au/integrity/consultations/deferred-prosecution-agreement-scheme-code-practice.

[228]   Colm Keena, The DPA Regime Recommended for Ireland Does Not Allow Deals Which Give Immunity to Particular Individuals, Irish Times (Oct. 26, 2018), https://www.irishtimes.com/news/crime-and-law/the-dpa-regime-recommended-for-ireland-does-not-allow-deals-which-give-immunity-to-particular-individuals-1.3675677.

[229]   Poland Gov’t Legislative Process, Draft Act on the Liability of Collective Entities for Offenses, https://legislacja.rcl.gov.pl/projekt/12312062.

[230]   See Emily Casswell, Switzerland Favours US-Style DPAs, Global Investigations Rev. (May 25, 2018), https://globalinvestigationsreview.com/article/1169927/switzerland-favours-us-style-dpas.

[231]   Press Release, UK Serious Fraud Office, SFO Enters Into €991m Deferred Prosecution Agreement with Airbus as Part of a €3.6bn Global Resolution (Jan. 31, 2020), https://www.sfo.gov.uk/2020/01/31/sfo-enters-into-e991m-deferred-prosecution-agreement-with-airbus-as-part-of-a-e3-6bn-global-resolution/.

[232]   Press Release, UK Serious Fraud Office, SFO Receives Approval in Principle for DPA with G4S Care and Justice Services (UK) Ltd (July 10, 2020), https://www.sfo.gov.uk/2020/07/10/sfo-receives-approval-in-principle-for-dpa-with-g4s-care-and-justice-services-uk-ltd/.

[233]   Press Release, UK Serious Fraud Office, SFO Confirms DPA in Principle with Airline Services Limited (Oct. 22, 2020), https://www.sfo.gov.uk/2020/10/22/sfo-confirms-dpa-in-principle-with-airline-services-limited/.

[234]   Press Release, UK Serious Fraud Office, SFO Enters into Deferred Prosecution Agreement with Airline Services Limited (Oct. 30, 2020), https://www.sfo.gov.uk/2020/10/30/sfo-enters-into-deferred-prosecution-agreement-with-airline-services-limited/.

[235]   Deferred Prosecution Agreement, Director of Serious Fraud Office and Airline Services Limited, Case No. U20201913 (October 30, 2020).

[236]   Id.

[237]   Id.

[238]   Id.

[239]   Serious Fraud Office, SFO Operational Handbook: Deferred Prosecution Agreements (Oct. 23, 2020), https://www.sfo.gov.uk/publications/guidance-policy-and-protocols/sfo-operational-handbook/deferred-prosecution-agreements/ (hereinafter “SFO Operational Handbook”).

[240]   Press Release, UK Serious Fraud Office, Serious Fraud Office Releases Guidance on Deferred Prosecution Agreements (Oct. 23, 2020), https://www.sfo.gov.uk/2020/10/23/serious-fraud-office-releases-guidance-on-deferred-prosecution-agreements/.

[241]   Serious Fraud Office, Deferred Prosecution Agreements Code of Practice  (Feb. 14, 2014), https://www.sfo.gov.uk/?wpdmdl=1447.

[242]   SFO Operational Handbook, supra note 232.

[243]   Id.  Similarly, the Justice Manual instructs prosecutors to coordinate with other enforcement agencies in imposing penalties on a company in relation to investigations of the same conduct.  See U.S. Dep’t of Justice, Justice Manual § 1-12.100.

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I.   Introduction: Themes and Notable Developments

This year’s update marks the end of the Trump administration and the beginning of the Biden administration. The change in leadership of the Securities and Exchange Commission has already begun. In December, Jay Clayton stepped down as Chairman, and this week the Biden administration nominated Gary Gensler to be the new Chairman. Mr. Gensler was Chairman of the Commodity Futures Trading Commission in the Obama administration and presided over a period of heightened financial regulation and aggressive enforcement against major financial institutions. The Wall Street Journal predicts that Mr. Gensler could give Wall Street its “most aggressive regulator in two decades.”[1] In addition to a new Chairman, 2021 will also bring new senior leadership to the Division of Enforcement, as the Division’s Co-Directors have also left the agency.

In this update, we look back at the significant enforcement actions and developments from the last six months of 2020, and consider what to expect from new leadership at the Commission and the Enforcement Division. In sum, it is safe to say that the next four years will see a return to increasing regulatory oversight and escalated enforcement of market participants.

A.   Back to the Future: A Look Back and the View Ahead

During the last six months of 2020, the SEC’s enforcement program continued to follow the priorities emphasized by Chairman Clayton over the last four years, while also navigating the challenges presented by the pandemic.

In the last few months, there has also been a nearly complete departure of the senior-most leadership of the Division of Enforcement. In August and December, respectively, Division Co-Directors Steven Peikin and Stephanie Avakian, departed the agency. And in January, Marc Berger, who had been appointed Deputy Director and then Acting Director also announced that he will be leaving at the end of January.

In one of his last speeches, Chairman Clayton reflected on his tenure and echoed the theme that has defined enforcement during the last administration, namely a focus on “Main Street” investors.[2] In practice, and as the Chairman noted, this has translated into a significant number of enforcement actions against fraudulent securities offerings – Ponzi schemes, affinity frauds and other offering frauds – that targeted individual investors.

Of course, one of the notable challenges for the Enforcement Division this year was created by the COVID-19 pandemic. After overcoming the initial hurdles of conducting investigations remotely, the Enforcement staff continued to pursue investigations and bring enforcement actions. Nevertheless, from a numerical standpoint, the number of enforcement actions was off from the prior year. For fiscal 2020, the SEC brought a total of 715 enforcement actions (of which 405 were stand-alone enforcement actions), a significant decline from 862 actions in fiscal 2019 (of which 526 were stand-alone enforcement actions) – a decline of 23% in stand-alone enforcement actions.[3]

There was also a change from last year in the types of cases the SEC brought. For fiscal 2020, the largest single category of cases involved securities offerings, typically offering frauds or unregistered securities offerings. This category accounted for nearly one-third, or 32%, of the stand-alone enforcement actions, compared to 21% of the actions brought in 2019 (and compared to only 16% of the cases in the last year of the Obama administration). Other major categories of cases in fiscal 2020 included cases against investment advisers, which comprised 21% of the total (compared to 36% of the total in fiscal 2019) and cases involving public company financial reporting and disclosure, which comprised 15% of the total in fiscal 2020 (compared to 17% of the total in fiscal 2019).

Despite the decline in the number of cases, there was an increase in the amount of financial remedies (disgorgement and penalties) ordered in enforcement actions. For fiscal 2020, financial remedies totaled $4.68 billion, representing an increase of approximately 8% over the amount ordered in 2019. However, it should be noted that a substantial portion of the 2020 financial remedies was attributable to one case – a settlement with Telegram Group Inc. – in which the company was ordered to pay $1.2 billion in disgorgement, but was credited in full for returning the same amount to investors that had purchased the company’s unregistered digital tokens. Removing this settlement from the financial remedies for fiscal 2020 would reduce the total amount recover to an amount well below the amount ordered in 2019.

Notwithstanding the challenges of the pandemic, the SEC brought a number of significant enforcement actions in the last half of 2020 that we discuss in greater detail in other sections of this update. In particular, the SEC brought a number of cases against public companies for financial reporting and disclosure issues. Three of these cases were the result of the Enforcement Division’s “EPS Initiative,” in which the staff used risk-based data analytics to identify potential earnings management practices.

Other significant cases were the result of the Enforcement Division’s focus on cases related to the pandemic. In particular, the SEC brought the first enforcement action based on disclosures concerning a company’s ability to operate sustainably despite the pandemic.

This year also saw a number of enforcement actions in the area of crypto-currency and other digital assets. In particular, shortly before the end of the year, the SEC filed a complaint against Ripple Labs for alleged violation of the securities registration provisions. The outcome of this litigation will have a significant impact on enforcement and regulation of the digital asset market in the future.

Another highlight of the last year has been the continued growth of the SEC’s whistleblower program. This year is the tenth anniversary of the program and was also a year of record awards both in number and size. Increased efficiency in the award process is also ensuring that the program has become, and will continue to be, an important source of investigations for the future.

Looking ahead, there is little doubt that the new administration will bring a heightened level of enforcement activity. But more important, we can expect a shift in focus and priorities away from retail investors and securities offering frauds and an increased emphasis on the conduct of institutional market participants – investment advisers and broker-dealers, as well as public company accounting, financial reporting and disclosure.

Assuming Mr. Gensler is confirmed by the Senate to be the next SEC Chairman, his experience, both at the helm of the CFTC and since, confirm expectations for increased regulation and enforcement. Mr. Gensler oversaw the implementation of an entirely new regime for the regulation of the markets for derivatives as well as the adoption of numerous regulations pursuant to the Dodd-Frank Act. The CFTC under his leadership also took aggressive enforcement actions against financial institutions in connection with the alleged manipulation of LIBOR. Mr. Gensler will also bring a strong interest in, and familiarity with, the market for crypto-currency and other digital tokens. This will ensure that the market for digital assets will receive particular attention in the coming years.

The last time there was a transition to a Democratic administration in 2008, the SEC confronted the financial crisis and the collapse of the mortgage-backed securities market. In the wake of the financial crisis, the SEC had a defined focus for investigation in distressed financial institutions and participants in the market for mortgage-backed securities. The SEC also adopted a number of initiatives to empower the enforcement program – some based in statute, such as the whistleblower program; others based in policy and practice, such as the encouragement of witness cooperation and the imposition of admissions on certain settling defendants.

The current transition in administrations follows a year of extreme market volatility caused by the pandemic, but also ending with the markets continuing to set records, benefiting from government stimulus and continued low interest rates. There is anticipation that as the COVID-19 crisis abates, the economy and markets will experience significant growth in the coming year. New Enforcement Division leadership will endeavor to identify areas of risk that they deem worthy of heightened scrutiny. In addition, oversight by a Democratic controlled House and Senate may further escalate pressure on the SEC to demonstrate its aggressiveness.

The takeaway from all of this is that the next four years will put a premium on legal and compliance departments and financial reporting functions of financial institutions, investment advisers, broker-dealers and public companies.

B.   Commissioner and Senior Staffing Update

As the Trump administration wound down, there were a number of significant changes in the leadership of the Commission and the Enforcement Division. Looking ahead to the coming months, there will be further developments as a new Chairman is confirmed and new leadership of the Enforcement Division is appointed.

Simultaneous with Chairman Clayton’s departure, the White House appointed Republican Commissioner Elad Roisman as Acting Chairman of the Commission. During the interim period following the inauguration of President-elect Biden, but before a new Chairman is nominated and confirmed, the White House could substitute the senior Democratic Commissioner, Allison Herren Lee, as Acting Chairman. Also during the second half of 2020, the other two Commissioners were sworn in: Democrat Commissioner Caroline Crenshaw filled the vacancy left by former Commissioner Robert Jackson, and Republican Commissioner Hester Peirce was sworn in for a second term, after her original term (for which she filled a vacancy in 2018) ended.

There were also significant changes in the leadership of the Enforcement Division. With the departure of the Co-Directors Peikin and Avakian, Marc Berger was appointed Acting Director of the Enforcement Division in December. This month, Mr. Berger also announced his departure. No Acting Director has been appointed as of this writing.

Other changes in the senior staffing of the Commission include:

• In August, Scott Thompson was appointed Associate Regional Director of Enforcement in the SEC’s Philadelphia Regional Office. Mr. Thompson succeeds Kelly Gibson, who was appointed Director of the Philadelphia office in February 2020. Mr. Thompson has worked at the SEC since 2007, first as a trial attorney in the Enforcement Division and most recently as Assistant Regional Director from 2013 until his promotion in August 2020.
• Also in August, Richard Best was appointed Director of the SEC’s New York Regional Office, succeeding Mr. Berger in the role. Mr. Best has worked at the SEC since 2015, serving in two other Regional Director roles—Salt Lake and Atlanta—before becoming the Director of the New York office. He also previously worked in FINRA’s Department of Enforcement and as a prosecutor in the Bronx District Attorney’s Office.
• In early December, Nekia Hackworth Jones was appointed Director of the SEC’s Atlanta Regional Office. She joins the SEC from private practice where she specialized in government investigations and white collar criminal defense. Ms. Jones also previously served as an Assistant U.S. Attorney in the Northern District of Georgia and in DOJ’s Office of the Deputy Attorney General.

C.   Legislative Developments: Disgorgement

With little fanfare, the SEC achieved a significant legislative success at the end of 2020, cementing its ability to obtain disgorgement in civil enforcement actions. On January 1, 2021, Congress voted to override the President’s veto of the National Defense Authorization Act (“NDAA”), a military spending bill passed each year since 1961.[4] Buried in the $740.5 billion bill was an amendment to the Securities Exchange Act of 1934, which gives the SEC explicit statutory authority to seek disgorgement in federal court.[5] Under Section 6501 of the NDAA, the SEC is authorized to seek “disgorgement . . . of any unjust enrichment by the person who received such unjust enrichment.”[6] Perhaps more significant, the amendment establishes a ten-year statute of limitations for obtaining disgorgement for scienter-based violations of federal securities laws, doubling the 5-year standard previously established by the Supreme Court. The amendment applies to any action or proceeding that is pending on, or commenced after its enactment (i.e., January 1, 2020).

As discussed in a previous alert, the amendment is a response to two recent Supreme Court decisions which limited the SEC’s authority to seek disgorgement, although the agency has a long history of seeking and receiving disgorgement: Kokesh v. SEC, 137 S. Ct. 1635 (2017) (imposing a five-year statute of limitations on disgorgement), and Liu v. SEC, 140 S. Ct. 1936 (2020) (which imposed equitable limitations on disgorgement, such as the limitation to net profits). The extension of the statute of limitations to ten years is a significant enhancement to the SEC’s remedies since many cases involve conduct that extends more than five years before an action is filed. However, notably, the amendment does not expressly reverse the equitable limitations that the Supreme Court imposed on the disgorgement remedy in Liu. Accordingly, the SEC will continue to confront defenses grounded in equitable principles, such as deduction for legitimate expenses and the elimination of joint and several liability for disgorgement.

D.   Whistleblower Awards

2020 marked the 10-year anniversary of the SEC’s whistleblower program. It also marked a record year for the number of whistleblower awards, the total amount of money awarded and the largest single whistleblower award.[7] During fiscal 2020, the Commission issued awards totaling approximately $175 million to 39 individual whistleblowers. As of the end of 2020, the SEC has awarded a total of approximately $736 million to 128 individual whistleblowers in the program’s 10-year history.[8] Perhaps equally notable, enforcement actions attributed to whistleblower tips have resulted in more than $2.5 billion in ordered financial remedies.

The increase in the number of awards is the result of the SEC’s efforts to increase the efficiency of the claim review and award process. In September, the SEC also adopted amendments to the Whistleblower Rule to promote efficiencies in the review and processing of whistleblower award claims. The amendments aim to provide the Commission with tools to appropriately reward individuals, and include a presumption of the statutory maximum award for certain whistleblowers with potential awards of less than $5 million.[9] For further discussion of the amendments to the Whistleblower Rule, see our prior alert on the subject.

The amendments also made one modification to the Whistleblower Rule that has proven to be controversial. As originally proposed in 2018, the amendment would have given the Commission authority to reduce the dollar amount of awards in cases with large monetary sanctions (in excess of $100 million). In the face of opposition from whistleblower advocates, the final rule dropped that amendment, and instead clarified that in determining the appropriate award, the Commission has discretion to consider both the percentage and the dollar amount of the award a discretion the Commission. In the adopting release, the Commission explained the modification as merely clarifying the discretion that the Commission always had in determining the appropriate award. One whistleblower advocate has already filed a suit against the SEC challenging the validity of the amendment under the Administrative Procedure Act.[10]

In October, the SEC also announced the largest award in the program’s history—a payment of over $114 million to a whistleblower who provided information and assistance leading to successful enforcement actions.[11] The award, which consists of a $52 million award in connection with the SEC matter and a $62 million award arising out related actions by another agency, comes on the heels of the SEC’s previous record-breaking $50 million whistleblower award in June.[12]

This year also saw a record level of tips received by the Office of the Whistleblower, as well as other complaints and referrals received by the Enforcement Division as a whole. The Office of the Whistleblower received over 6,900 tips in fiscal year 2020, a 31% increase over the second-highest tip year in fiscal year 2018.[13] More broadly, the Enforcement Division received over 23,650 tips, complaints and referrals in fiscal 2020, a more than 40% increase over the prior year. Inevitably, the increase in tips this past year is likely to lead to an increase in the number of investigations in the years to come.

The SEC’s whistleblower awards also emphasize the assistance whistleblowers contribute to investigations through industry expertise or simply expediting an investigation. For example, in November, the SEC made a payment of over $28 million to an individual who provided information that prompted a company’s internal investigation, and who provided testimony and identified a key witness.[14] Likewise, the SEC announced an award of over $10 million in October to a whistleblower, emphasizing the individual’s substantial ongoing assistance, including help deciphering communications and distilling complex issues.[15] Also of importance to the Commission is a whistleblower’s efforts to reduce ongoing harm to investors. In December, the SEC announced an award of over $1.8 million to a whistleblower who took immediate steps to mitigate harm to investors.[16] Additionally, the announcement noted the whistleblower’s ongoing assistance, which saved time and resources of SEC staff.[17]

Other significant whistleblower awards granted during the second half of this year include:

• An award in July of $3.8 million to a whistleblower for information that allowed the SEC to disrupt an ongoing fraud scheme and led to a successful enforcement action.[18]
• An award in August of over $1.25 million for information leading to a successful enforcement action, resulting in the return of millions of dollars to investors.[19]
• Eleven awards in September, including a notable award of $22 million to an insider whistleblower whose tip led the SEC to open an investigation, and who provided ongoing assistance; and a $7 million award to another whistleblower who provided what the SEC deemed “valuable” information regarding the investigation.[20] Additional awards in September included an award of over $2.5 million to joint whistleblowers for a tip based on an independent analysis of a public company’s filings, and for the whistleblowers’ ongoing assistance in the SEC’s investigation;[21] a $10 million payment to an individual who provided information and assistance that were described as of “crucial importance” to the SEC’s successful enforcement action;[22] a $250,000 award to joint whistleblowers who raised concerns internally and whose tip to the SEC spurred the opening of an investigation and a successful enforcement action;[23] payment of $2.4 million to a whistleblower who provided information and assistance that ultimately stopped ongoing misconduct;[24] awards to totaling over $2.5 million to two whistleblowers who reported misconduct overseas;[25] an award of $1.8 million for information regarding ongoing securities law violations;[26] and four awards totaling almost $5 million for “critical information” resulting in a successful enforcement action.[27]
• An award in October of $800,000 for information that caused the SEC to open an investigation leading to two successful enforcement actions.[28]
• Four awards in November, including a payment of $3.6 million to a whistleblower who provided information and ongoing assistance to enforcement staff regarding misconduct abroad;[29] a $750,000 payment to an individual who met with enforcement staff and provided information regarding an ongoing fraud;[30] an award of over $1.1 million to a whistleblower who provided what the SEC described a “exemplary assistance,” and led the staff to look at new conduct during an ongoing investigation;[31] and a payment of over $900,000 to an individual who provided importantly information regarding securities law violations occurring overseas.[32]
• Six awards in December, including payments totaling of over $6 million to joint whistleblowers who provided information, submitted documents, participated in interviews, and identified key witnesses leading to a successful enforcement action;[33] a payment of nearly $1.8 million to a company insider who provided information that would have otherwise been difficult to detect;[34] an award of approximately $750,000 to two whistleblowers who provided tips and substantial assistance to the staff, including participating in interviews and providing subject matter expertise;[35] a payment of almost $400,000 to two individuals who provided information that prompted the opening of an investigation and ongoing assistance to SEC staff;[36] an award of more than $300,000 to a whistleblower with audit-related responsibilities who provided “high-quality” information after becoming aware of potential securities law violations;[37] a payment of more than $1.2 million for a whistleblower who provided information leading to a successful enforcement action, but whose “culpability and unreasonable delay” impacted the award amount; and a $500,000 payment to a whistleblower who provided significant information and ongoing assistance, which led to a successful enforcement action.[38]

II.   Public Company Accounting, Financial Reporting and Disclosure Cases

Public company accounting and disclosure cases comprised a significant portion of the SEC’s cases in the latter half of 2020, and included a range of actions concerning earnings management, revenue recognition, impairments, internal controls, and disclosures concerning financial performance.

A.   Financial Reporting Cases

EPS Initiative

In September, the SEC announced the Enforcement Division’s “Earnings Per Share (EPS) Initiative” and the settlement of its first two investigations arising from the Initiative. According to the press release announcing the settled actions, the SEC described the EPS Initiative as using “risk-based data analytics to uncover potential accounting and disclosure violations.”[39] Based on the facts described in the two settled actions, the EPS Initiative is focused at least in part on detecting a practice known as “EPS smoothing,” i.e., questionable accounting to achieve EPS results consistent with consensus analyst estimates. According to the SEC, the first company, a carpet manufacturer, made unsupported and non-GAAP-compliant manual accounting adjustments to multiple quarters in order to avoid EPS results falling below consensus estimates. The second company, a financial services company, used a valuation method that was inconsistent with the valuation methodology described in its filings, in order to appear to have consistent earnings over time. Without admitting or denying wrongdoing, the carpet manufacturer agreed to pay a $5 million penalty to settle the charges; the financial services company agreed to pay a $1.5 million penalty.

Based on our experience representing clients in such matters, the SEC’s attention can be drawn simply by consistent EPS performance, even in the absence of any basis to suspect misconduct. In such circumstances, it is important to demonstrate to the Staff the integrity of accounting and financial reporting controls that negate the potential for improper accounting.

Other Financial Reporting Actions

In August, the SEC instituted a settled action against a motor vehicle parts manufacturer for failing to estimate and report over $700 million in future asbestos liabilities.[40] The SEC alleged that, from 2012 to 2016, the company failed to perform quantitative analyses to estimate its future asbestos claim liabilities, despite having decades of raw historical claims data. Instead, the company incorrectly concluded that it could not estimate these liabilities and therefore did not properly account for them in its financial statements. The company agreed to pay a penalty of $950,000 to settle the action, without admitting or denying the SEC’s allegations.

Also in August, the SEC announced a settled action against a computer server producer and its former CFO related to alleged violations of the antifraud, reporting, books and records, and internal accounting controls provisions of the federal securities laws.[41] According to the SEC’s order, among other violations, the company incentivized employees to maximize revenue at the end of each quarter without implementing and maintaining sufficient internal accounting controls, resulting in a variety of accounting violations related to prematurely recognized revenue. Without admitting or denying wrongdoing, the company agreed to pay a $17.5 million penalty; the CFO agreed to pay more than $300,000 as disgorgement and prejudgment interest and $50,000 as a penalty. Additionally, the company’s CEO, who was not charged with misconduct, consented to reimburse the company $2.1 million in stock profits he received during the period when the accounting errors occurred under the Sarbanes-Oxley Act’s clawback provision.

In September, the SEC instituted a settled action against an engine manufacturer that allegedly inflated its revenue by nearly $25 million by recording its revenues in a manner inconsistent with GAAP.[42] The SEC alleged that the company overstated its revenue by improperly recognizing revenue from incomplete sales, from products that customers had not agreed to accept, and from products with falsely inflated prices, among other violations of GAAP. Without admitting or denying the allegations, the company agreed to pay a $1.7 million penalty, and to undertake measures aimed at remediating alleged deficiencies in its financial reporting internal controls.

Also in September, the SEC announced a settled action against a lighting manufacturer and four of its current and former executives for allegedly inflating the company’s revenue from late 2014 to mid-2018, by prematurely recognizing revenue.[43] According to the complaint, using a variety of improper practices, the company recognized sales revenue earlier than allowed by GAAP and by the company’s own internal accounting policies. The company also allegedly provided backdated sales documents to the company’s auditor in order to cover up the improper practices related to premature revenue recognition. Without admitting or denying wrongdoing, the company agreed to pay a $1.25 million penalty, and the executives agreed to pay penalties as well.

The same month, the SEC also instituted a settled action against an automaker and two of its subsidiaries related to charges that the automaker disclosed false and misleading information related to overstated retail sales reports.[44] According to the SEC, the automaker inflated its reported retail sales using a reserve of previously unreported retail sales to meet internal monthly sales targets, regardless of the date of the actual sales. The company also allegedly paid dealers to falsely designate unsold vehicles as demonstrators or loaners so that the vehicles could be counted as having been sold, even though they had not been sold. The company and its subsidiaries agreed to pay a joint penalty of $18 million without admitting or denying the SEC’s allegations.

Also in September, the SEC instituted settled actions against a heavy equipment manufacturer and three of its former executives for allegedly misleading the company’s outside auditor about nonexistent inventory in order to overstate its income.[45] According to the SEC, the company improperly accounted for nonexistent inventory and created false inventory documents, which it later provided to its outside auditor. The company also allegedly deceived its outside auditor about approximately $12 million in revenue that it improperly recognized. Without admitting or denying the SEC’s allegations, the company and its executives agreed to pay a total of $485,000 in penalties.

In October, the SEC filed a complaint against a seismic data company and four of its former executives for accounting fraud for concealing theft by the executives, and for falsely inflating the company’s revenue.[46] According to the complaint, the company improperly recorded revenue from sales to a purportedly unrelated client (that was actually controlled by the executives), with the company recording roughly $100 million in revenue from sales that it knew the client would be unable to actually pay. The U.S. Attorney’s Office for the Southern District of New York also brought a criminal action against the company’s CEO.

In November, in a case related to previously settled charges against a large bank, the SEC filed a complaint against the bank’s former Senior Executive Vice President of Community Banking alleging that disclosures concerning the bank’s “cross-sell” metric were misleading and that the defendant knew or should have known was improperly inflated.[47] The SEC also instituted a settled action against the bank’s former chairman and CEO for certifying statements that he should have known were misleading arising from the bank’s inflated cross-sell metric. The SEC alleged that the executives knew or should have known that the cross-sell metric was “inflated by accounts and services that were unused, unneeded, or unauthorized.” The litigation against the vice president remains pending; the CEO agreed to pay a $2.5 million penalty to settle the charges, without admitting or denying the SEC’s allegations.

In December, the SEC instituted a settled action against a China-based coffee company, alleging that the company defrauded investors by misstating its revenue, expenses, and net operating losses.[48] According to the complaint, among other things, the company recorded approximately $311 million in false retail sales transactions, as well as roughly $196 million in inflated expenses to conceal the fraudulent sales. The company agreed to pay a $180 million penalty to settle the action, without admitting or denying the SEC’s allegations.

B.   Disclosure Cases

Disclosures Related to the COVID-19 Pandemic

In March 2020, the SEC’s Division of Enforcement formed a Coronavirus Steering Committee to oversee the Division’s efforts to actively look for COVID-19 related misconduct. Since the Steering Committee’s formation, there have been at least five enforcement actions for alleged disclosure violations related to COVID-19. As discussed in our mid-year 2020 alert, there was an initial flurry of disclosure-related enforcement actions at the onset of the pandemic. These actions tended to involve microcap companies whose stock was suspended from trading after sky rocketing on the back of allegedly false statements about these companies’ ability to distribute or access highly coveted protective equipment or technology that could detect or prevent the coronavirus.[49] In the second half of 2020, the SEC has continued to bring enforcement actions against companies for allegedly making false statements about their ability to detect COVID-19. For example, in September, the SEC filed an action against a President and Chief Science Officer (“CSO”) alleging he issued false and misleading statements about the company’s development of a COVID-19 blood test.[50] According to the complaint, the President and CSO incorrectly stated that (i) the company had purchased materials to make a test, (ii) the company had submitted the test for emergency approval, and (iii) there was a high demand for the test. The SEC’s complaint also alleged that the defendant failed to provide necessary documents and financial information to the company’s independent auditor to update the company’s delinquent financial statements for 2014 and 2015.

More recently, the SEC announced charges against a biotech company and its CEO for making false and misleading claims in press releases that the company had developed a technology that could accurately detect COVID-19 through a blood test.[51] According to the complaint, the company and CEO made false and misleading statements about the existence of the physical testing device and the status of FDA emergency use authorization while advisors warned that the testing kit would not work as the company publicly described.

The SEC is also starting to bring enforcement actions against companies for alleged misstatements concerning how their financials were affected by the coronavirus. For example, in December, the SEC announced a settled order against a publicly traded restaurant company for allegedly incomplete disclosures in a Form 8-K about the financial effects of the pandemic on the company’s business operations and financial condition.[52] In brief, according to the SEC’s settled order, the company disclosed that it expected to be able to operate “sustainably, ” but did not disclose that it was losing $6 million in cash per week, it only had 16 weeks of cash remaining, it was excluding expenses attributable to corporate operations from its claim of sustainability, and it was not going to pay rent in April 2020. Without admitting or denying the SEC’s findings, the company agreed to pay a $125,000 penalty and to cease-and-desist from further violations of the reporting provisions in Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20. See our prior alert on this case for additional analysis and commentary on this case.

Other Disclosure Cases

In December, the SEC instituted a settled action against a U.S. based multinational company for allegedly failing to disclose material information about the company’s power and insurance businesses in three separate situations.[53] First, according to the SEC, the company misled investors by disclosing its power business’s increased profits without also disclosing that between one-quarter and one-half of those profits were a result of reductions in the company’s prior cost estimates. Second, the company failed to disclose that its reported increase in cash collections came at the expense of future years’ cash and was derived principally from internal sales between the company’s own business units. Third, the company lowered projected costs for its future insurance liabilities without disclosing uncertainties about those projected costs due to a general trend of rising long-term health insurance claim costs. Without admitting or denying wrongdoing, the company agreed to settle the allegations and pay a $200 million penalty. The settlement also contained a relatively unique undertaking by which the company agreed to self-report to the SEC regarding certain accounting and disclosure controls for one year.

In September, the SEC announced a settled action against an automaker for allegedly misleading disclosures about its vehicles’ emissions control systems.[54] According to the SEC, the automaker stated in a February press release and annual report that an internal audit had confirmed its vehicles complied with emissions regulations, without disclosing that the internal audit had a narrow scope and was not a comprehensive review, and also without disclosing that the Environmental Protection Agency and California Air Resource Board had expressed concerns to the automaker about some of its vehicles’ emissions. The automaker agreed to pay a $9.5 million penalty without admitting or denying the SEC’s allegations.

In September, the SEC instituted a settled action against a hospitality company for failing to fully disclose executive perks by omitting disclosure of approximately $1.7 million in executive travel benefits.[55] The benefits at issue related to company executives’ stays at the company’s hotels, and to the CEO’s personal use of corporate aircraft from the period 2015 to 2018. The company agreed to pay a $600,000 penalty to settle the action, without admitting or denying the SEC’s allegations.

C.   Cases Involving Both Misleading Disclosures and Financial Reporting

In July, the SEC announced a settled action against a pharmaceutical company and three of its former executives for misleading disclosures and accounting violations.[56] According to the SEC, the company made misleading disclosures related to its sales to a pharmacy that the company helped establish and subsidize. For example, the company announced it was experiencing double-digit same store organic growth (a non-GAAP financial measure) without disclosing that much of that growth came from sales to the subsidized pharmacy and without disclosing risks related to that pharmacy. The SEC also alleged that the company improperly recognized revenue by incorrectly allocating $110 million in revenue attributable solely to one product to over 100 unrelated products. Without admitting or denying the allegations, the company agreed to pay a $45 million penalty; the former executives agreed to pay penalties ranging from $75,000 to $250,000 and to reimburse the company for previously paid incentive compensation in amounts ranging from $110,000 to $450,000. Additionally, the Controller agreed to a one-year accounting practice bar before the SEC.

In August, the SEC settled instituted a settled action against the former CEO and Chairman of a car rental company alleging that he aided and abetted the company in filing misleading disclosures and inaccurate financial reporting.[57] According to the SEC, the former CEO lowered the company’s depreciation expenses by lengthening the period for which the company planned to hold rental cars in its fleet, from holding periods of twenty months to holding periods of twenty-four and thirty months; the CEO did not fully disclose the new, lengthened holding periods, and did not disclose the risks associated with an older fleet. The complaint also alleged that, when the company fell short of forecasts, the former CEO pressured employees to “find money,” mainly by reanalyzing reserve accounts, resulting in his subordinates making accounting changes that left the company’s financial reports inaccurate. Without admitting or denying the SEC’s allegations, the former CEO agreed to pay a $200,000 penalty and reimburse the company $1.9 million. The car rental company had already agreed to pay a $16 million penalty to settle related charges, in December 2018.

In September, the SEC announced a settled action against a charter school operator engaged in a $7.6 million municipal bond offering, and its former president alleging that the defendants provided inaccurate financial projections and failed to disclose the school’s financial troubles.[58] According to the complaint, the school’s offering document included inaccurate profit and expense projections that indicated the school would become profitable in the next year when, according to the SEC, the school knew or should have known that these projections were inaccurate. The complaint also alleged that the school failed to disclose that it was operating at a sizable loss and had made repeated unauthorized withdrawals from its reserve accounts to pay its debts and routine expenses. Without admitting or denying wrongdoing, the school and its former president agreed to a settlement enjoining them from future violations; the former president also agreed to be enjoined from participating in future municipal securities offerings and to pay a $30,000 penalty.

Also in September, the SEC instituted a settled action against a technology company for inflating reported sales by prematurely recognizing sales expected to occur later and for failing to disclose these practices.[59] According to the SEC’s order, the company allegedly failed to disclose a practice used to increase monthly sales in which some regional managers would accelerate, or “pull-in,” to an earlier quarter’s sales that they expected to occur in later quarters. The company also allegedly failed to disclose that some regional managers sold to resellers known to violate company policy by selling product outside their designated territories in order to increase monthly sales. Finally, the SEC’s order alleged that the company made misleading disclosures by disclosing information related to its channel health that only included channel partners to which the company sold directly, without disclosing that this information did not include channel partners to which the company sold indirectly. The company agreed to pay a $6 million penalty, without admitting or denying wrongdoing.

In December, the SEC announced the settlement of an action filed in February against an energy company and its subsidiary for making misleading statements by claiming that the company would qualify for large tax credits for which the company knew it likely would not be eligible.[60] According to the SEC, the company represented that its project to build two new nuclear power units was on schedule, and therefore, would likely qualify for more than $1 billion in tax credits, when the company knew its project was substantially delayed and, resultingly, would likely fail to qualify for these tax credits. Without admitting or denying the allegations, the company agreed to pay a $25 million penalty; the company and its subsidiary also agreed to pay $112.5 million in disgorgement and prejudgment interest. The settlement remains subject to court approval. The litigation against two of the company’s senior executives remains ongoing.

Also in December, the SEC filed a complaint against a brand-management company with violations of the federal securities laws’ related to the company’s alleged failure to account for and disclose evidence of goodwill impairment.[61] The complaint alleged that the company unreasonably concluded that its goodwill was not impaired based on a qualitative impairment analysis, without taking into account and also without disclosing two internal quantitative analyses showing that goodwill was likely impaired. The litigation against the company remains ongoing.

D.   Internal Controls

Increasingly, the SEC has demonstrated a willingness to resolve investigations of public companies on the basis of violations of the internal controls provisions of the Exchange Act. One recent example of an internal controls settlement provided a rare window into a significant divergence of opinion among the Commissioners concerning the appropriateness of such settlements based on a broad application of the internal controls provision.

In October, the SEC instituted a settled action against an energy company related to charges that the company failed to maintain internal controls that would have provided reasonable assurance that the company’s stock buyback plan would have complied with its own buyback policies.[62] According to the SEC’s order, the company implemented a $250 million stock buyback while in possession of material nonpublic information (MNPI) about a potential acquisition, in spite of the company’s policy prohibiting repurchasing stock while in possession of MNPI. In addition to detailing the litany of factors illustrating that the probability of the acquisition was sufficiently high as to have constituted MNPI, the SEC’s order focused on the company’s insufficient process for evaluating whether the acquisition discussions were material at the time it adopted a 10b5-1 plan for the buyback. Specifically, the process did not include speaking with the individuals at the company reasonably likely to have material information about significant corporate developments. As a result, the SEC’s order alleged that the company’s legal department did not consult with the CEO about the prospects of the company being acquired, even though the CEO was the primary negotiator. The company’s legal department thus “failed to appreciate” that the transaction’s probability was high enough to constitute MNPI.

Despite these findings, the SEC did not bring insider trading charges, but instead alleged that the company’s internal controls were insufficient to provide reasonable assurance that the company’s buyback transactions would comply with its buyback policy. Without admitting or denying the allegations, the company agreed to pay a $20 million penalty. Notably, Republican Commissioners Roisman and Peirce dissented from the Commission’s decision to institute the enforcement action. In a public statement explaining their dissent, the Commissioners argued that the internal controls provision, Section 13(b)(2)(B) of the Exchange Act, applies to “internal accounting controls,” and thus does not apply to internal controls to ensure a company does not repurchase stock in compliance with company policies.

III.   Investment Advisers

In the second half of 2020, the SEC instituted a number of actions against investment advisers. We discuss notable cases below.

A.   Payment for Order Flow

In August, the SEC instituted a settled action against two affiliated investment advisers in connection with their alleged misrepresentations to certain mutual fund and exchange-traded fund clients regarding “payment for order flow” arrangements, i.e., payments the investment adviser received for sending client orders to other brokerage firms for execution.[63] According to the SEC, on multiple occasions, the investment advisers made misleading statements that the payment for order flow arrangements did not adversely affect the prices at which the clients’ orders were executed, when in fact the executing brokers adjusted the execution prices to recoup those payments. Without admitting or denying the findings in the SEC’s order, the firms agreed to a cease-and-desist order, and to pay a combined total of $1 million in penalties.

B.   Mutual Fund Share Classes

In August, the SEC instituted a settled action against a California-based investment advisory firm based on allegations that it engaged in practices that violated its fiduciary duties to clients.[64] According to the SEC, the firm failed to disclose a conflict of interest in selecting mutual fund share classes that charged certain fees instead of available lower-cost share classes of the same funds. The firm’s affiliated broker received the associated fees in connection with these investments. Additionally, the SEC alleged that the firm failed to disclose its receipt of revenue sharing payments from its clearing broker in exchange for purchasing or recommending certain money market funds to clients. The SEC further alleged that these practices resulted in a violation of the firm’s duty to seek best execution for those transactions. Without admitting or denying the findings in the SEC’s order, the firm agreed to a cease-and-desist order and to pay disgorgement of $544,446, plus prejudgment interest of $22,746, and a penalty of $200,000, all for distribution to investors.

C.   Exchange-Traded Products

In November, the SEC announced the first enforcement actions resulting from the Division of Enforcement’s “Exchange-Traded Products Initiative.” The SEC instituted settled actions against five firms registered as investment advisers and/or broker dealers in connection with their alleged unsuitable sales of complex, volatility-linked exchange-traded products to retail investors.[65] According to the SEC, representatives of the firms recommended that their clients buy and hold exchange-traded products for long periods of time, contrary to the warnings in the products’ offering documents, which made clear that they were intended to be short-term investments. The SEC further alleged that the firms failed to adopt or implement policies and procedures to address whether their registered representatives sufficiently understood the products to be able to form a reasonable basis to assess suitability or to recommend that their clients buy and hold the products. The firms agreed to pay a total of $3,000,000 in civil penalties among the five firms.

D.   Puerto Rico Bonds

In December, the SEC filed a complaint in federal court in Puerto Rico against a Florida-based individual operating as an unregistered investment adviser.[66] According to the SEC’s complaint, the individual promised municipal officials in Puerto Rico an annual return of 8-10% on their approximately $9 million investment in the municipality’s funds, with no risk to principal. To convince officials to invest in the municipality’s funds, the individual allegedly falsified bank correspondence and brokerage opening documents. The SEC further alleged that the individual failed to execute the promised investment strategy, instead misappropriating $7.1 million of taxpayer funds by transferring the funds to himself, entities he controlled, and his associates. The SEC’s complaint seeks permanent injunctive relief, disgorgement of alleged ill-gotten gains plus prejudgment interest, and a civil penalty.

E.   Disclosure Violations

In December, the SEC instituted a settled action against a UK-based investment adviser based on allegations that the company failed to make complete and accurate disclosures relating to the transfer of its highest-performing traders from its flagship client fund to a proprietary fund, and the replacement of those traders with a semi-systematic, algorithmic trading program.[67] The SEC alleged that the algorithmic trading program underperformed compared to the firm’s live traders, generating less profit with greater volatility. Additionally, the investment adviser allegedly failed to adequately implement policies and procedures reasonably designed to prevent the violations of the Investment Advisers Act under the particular circumstances described above. Without admitting or denying the findings in the SEC’s order, the firm agreed to a cease-and-desist order and to pay disgorgement and penalties totaling $170 million, all to be distributed to investors.

F.   Single Broker Quotes

In December, the SEC instituted a settled action against a New York-based investment adviser and global securities pricing service based on allegations that the firm failed to adopt and implement policies and procedures reasonably designed to address the risk that the single broker quotes it delivered to clients did not reasonably reflect the value of the underlying securities.[68] The SEC further alleged that the firm failed to effectively or consistently implement quality controls for prices delivered to clients based on the single broker quotes. Without admitting or denying the findings in the SEC’s order, the firm agreed to cease and desist from future violations, to a censure, and to pay an $8 million penalty.

G.   Cherry Picking

In December, the SEC filed a complaint in federal court in Texas against a Dallas-based investment adviser and its principal, charging the defendants with violations of the antifraud provisions of the federal securities laws.[69] The SEC’s complaint alleges that the principal placed options trades in the investment adviser’s omnibus account early in the trading day, but waited until near or after market close to allocate the trades to either his personal account or to specific client accounts. As alleged in the complaint, the principal disproportionately allocated profitable trades to his personal accounts and unprofitable trades to advisory clients, while representing to clients that all trades would be equitably allocated. The SEC’s complaint seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties.

IV.   Broker-Dealers and Financial Institutions

Although not as numerous as prior years, there were nevertheless notable cases involving the conduct of broker-dealers in the latter half of 2020.

A.   Financial Reporting and Recordkeeping

In August, the SEC instituted a settled action against a broker-dealer for neglecting to file over 150 suspicious activity reports (SARs) relating to microcap securities that the firm traded on behalf of its customers.[70] The purpose of SARs is to identify and investigate potentially suspicious activity, and the SEC’s order alleged that the broker-dealer failed to do so, even when suspicious transactions were identified by compliance personnel. The allegedly suspicious activity included numerous instances where customers either deposited and sold large blocks of microcap securities before quickly withdrawing the resulting proceeds from the respective accounts, sold enough of a particular microcap security on given days to account for over 70% of the daily trading volume for that security, or deposited microcap securities that were subject to SEC trading suspensions. The broker-dealer agreed to pay an $11.5 million penalty to the SEC, without admitting or denying the findings, and additionally agreed to pay penalties of $15 million and $11.5 million to FINRA and the CFTC respectively.

In September, the SEC instituted a settled action against a broker-dealer subsidiary of a global financial services firm for alleged violations of Regulation SHO.[71] Regulation SHO governs short sales and, among other things, generally prohibits broker-dealers from separately marking their long and short positions in a given security, instead requiring order aggregation to determine and mark one net position for each security. The SEC’s order alleged that the broker-dealer had a “Long Unit” that purchased equity securities to hedge short synthetic exposure, which should have been aggregated with a separate “Short Unit” that sold equity securities to similarly hedge long synthetic exposure for the purposes of order marking. The broker-dealer agreed to pay a $5 million penalty without admitting or denying the SEC’s findings.

B.   Trade Manipulation

In September, the SEC instituted a settled action against a broker-dealer subsidiary of a global financial services firm for allegedly using trading techniques that artificially depressed or boosted the price of securities that it intended to buy or sell.[72] Specifically, the SEC’s order alleged that traders at the broker-dealer entered bona-fide buy-or-sell orders for particular securities, while simultaneously entering non bona-fide orders on the opposite side of the market to create a false appearance of buy or sell interest. In a settlement, the broker-dealer admitted to the SEC’s findings and agreed to pay a $25 million penalty and $10 million in disgorgement.

C.   Best Execution and Payment for Order Flow

In December, the SEC instituted a settled action against a retail broker-dealer for alleged misstatements concerning revenue streams and execution quality, and for alleged best execution violations.[73] Specifically, the SEC’s order alleged that the broker-dealer did not disclose that it received revenue from order flow, i.e. routing its customers’ orders to principal trading firms, and further alleged that its statements concerning execution quality were inaccurate, even after accounting for customer savings from not having to pay a commission. Without admitting or denying the Commission’s findings, the broker-dealer agreed to pay a $65 million penalty and to obtain an independent consultant to review its relevant policies.

V.   Cryptocurrency and Digital Assets

The Commission continued to bring enforcement actions in the area of digital assets during the second half of 2020. As in the first half of the year, these actions primarily were based on alleged failures to comply with the requirement to register an offering of assets deemed to be securities or allegations of fraud in the offer and sale of digital assets.

A.   Significant Developments

Significantly, the SEC closed the year by bringing two enforcement actions involving digital assets. On December 22, the SEC charged Ripple Labs Inc. (“Ripple”) and two of its executives—its co-founder and board chairman and its CEO—with raising $1.3 billion through the sale of unregistered digital asset securities.[74] In particular, the SEC alleged that the native digital currency of Ripple, XRP, which has been sold by Ripple and others and trading in secondary markets, including on cryptocurrency exchanges for seven years, is a security (not merely a currency) under the Howey test, which defines a security as an investment of money in a shared enterprise with an expectation of profits from others’ work.[75] Additionally, the SEC alleged that the two executives personally made $600 million worth of unregistered sales of the digital asset. In the press release announcing the action, the SEC stressed that all public issuers “must comply with federal securities laws that require registration of offerings unless an exemption from registration applies.” Six days later, on December 28, the SEC obtained an emergency asset freeze against Virgil Capital LLC and its affiliates due to an alleged fraud perpetrated by the company’s owner.[76] The complaint alleged that the owner and his companies had been fraudulently misrepresenting to investors that their funds were to be used only for digital currency trading, when in reality those funds were used for personal expenses or other high-risk investments.

Another notable development demonstrates the increasing emphasis the SEC is placing on the protection of investors in the context of FinTech innovation. On December 3, 2020, the Commission announced that it was elevating the Strategic Hub for Innovation and Financial Technology (“FinHub”), to a stand-alone office. Previously, the FinHub, which was initially established in 2018, had been a unit within the Division of Corporation Finance.[77] Since its inception, FinHub has “spearheaded agency efforts to encourage responsible innovation in the financial sector, including in evolving areas such as distributed ledger technology and digital assets, automated investment advice, digital marketplace financing, and artificial intelligence and machine learning,” and provided industry players and regulators with a forum to engage with SEC Staff. The establishment of FinHub as a stand-alone office—which will continue to be led by current director Valerie A. Szczepanik—signals that the Commission will continue to focus on digital assets in the years to come.

Although the end of the year arguably was a high-water mark concerning the SEC’s enforcement of actions involving digital assets, the Commission consistently brought similar actions throughout the second half of the year, as discussed below.

B.   Registration Cases

In July, the SEC instituted a settled action against a privately-owned California-based company and a related Philippine company for offering and selling U.S.-based securities without registration via an app and for trading in the related swap transactions outside of a registered national exchange.[78] The app allowed individuals to enter into a contract in which they would choose specific securities to “mirror,” and the value of their contracts would fluctuate according to the price of the underlying security. The Commission determined that the contracts constituted security-based swaps, and therefore were subject to U.S. securities laws. Without admitting or denying to the findings in the order, the two companies agreed to pay a penalty of $150,000. Additionally, the companies entered into a separate settlement with the CFTC arising from similar conduct.

In September, the SEC instituted a settled action against an operator of an online gaming and gambling platform for conducting an unregistered initial coin offering (“ICO”) of digital assets.[79] The order found that the company raised approximately $31 million through the offering of its digital token, and promised investors that it would develop a secondary market for trading in its tokens. The SEC determined that the tokens were sold as investment contracts, thereby constituting securities, the offering of which should have been registered. The company agreed to pay a $6.1 million penalty, without admitting or denying the Commission’s findings, and further agreed to disable the token and remove it from all digital asset-trading platforms. The Washington State Department of Financial Institution separately entered into a settlement agreement in connection with this offering.

C.   Fraud Cases

In August, the SEC instituted a settled action against a Virginia-based company and its CEO, in connection with the company’s $5 million ICO to raise funding to develop an internet-based job-posting platform.[80] The SEC found that the offering of sale of the coin constituted the sale of unregistered securities, and that the company and its CEO made false and misleading statements to investors relating to the stability of its digital asset and its scalability compared to its competitors. Without admitting or denying the findings in the order, the company agreed to disgorge the $5 million raised and pay over $600,000 in prejudgment interest; the CEO was barred from serving as an officer or director of a public company and agreed to pay a $150,000 penalty; and the company and CEO both agreed to cease trading in (and destroy existing) coins and refrain from participating in any offerings of any digital asset securities.

In September, the SEC instituted a settled action against four individuals, and brought non-settled charges against another individual—an Atlanta-based film producer—and their two companies in connection with the misappropriation and theft of funds that were raised via ICOs.[81] The producer allegedly used the misappropriated funds and proceeds of manipulative trading to buy a Ferrari, a home, jewelry, and other luxury items. Three of the settling defendants agreed to pay a penalty of $25,000 and are prohibited from participating in the issuance of or otherwise transact in digital assets for five years. The fourth settling defendant agreed to pay a $75,000 penalty and is subject to a similar injunction. The U.S. Attorney’s Office for the Northern District of Georgia has also brought a criminal action against the non-settling defendant.

In October, the SEC filed an action against a software magnate and computer programmer for fraudulently promoting investments in ICOs to his thousands of Twitter followers.[82] The Complaint alleges that the programmer failed to disclose that he was paid more than $23 million to promote the investments and made other false and misleading statements, such as that he was advising some of the issuers and personally invested in some of the ICOs. The SEC also brought charges against the programmer’s bodyguard, alleging that he received over $300,000 to help with the scheme. The SEC also alleged that the programmer secretly amassed a large holding in another digital asset while promoting it on Twitter, with the intention of selling his holding at an inflated price. The DOJ’s Tax Division has separately brought criminal charges against the computer programmer.

VI.   Insider Trading

Insider trading is another area in which the number and size of cases was diminished from prior years. Nevertheless, insider trading enforcement remains a significant focus for the SEC. Below we note some of the more significant actions.

The SEC announced two insider trading cases in September, and brought a third in December. In the first case, the SEC filed charges against a senior manager at an index provider and his friend, for allegedly obtaining more than $900,000 by trading on inside information.[83] According to the SEC, the manager used information regarding which companies were to be added or removed from the market index to place call and put options using the friend’s brokerage account. The SEC’s complaint seeks injunctive relief and civil penalties; the U.S. Attorney’s Office for the Eastern District of New York filed parallel criminal charges against the manager.

In the second case, the SEC settled insider trading charges against a former finance manager at an online retailer and two family members.[84] According to the SEC’s complaint, the employee allegedly tipped her husband about the company’s financial performance in advance of earnings announcements; the employee’s husband and his father used the information to trade in the company’s shares. The three individuals consented to the entry of a judgment enjoining future violation ordering payment of approximately $2.65 million in disgorgement and penalties. The U.S. Attorney’s Office for the Western District of Washington filed parallel criminal charges against the employee’s husband.

Most recently, the SEC filed insider trading charges against an individual in the Eastern District of New York.[85] According to the SEC’s complaint, the individual obtained information regarding a private equity firm’s interest in a publicly traded chemical manufacturing company in advance of a press release announcing the news. The individual traded on the information and additionally tipped others to trade for a collective profit of $1 million once the news broke. The SEC’s complaint seeks injunctive relief and civil penalties.

VII.   Actions Against Attorneys

It is rare for the SEC to bring enforcement actions against attorneys for conduct in their capacity as lawyers. Thus, when the SEC does bring such cases, it is notable.

In December, the SEC filed a partially settled action against two attorneys: one licensed attorney and one disbarred attorney with fraud related to the licensed attorney’s reliance on the disbarred attorney for the preparation of attorney opinion letters for the sale of shares in microcap securities to retail investors.[86] The SEC alleged that the licensed attorney knew the disbarred attorney was disbarred during all relevant times. According to the complaint, the disbarred attorney prepared for the licensed attorney’s signature at least thirty attorney opinion letters, on which the licensed attorney falsely stated that he had personal knowledge of the bases for the opinions in the letters. The complaint also alleged that the disbarred attorney submitted over 100 attorney opinion letters in which he falsely claimed to be an attorney. Without admitting or denying the allegations, the licensed attorney agreed to a partial settlement to an injunction and penny-stock bar, with the potential for other remedies, including penalties, reserved. The SEC’s litigation against the disbarred attorney remains ongoing, as does a criminal action against both attorneys.

VIII.   Offering Frauds

The SEC continued to bring offering fraud cases, which often contain charges against individuals and companies that target particular groups of investors.

A.   Frauds Targeting Senior Citizens and Retirees

In July, the SEC filed a complaint against an aviation company and its owner, alleging that the company raised $14 million, largely from retired first responders, by representing that it would use the funds to purchase engines and other aircraft parts for leasing to major airlines.[87] The SEC’s complaint alleges that, instead, the company and its owner diverted most of the money for unauthorized purposes, including Ponzi-scheme like payments to other investors.

In September, the SEC charged the former president of a real estate company with violating antifraud provisions of the securities laws in connection with a $330 million alleged Ponzi-like scheme that impacted seniors.[88] In a second September case, the SEC announced settled charges against two individuals charged in connection with the sale of unregistered stock, following up on a 2019 action by the SEC against the company’s former CEO and two previously barred brokers.[89] According to the SEC, the three recently-charged individuals received undisclosed commissions totaling nearly $500,000 in connection with the sale of nearly $1.4 million in stocks to retail investors, most of whom were seniors.

In a recent case, the SEC filed civil charges against an individual in the Eastern District of New York for operating a Ponzi-like scheme that raised over $69 million from current and retired police officers and firefighters, among other investors.[90] The SEC’s complaint alleges that the individual represented that the investments would be used to acquire jewelry for a business that he operated, but instead were diverted to perpetuate and conceal the fraudulent scheme. The individual has pleaded guilty to related criminal charges.

B.   Frauds Targeting Affinity Groups

In August, the SEC charged three principals and their companies in connection with a Ponzi-like scheme targeting African immigrants.[91] According to the SEC, the investors believed that the funds would be used for foreign exchange and cryptocurrency trading. The CFTC also filed civil charges, and the DOJ filed criminal charges. In September, the SEC filed a complaint in the Eastern District of New York against a Swedish national in connection with a purportedly “pre-funded reversed pension plan” that was largely marketed online and attracted over 800 investors from the Deaf, Hard of Hearing and Hearing Loss communities.[92] Finally, in December, the SEC brought an emergency action against a real estate development company and its owner in connection with a $119 million round of fundraising that predominantly targeting South Asian investors.[93]

C.   Fraud Related to Online Retailers and Technology Providers

The SEC has also focused on companies engaged in or making representations about emerging technologies and e-commerce. For example, the SEC charged an e-commerce startup and its CEO in Northern California with misrepresenting the extent of the company’s contracts with more well-known retailers and brands in order to attract investment.[94] The SEC filed another complaint against the founder and CEO of a machine-learning analytics company in California, alleging that the founder misrepresented the company’s prior financial performance and its client list.[95] In the Eastern District of Virginia, the SEC filed charges alleging that the founder and CEO of an online marketplace in connection with the offering and selling of over $18.5 million in securities, some of which were sold to corporate investors.[96] Both the U.S. Attorney’s Office and the Fraud Section of the Department of Justice have also announced criminal charges based on similar allegations. Finally, a court in the Southern District of New York froze over $35 million in assets[97] in connection with allegations by the SEC that the former CEO of a fraud detection and prevention software company misled investors by providing investors with erroneous financial statements.[98] According to the SEC, the former CEO altered bank statements supplied to the company’s finance department and incorporated into investor materials over the course of two years, during which the company raised approximately $123 million.

________________________

    [1]     Paul Kiernan and Scott Patterson, “An Old Foe of Banks Could Be Wall Street’s New Top Cop,” Wall Street Journal, Jan. 16, 2021, available at https://www.wsj.com/articles/an-old-foe-of-banks-could-be-wall-streets-new-top-cop-11610773211.

   [2]     Speech by Chairman Jay Clayton, “Putting Principles into Practice, the SEC from 2017-2020,” Remarks to the Economic Club of New York, Nov. 12, 2020, available at https://www.sec.gov/news/speech/clayton-economic-club-ny-2020-11-19.

   [3]     See 2020 Annual Report of U.S. SEC Division of Enforcement, available at https://www.sec.gov/files/enforcement-annual-report-2020.pdf.

   [4]     National Defense Authorization Act for Fiscal Year 2021, H.R. 6395, 116th Cong. (2020).

   [5]     Id.

   [6]     Id.

   [7]     Whistleblower Program, 2020 Annual Report to Congress, available at https://www.sec.gov/files/2020%20Annual%20Report_0.pdf.

   [8]     SEC Press Release, SEC Awards Over $1.6 Million to Whistleblower (Dec. 22, 2020), available at https://www.sec.gov/news/press-release/2020-333.

   [9]     SEC Press Release, SEC Adds Clarity, Efficiency, and Transparency to Its Successful Whistleblower Award Program (Sept. 23, 2020), available at https://www.sec.gov/news/press-release/2020-219.

   [10]    Lydia DePhillis, “The SEC Undermined a Powerful Weapon Against White-Collar Crime,” ProPublica (Jan. 13, 2021), available at https://www.propublica.org/article/the-sec-undermined-a-powerful-weapon-against-white-collar-crime.

   [11]    SEC Press Release, SEC Issues Record $114 Million Whistleblower Award (Oct. 22, 2020), available at https://www.sec.gov/news/press-release/2020-266.

   [12]    SEC Press Release, SEC Issues Record $114 Million Whistleblower Award (Oct. 22, 2020), available at https://www.sec.gov/news/press-release/2020-266.

   [13]    Whistleblower Program, 2020 Annual Report to Congress, available at https://www.sec.gov/files/2020%20Annual%20Report_0.pdf.

   [14]    SEC Press Release, SEC Awards Over $28 Million to Whistleblower (Nov. 3, 2020), available at https://www.sec.gov/news/press-release/2020-275.

   [15]    SEC Press Release, SEC Awards Over $10 Million to Whistleblower (Oct. 29, 2020), available at https://www.sec.gov/news/press-release/2020-270.

   [16]    SEC Press Release, SEC Issues Multiple Whistleblower Awards Totaling Over $3.6 Million (Dec. 18, 2020), available at https://www.sec.gov/news/press-release/2020-325.

   [17]    SEC Press Release, SEC Issues Multiple Whistleblower Awards Totaling Over $3.6 Million (Dec. 18, 2020), available at https://www.sec.gov/news/press-release/2020-325.

   [18]    SEC Press Release, SEC Issues $3.8 Million Whistleblower Award (July 14, 2020), available at https://www.sec.gov/news/press-release/2020-155.

   [19]    SEC Press Release, SEC Awards Over $1.25 Million to Whistleblower (Aug. 31, 2020), available at https://www.sec.gov/news/press-release/2020-199.

   [20]    SEC Press Release, SEC Awards Almost $30 Million to Two Insider Whistleblowers (Sept. 30, 2020), available at https://www.sec.gov/news/press-release/2020-239.

   [21]    SEC Press Release, SEC Awards Over $2.5 Million to Joint Whistleblowers for Detailed Analysis That Led to Multiple Successful Actions (Sept. 1, 2020), available at https://www.sec.gov/news/press-release/2020-201.

   [22]    SEC Press Release, SEC Awards More Than $10 Million to Whistleblowers (Sept. 14, 2020), available at https://www.sec.gov/news/press-release/2020-209.

   [23]    SEC Press Release, SEC Awards Almost $250,000 to Joint Whistleblowers (Sept. 17, 2020), available at https://www.sec.gov/news/press-release/2020-214.

   [24]    SEC Press Release, SEC Issues $2.4 Million Whistleblower Award (Sept. 21, 2020), available at https://www.sec.gov/news/press-release/2020-215.

   [25]    SEC Press Release, SEC Issues Two Whistleblower Awards for High-Quality Information Regarding Overseas Conduct (Sept. 25, 2020), available at https://www.sec.gov/news/press-release/2020-225.

   [26]    SEC Press Release, SEC Issues $1.8 Million Whistleblower Award to Company Outsider (Sept. 28, 2020), available at https://www.sec.gov/news/press-release/2020-231.

   [27]    SEC Press Release, SEC Whistleblower Program Ends Record-Setting Fiscal Year With Four Additional Awards (Sept. 30, 2020), available at https://www.sec.gov/news/press-release/2020-240.

   [28]    SEC Press Release, SEC Awards $800,000 to Whistleblower (Oct. 15, 2020), available at https://www.sec.gov/news/press-release/2020-255.

   [29]    SEC Press Release, SEC Awards More Than $3.6 Million and $750,000 in Separate Whistleblower Awards (Nov. 5, 2020), available at https://www.sec.gov/news/press-release/2020-278.

   [30]    SEC Press Release, SEC Awards More Than $3.6 Million and $750,000 in Separate Whistleblower Awards (Nov. 5, 2020), available at https://www.sec.gov/news/press-release/2020-278.

   [31]    SEC Press Release, SEC Awards Over $1.1 Million to Whistleblower for Independent Analysis (Nov. 13, 2020), available at https://www.sec.gov/news/press-release/2020-283.

   [32]    SEC Press Release, SEC Awards Whistleblower Over $900,000 (Nov. 19, 2020), available at https://www.sec.gov/news/press-release/2020-288.

   [33]    SEC Press Release, SEC Awards Over $6 Million to Joint Whistleblowers (Dec. 1, 2020), available at https://www.sec.gov/news/press-release/2020-297.

   [34]    SEC Press Release, SEC Issues Multiple Whistleblower Awards Totaling Nearly $3 Million (Dec. 7, 2020), available at https://www.sec.gov/news/press-release/2020-307.

   [35]    SEC Press Release, SEC Issues Multiple Whistleblower Awards Totaling Nearly $3 Million (Dec. 7, 2020), available at https://www.sec.gov/news/press-release/2020-307.

   [36]    SEC Press Release, SEC Issues Multiple Whistleblower Awards Totaling Nearly $3 Million (Dec. 7, 2020), available at https://www.sec.gov/news/press-release/2020-307.

   [37]    SEC Press Release, SEC Awards More Than $300,000 to Whistleblower with Audit Responsibilities (Dec. 14, 2020), available at https://www.sec.gov/news/press-release/2020-316.

   [38]    SEC Press Release, SEC Issues Multiple Whistleblower Awards Totaling Over $3.6 Million (Dec. 18, 2020), available at https://www.sec.gov/news/press-release/2020-325.

   [39]         SEC Press Release, SEC Charges Companies, Former Executives as Part of Risk-Based Initiative (Sept. 28, 2020), available at https://www.sec.gov/news/press-release/2020-226.

   [40]    SEC Press Release, SEC Charges BorgWarner for Materially Misstating its Financial Statements (Aug. 26, 2020), available at https://www.sec.gov/news/press-release/2020-195.

   [41]    SEC Press Release, SEC Charges Super Micro and Former CFO in Connection with Widespread Accounting Violations (Aug. 25, 2020), available at https://www.sec.gov/news/press-release/2020-190.

   [42]    SEC Press Release, Engine Manufacturing Company to Pay Penalty, Take Remedial Measures to Settle Charges of Accounting Fraud (Sept. 24, 2020), available at https://www.sec.gov/news/press-release/2020-222.

   [43]    SEC Press Release, SEC Charges Lighting Products Company and Four Executives with Accounting Violations (Sept. 24, 2020), available at https://www.sec.gov/news/press-release/2020-221.

   [44]    SEC Press Release, SEC Charges BMW for Disclosing Inaccurate and Misleading Retail Sales Information to Bond Investors (Sept. 24, 2020), available at https://www.sec.gov/news/press-release/2020-223.

   [45]    SEC Press Release, SEC Charges Manitex International and Three Former Senior Executives with Accounting Fraud (Sept. 29, 2020), available at https://www.sec.gov/news/press-release/2020-237.

   [46]    SEC Press Release, SEC Charges Seismic Data Company, Former Executives with $100 Million Accounting Fraud (Oct. 8, 2020), available at https://www.sec.gov/news/press-release/2020-251.

   [47]    SEC Press Release, SEC Charges Former Wells Fargo Executives for Misleading Investors About Key Performance Metric (Nov. 13, 2020), available at https://www.sec.gov/news/press-release/2020-281.

   [48]    SEC Press Release, Luckin Coffee Agrees to Pay $180 Million Penalty to Settle Accounting Fraud Charges (Dec. 16, 2020), available at https://www.sec.gov/news/press-release/2020-319.

   [49]    See, e.g., Praxsyn Corp., Applied Biosciences Corp., and Turbo Global partners Inc.

   [50]     SEC Press Release, SEC Orders Top Executive of California Microcap Company for Misleading Claims Concerning COVID-19 Test and Financial Statements (Sept. 25, 2020), available at https://www.sec.gov/news/press-release/2020-224.

   [51]     SEC Press Release, SEC Charges Biotech Company and CEO with Fraud Concerning COVID-19 Blood Testing Device (Dec. 18, 2020), available at https://www.sec.gov/news/press-release/2020-327.

   [52]     SEC Press Release, SEC Charges the Cheesecake Factory for Misleading COVID-19 Disclosures (Dec. 4, 2020), available at https://www.sec.gov/news/press-release/2020-306.

   [53]    SEC Press Release, General Electric Agrees to Pay $200 Million Penalty for Disclosure Violations (Dec. 9, 2020), available at https://www.sec.gov/news/press-release/2020-312.

   [54]    SEC Press Release, Fiat Chrysler Agrees to Pay $9.5 Million Penalty for Disclosure Violations (Sept. 28, 2020), available at https://www.sec.gov/news/press-release/2020-230.

   [55]    SEC Press Release, SEC Charges Hospitality Company for Failing to Disclose Executive Perks (Sept. 30, 2020), available at https://www.sec.gov/news/press-release/2020-242.

   [56]    SEC Press Release, Pharmaceutical Company and Former Executives Charged with Misleading Financial Disclosures (July 31, 2020), available at https://www.sec.gov/news/press-release/2020-169.

   [57]    SEC Press Release, SEC Charges Hertz’s Former CEO with Aiding and Abetting Company’s Financial Reporting and Disclosure Violations (Aug. 13, 2020), available at https://www.sec.gov/news/press-release/2020-183.

   [58]    SEC Press Release, SEC Charges Charter School Operator and its Former President with Fraudulent Municipal Bond Offering (Sept. 14, 2020), available at https://www.sec.gov/news/press-release/2020-208.

   [59]    SEC Press Release, SEC Charges HP Inc. with Disclosure Violations and Control Failures (Sept. 30, 2020), available at https://www.sec.gov/news/press-release/2020-241.

   [60]    SEC Press Release, Energy Companies Agree to Settle Fraud Charges Stemming from Failed Nuclear Power Plant Expansion (Dec. 2, 2020), available at https://www.sec.gov/news/press-release/2020-301.

   [61]    SEC Press Release, SEC Charges Sequential Brands Group Inc. with Deceiving Investors by Failing to Timely Impair Goodwill (Dec. 11, 2020), available at https://www.sec.gov/news/press-release/2020-315.

   [62]    SEC Press Release, SEC Charges Andeavor for Inadequate Controls Around Authorization of Stock Buyback Plan (Oct. 15, 2020), available at https://www.sec.gov/news/press-release/2020-258.

   [63]     SEC Press Release, SEC Charges Affiliated Advisers for Misrepresentations About Payment for Order Flow Arrangements (Aug. 5, 2020), available at https://www.sec.gov/news/press-release/2020-175.

   [64]     SEC Press Release, Advisory Firm Settles Charges of Defrauding Investors, Agrees to Refund Allegedly Ill-Gotten Gains to Harmed Clients (Aug. 13, 2020), available at https://www.sec.gov/news/press-release/2020-182.

   [65]     SEC Press Release, SEC Charges Investment Advisory Firms and Broker-Dealers in Connection with Sales of Complex Exchange-Traded Products (Nov. 13, 2020), available at https://www.sec.gov/news/press-release/2020-282.

   [66]     SEC Press Release, SEC Charges Unregistered Investment Adviser with Defrauding Puerto Rico Municipality (Dec. 1, 2020), available at https://www.sec.gov/news/press-release/2020-299.

   [67]     SEC Press Release, SEC Orders BlueCrest to Pay $170 Million to Harmed Fund Investors (Dec. 8, 2020), available at https://www.sec.gov/news/press-release/2020-308.

   [68]     SEC Press Release, Global Securities Pricing Service to Pay $8 Million for Compliance Failures (Dec. 9, 2020), available at https://www.sec.gov/news/press-release/2020-310.

   [69]     SEC Litig. Rel. No. 24990, SEC Charges Texas-Based Investment Adviser and Its President for Conducting Fraudulent “Cherry-Picking” Scheme (Dec. 21, 2020), available at https://www.sec.gov/litigation/litreleases/2020/lr24990.htm.

   [70]     SEC Press Release, SEC Charges Interactive Brokers with Repeatedly Failing to File Suspicious Activity Reports (Aug. 10, 2020), available at https://www.sec.gov/news/press-release/2020-178.

   [71]     SEC Press Release, Morgan Stanley Agrees to Pay $5 Million for Reg SHO Violations in Prime Brokerage Swaps Business (Sept. 30, 2020), available at https://www.sec.gov/news/press-release/2020-238.

   [72]     SEC Press Release, J.P. Morgan Securities Admits to Manipulative Trading in U.S. Treasuries (Sept. 29, 2020), available at https://www.sec.gov/news/press-release/2020-233.

   [73]     SEC Press Release, SEC Charges Robinhood Financial with Misleading Customers About Revenue Sources and Failing to Satisfy Duty of Best Execution (Dec. 17, 2020), available at https://www.sec.gov/news/press-release/2020-321.

   [74]    SEC Press Release, SEC Charges Ripple and Two Executives with Conducting $1.3 Billion Unregistered Securities Offering (Dec. 22, 2020), available at https://www.sec.gov/news/press-release/2020-338.

   [75]     SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

   [76]    SEC Press Release, SEC Obtains Emergency Asset Freeze, Charges Crypto Fund Manager with Fraud (Dec. 28, 2020), available at https://www.sec.gov/news/press-release/2020-341.

   [77]    SEC Press Release, SEC Announces Office Focused on Innovation and Financial Technology (Dec. 3, 2020), available at https://www.sec.gov/news/press-release/2020-303.

   [78]    SEC Press Release, SEC Charges App Developer for Unregistered Security-Based Swap Transactions (July 13, 2020), available at https://www.sec.gov/news/press-release/2020-153.

   [79]    SEC Press Release, Unregistered ICO Issuer Agrees to Disable Tokens and Pay Penalty for Distribution to Harmed Investors (Sept. 15, 2020), available at https://www.sec.gov/news/press-release/2020-211.

   [80]    SEC Press Release, SEC Charges Issuer and CEO With Misrepresenting Platform Technology in Fraudulent ICO (Aug. 13, 2020), available at https://www.sec.gov/news/press-release/2020-181.

   [81]    SEC Press Release, SEC Charges Film Producer, Rapper, and Others for Participation in Two Fraudulent ICOs (Sept. 11, 2020), available at https://www.sec.gov/news/press-release/2020-207.

   [82]    SEC Press Release, SEC Charges John McAfee With Fraudulently Touting ICOs (Oct. 5, 2020), available at https://www.sec.gov/news/press-release/2020-246.

   [83]     SEC Press Release, SEC Charges Index Manager and Friend With Insider Trading (Sept. 21, 2020), available at https://www.sec.gov/news/press-release/2020-217.

   [84]     SEC Press Release, SEC Charges Amazon Finance Manager and Family With Insider Trading (Sept. 28, 2020), available at https://www.sec.gov/news/press-release/2020-228.

   [85]     SEC v. Peltz, 20-cv-6199 (E.D.N.Y. Dec. 22, 2020), ECF 1.

   [86]    SEC Press Release, SEC Charges Disbarred New York Attorney and Florida Attorney with Scheme to Create False Opinion Letters (Dec. 2, 2020), available at https://www.sec.gov/news/press-release/2020-300.

   [87]     SEC Press Release, SEC Charges CEO and Company With Defrauding First Responders and Others Out of Millions (July 30, 2020), available at https://www.sec.gov/news/press-release/2020-167.

   [88]     SEC Press Release, SEC Charges Former Real Estate Executive With Misappropriating $26 Million in Ponzi Scheme (Sept. 29, 2020), available at https://www.sec.gov/news/press-release/2020-236.

   [89]     SEC Press Release, SEC Charges Unregistered Brokers in Penny Stock Scheme Targeting Seniors (Sept. 29, 2020), available at https://www.sec.gov/news/press-release/2020-234; see also SEC Press Release, SEC Halts Penny Stock Scheme Targeting Seniors (Nov. 27, 2019), available at https://www.sec.gov/news/press-release/2019-245.

   [90]     SEC Press Release, SEC Charges Jewelry Wholesaler with Fraudulent Securities Offering Targeting Current and Retired Police Officers and Firefighters (Dec 30, 2020), available at https://www.sec.gov/news/press-release/2020-343.

   [91]     SEC Press Release, SEC Charges Ponzi Scheme Targeting African Immigrants (Aug. 18, 2020), available at https://www.sec.gov/news/press-release/2020-198.

   [92]     SEC Press Release, SEC Charges Swedish National with Global Scheme Defrauding Retail Investors, Including Deaf Community Members (Sept. 21, 2020), available at https://www.sec.gov/news/press-release/2020-232.

   [93]     SEC Press Release, SEC Charges Company and CEO for $119 Million Securities Fraud Targeting Members of the South Asian American Community (Dec. 21, 2020), available at https://www.sec.gov/news/press-release/2020-329.

   [94]     SEC Press Release, SEC Charges E-Commerce Startup and CEO With Defrauding Investors (Nov. 23, 2020), available at https://www.sec.gov/news/press-release/2020-291.

   [95]     SEC Press Release, SEC Charges Silicon Valley Start-Up and CEO With Defrauding Investors (July 20, 2020), available at https://www.sec.gov/news/press-release/2020-160.

   [96]     SEC Press Release, SEC Charges Trustify Inc. and Founder in $18.5 Million Offering Fraud (July 24, 2020), available at https://www.sec.gov/news/press-release/2020-162.

   [97]     SEC v. Rogas, No. 20-cv-7628 (S.D. Cal. Sept. 24, 2020), ECF No. 21.

   [98]     SEC Press Release, SEC Charges Former CEO of Technology Company With Raising $123 Million in Fraudulent Offerings (Sept. 17, 2020), available at https://www.sec.gov/news/press-release/2020-213.

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The following Gibson Dunn lawyers assisted in the preparation of this client update:  Mark Schonfeld, Barry Goldsmith, Richard Grime, Jeff Steiner, Tina Samanta, Brittany Garmyn, Zoey Goldnick, Rachel Jackson, Jesse Melman, Lauren Myers, Jaclyn Neely, Jason Smith, Mike Ulmer, Timothy Zimmerman, and Marie Zoglo.

Gibson Dunn is one of the nation’s leading law firms in representing companies and individuals who face enforcement investigations by the Securities and Exchange Commission, the Department of Justice, the Commodities Futures Trading Commission, the New York and other state attorneys general and regulators, the Public Company Accounting Oversight Board (PCAOB), the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange, and federal and state banking regulators.

Our Securities Enforcement Group offers broad and deep experience.  Our partners include the former Director of the SEC’s New York Regional Office, the former head of FINRA’s Department of Enforcement, the former United States Attorneys for the Central and Eastern Districts of California, and former Assistant United States Attorneys from federal prosecutors’ offices in New York, Los Angeles, San Francisco and Washington, D.C., including the Securities and Commodities Fraud Task Force.

Securities enforcement investigations are often one aspect of a problem facing our clients. Our securities enforcement lawyers work closely with lawyers from our Securities Regulation and Corporate Governance Group to provide expertise regarding parallel corporate governance, securities regulation, and securities trading issues, our Securities Litigation Group, and our White Collar Defense Group.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work or any of the following:

Securities Enforcement Practice Group Leaders:
Barry R. Goldsmith – New York (+1 212-351-2440, [email protected])
Richard W. Grime – Washington, D.C. (+1 202-955-8219, [email protected])
Mark K. Schonfeld – New York (+1 212-351-2433, [email protected])

Please also feel free to contact any of the following practice group members:

New York
Zainab N. Ahmad (+1 212-351-2609, [email protected])
Matthew L. Biben (+1 212-351-6300, [email protected])
Reed Brodsky (+1 212-351-5334, [email protected])
Joel M. Cohen (+1 212-351-2664, [email protected])
Lee G. Dunst (+1 212-351-3824, [email protected])
Mary Beth Maloney (+1 212-351-2315, [email protected])
Alexander H. Southwell (+1 212-351-3981, [email protected])
Avi Weitzman (+1 212-351-2465, [email protected])
Lawrence J. Zweifach (+1 212-351-2625, [email protected])
Tina Samanta (+1 212-351-2469, [email protected])

Washington, D.C.
Stephanie L. Brooker (+1 202-887-3502, [email protected])
Daniel P. Chung (+1 202-887-3729, [email protected])
M. Kendall Day (+1 202-955-8220, [email protected])
Jeffrey L. Steiner (+1 202-887-3632, [email protected])
Patrick F. Stokes (+1 202-955-8504, [email protected])
F. Joseph Warin (+1 202-887-3609, [email protected])

San Francisco
Winston Y. Chan (+1 415-393-8362, [email protected])
Thad A. Davis (+1 415-393-8251, [email protected])
Charles J. Stevens (+1 415-393-8391, [email protected])
Michael Li-Ming Wong (+1 415-393-8234, [email protected])

Palo Alto
Michael D. Celio (+1 650-849-5326, [email protected])
Paul J. Collins (+1 650-849-5309, [email protected])
Benjamin B. Wagner (+1 650-849-5395, [email protected])

Denver
Robert C. Blume (+1 303-298-5758, [email protected])
Monica K. Loseman (+1 303-298-5784, [email protected])

Los Angeles
Michael M. Farhang (+1 213-229-7005, [email protected])
Douglas M. Fuchs (+1 213-229-7605, [email protected])
Nicola T. Hanna (+1 213-229-7269, [email protected])
Debra Wong Yang (+1 213-229-7472, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Chapter 11 of the Bankruptcy Code provides a legal framework for financially distressed companies to survive turbulent times and maximize value for investors, lenders, and other stakeholders.  However, chapter 11 also provides a debtor with tools to modify stakeholders’ rights and expectations with respect to the debtor or its assets.  These tools are particularly relevant with respect to distressed real estate assets.  During this panel presentation, members of Gibson Dunn’s restructuring and real estate practices will discuss the opportunities and risks arising from bankruptcy cases involving real estate assets, and how all stakeholders can proactively take advantage of those opportunities and avoid those risks—particularly through thoughtful pre-bankruptcy planning.

View Slides (PDF)

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PANELISTS:

Robert Klyman, Michael Neumeister, Allison Kidd & Matthew Bouslog

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement.

This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour.

California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

 

Join Charlie Falconer, Michelle Kirschner, Ali Nikpay, Attila Borsos and Matt Aleksic in a discussion of the Christmas Eve Brexit deal and whether it is good or bad for business.

The webinar will provide an overview of the main structural changes of the deal and what the United Kingdom’s future relationship with the European Union will look like. We will then focus on what the deal means for trade (including supply chains and tariffs), financial services and competition law and what businesses need to do to respond and what to expect in the coming months.

View Slides (PDF)

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PANELISTS:

Charlie Falconer QC: An English qualified barrister and Gibson Dunn partner. Former UK Lord Chancellor and first Secretary of State for Justice, he spent 25 years as a commercial barrister, and became a QC in 1991.

Michelle M Kirschner: A partner in the London office.  She advises a broad range of financial institutions, including investment managers, integrated investment banks, corporate finance boutiques, private fund managers and private wealth managers at the most senior level.

Ali Nikpay: A partner and head of the competition practice group in the London office. He has more than 20 years of EU and UK merger control, antitrust and litigation experience in both the private and public sectors.

Attila Borsos: A partner in the Brussels office.  He has 15 years of experience advising on antitrust and competition as well as international trade matters.

Matt Aleksic: An associate in the Litigation and International Arbitration practice groups of Gibson Dunn. He has experience in a wide range of disputes and investigations and a background in public policy and government affairs.

On January 8, 2021, the United States Court of Appeals for the D.C. Circuit in CNN v. FBI, — F.3d –, 2021 WL 68307 (D.C. Cir. Jan. 8, 2021), issued a rare precedential opinion clarifying application of the factors relevant to determining whether competing interests outweigh the “strong presumption” of public access to judicial records, in particular, in a context in which the government provides a national security justification for continued sealing. The case arose out of CNN’s efforts to obtain copies of the “Comey Memos”—memos former FBI Director James Comey claimed to have written about his conversations with President Trump—though the D.C. Circuit’s decision does not concern access to the Comey Memos themselves, but rather access to an FBI declaration submitted in the course of litigation about the Comey Memos.

I.   Background

Following President Trump’s firing of FBI Director James Comey in 2017, news outlets, including CNN, filed Freedom of Information Act (“FOIA”) requests to obtain access to memos that Director Comey claimed to have written about his meetings with President Trump.[1] The FBI denied the FOIA request, including on the basis of the then-ongoing investigation of Special Counsel Robert Mueller into Russian interference in the 2016 presidential election.[2] CNN challenged the denial of the FOIA request in court, and to support the denial of the FOIA request, the FBI submitted an ex parte, in camera declaration from then-Deputy Assistant Director of the FBI David Archey, who oversaw all FBI employees working on the Mueller probe. Relying on the Archey declaration, Judge Boasberg of the District Court for the District of Columbia initially ruled that the FBI could withhold the Comey Memos at least until the end of the ongoing Mueller investigation.[3]

After the Department of Justice subsequently released the Comey Memos to members of Congress in redacted form, after which they were released to the public, CNN sought disclosure of the Archey declaration. Rather than disclose the declaration in its entirety, however, the FBI filed a redacted version. In a June 7, 2019 decision, the district court considered whether CNN had a common-law right of access to the unredacted Archey declaration as a judicial document.[4] The court found that CNN had established that the Archey declaration was a judicial record because the government had filed it to support its motion for summary judgment, raising a “strong presumption in favor of public access.”[5] The court next considered whether the government had established that its interest in secrecy outweighed the public right of access according to factors set forth in United States v. Hubbard, 650 F.2d 293, 317-22 (D.C. Cir. 1980):

(1) [T]he need for public access to the documents at issue; (2) the extent of previous public access to the documents; (3) the fact that someone has objected to disclosure, and the identity of that person; (4) the strength of any property and privacy interests asserted; (5) the possibility of prejudice to those opposing disclosure; and (6) the purposes for which the documents were introduced during the judicial proceedings.

The district court found that none of these factors strongly favored redaction, and in particular, that factor (1) favored disclosure due to the “enormous public interest in the Comey Memos,” even though “the Court sees little public value in the specific information that remains redacted” in the Archey declaration.[6] The district court also found that factor (2) favored disclosure because “the vast majority of the declaration” had already been released.[7] With respect to factor (3), the district court noted that while the government had objected to the disclosure on national security grounds, a “third-party objection”—which had not been made—would have more weight.”[8] The district court also found that factor (6) was the “most important” factor in its assessment and favored disclosure because the FBI introduced the declaration to persuade the court to rule in the FBI’s favor regarding disclosure of the Comey Memos.[9] The district court thus concluded that there was a heightened public interest in the redacted material that weighed in favor of its complete disclosure.[10] The district court ordered disclosure of the redacted material in the Archey declaration

II.   Access to Judicial Documents in the D.C. Circuit

On appeal, the D.C. Circuit held that the district court had erred in evaluating several of the Hubbard factors, and vacated and remanded for further proceedings.

In reviewing the district court’s decision, the D.C. Circuit acknowledged that it “ha[d] not previously given . . . sufficient guidance regarding the meaning of” the multi-factor test set forth in United States v. Hubbard,[11] which had been the subject of only six precedential opinions since its issuance in 1980.[12]

With respect to the first two Hubbard factors, the D.C. Circuit held that the district court’s lens was too broad. With respect to factor (1) the relevant consideration was the “public’s need to access the information that remains sealed, not the public’s need for other information sought in the overall lawsuit,” including the Comey Memos, which the district court had taken into consideration in evaluating this factor.[13] Similarly, with respect to factor (2), the D.C. Circuit held that the relevant consideration was “the public’s previous access to the sealed information, not its previous access to the information available in the overall lawsuit,” including the disclosed parts of the Archey declaration, which the district court had considered in evaluating this factor.[14]

In connection with the third factor, the D.C. Circuit noted that while the absence of any third-parties objecting to disclosure would usually weigh in favor of disclosure, the “national security context” had to be taken into account. Here, “the National Security Act requires the FBI to keep intelligence sources and methods confidential.”[15] Thus, the FBI was “no ordinary agency” in this context, and “the third parties with the most acute interest in the disclosure of the sealed material”—namely, “the intelligence sources whose lives may depend on those redactions”—were not in a position to object without outing themselves.[16] Thus, the D.C. Circuit noted that in assessing this factor, district courts “should consider whether secrecy plays an outsized role in the specific context” at issue.[17] The national security context also had to be considered with respect to factor (5); specifically, courts “should consider the dire consequences that may occur if an agency discloses its intelligence sources and methods” because “‘[e]ven a small chance that some court will order disclosure of a source’s identity could well impair intelligence gathering and cause sources to close up like a clam.’”[18]

The D.C. Circuit held that the district court had erred in considering factor (6)—the purpose for which the document was introduced—as the “most important” factor in its analysis.[19] It explained that when the Hubbard court referred to this factor, the purpose for which a document was used, as “the most important element” in assessing whether or not to require its disclosure, that holding was confined to “the context of that case.”[20] Indeed, “when the sixth factor highlights the fact that a sealed document didn’t affect a judicial decision, it can be the ‘most important’ element cutting against disclosure,” but “the reverse can also be true” “[w]hen a sealed document is considered as part of judicial decisionmaking.”[21] Once again, taking the “national security context of the sealed information” into account, the “sixth factor [did]n’t outweigh other factors.”[22] Rather, the D.C. Circuit found that this factor “cut both ways”; while the fact that the Archey declaration was “submitted to influence a judicial decision” weighed in favor of disclosure, the fact that “the government necessarily had to disclose information to the court for the very purpose of keeping it secret” “cut[] against disclosure.”[23]

In light of this elucidation of the Hubbard factors, the D.C. Circuit remanded the matter for further consideration by the district court. The D.C. Circuit expressly declined to address whether a First Amendment right of access might have provided an alternative ground for affirmance of the lower court’s initial decision requiring disclosure of the Archey declaration in its entirety.[24]

III.   Conclusion

CNN v. FBI offers a rare elaboration of the Hubbard factors that will be critically important for litigants seeking to withhold or force the disclosure of judicial documents, in particular in the face of objections from government agencies in the national security context. By narrowing the analysis to focus only on the public’s interest in particular information withheld, rather than the broader context, the opinion appears to put a thumb on the scale in favor of non-disclosure, at least in the national security context, for keeping secret redacted portions of court filings in all manner of litigation.

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   [1] CNN v. FBI, 271 F. Supp. 3d 108 (D.D.C. 2017).

   [2]   5 U.S.C. § 552 (b)(7)(A) (exempting from disclosure “records or information compiled for law enforcement purposes, but only to the extent that the production of such law enforcement records or information . . . could reasonably be expected to interfere with law enforcement proceedings”).

   [3]   CNN v. FBI, 293 F. Supp. 3d 59, 65-66 (D.D.C. 2018).

   [4] CNN v. FBI, 384 F. Supp. 3d. 20, 43-44 (D.D.C. 2019).

   [5]   Id. at 41-42 (internal quotation marks omitted).

   [6]   Id. at 42.

   [7]   Id. at 42-43.

   [8]   Id. at 43.

   [9]   Id. at 43-44.

[10] Id. at 44.

[11] CNN, — F.3d –, 2021 WL 68307 at *3.

[12] See Leopold v. United States, 964 F.3d 1221 (D.C. Cir. 2020); League of Women Voters v. Newby, 963 F.3d 130 (D.C. Cir. 2020); MetLife, Inc. v. Fin. Stability Oversight Council, 865 F.3d 661 (D.C. Cir. 2017); In re Sealed Case, 237 F.3d 657 (D.C. Cir. 2001); EEOC v. Nat’l Children’s Ctr., 98 F.3d 1406 (D.C. Cir. 1996); In re Application of NBC, 653 F.2d 609 (D.C. Cir. 1981).

[13]   CNN, — F.3d –, 2021 WL 68307 at *3.

[14]   Id. (emphasis added).

[15]   Id.

[16]   Id. at *4.

[17]   Id.

[18]   Id. (quoting CIA v. Sims, 471 U.S. 159, 175 (1985)).

[19]   Id.

[20] Id.

[21]   Id. at *5.

[22]   Id..

[23] Id.

[24] Id. at *2 n.4.

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The following Gibson Dunn lawyers assisted in the preparation of this client update: Anne Champion, Brian Ascher, Michael Nadler, Michael Klurfeld and Thomas A. Lloyd.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm’s Media, Entertainment & Technology Practice Group:

Orin Snyder – Co-Chair, Media, Entertainment and Technology Practice, New York (+1 212-351-2400, [email protected])
Anne M. Champion – New York (+1 212-351-5361, [email protected])
Theodore J. Boutrous, Jr. – Co-Chair, Litigation Practice, Los Angeles (+1 213-229-7000, [email protected])
Scott A. Edelman – Co-Chair, Media, Entertainment and Technology Practice, Los Angeles (+1 310-557-8061, [email protected])
Kevin Masuda – Co-Chair, Media, Entertainment and Technology Practice, Los Angeles (+1 213-229-7872, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

In 2020, the COVID-19 pandemic taught the world another lesson about the unpredictability of life. Each country responded to the challenges posed by the pandemic in its own way. The German Government in its familiar technocratic and sober approach quickly unlocked massive financial resources to mitigate any immediate economic damage. It supported a further relaxation of the purse strings at EU level and put legislative acts in place that helped manage the uncertainty in the most affected industries for now. Hit by a second wave of the pandemic in an unexpectedly hard way, Germany is now left wondering whether the country really was smart in the spring or just lucky. The new year 2021 will provide the answer to this question.

The disruption caused by the pandemic is not over; it has just started. On a positive note, we have seen an unprecedented move towards more efficient means of communication through the use of new media and the leveraging of technology in general. For example, long overdue changes to the handling of annual shareholder meetings of German joint stock corporations were implemented within weeks to facilitate the annual reporting season under lock-down conditions. By providing short term work allowances to compensate for losses in remuneration resulting from temporary cuts in working hours, the German system helped employers to hold onto their highly-skilled work force in the hope of a quick recovery thereby avoiding immediate hardship for those hit hard by the imposed restrictions. A speedy process to amend legislation addressing topics from suspending rent payments and interest payments to the temporary relaxation of insolvency filing obligations flanked by a coherent communication strategy added to the sentiment of most Germans of having been governed well, so far.

2021 will be different and bigger challenges certainly lie in wait. Instead of throwing hundreds of billions of Euros at the problem, German politicians will now have to explain to the public who is going to pick up the bill for all the important measures taken. The inadequate accords reached with the twenty-seven European Union members states that remain after Brexit designed to stabilize the weakest member state economies will require rigorous implementation and oversight. To date, hope rests on what has been a series of blink-decisions taken in face of an imminent European crisis coupled with the expectation that this will all result in a more aligned and more integrated European Union. A very optimistic scenario, indeed.

Apart from the emergency measures triggered by the COVID-19 pandemic, the EU and Germany have set and started to implement an ambitious agenda with regard to the regulation of international trade (by the introduction of tightened rules on foreign direct investments), antitrust laws (responding to the topics of market dominance in the digital age), consumer protection (with the introduction of collective redress within the EU), increased corporate responsibility in the white collar area (with the long-discussed introduction in Germany of criminal corporate liability), and the fight against money laundering and tax evasion.

And, finally, Angela Merkel’s term ends in the fall of 2021. She will have been the longest serving Chancellor in German history. This brings a 16-year era to an end that served Germany well and also helped Europe to navigate through difficult waters. She is expected to leave a temporary vacuum in German and European leadership that comes at the wrong time and is difficult to be filled in the short term.

Is this a dramatic crisis? No. Should we be concerned? Maybe. Should we act? Yes.

There are many things that each of us can do to turn the many challenges ahead into something new and potentially better. Here is our favorite list: First, stay healthy, look after yourself and your loved ones. Second, take informed and careful decisions each day to tackle the problems ahead, instead of rushing to beat “long-term-trends” with blurry visionary steps or short-sighted activism. Third, stay connected with the world, avoid narrow-minded thinking and a further fragmentation of the world, while staying connected to your local community. Learn where you can, challenge where you can, and help where you can. We are all in this together and only when we join forces, will we navigate the challenging times ahead of us.

At Gibson Dunn, we are proud and honored to be at your side to help solve your most complex legal questions and to continue our partnership with you in the coming year in Germany, in Europe and the world. We trust you will find this German Law Year-End Update insightful and instructive for the best possible start in 2021.

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Table of Contents

1. Corporate, M&A
2. Tax
3. Financing and Restructuring
4. Labor and Employment
5. Real Estate
6. Compliance / White Collar
7. Data Privacy – Regulatory Activity and Private Enforcement on the Rise
8. Technology
9. Antitrust and Merger Control
10. International Trade, Sanctions and Export Control
11. Litigation
12. Update on COVID-19 Measures in Germany

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1.         Corporate, M&A

1.1       Next Round – Virtual-only Shareholder’s Meetings of Stock Corporations in 2021

The temporary COVID-19-related legislation of March 2020 allowing to hold virtual-only shareholders’ meetings of stock corporations in 2020[1] has been extended until the end of 2021 by means of an executive order of the German Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz) issued in October 2020. While the legal framework of the temporary regime for virtual-only meetings remained unchanged, the regulator strongly appealed to the management of the relevant corporations to use the emergency instrument of a virtual-only meeting in a responsible manner, taking into account the specific individual circumstances due to the pandemic situation.

In addition to this mere moral appeal by the executive branch, just before year-end and somewhat surprisingly, the parliamentary legislator modified the March 2020 legislation with regard to the shareholders’ right to information in virtual-only meetings as a concession to the widespread criticism in the aftermath of the March 2020 legislation. The March 2020 legislation had reduced the shareholders’ right to information to a mere possibility to submit questions in electronic form prior to the meeting, leaving it up to management in its sole discretion as to whether and in which manner to answer such questions. Additionally, it allowed management to set a submission deadline of up to two days prior to the meeting.

The October legislation, addressing widespread criticism raised not only by shareholder activists and institutional investors but also by legal scholars, restored the shareholder’s right to ask questions in the 2021 season for shareholders’ meetings taking place after February 28, 2021: It will again constitute a genuine information right requiring management to duly answer all shareholders’ questions submitted in time prior to the meeting. In addition, the cut-off deadline for the submission of shareholders’ questions may not exceed one day.

Furthermore, the parliamentary legislator also clarified in its last minute amendments that counter-motions by shareholders that are submitted for publication with the company at least 14 days prior to the shareholders’ meeting must be dealt with in the virtual-only shareholders’ meeting if the submitting shareholder has duly registered for the virtual shareholders meeting.

The virtual-only format is available to shareholders’ meetings of stock corporations which are held by December 31, 2021. In light of the current pandemic, the extensive use of the virtual-only format and the frequently observed extraordinary high participation-rate of shareholders in 2020, it can be expected that most stock corporations will again hold their shareholders’ meetings in a virtual-only format in 2021.

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1.2       Legislative Initiative to Strengthen Market Integrity after the Wirecard Scandal

In the aftermath of the spectacular collapse of German payment solutions provider Wirecard last summer, the German Government on December 16, 2020 presented a draft bill (Regierungsentwurf) for an Act on the Strengthening of the Financial Market Integrity (Finanzmarktintegritätsstärkungsgesetz – FISG) which aims to restore and strengthen trust in the German financial market.

The draft bill provides for new rules designed to bolster both the internal (in particular, via the supervisory board) and external (e.g. by strengthening the independence of external auditors and their supervision) corporate governance of companies of public interest, including listed companies.

This includes, in particular, the explicit obligation for the management board of a listed stock corporation to implement an adequate and effective internal control and risk management system. Furthermore, the draft bill also aims to strengthen the accounting and audit expertise present in the supervisory board of listed companies: Whereas the law currently only requires that, at least, one supervisory board member shall have expertise in the fields of accounting and auditing, the draft bill requires that, at least, one board member has expertise in the fields of accounting and, at least, one other board member has expertise in the fields of auditing, thus increasing the minimum number of experts to, at least, two board members. In addition, the establishment of an audit committee by the supervisory board shall no longer be discretionary but becomes compulsory for companies of public interest, including all listed companies.

In order to strengthen the independence of the auditor as part of a company’s external safeguards, the draft bill suggests the tightening of the mandatory external rotation. The external rotation of the auditor shall occur no later than after ten years for all companies of public interest, including listed companies, thus eliminating national exemptions from the EU audit regime, which currently allow for a maximum term of 24 years, and introduces further restrictions on non-audit services that can be provided by the auditor.

In reaction to the widespread criticism leveled at the response of Germany’s Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) to the events that led to Wirecard’s collapse and the perceived failure of the supervisory and enforcement procedures and mechanisms in financial reporting, the draft bill also proposes revisions to the current supervisory and enforcement procedures, including further-reaching competences for the financial regulator BaFin itself.

Last but not least, the draft bill provides for increased civil liability for damages caused by auditors as well as a tightening of criminal and administrative penalties for misrepresentations made by company representatives and statutory auditors in connection with the preparation and audit of company accounts.

The Government’s draft bill essentially corresponds to a joint ministerial draft of October 26, 2020 by the Federal Ministry of Finance (Bundesministerium für Finanzen) and the Federal Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz), which had been met with widespread criticism arguing that the proposals were not going far enough and failed to address the shortcomings of the current system which were also identified by the EU’s securities market regulator, the European Securities and Markets Authority (ESMA), in its special report on the Wirecard collapse published in November 2020. It remains to be seen whether and to which extent this criticism will be taken up by the lawmaker in the upcoming parliamentary process by providing for more fundamental changes and reforms.

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1.3       German Foreign Direct Investment Control – Rule-Tightening in Light of COVID-19 and the EU Screening Regulation

In December 2020, for the very first time, the German Federal government officially prohibited the indirect acquisition of a German company with specific expertise in satellite/radar communications and 5G millimeter wave technology by a Chinese state-owned defense group. The decision is the culmination of an eventful year which has seen various changes to the rules on foreign direct investments (the “FDIs”) in light of, inter alia, COVID-19 and the application of the EU Screening Regulation[2].

Below is an overview of the five key changes that have become effective over the course of 2020:

1. 1. Extension of the catalog of select industries triggering a mandatory filing with the German Ministry of Economy and Energy (Bundesministerium für Wirtschaft und Energie, BMWi) upon acquisition of 10% or more of the voting rights in a German company by a non-EU/non-EFTA acquirer to include (i) personal protective equipment, (ii) pharmaceuticals that are essential for safeguarding the provision of healthcare to the population as well as (iii) medical products and in-vitro-diagnostics used in connection with life-threatening and highly contagious diseases.
   2. No more gun-jumping: All transactions falling under the cross-sector review that require a mandatory notification (i.e., FDIs of 10% or more of the voting rights by a non-EU/non-EFTA investor in companies active in one or more of the conclusively listed select industries) may only be consummated upon conclusion of the screening process (condition precedent).
   3. Introduction of penalties (up to five years imprisonment or criminal fine (in case of willful infringements and attempted infringements) or an administrative fine of up to EUR 500,000 (in case of negligence)) for certain actions pending (deemed) clearance by the BMWi, namely: (i) enabling the investor to, directly or indirectly, exercise voting rights, (ii) granting the investor dividends or any economic equivalent, (iii) providing or otherwise disclosing to the investor certain security-relevant information on the German target company, and (iv) the non-compliance with enforceable restrictive measures (vollziehbare Anordnungen) imposed by the BMWi.
   4. Implementation of the EU-wide cooperation mechanism as required under the EU Screening Regulation.
   5. Expansion of the grounds for screening under German FDI rules to include public order or security (öffentliche Ordnung oder Sicherheit) of a fellow EU member state as well as effects on projects or programs of EU interest, and tightening of the standard under which an FDI may be prohibited or restrictive measures may be imposed from “endangering” (Gefährdung) to “likely to affect” (voraussichtliche Beeinträchtigung) the public order or security, so as to reflect the EU Screening Regulation.

For additional details on these and other changes in 2020 to foreign investment control and an overview on the overall screening process in Germany, please refer to our respective client alerts published in May 2020[3] and November 2020[4].

Further changes to the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, AWV) are announced for 2021. In particular, the catalog of critical industries are to be extended further. Based on earlier announcements by the BMWi, artificial intelligence, robotics, semiconductors, biotechnology and quantum technology will likely be added to the catalog of critical industries.

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1.4       Gender Quota for (Certain) Management Boards on the Horizon

Five years after the (first) Management Position Act (Führungspositionen-Gesetz) for the first time implemented a mandatory female quota for the composition of supervisory boards of certain German companies in 2016,[5] the German government coalition parties now support a mandatory quota also for management boards. In the future, under the contemplated Second Management Position Act (Zweites Führungspositionen-Gesetz) (i) listed companies, (ii) which are subject to the 50% employee co-determination under the Co-Determination Act (Mitbestimmungsgesetz) and (ii) whose management board consists of more than three members, must appoint at least one female management board member whenever a position becomes vacant.

The new management board quota will only apply with regard to the rather limited number of companies who meet all of the above criteria. However, it is nevertheless a strong signal by the German coalition parties to a German business community in which voluntary commitments to increase gender equality have failed to gain significant momentum in the past. Under the 2015 Management Position Act which had introduced the mandatory gender quota for supervisory boards, companies were, in addition, requested to set themselves gender targets for the composition of their management boards. Rather than taking the opportunity to consider voluntary targets in line with the specific circumstances of a company, a large number of affected companies simply set the target at “zero” year after year. By contrast, the mandatory 30% gender quota for the composition of supervisory boards has not just been met but even exceeded and is currently polling at approximately 37%.

For all companies in which governmental authorities hold a majority, the contemplated Second Management Position Act will also (i) provide for a mandatory 30% female quota for the composition of supervisory boards and (ii) introduce a minimum number of mandatory female management board members. In addition, public law corporations (Körperschaften des öffentlichen Rechts) primarily active in the health and insurance sectors which typically employ a large number of female staff, will be required to appoint at least one female board member if the board is composed of two or more members.

The draft legislation was approved by the cabinet in early January 2021 and will now be submitted to the German Parliament. The new gender quota should in any event come into force prior to the German federal elections in autumn 2021.

While a number of corporations welcome the move towards more gender equality as Germany is lagging behind in comparison to, in particular, Scandinavian and UK companies, others oppose the quota law arguing undue interference with the right of the supervisory board to appoint the best available candidate. It will be interesting to see if and how investors position themselves.

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1.5       New Developments on Taxation of Remuneration for Supervisory Board Members

As a consequence of a ruling by the German Federal Fiscal Court (Bundesfinanzhof, BFH) late in 2019, the tax classification of compensation paid to supervisory board members has been modified in terms of value-added tax (VAT). In order to avoid potential adverse tax effects based on the incorrect tax treatment of supervisory board compensation, both individual supervisory board members and the companies they serve should be familiar with the ruling.

Previously, the tax authorities presumed without further differentiation between fixed or variable supervisory board compensation that members of supervisory boards were engaged in independent entrepreneurial activity and their remuneration was to be charged with VAT. It was irrelevant whether the respective member of the supervisory board was an elected member, served on the board as a shareholder delegate or in a capacity as an employee representative. At least in those cases where supervisory board members receive a fixed compensation for their service, future invoices will no longer be permitted to charge a VAT component.

The respective ruling by the BFH applied an earlier decision of the European Court of Justice (ECJ) taken on June 13, 2019 at the national level and confirmed the ECJ’s view that supervisory board members who receive fixed remuneration are not qualified as independent. The ECJ held in its decision that supervisory board members, who act on behalf of and in the sphere of responsibility of the supervisory board, do not bear any economic risk for their activities and therefore do not perform entrepreneurial activities due to a lack of independence. The BFH followed the argumentation of the ECJ and agreed that supervisory board members who receive a fixed remuneration which is neither dependent on their attendance at meetings nor on the services actually performed, cannot be classified as entrepreneurs. The BFH left it open whether independent entrepreneurial activities can be deemed to exist in cases where a variable remuneration is agreed with the individual member of the supervisory board.

For the individual supervisory board member, such classification as a dependent activity means, at least, in the case of fixed remuneration, that he or she may no longer add a VAT element to the remuneration in invoices issued to the company. Otherwise the supervisory board member would owe such tax, while the company would not be able to deduct such an incorrectly added tax component as an input tax deductible. Likewise, input tax amounts incurred in connection with the activity as a supervisory board member (e.g. VAT on travel expenses or office supplies) would no longer be recoverable due to the lack of independence of the supervisory board member.

If the supervised company is entitled to an unrestricted input tax deduction, this new jurisprudence should not have any adverse economic impact on the company, provided correct invoices are issued. Industries which are not entitled to deduct input tax or only entitled to deduct it to a limited extent – such as banks, insurance companies or non-profit organizations – actually benefit if the supervisory board member issues invoices without VAT.

The tax authorities have so far not yet published any guidelines in response to the new case law. It therefore remains to be seen whether the tax authorities will draw a distinction between fixed and variable compensation when qualifying the activities of a supervisory board member for VAT purposes. It would also be conceivable that the tax authorities would now generally assume that a supervisory board member’s services are deemed to be a dependent activity which is generally not subject to VAT.

However, since a short-term response to the case in the administrative guidelines is to be expected in the near future, the ruling should be applied to fixed compensation and VAT should not be included in any future invoice. In the case of variable compensation and in view of the previous administrative practice, the invoicing of a separate VAT component would continue to be required until the tax authorities have communicated their new position on the matter or – if variable compensation is also to be accounted for without VAT – legal action may become necessary. It also remains to be seen whether the tax authorities will apply the new case law retrospectively and whether and how it would take into account considerations of the protection of legitimate expectations (Vertrauensschutz).

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2.         Tax

2.1       Taxation of Transactions involving German Registered IP

In a decree issued on November 6, 2020, the German tax authorities expressed their opinion that transactions between non-German parties, which relate to IP registered in a German register, are subject to tax in Germany. The tax provision the German tax authorities are referring to has been in existence for almost 100 years but in practice this provision has not been applied to transactions where both contracting parties reside outside of Germany. The German tax authorities now deviate from past practice and take the view that such extraterritorial transactions with German registered IP are taxable in Germany. In essence, such interpretation of the German tax authorities creates a taxable nexus in Germany only by virtue of the German registration of IP. As a consequence, royalties paid by a non-German licensee to a non-German licensor for German registered IP are subject to German withholding tax at a flat rate of 15.8%. A potential upfront tax relief under European directives or applicable double tax treaties may be applicable but requires a formal application by the licensor and a certification by the German tax authorities prior to payment of the royalties. If the withholding tax was not withheld, which is the typical case for German registered IP, the licensee as well as the licensor may be held liable for the payment of the withholding tax.

Only two weeks after the issuance of the decree, the German government released a draft tax bill on November 20, 2020 recognizing the far reaching interpretation of the tax authorities. Under the draft tax bill German tax for registered IP in Germany would only apply if the IP is exploited through a German permanent establishment or facility of the licensee; the pure registration of IP in a German register would not be sufficient anymore to become taxable in Germany. It is still unclear if and to what extent the draft tax bill becomes effective and, therefore, the November 6 decree remains for now the only currently valid administrative guidance on the taxation of IP registered in Germany.

Affected tax payers are well advised to closely monitor the further legislative process.

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2.2       Anti-Tax-Avoidance Directive

In 2016, the EU enacted the Anti-Tax-Avoidance Directive (ATAD) containing a package of legally binding measures to combat tax avoidance to be implemented into national law by all EU member states by 2018/2019. Germany has so far delayed implementation, exposing itself to EU infringement proceedings for failure to implement ATAD into national law in time. Almost one year after publication of the first draft bill, Germany is now considering implementing ATAD requirements in early 2021. Implementation has been delayed because Germany wanted to introduce several measures beyond a one-to-one implementation of the Directive, such as new rules on cross-border intercompany financing or exit taxation for individuals.

As part of the most relevant gap between existing German tax rules and ATAD requirements, Germany will introduce rules which limit the deduction of operating expenses for certain hybrid arrangements between related parties. Significant changes under ATAD regarding the current controlled foreign corporation (CFC) rules (Außensteuergesetz) will be a new control criterion and introduction of a shareholder-based approach. Control shall be deemed to exist if a German-resident shareholder, alone or jointly with related persons, holds a majority stake in the foreign company. The current concept of domestic control by adding up the participations of all German taxpayers will be abandoned. The current CFC rules, according to which a foreign company is considered as lowly taxed if the income tax is below 25%, shall, however, be retained.

This has evoked strong criticism by commentators since even in many developed countries the income tax rate is below 25% and CFC regulations in Germany can therefore be triggered too easily.

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2.3       New Anti-Treaty Shopping Rule

The European Court of Justice (ECJ) has consistently declared Germany’s attempts at creating a treaty-overriding anti-abuse provision to be a violation of EU fundamental freedoms. On November 20, 2020, the German government released a draft tax bill and launched another attempt at making the anti-abuse provision compatible with EU law. The draft law takes into account recent ECJ case law and provisions under the ATAD. Under the new wording of the anti-abuse provision a foreign company has no claim for relief from withholding tax to the extent that it is owned by persons, which would not be entitled for such relief, had they been the direct recipients of the income, and as far as the source of income is not materially linked to economic activity of this foreign company. Receiving the income and its onward transfer to investors or beneficiaries as well as any activity that is not carried out using business substance commensurate with the business purpose cannot be regarded as an economic activity. Withholding tax relief shall be given in so far as the foreign company proves that none of the main purposes of its interposition is obtaining a tax advantage or if the shares in the foreign company are materially and regularly traded on a recognized stock exchange.

If the new rule becomes law, it could in the future be harmful for a holding company to be interposed between its parent and a German income source even if the holding company and the parent are in different countries and both German tax treaties applicable to the holding and the parent company provide for the same withholding tax benefits. In such case it may be required to create a sufficient economic link between the German income source and the economic activity of the holding company in order to avoid the application of the anti-treaty shopping rule. An active management holding company should be regarded as a sufficient economic activity and such holding company should not to fall under the new rules. Further clarifications in that respect by the German tax authorities are expected in the first half of 2021.

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3.         Financing and Restructuring

With the COVID-19 pandemic hitting the German economy hard, the areas of financing and restructuring saw some of the most significant changes and sustained reform in 2020. The initial legislative response focused, in particular, on providing new sources of emergency funding and a temporary relaxation of the traditionally strict German insolvency filing obligations for companies perceived to be in financial disarray through no fault of their own due to the effects of the pandemic.[6]

On December 17, 2020, the German Parliament then adopted the Act on the Continued Development of Restructuring and Insolvency Law (Sanierungs- und Insolvenzfortentwick­lungsgesetz – SanInsFoG) to address (i) the fear of a large-scale “insolvency wave” upon the originally scheduled expiry of the COVID-19 pandemic triggered partial suspension of the insolvency filing requirement due to over-indebtedness on December 31, 2020,[7] and (ii) the implementation of the European Union Directive (EU) 2019/1029 of June 23, 2019 on preventive restructuring frameworks, the discharge of debt and measures to increase the efficiency of restructuring and insolvency proceedings (the “Restructuring Framework Directive”) into German law which would have been due by July 2021.

This reform of German restructuring and insolvency law, which was pushed through the parliamentary process in a very short period of time, has been labeled by many commentators as potentially the most significant reform of the German restructuring landscape since the introduction of the German Insolvency Code (Insolvenzordnng, InsO) in 2001.

A selection of key changes introduced by the SanInsFoG reform which came into effect on January 1, 2021 are highlighted in the below sections:

3.1       Reform of the German Insolvency Code (InsO) by the SanInsFoG

• The insolvency reason of over-indebtedness (Überschuldung) was modified in such a way that the period for the necessary continuation prognosis (Fortführungsprognose), during which a mathematically over-indebted company must be able to meet its obligations when they fall due, was shortened to twelve months only. Before the reform, the relevant period was the current and the following business year.
• If certain special requirements during the period of the pandemic are met, the prognostication period is shortened further to only four months in order to deal with the economic effects of the pandemic which makes reliable long term planning difficult if not impossible. This provision is designed further to soften the effects of the pandemic and applies only from January 1, 2021 to December 31, 2021.
• The suspension of the insolvency filing obligation under the COVInsAG was further extended for all of January 31, 2021. The suspension applies to all over-indebted and/or illiquid companies (i) who filed an application for public support under the “November and December COVID-relief funds” (November- und Dezemberhilfen) but the respective funds were not yet paid out or (ii) such application was not possible for technical or legal reasons even though a business was entitled to apply. The extension does not apply if the receipt of such funds would not be sufficient to cure the existence of the insolvency reason or such application would clearly be unsuccessful.
• For the insolvency reason of over-indebtedness only, the previous maximum period for mandatory insolvency filing of three weeks was extended to a maximum of six weeks.
• The prognostication period for the determination of impending illiquidity (drohende Zahungsunfähigkeit) is now as a general rule twenty-four months.
• Certain provisions relevant for the liability of the managing directors in times of distress were removed from various corporate statutes and concentrated in modified form in a new provision of the Insolvency Code (§ 15b InsO). The legislator, in particular, clarified and extended the payments permitted by the management of a debtor company after the time an insolvency reason has already occurred if a timely filing is later made.
• The provisions on future access to own administration by management (Eigenverwaltung) and so-called protective umbrella proceedings (Schutzschirmverfahren) in the Insolvency Code were modified and partly restricted to address past undesirable developments. However, exceptions apply for entities who became insolvent due to the pandemic: (i) Illiquid entities may rely on the protective umbrella proceedings which otherwise are only available in case of impending illiquidity, and (ii) companies may under certain specific circumstances continue to avail themselves of the less restrictive pre-reform rules on own administration by management if such proceedings are applied for during the year 2021.

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3.2       Introduction of a New Pre-Insolvency Restructuring Tool Kit

The core piece of the SanInsFoG is the new, stand-alone act called the Business Stabilization and Restructuring Act (Unternehmensstabilisierungs- und -restrukturierungsgesetz – StaRUG, the “Restructuring Act”). This Restructuring Act contains the German rules to transpose the requirements of the Restructuring Framework Directive into local German law, but partly goes beyond such minimum requirements.

Without any claims to be complete, clients and their management ought to be aware of the following key items in the Restructuring Act:

• The Restructuring Act introduces a general obligation for management to install continuous supervision and early warning systems that enable management to detect any developments endangering their company’s existence or financial wellbeing.
• Once a company is faced with impending illiquidity, and has opted for voluntary pre-insolvency restructuring proceedings, management of the debtor has to conduct the business with the care of prudent business person in restructuring and thus, in particular, has to safeguard the interests of the community of creditors. Conflicting shareholder instructions may not be complied with.
• In voluntary pre-insolvency restructuring proceedings, management of the company must draw up a detailed, descriptive (darstellend) and executive (gestaltend) restructuring plan in order to restructure the company’s business or individual types of liabilities or contractual obligations. Measures may, for example, include haircuts and amendments of the rights of secured or unsecured creditors, but a comparative calculation/analysis needs to be attached which outlines the effects of the restructuring on individual creditors compared to a regular insolvency situation. It should be noted that claims of employees (including pension claims) may not be restructured or changed as part of the restructuring plan.
• Approval of the restructuring plan requires a majority of 75% of the voting rights per creditor group. Subject to additional requirements, non-consenting creditors can be overruled via a court approved cross-class cram-down.
• The court may upon request of the restructuring company further impose a temporary three-month moratorium on individual enforcement measures. Such moratorium may under certain circumstances be extended to a maximum period of eight months.
• The handling of the entire pre-insolvency restructuring can be assisted or facilitated by the involvement of two newly-created functional experts appointed by the competent court, the so-called restructuring agent (Restrukturierungsbeauftragter) and the restructuring moderator (Sanierungsmoderator). In addition, the competent court may appoint a so-called creditor’s advisory committee (Gläubigerbeirat) ad officium if the proposed restructuring plan affects all creditors (except for creditors of exempt claims such as claims of employees) and, thus, is of such general application to all groups of creditors that the proceedings are akin to universal proceedings (gesamtverfahrensartige Züge). Such creditor advisory committee may also include members that are unaffected by the restructuring plan like e.g. employee representatives or others.
• If illiquidity or over-indebtedness occurs during the restructuring proceedings, management is obliged to immediately inform the restructuring court, but the formal duty to file for insolvency is suspended. Such insolvency filings do remain possible, though, and the restructuring court may close the restructuring matter to allow for formal insolvency proceedings. Failure to inform the restructuring court duly or timely may incur personal liability for management.
• The tools, procedures and restructuring measures contained in the Restructuring Act are mostly new and untested. It can thus be expected that the need for specialist advice for distressed companies will generally increase.

The need for additional expert assistance and the relatively heavy load of technical and procedural safeguards may pose a challenge in particular for small and medium-sized distressed businesses who suffer heavily from the pandemic and who may not have the financial and other resources to benefit from the Restructuring Act. It therefore remains to be seen whether and how the new Restructuring Act will stand the test of time in this regard. It can be expected, though, that the Restructuring Act will offer interesting options and restructuring potential, at least, for bigger and more sophisticated players in the German or international business arena. We would thus recommend that interested circles, i.e. German managing directors and board members but also investors or shareholders, familiarize themselves with the fundamentals of the Restructuring Act.

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4.         Labor and Employment

4.1       Employers’ Options during the COVID-19 Pandemic

The German lawmaker has enacted several support measures and subsidies for companies to cope with the ongoing COVID-19 pandemic, especially enhancing short-time work options. In a nutshell, short-time work means that working hours are reduced (even down to zero) and that the state pays between 60% and 87% of the net income lost by the affected employees. Currently, such a scheme can be extended to 24 months with the government even covering the social security costs.

Companies that make use of this generous scheme are not barred from carrying out redundancy measures. However, the narrative for such lay-offs is different: A termination for business reasons requires a permanent, not only a temporary loss of work. Regardless of these strict requirements, we have seen an uptick of redundancies during the pandemic.

For a more detailed insight we would refer to our client alert on the topic.[8]

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4.2       Reclassification Risk of Crowd-Workers into De-Facto Employees

The German Federal Labor Court (Bundesarbeitsgericht, BAG) has recently held that crowd-workers, i.e. freelancers hired over an online platform, can be classified as employees of the platform (9 AZR 102/20). This would entitle them to certain employee-protection rights, such as protection against dismissal, continued payment of remuneration and vacation claims.

In this particular case, the crowd-worker was considered an employee because the platform controlled the details of the work (place, date and contents) and featured a rating system that incentivized him to continuously perform activities for the platform operator. In the opinion of the court that sufficed to show that the crowd-worker was integrated in the platform operator’s business, making him an employee.

While the ruling will not render the business model of crowd-working platforms entirely impossible, especially platform operators using incentive systems should have these arrangements double-checked to mitigate the risk of costly reclassification of their crowd-workers.

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4.3       Pension Claims in Insolvency (Distressed M&A)

The European Court of Justice (ECJ) has issued an important ruling concerning the liability of acquirers of insolvent companies for occupational pensions. According to German case law, such acquirers have not been liable for their new employees’ rights with regard to occupational pension schemes as far as these rights had been accrued prior to insolvency. Instead, such claims are covered by the German Insolvency Protection Fund (Pensionssicherungsverein, PSV), which secures them to a certain extent, but not always entirely.

The plaintiffs in the underlying German court proceedings sued the acquirer for acknowledgement of their full pension claims disregarding reductions due to the insolvency. The ECJ now ruled on September 9, 2020 that the limited liability of the acquirer regarding occupational pension claims was only in line with European Union law if national law provided a certain minimum protection regarding the part not covered by the acquirer (C-674/18 and C-675/18). Regrettably, the ruling does not make it entirely clear who would be liable for a possible difference in benefits – the acquirer or the PSV. According to the few publications available so far, it appears more convincing that the PSV would have to cover said deficit. However, due to the lack of certainty, investors ought to take this potential risk into account when acquiring insolvent businesses.

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5.         Real Estate

5.1       Conveyance requires Domestic German Notary

The transfer of title to German real estate requires (i) the agreement in rem between the transferor and the acquiror on the transfer (conveyance) and (ii) the subsequent registration of the transfer in the competent land register. To be effective, the conveyance needs to be declared in the presence of both parties before a competent agency. While a notary appointed in Germany fulfills this criterium, it is disputed among German scholars whether the conveyance may also be effectively declared before a notary public abroad.

In its decision of February 13, 2020, the German Federal Supreme Court (Bundesgerichtshof – BGH) held that the conveyance may not be effectively declared before a notary who has been appointed outside of Germany. Engaging a notary abroad for the conveyance to get the benefit of (often considerably) lower notarial fees abroad, is thus not a viable option. In case of a sale of real estate under German law, additional notarial fees for the conveyance, however, may be avoided if the conveyance is included in the notarial real estate sale agreement recorded by a German notary.

The feasibility of a notarization before a notary public abroad is still disputed with respect to the notarization of the sale and transfer or the pledging of shares in a German limited liability company (GmbH). It remains to be seen whether this decision on real estate conveyance may also impact the dispute and arguments on the permissibility of foreign notarization of share sales and transfers or pledges.

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5.2       Update regarding Commercial Lease Agreements

Further developments of potential relevance for the real estate world, which were triggered by the COVID-19 pandemic, are discussed in the context of the continuing legal impact of the pandemic in sections 12.3 and 12.4 below.

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6.         Compliance / White Collar

6.1       Corporate Sanctions Act: Extended Liability for Criminal Misconduct

The German Federal Government is still pursuing its plan to implement a corporate criminal law into German law. After the Federal Council (Bundesrat) had demanded some changes to the previous draft bill, the Federal Government introduced its draft to Parliament on October 21, 2020. Unlike many other countries, German criminal law does not currently provide for corporate criminal liability. Corporations may only be fined for an administrative offense. Based on the draft bill, corporations will be responsible for business-related criminal offenses committed by their leading personnel and will be liable for fines of up to 10% of the annual – worldwide and group-wide – turnover. In addition to this fine, profits can be disgorged and the corporation will be named in a sanctions register as a convicted party for up to 15 years.

Furthermore, if implemented, public prosecutors would be legally obliged to open investigations against the corporation on the basis of a reasonable suspicion (currently, it is in their discretion), and a written legal framework for internal investigations will be established. A corporation will benefit from considerable mitigation of the sanction if it carries out an internal investigation that meets certain criteria (such as a cooperation with the authorities in an uninterrupted and unlimited manner, organizational separation between investigation and criminal defense, and adherence to fair trial standards).

In view of these developments, corporations should not only revise existing compliance systems to prevent corporate criminal misconduct, but also set up an action plan to be prepared for criminal investigations under the planned Corporate Sanctions Act. Considering that the current legislative period will end in the autumn of 2021, it is expected that a final resolution on the Corporate Sanctions Act will soon be reached by the legislator.

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6.2       Money Laundering: The German Government’s Intensified Fight for AML Compliance

In the past, the FATF (Financial Action Task Force) and others have often portrayed Germany as being too lenient in its efforts to combat money laundering, and the German regulatory framework was branded as containing too many loopholes. Recent developments surrounding the collapse of German pay service provider Wirecard have done little to assuage such views.

In response to such criticism, Germany has recently increased its efforts towards introducing a more forceful AML framework. A prime example of Germany’s new-found vigor in this regard is the fact that the German government opted not only to implement the 5^th EU Money Laundering Directive, but to go above and beyond the minimum requirements set by the EU. As already discussed in sections 1.4, 5.2 and 6.2 of last year’s client alert, a number of legislative changes came into effect.[9]

In addition, the German government issued two distinct resolutions, namely the eleven points “National Strategy Package” and – in direct conjunction with the Wirecard collapse – the “16-Points Action Plan”. The corresponding changes are not limited to the German Criminal Code and the Anti Money Laundering Act (Geldwäschegesetz, GwG), but extend to establishing an improved organization of the German AML authorities.

The provision on money laundering in the German Criminal Code (section 261) will, according to the current Ministry of Justice draft bill, undergo a fundamental change. Pursuant to the intended legislation, the scope of section 261 of the German Criminal Code will be significantly broadened as any criminal wrongdoing may in the future constitute a predicate offense for money laundering.

Under the current state of the law, only a limited set of criminal offenses may give rise to money laundering. Importantly, criminal acts committed abroad may serve as predicate offenses for money laundering as well. The new legislation extends the scope of relevant prior offenses to certain acts which under EU law is required to be rendered punishable under the respective local criminal laws of the member states, irrespective of whether such act is in fact punishable in the jurisdiction at the place it is committed. Moreover, the offense of grossly-negligent money laundering has been re-introduced into the draft after a heated debate in this regard.

As supporting measures to the amended Anti Money Laundering Act, the German government decided to subject numerous economic players to (new or partially enhanced) AML requirements, including private financial institutions, crypto currency traders, real estate agencies and notaries who would be burdened with extended new obligations to disclose AML-related concerns regarding their customers and clients. These measures are mainly reflected in this year’s draft of a regulation on obligations to report certain facts surrounding real estate (Verordnung zu den nach dem Geldwäschegesetz meldepflichtigen Sachverhalten im Immobilienbereich).

Key German AML institutions were – as a direct result of the aforementioned government’s resolutions – significantly strengthened:

• The Financial Intelligence Unit’s (FIU) personnel was more than doubled, and its data access rights were significantly expanded. In addition, a high level government body was established between German federal and local state authorities.
• The German Federal financial supervisory authority BaFin was requested to ensure that companies and persons under its supervision implement any statutory obligations, and BaFin’s related supervisory competences were broadened.
• The transparency registry which may be accessed by members of the public was established, collecting key relevant data including the UBO. Registration in the transparency register is mandatory for all companies with business activities in or related to Germany.

The German business community and relevant AML specialists should, at least, inform themselves or gain an in depth understanding of the new and extended regulatory framework. New monitoring systems need to be put in place to follow up on future predicate offenses. Therefore, relevant risk factors including those arising from new business models such as crypto currency trading have to be evaluated as a first step prior to implementing the new provisions.

While Germany has failed to implement new European AML requirements by December 3, 2020, the corresponding draft bill is expected to come into force soon.

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6.3       Cross-Border European Investigations: The European Public Prosecutor’s Office

To fight crimes against the fiscal interests of the European Union, the European Public Prosecutor’s Office (“EPPO”) is expected to become operative in 2021. The EPPO will act both on a centralized level with European Prosecutors based in Luxembourg having a supervisory and coordinating function and on a decentralized level with European Delegated Public Prosecutors situated in the participating EU member states having the same powers as national prosecutors to investigate specific cases. Its activities will focus on the prosecution of offenses to the detriment of the EU such as subsidy fraud, bribery and cross-border VAT evasion.

After the originally intended start of the new authority was delayed at the end of 2020, it is anticipated that investigation activities will start in 2021. In addition to the existing national criminal prosecution authorities and European institutions such as OLAF, Europol and Eurojust, a genuine European criminal prosecution authority will enter the stage and possibly bring about a shift in European enforcement trends. It is to be hoped that crimes affecting the EU’s financial interests will be pursued in a more robust manner and that international coordination of investigations will be significantly improved.

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7.         Data Privacy – Regulatory Activity and Private Enforcement on the Rise

The German Data Protection Authorities (“DPAs”) have certainly had a busy year. While, the trend towards higher fine levels for GDPR violations continues, the German DPAs have also initiated a number of investigations and issued guidance on a variety of issues, such as COVID-19 related data privacy concerns, the consequences of the “Schrems II” ruling of the Court of Justice of the European Union (judgment of July 16, 2020, case C-311/18)[10] and the use of video conferencing services and other technological tools in the context of working from home.

With regard to fines, in 2020 the German DPAs issued fines in the total amount of EUR 36.6 million (approx. USD 44.8 million). In October 2020, the Hamburg Data Protection Authority imposed a record-breaking fine in the amount of EUR 35.3 million (approx. USD 43.2 million) on a retail company for comprehensively and extensively collecting sensitive personal data from its employees, including health data and data about the employees’ personal lives, without having a sufficient legal basis to do so. This was the highest fine ever issued by a German DPA.

However, for companies it may well pay off to push back against such fines: The District Court (Landgericht) of Bonn largely overturned a fining decision issued by the German Federal Commissioner for Data Protection and Freedom of Information against a German telecommunications service provider in December 2019. While the court confirmed a violation of the GDPR, the court significantly reduced the fine in the amount of EUR 9.5 million (approx. USD 11.6 million) to EUR 900,000 (approx. USD 1.1 million).

Another important trend is the increasing number of private enforcements in the context of data protection violations. In particular, consumers are seeking judicial help to enforce information and access requests as well as compensation claims for material or non-material damages suffered as a result of GDPR violations, especially in the employment context. But German courts are apparently not (yet) prepared to award larger amounts to plaintiffs for this kind of GDPR violations. For example, in a case where an employee requested damages in the amount of EUR 143,500 (approx. USD 175,800) the Labor Court of Düsseldorf has awarded damages in the amount of only EUR 5,000 (approx. USD 6,000). Nevertheless, companies are well advised to keep an eye on future developments as courts may raise the amount of damages awarded if an increasing number of cases were to show that current levels of damages awarded are not sufficient to have a deterrent effect.

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8.         Technology

8.1       Committee Report on Artificial Intelligence

In November 2020, the German AI inquiry committee (Enquete-Kommission Künstliche Intelligenz des Deutschen Bundestages, hereafter the “Committee”) presented its final report, which provides broad recommendations on how society can benefit from the opportunities inherent in AI technologies while acknowledging the risks they pose. The Committee was set up in late 2018 and comprises 19 members of the German Parliament and 19 external experts.

The Committee’s work placed a focus on legal and ethical aspects of AI and its impact on the economy, public administration, cybersecurity, health, work, mobility, and the media. The Committee advocates for a “human-centric” approach to AI, a harmonious Europe-wide strategy, a focus on interdisciplinary dialog in policy-making, setting technical standards, legal clarity on testing of products and research, and the adequacy of digital infrastructure.

At a high level, the Committee’s specific recommendations relate to (1) data-sharing and data standards; (2) support and funding for research and development; (3) a focus on “sustainable” and efficient use of AI; (4) incentives for the technology sector and industry to improve scalability of projects and innovation; (5) education and diversity; (6) the impact of AI on society, including the media, mobility, politics, discrimination and bias; and (7) regulation, liability and trustworthy AI.

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8.2       Proposed German Legislation on Autonomous Driving

The German government announced plans to pass a law on autonomous vehicles by mid-2021. The new law is intended to regulate the deployment of connected and automated vehicles (“CAV”) in specific operational areas by the year 2022 (including Level 5 “fully automated vehicles”), and will define the obligations of CAV operators, technical standards and testing, data handling, and liability for operators. The proposed law is described as a temporary legal instrument pending agreement on harmonized international regulations and standards.

Moreover, the German government also plans to create, by the end of 2021, a “mobility data room”, described as a cloud storage space for pooling mobility data coming from the car industry, rail and local transport companies, and private mobility providers such as car sharers or bike rental companies. The idea is for these industries to share their data for the common purpose of creating more efficient passenger and freight traffic routes, and support the development of autonomous driving initiatives in Germany.

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9.         Antitrust and Merger Control

9.1       Enforcement Overview 2020

The German Federal Cartel Office (Bundeskartellamt), Germany’s main antitrust watchdog, has had another very active year in the areas of cartel prosecution, merger control, consumer protection and its focus on the digital economy.

On the cartel prosecution side, the Bundeskartellamt concluded several investigations in 2020 and imposed fines totaling approximately EUR 358 million against 19 companies and 24 individuals from various industries including wholesalers of plant protection products, vehicle license plates, and aluminum forging. It is of note that the fining level decreased by more than 50 % compared to 2019. While the Bundeskartellamt received 13 notifications under its leniency program, the increasing risks associated with private follow-on damage claims clearly reflect on companies’ willingness to cooperate with the Bundeskartellamt under its leniency regime. The authority stressed that it is continuing to explore alternative means to detect illegitimate cartel conduct, including through investigation methods like market screening and the expansion of its anonymous whistle-blower system.

In 2020, the Bundeskartellamt also reviewed approximately 1,200 merger control filings (i.e., approximately 14 % less than in 2019). As in previous years, more than 99 % of these filings were concluded during the one-month phase one review. Only seven merger filings required an in-depth phase-two examination. Of those, five were cleared in phase-two (subject to conditions in two of these cases), and two phase-two proceedings are still pending.

Looking ahead to the year 2021, the Bundeskartellamt will likely continue to focus on the digital economy and conclude its sector inquiry into online advertising. The agency also announced to go live with its competition register in Q1 of 2021 for public procurement purposes. This database will list companies that were involved in competition law infringements and other serious economic offenses.

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9.2       Paving the Way for Private Enforcement of Damages

In its Otis decision (C-435/18 of December 12, 2019), the European Court of Justice (ECJ) paved the way for private enforcement in cases concerning antitrust damages. The ECJ held that even a party not active on the market related to the one affected by the cartel may seek damages if there is a causal link between the damages incurred and the violation of Article 101 of the Treaty on the Functioning of the European Union (TFEU). The ECJ also reaffirmed that the scope of the right to compensation under Article 101 TFEU, i.e. the “who,” “what” and “why”, is governed by EU law while the national laws of the member states determine how to enforce the right.

Private enforcement of cartel damages is gaining momentum. Since the Otis decision, German courts, in particular the German Federal Supreme Court (Bundesgerichtshof, BGH), have further explored the course set by the ECJ in several antitrust damages cases concerning the so-called rail cartel.

The BGH held that Article 101 TFEU and, therefore, also the right to damages under German law, does not require the claimant to prove that a certain business transaction has directly been affected by the cartel at issue. Instead, it is sufficient if the claimant establishes that the cartel infringement is abstractly capable of causing damages to the claimant. As a result, courts only need to evaluate one long-lasting cartel infringement instead of individual breaches. The BGH further clarified in its decisions that the extent of an impairment by a cartel is a question of “how” a claimant would be compensated and, therefore, subject to German procedural law. As a consequence, the BGH encouraged courts to exercise judicial discretion when weighing the parties’ factual submissions and assessing cartel damages.

The BGH also ruled that the passing-on defense could apply if the claimant had received public grants which otherwise would not or not in such an amount have been paid to the claimant if the cartel had not existed. The court explained, however, that the defense may be barred when the damage is scattered to the downstream market level. In this case, it is inappropriate for the initiator of the cartel to walk free only because the individual damages were too minor to prompt claims for damages.

In the future, businesses will do well to monitor these ongoing developments as private enforcement actions of damages further gather pace and may develop into a sharp sword to police anti-competitive practices of other market players.

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9.3       Adoption of the “GWB Digitalization Act” expected for 2021

The draft bill for the 10^th Amendment of the German Competition Act, also known as “GWB Digitalization Act” endorsed by the German Federal Government on September 9, 2020 is currently undergoing the legislative procedure in the German Parliament. The adoption of the bill is expected for early 2021. Having said that, the final discussions of the bill originally scheduled for December 17, 2020 were postponed until January 14, 2021.

As reported in our Year-End Alert 2019,[11] the draft bill addresses topics such as market dominance in the digital age and introduces a number of new procedural simplifications. For example, the bill currently foresees that companies, which depend on data sets of market-dominating undertakings or platforms, would have a legal claim to data access against such undertakings or platforms. Further, the draft bill introduces a rebuttable presumption whereby it is presumed that direct suppliers and customers of a cartel are affected by the cartel in case of transactions during the duration of the cartel with companies participating in the cartel.

Compared to the draft bill discussed in our Year-End Alert 2019, the governmental revision contains certain changes, in particular in the area of merger control. Thus, the draft bill currently features an increase of the two domestic turnover thresholds by EUR 5 million (approx. USD 6 million), i.e. from EUR 25 million to EUR 30 million (from approx. USD 30.6 million to approx. USD 36.8 million), and from EUR 5 million to EUR 10 million (from approx. USD 6.1 million to approx. USD 12.3 million), respectively. Additionally, a new provision was introduced in the legislative procedure, whereby the German Federal Cartel Office (Bundeskartellamt,) may require companies, which are deemed to reduce competition through a series of small company acquisitions in markets in which the Bundeskartellamt conducted sector inquiries, to notify every transaction in one or more specific sectors provided that certain thresholds are met. This notification obligation can be imposed on a company, if (i) the company has generated global turnover of more than EUR 500 million in the last business year, (ii) there are reasonable grounds for the presumption that future mergers could significantly impede effective domestic competition in the sectors for which the obligation has been imposed and (iii) the company has a market share of at least 15% in Germany in the sectors for which the obligation has been imposed. However, a notification will only be required if the target company has (i) generated turnover of more than EUR 2 million in the last business year and (ii) has generated more than two-thirds of its turnover in Germany. The notification obligation lasts for three years.

In light of the recent publication of the draft regulation on an EU Digital Markets Act by the European Commission, it remains to be seen how the German legislator will react to the proposals put forward by the Commission and how the national legislative procedure will evolve.

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10.       International Trade, Sanctions and Export Control

10.1     The New Chinese Export Control Law and its Impact on German Companies

The challenges, which German companies, specifically those with a U.S. parent or another U.S. nexus, face in light of the EU Blocking Statute’s prohibition to comply with certain U.S. sanctions on Iran and on Cuba, are well documented.[12] While 2021 might see calmer waters in the West due to the expected (yet far from certain) return to a more multilateral focus of the incoming Biden Administration, further complications await the German export business community in the East.

On December 1, 2020, a comprehensive new Chinese export control law went into effect. Generally speaking, the Chinese export control law reflects key elements of U.S. and EU/German export control related law. Particularly, licensing requirements for the export of controlled Chinese goods (including technologies) are determined on the basis of lists of goods and a catch-all clause.

As early as December 4, 2020, China’s Ministry of Commerce along with other authorities already published the first such lists of goods in the area of “commercial cryptography”, i.e. regarding goods and technologies which can be used for encryption, inter alia, in telecommunication applications, VPN equipment or quantum cryptographic devices.

It is likely that any significant restrictions on, inter alia, exports of certain U.S. origin items and technology to China will eventually be mirrored in the respective Chinese lists to also impose significant restrictions on the export of certain Chinese origin items and technology to the U.S. For many German-based companies with a diversified supply chain this raises the unenviable prospect that they may use suppliers whose sourced goods originate in the U.S. and in China, respectively, which feature on each of the respective lists. This conflict may eventually limit the number of counterparties the German company can export the final product to without jeopardizing either supply chain. It may also limit the possibility of cooperation (e.g. technology transfer) with U.S. and/or Chinese suppliers and customers alike.

Further, China’s new Export Control Law contains regulation comparable to the (U.S.) concept of “deemed export” via the definition of “exports”, which applies when a Chinese person transfers listed goods to a foreign person. Depending on how extensively this is interpreted by the Chinese authorities, this could, for example, result in Chinese export control law also applying to transfers by Chinese individuals located in Germany to a German person. Therefore, the details of this potential extraterritorial effect of Chinese export control law, as well as a vague reference to an extension of Chinese export control law to re-exports of listed goods and technologies or goods and technologies covered by the catch-all regime, raises numerous questions that will presumably only be clarified in time by the publication of specific regulations or guidance by the Chinese authorities.

Additionally, the EU is also taking initial steps to further strengthen its defense mechanisms against perceived and potential interference with its sovereignty by the extraterritorial effects of U.S. and Chinese export control laws. Specifically, the EU Parliament requested a study[13] on extraterritorial sanctions on trade and investments and European responses, that, inter alia, suggests the establishment of an EU agency of Foreign Assets Control (EU-AFAC) with the aim of more efficient and effective enforcement of, inter alia, the EU Blocking Statute, which might also come to include parts of the Chinese export control law.

In any case, any German export control compliance department would be well-advised to update its Internal Compliance Program to be able to identify conflicting compliance obligations early and establish a process to swiftly resolve them – without breaching applicable anti-boycott regulations – in order to avoid the supply-chain-management of the company being negatively impacted.

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10.2     Update on the German Rules regarding Foreign Direct Investment Control

For a summary of the recent reforms of German foreign investment control laws, reference is made to section 1.3 above.

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11.       Litigation

11.1     Establishment of Commercial Courts in Germany – An Emerging Forum for International Commercial Disputes?

Over the past few years, Germany has taken several efforts to become a more attractive forum venue for international disputes. In 2010, three District Courts (Landgerichte) in Cologne, Bonn and Aachen had established English-speaking divisions for civil disputes. Since January 2018, the Frankfurt district court has allowed oral hearings in international commercial disputes to be conducted in English, provided the parties agree. The same now applies for the district courts in Mannheim and Stuttgart where two civil and two commercial divisions specially established for this purpose have started their work in November 2020. The civil divisions consist of three professional judges, respectively. The commercial divisions offer a combination of legal and industry-specific expertise and are led by one professional judge and two honorary judges from the local business community. All divisions have been equipped with state-of-the-art technical equipment, allowing for video-conferences and video testimonies of witnesses and experts.

Provided that the district court in Mannheim or in Stuttgart has jurisdiction (or the parties agree), the Commercial Courts in Mannheim or Stuttgart may hear corporate disputes, post-M&A disputes as well as disputes concerning mutual commercial transactions. Additionally, the court in Mannheim is available for disputes resulting from banking and financial transactions. While the Commercial Court in Stuttgart does not limit its jurisdiction to a certain litigation value, the court in Mannheim (its patent division enjoys global recognition) requires an amount in dispute of at least EUR 2 million. To ensure an effective review at the appellate level, the Higher District Courts (Oberlandesgerichte) in Stuttgart and Karlsruhe have also established specialized appeal panels responsible for dealing with appeals and complaints against the decisions of the new Stuttgart and Mannheim Commercial Courts.

The new Commercial Courts are supposed to let international litigants benefit from the high quality of the German court system and the advantages of its procedural rules. Overall, the duration of court proceedings in Germany is fairly short. There is no “American-style” discovery process. Costs are moderate by international standards, and must be borne by the losing party. Hearings are usually held in public, but the public can be excluded when business secrets are discussed. Additionally, parties may decide whether or not to allow for an appeal.

Despite these benefits, it remains to be seen whether the Commercial Courts in practice will measure up to these high expectations: Even though oral hearings may be conducted in English and a translation of English appendices is no longer required, every written submission must still be filed in German, and the decisions the court renders are in German as well. In any case, the new Commercial Courts seem to be a further step into the right direction towards a more international business-friendly approach.

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11.2     Directive for Collective Redress – Class Action at EU-Level

On December 4, 2020, following an agreement between the EU-institutions in June 2020, the EU-Parliament has approved the “Directive on representative actions for the protection of the collective interests of Consumers” (the “Directive”)[14], introducing the possibility of collective redress across the borders within the EU. The Directive aims to strengthen the protection of EU-consumer rights in case of mass damages, covering both domestic and cross-border infringements, especially with regard to data protection, energy, telecoms, travel and tourism, environment and health, airline rights and financial services. The EU Member States need to implement the Directive into their national laws within two years and six months, i.e. by mid-2023.

Under the Directive, collective legal actions may only be taken by “qualified entities” on behalf of consumers against traders, seeking injunction and/or redress measures. For the purpose of cross-border representative actions, the qualified entities may only be designated (by the Member State) if they comply with EU-wide criteria (i.e. non-profit, independent, transparent and ensure a legitimate interest in consumer protection). To prevent abusive litigation, the defeated party has to bear the costs of the proceedings (“loser pays”) and courts or administrative authorities may dismiss manifestly unfounded cases. Consumers can join the action by either opt-in or opt-out mechanisms, depending on the decision regarding procedure which each Member State takes.

Even though the legal orders of many Member States already provide for the possibility of collective redress, the Directive assures (i) a harmonized approach to collective redress and (ii) mandatory redress measures in every Member State such as compensation, repair or price reduction without the need to bring a separate action. Therefore, the Directive goes beyond some existing regulations, which only allow declaratory actions or injunctive relief. At the same time, individual actions by plaintiffs remain possible and unregulated at the EU level. As the diesel emissions lawsuits in Germany demonstrate, this can lead to waves of mass actions and a massive clogging of court dockets.

Even though the deadline for the implementation of the Directive is still sometime down the road, the adoption of laws and regulations in the Member States to implement the Directive will need to be closely monitored by companies and law firms, in particular with regard to the various Member States’ chosen path on such issues as opt-in vs. opt-out and discovery or disclosure of documents.

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11.3     German Courts and the COVID-19 Pandemic

COVID-19 has affected all areas of life, including the court system. Over the year 2020, German courts had to learn how to litigate despite the pandemic and conduct oral hearings, as well as litigation in general, as safe as possible for everyone involved.

During the first wave of the pandemic in spring 2020, non-urgent matters were mostly postponed. Some courts in areas particularly troubled by the virus were forced to close their buildings to the public. However, the German administration of justice was never completely suspended or paused.

During the summer of 2020, with fewer COVID-19 cases, court proceedings started to normalize and courts developed concepts to continue with litigation despite the pandemic. In appropriate cases, courts tried to avoid oral hearings and, with the parties’ consent, conducted the proceedings in writing only. Courts also slowly started to hold oral hearings using video conferencing tools. While the German Rules of Civil Procedure (Zivilprozessordnung, ZPO) allow this method since 2001, German Courts were reluctant to use it before the pandemic. However, in the vast majority of cases, German Courts still conduct oral hearings despite the COVID-19 situation. Most courts adhere to hygiene concepts for these hearings, such as wearing face masks, keep sufficient distance between the individuals and ventilate the court room frequently.

For the year 2021, we expect that more and more courts elect to conduct the proceedings in writing or by videoconference. If an oral hearing is necessary nevertheless, the courts now have hygienic routines in place. Thus, unless we see a dramatic change in the COVID-19 infection rates, we do not expect that German courts will need to reduce their working speed in 2021.

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12.       Update on COVID-19 Measures in Germany

As in other jurisdictions, the COVID-19 pandemic has led to a large variety of legislative measures in Germany, which were aimed at mitigating the impact of the pandemic on the economy. These measures included in particular a moratorium for continuing obligations (temporary right to refuse performance under certain contracts), a temporary deferral of payment for consumer loans, the Special Program 2020 set up by the Kreditanstalt für Wiederaufbau (KfW) and the introduction of the Economic Stabilization Fund (Wirtschaftsstabilisierungsfonds). While many of these state measures and programs are still in place unchanged, others have been amended and adapted in time and some have lapsed without replacement. The following summary therefore gives a short overview on the current status of the COVID-19-induced state measures and programs in Germany. Most of the measures mentioned in this alert have already been covered in more detail in previous alerts published throughout 2020, that can be found here.[15]

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12.1     Economic Stabilization Fund (Wirtschaftsstabilisierungsfonds)

The Act on the Introduction of an Economic Stabilization Fund (Gesetz zur Errichtung eines Wirtschaftsstabilisierungsfonds – WStFG) entered into force on March 28, 2020. This act provides the statutory framework for state stabilizing measures, in particular, guarantees and recapitalization measures, like the acquisition of subordinated debt instruments, profit-sharing rights (Genussrechte), silent partnerships, convertible bonds and the acquisition of shares. After the introduction of the Economic Stabilization Fund was approved under state aid law by the EU Commission in July 2020 and the legal regulations for its implementation were published in the Federal Law Gazette in October 2020, the Economic Stabilization Fund has become fully operational.

Moreover, in July 2020 the new Economic Stabilization Acceleration Act (Wirtschaftsstabilisierungsbeschleunigungsgesetz – WStBG) came into force, which provides for temporary modifications of German corporate law in order to implement the state aid measures by the Economic Stabilization Fund more efficiently. These changes include, inter alia, facilitations for capital measures and transactions (capital increases, capital reductions, etc.) in connection with stabilization measures, which significantly relax minority protection.

Since the introduction of the Economic Stabilization Fund, there have been several high profile cases, in which those measures have been effectively put into action: Deutsche Lufthansa (silent participation in the amount of EUR 5,7 billion and subscription of shares by way of a capital increase amounting to 20% of the share capital), TUI (convertible bond and various other emergency support measures in the amount of EUR 1.3 billion), FTI Touristik (subordinated loan in the amount of EUR 235 million), MV Werften Holding (subordinated loan in the amount of EUR 193 million) and German Naval Yards Kiel (subordinated loan in the amount of EUR 35 million).

Originally, (i) guarantees under the Economic Stabilization Fund could only be granted until December 31, 2020 and (ii) the application period for recapitalization measures was set to run until June 30, 2021. These deadlines have now been extended and (i) guarantees can now be granted until June 30, 2021 and (ii) recapitalizations can be granted until September 30, 2021, respectively.

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12.2     Corporate Law Modifications pursuant to the COVID-19 Pandemic Mitigation Act

The COVID-19 Pandemic Mitigation Act (Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht) provided for, inter alia, (i) a modification of the Limited Liability Company Act (GmbHG), which facilitates shareholder resolutions in text form or by written vote (circulation procedure) without requiring the consent of all shareholders to such procedure, and (ii) a modification of the Conversion Act (UmwG) with regard to measures requiring the submission of a closing balance sheet, where the balance sheet reference date (Bilanzstichtag) used in such filings can now be up to twelve months old at the time of the register filing instead of a maximum of eight months as under the regular statutory rules.

Both of these COVID-19-induced rules were extended by legislative decree dated October 20, 2020 (Verordnung zur Verlängerung von Maßnahmen im Gesellschafts-, Genossenschafts-, Vereins- und Stiftungsrecht zur Bekämpfung der Bekämpfung der Auswirkungen der COVID-19-Pandemie) and are effective until December 31, 2021.

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12.3     Moratorium for Continuing Obligations and Consumer Loans, Restriction of Lease Terminations

The COVID-19 Pandemic Mitigation Act also introduced a moratorium for substantial continuing obligations (i.e. those which serve to provide goods or services of general interest, such as the supply of energy and water), which allowed obligors to refuse to fulfill their obligations if they were no longer able to meet their obligations as a result of the COVID-19 pandemic. This moratorium was limited to June 30, 2020. It could theoretically have been extended thereafter by legislative decree until September 30, 2020, but the government decided not to make use of the option to extend the moratorium. The moratorium therefore expired on June 30, 2020.

Likewise, the payment deferral for consumer loan agreements, which stipulated that claims of lenders for payment of principal or interest due between April 1 and June 30, 2020 were deferred by three months, was not extended by the government, either. As a result, debtors can no longer defer payment, and in order to avoid a double burden for the debtor, the period of the loan agreement will be extended by three months, unless the lender under such a consumer loan and the debtor have reached another arrangement.

Furthermore, the COVID-19 Pandemic Mitigation Act restricts the landlords’ termination right concerning German real estate lease agreements. Until June 30, 2022, a landlord is not entitled to terminate such a lease agreement solely based on the argument that the tenant is in default with payment of the rent for the period April 1, 2020 through June 30, 2020 if the tenant provides credible evidence that the payment default is based on the impact of the COVID-19 pandemic. The landlord’s other contractual and statutory termination rights as well as its rental payment claims for such period, however, remained unaffected by the COVID-19 Pandemic Mitigation Act. Likewise, the government did not make use of the option to extend the termination restrictions to backlogs in tenants’ payments for the period July 1, 2020 through September 30, 2020.

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12.4     Request for Adjustment of Commercial Lease Agreements

The German Parliament (Bundestag) passed a bill on December 17, 2020 that is supposed to increase the chances of tenants of German commercial property or room leases to successfully request an adjustment of the contractual lease terms or even termination of the lease pursuant to Section 313 German Civil Code (Bürgerliches Gesetzbuch – BGB) due to the COVID-19 pandemic. A request pursuant to Section 313 BGB requires that (i) circumstances that are the mutually accepted basis of the contract have significantly changed since the conclusion of the contract, (ii) the parties would not have entered into the contract or only with different content if they had foreseen this change, and (iii) the party making such a request cannot reasonably be expected to be held to the terms of the contract without adjustments or even at all taking into account all circumstances of the specific case, in particular, the contractual or statutory distribution of risk between the parties.

According to this bill, circumstances that are the mutual basis of the contract are refutably deemed to have significantly changed if the use of such leased premises is significantly restricted due to public measure for the purpose of combating the COVID-19 pandemic. As the tenant still needs to show that the other conditions are fulfilled, in particular, that the balancing of interest under (iii) above is in its favor, it remains to be seen whether this bill has the desired effect. Attempting to find an amicable solution may still be the better option for both the landlord and the tenant.

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12.5     Miscellaneous

In addition to the legislative measures mentioned above, Germany has introduced a varied array of additional programs to stabilize and support the German economy. Particularly noteworthy is the KfW’s Special Program 2020 (“KfW Sonderprogramm 2020 für Investitions- und Betriebsmittelfinanzierung”), which includes the KfW Entrepreneur Loan (“KfW Unternehmerkredit”), the ERP Start-Up Loan – Universal (“EPR Gründerkredit – Universell”) and the KfW Special Program Syndicated Lending (KfW Sonderprogramm “Direktbeteiligung für Konsortialfinanzierung“). The Special Program 2020 was originally set to run until December 31, 2020 and has in the meantime been extended until June 30, 2021. The European Commission has not yet approved the program under state aid law, but this is expected to take place in the near future.

The Immediate Corona Support Program for small(est) enterprises and sole entrepreneurs (Corona Soforthilfe für Kleinstunternehmen und Soloselbstständige) was a one-off payment for three months during the first lockdown in the spring of 2020, that has not been relaunched by the government in connection with the second lockdown in Germany in the fall of 2020. However, similar support has been provided to companies which are particularly affected by the lockdown (most notably restaurants and hotels) through the so-called “November and December COVID-relief” program (November- und Dezemberhilfen).

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12.6     Conclusion

The COVID-19 pandemic is obviously not over yet and it is difficult to predict how things will develop going forward. It is important for companies to keep an eye on the current status of the COVID-19 support measures and programs and how they will be amended or evolve over time. Otherwise, there is the risk that new support programs will be overlooked or deadlines for existing programs will be missed.

The following webpage provides a good overview of the current support measures for businesses in Germany: https://www.bmwi.de/Redaktion/DE/Coronavirus/coronahilfe.html.

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   [1]   Also see our alerts dated March 27, 2020, section III., published under https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/ and dated September 24, 2020, published under https://www.gibsondunn.com/covid-19-german-rules-on-possibility-to-hold-virtual-shareholders-meetings-likely-to-be-extended-until-end-of-2021/.

   [2]   EU Regulation (EU) 2019/452 of March 19, 2019 establishing a framework for screening of foreign direct investments into the EU, available in the English language version under: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0452&from=EN.

   [3]   “German Foreign Investment Control Tightens Further”, available under https://www.gibsondunn.com/german-foreign-investment-control-tightens-further/.

   [4]   “Update on German Foreign Investment Control: New EU Cooperation Mechanism & Overview of Recent Changes”, available under https://www.gibsondunn.com/update-on-german-foreign-investment-control-new-eu-cooperation-mechanism-and-overview-of-recent-changes/.

   [5]      In this context, see section 1.6 of 2015 Year End Alert available under https://www.gibsondunn.com/2015-year-end-german-law-update/.

   [6]   We refer you to our earlier alerts in this regard available at: https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/ and at https://www.gibsondunn.com/european-and-german-programs-counteracting-liquidity-shortfalls-and-relaxations-in-german-insolvency-law/, as well as more specifically on insolvency filing obligations https://www.gibsondunn.com/temporary-german-covid-19-insolvency-regime-extended-in-modified-form/.

   [7]   Again see our alert at https://www.gibsondunn.com/temporary-german-covid-19-insolvency-regime-extended-in-modified-form/.

   [8]   Available under https://www.gibsondunn.com/covid-19-short-term-reduction-of-personnel-costs-under-german-labor-law/.

   [9]   Available under https://www.gibsondunn.com/2019-year-end-german-law-update/.

[10]   See https://www.gibsondunn.com/the-court-of-justice-of-the-european-union-strikes-down-the-privacy-shield-but-upholds-the-standard-contractual-clauses-under-conditions/.

[11]   Section 7.2 in the Year-End Alert published under https://www.gibsondunn.com/2019-year-end-german-law-update/.

[12]   Available under https://www.gibsondunn.com/new-iran-e-o-and-new-eu-blocking-statute-navigating-the-divide-for-international-business/.

[13]   This study is available under: https://www.europarl.europa.eu/RegData/etudes/STUD/2020/653618/EXPO_STU(2020)653618_EN.pdf.

[14]   See at https://eur-lex.europa.eu/legal-content/en/TXT/PDF/?uri=CELEX:32020L1828&from=DE.

[15]   These earlier alerts are available under https://www.gibsondunn.com/european-and-german-programs-counteracting-liquidity-shortfalls-and-relaxations-in-german-insolvency-law/, under https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/ and under https://www.gibsondunn.com/corporate-ma-in-times-of-the-corona-crisis-current-legal-developments-for-german-business/.

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The following Gibson Dunn lawyers assisted in preparing this client update:  Birgit Friedl, Marcus Geiss, Carla Baum, Silke Beiter, Andreas Dürr, Lutz Englisch, Ferdinand Fromholzer, Daniel Gebauer, Kai Gesing, Franziska Gruber, Selina Grün, Johanna Hauser, Alexander Horn, Markus Nauheim, Patricia Labussek, Wilhelm Reinhardt, Markus Rieder, Richard Roeder, Sonja Ruttmann, Martin Schmid, Annekatrin Schmoll, Benno Schwarz, Ralf van Ermingen-Marbach, Linda Vögele, Friedrich Wagner, Frances Waldmann, Michael Walther, Georg Weidenbach, Finn Zeidler, Mark Zimmer, Stefanie Zirkel and Caroline Ziser Smith.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The two German offices of Gibson Dunn in Munich and Frankfurt bring together lawyers with extensive knowledge of corporate, M&A, finance and restructuring, tax, labor, real estate, antitrust, intellectual property law and extensive compliance / white collar crime experience. The German offices are comprised of seasoned lawyers with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world. Our German lawyers work closely with the firm’s practice groups in other jurisdictions to provide cutting-edge legal advice and guidance in the most complex transactions and legal matters. For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following members of the German offices:

General Corporate, Corporate Transactions and Capital Markets
Lutz Englisch (+49 89 189 33 150), [email protected])
Markus Nauheim (+49 89 189 33 122, [email protected])
Ferdinand Fromholzer (+49 89 189 33 170, [email protected])
Dirk Oberbracht (+49 69 247 411 510, [email protected])
Wilhelm Reinhardt (+49 69 247 411 520, [email protected])
Birgit Friedl (+49 89 189 33 122, [email protected])
Silke Beiter (+49 89 189 33 170, [email protected])
Annekatrin Pelster (+49 69 247 411 521, [email protected])
Marcus Geiss (+49 89 189 33 115, [email protected])

Finance, Restructuring and Insolvency
Sebastian Schoon (+49 69 247 411 540, [email protected])
Birgit Friedl (+49 89 189 33 122, [email protected])
Alexander Klein (+49 69 247 411 518, [email protected])
Marcus Geiss (+49 89 189 33 115, [email protected])

Tax
Hans Martin Schmid (+49 89 189 33 110, [email protected])

Labor Law
Mark Zimmer (+49 89 189 33 130, [email protected])

Real Estate
Hans Martin Schmid (+49 89 189 33 110, [email protected])
Daniel Gebauer (+49 89 189 33 115, [email protected])

Technology Transactions / Intellectual Property / Data Privacy
Michael Walther (+49 89 189 33 180, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])

Corporate Compliance / White Collar Matters
Benno Schwarz (+49 89 189 33 110, [email protected])
Michael Walther (+49 89 189 33 180, [email protected])
Mark Zimmer (+49 89 189 33 130, [email protected])
Finn Zeidler (+49 69 247 411 530, [email protected])
Ralf van Ermingen-Marbach (+49 89 189 33 161, [email protected])

Antitrust
Michael Walther (+49 89 189 33 180, [email protected])
Jens-Olrik Murach (+32 2 554 7240, [email protected])
Georg Weidenbach (+69 247 411 550, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])

Litigation
Michael Walther (+49 89 189 33 180, [email protected])
Markus Rieder (+49 89 189 33 160, [email protected])
Mark Zimmer (+49 89 189 33 130, [email protected])
Finn Zeidler (+49 69 247 411 530, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])

International Trade, Sanctions and Export Control
Michael Walther (+49 89 189 33 180, [email protected])
Richard Roeder (+49 89 189 33 122, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Last week, the Small Business Administration (the “SBA”) issued two interim final rules incorporating changes to the Paycheck Protection Program (the “PPP”) prescribed by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, Pub. L. 116-260 (the “Economic Aid Act”). The Act extended the authority to make PPP loans to first and second-time PPP borrowers through March 31, 2021, and changed certain PPP requirements, including establishing additional eligibility criteria for applicants seeking a second PPP loan. One of the interim final rules governs new PPP loans made under the Economic Aid Act and pending loan forgiveness applications for existing PPP loans (the “First IFR”). The other interim final rule governs second draw PPP loans (the “Second IFR”). This alert will focus on some of the key provisions of these interim final rules.[1]

First IFR  

The First IFR consolidates the interim final rules and significant guidance previously issued by the SBA regarding the PPP originally established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide a single regulation governing borrower and lender eligibility, loan application requirements and loan origination requirements, as well as general rules regarding PPP loan increases and forgiveness. The First IFR expressly states that it is not intended to substantively change any existing PPP rules that were not amended by the Economic Aid Act, and that the SBA plans to issue a consolidated rule governing PPP loan forgiveness and the loan review process.

Notable amendments to the rules governing the PPP implementing the changes required by the Economic Aid Act include the following:

• Certain new types of organizations that meet the PPP eligibility requirements are eligible to receive new PPP loans including:
  • Certain nonprofit business associations (other than professional sports leagues and organizations formed to promote or participate in a political campaign) that do not employ more than 300 employees;[2]
  • Certain news organizations that employ no more than 500 employees (or, if applicable, the employee size standard established by the SBA for the entity’s industry) per location;[3]
  • Destination marketing organizations[4] that meet the requirements described in this alert for section 501(c)(6) organizations;[5] and
  • Housing cooperatives that employ no more than 300 employees.
• Certain business concerns that may have been eligible for PPP Loans under prior rules are ineligible to receive new PPP loans. These business concerns include:
  • Public companies (i.e., companies whose securities are listed on a national securities exchange); and
  • Recipients of grants under the Shuttered Venue Operator Grant program established by the Economic Aid Act.
• All new PPP borrowers may use 2019 or 2020 for purposes of calculating their maximum loan amount.
• A PPP borrower’s forgiveness amount will not be reduced by the amount of an Economic Injury Disaster Loan (“EIDL”) advance received by the borrower. Similarly, when calculating the maximum amount of a new PPP loan that will be used to refinance an EIDL made between January 31, 2020 and April 3, 2020, borrowers should not include the amount of an EIDL advance as this advance does not need to be repaid.
• PPP loan proceeds (including PPP loans made prior to December 27, 2020, as long as the SBA has not already remitted a loan forgiveness payment to the lender with respect to the loan) may be used to pay for goods that are essential to the borrower’s operations, investments in facility modifications, personal protective equipment required for the borrower to operate safely and business software and cloud computing services that help facilitate the borrower’s business operations.
• Recipients of new PPP loans may select a covered period between eight and 24 weeks.
• The SBA will forgive a PPP loan of $150,000 or less if the borrower signs and submits a one-page certification that, among other things, requires the borrower to describe the number of employees it was able to retain because of the PPP loan. The SBA has not published the certification to date.

Second IFR 

The Economic Aid Act gives PPP loan recipients the opportunity to receive, for the first time, a second PPP loan. However, the eligibility requirements are narrower than those for initial PPP loans as we first described in our recent client alert, Coronavirus Relief Package Passed by Congress Would Revive Paycheck Protection Program and Provide Additional Relief to Eligible Businesses. Each potentially eligible borrower must be an eligible recipient of an initial PPP loan and: (1) together with its affiliates, employ 300 or fewer employees (compared to the 500 employee standard for initial PPP loans); however, hotels and restaurants with a NAICS code beginning with 72 and certain news organizations are exempt from the affiliation rules and may employ 300 or fewer employees per physical location; (2) have used, or will use, the first PPP loan funds on eligible expenses before the second PPP loan is disbursed; and (3) demonstrate at least a 25% reduction in revenue in at least one quarter of 2020 relative to 2019. Borrowers whose initial PPP loans are under review will not receive a second loan until their eligibility for the first loan is confirmed.

Second draw PPP loans are eligible for loan forgiveness under the same terms as initial PPP loans, including the changes to the forgiveness rules set forth in the First IFR. Most borrowers’ maximum second draw loan amount is capped at 2.5 times monthly payroll costs up to $2 million, although eligible hotels and restaurants may receive a second draw loan of up to 3.5 times monthly payroll costs up to $2 million.

The Second IFR provides important clarifications for second draw PPP loan requirements under the Economic Aid Act:

• First, the 25% revenue reduction may be measured by comparing quarterly revenues (as established in the Economic Aid Act) or annual revenues. The Second IFR makes clear that eligible borrowers may use annual tax returns, in addition to quarterly statements, to demonstrate that they experienced at least a 25% reduction in revenue in 2020 as compared to 2019 to meet the revenue reduction criteria under the Economic Aid Act. An entity that was not in business during 2019, but was in operation on February 15, 2020, may satisfy the revenue reduction requirement for a second draw PPP loan if it had revenue during the second, third, or fourth quarter of 2020 that demonstrates at least a 25 percent reduction from the revenue of the entity during the first quarter of 2020.
• Second, borrowers may calculate payroll costs based on calendar year 2020 rather than, as provided in the Economic Aid Act, the 12-month period before the second loan is made. Noting that all second draw PPP loans will be made in 2021, the Second IFR states that this adjustment is not expected to make a significant difference in payroll costs while simplifying the payroll cost calculation and easing a borrower’s administrative burden. Adjusted calculation methodologies apply to seasonal businesses.
• Third, borrowers must determine whether their revenue was reduced in 2020 as compared to 2019 by comparing their “gross receipts” for the relevant periods. “Receipts” for this purpose is defined consistent with “receipts” as defined in SBA’s size regulations (§ 121.104) to include “all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.” Amounts forgiven in connection with initial PPP loans are not included in this definition.[6]
• Fourth, businesses that are part of a single corporate group may not collectively receive more than $4 million in second draw PPP loans in the aggregate. Given the maximum loan amount of $2 million, this cap is proportionately the same as the $20 million aggregate limit for first draw PPP loans to businesses that are part of a single corporate group. A borrower that has temporarily closed or temporarily suspended its business remains eligible for a second draw PPP loan, while a borrower that has permanently closed its operations is not.
• Finally, potential borrowers seeking more than $150,000 in a second draw PPP loan must submit documentation—such as annual tax forms or quarterly financial statements—at the time of their application to support the 25% reduction in revenue relative to 2019. Borrowers that receive less than $150,000 must submit such documentation prior to applying for loan forgiveness. If a borrower does not apply for loan forgiveness, this documentation is required upon request by the SBA.

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   [1]   For additional details about the PPP please refer to Gibson Dunn’s Frequently Asked Questions to Assist Small Businesses and NonProfits in Navigating the COVID-19 Pandemic and prior Client Alerts about the Program: Federal Reserve Modifies Main Street Lending Programs to Expand Eligibility and Attractiveness; President Signs Paycheck Protection Program Flexibility Act; Small Business Administration and Department of Treasury Publish Paycheck Protection Program Loan Application Form and Instructions to Help Businesses Keep Workforce Employed; Small Business Administration Issues Interim Final Rule and Final Application Form for Paycheck Protection Program; Small Business Administration Issues Interim Final Rule on Affiliation, Summary of Affiliation Tests, Lender Application Form and Agreement and FAQs for Paycheck Protection Program; Analysis of Small Business Administration Memorandum on Affiliation Rules and FAQs on Paycheck Protection Program; Small Business Administration Publishes Additional Interim Final Rules and New Guidance Related to PPP Loan Eligibility and Accessibility; Small Business Administration Publishes Loan Forgiveness Application; and Coronavirus Relief Package Passed by Congress Would Revive Paycheck Protection Program and Provide Additional Relief to Eligible Businesses.

   [2]   To be eligible, the business association must qualify for federal income tax-exempt status under section 501(c)(6) of the Internal Revenue Code and (1) it must not receive more than 15 percent of its receipts from lobbying activities; (2) its lobbying activities must not comprise more than 15 percent of its total activities; and (3) the cost of its lobbying activities must not exceed $1,000,000 during its most recent tax year ended prior to February 15, 2020.

   [3]   To be eligible, the news organization must be majority owned or controlled by a NAICS code 511110 business (newspaper publishers) or 5151 business (radio networks, radio stations, television broadcasting), or a nonprofit public broadcasting entity with a trade or business under NAICS code 511110 or 5151, and must certify in good faith that proceeds of the loan will be used to support expenses at the component of the organization that produces or distributes locally focused or emergency information.

   [4]   The Economic Aid Act defines a “destination marketing organization” as (a) engaged in marketing and promoting communities and facilities to businesses and leisure travelers through a range of activities, including assisting with the location of meeting and convention sites; providing travel information on area attractions, lodging accommodations and restaurants; providing maps; and organizing group tours of local historical, recreational and cultural attractions; or (b) engaged in, and deriving the majority of its operating budget from revenue attributable to, providing live events.

   [5]   In addition, to be eligible, the destination marketing organization must either be exempt from federal income taxation under section 501(a) of the Internal Revenue Code or be a quasi-governmental entity or political subdivision of a State or local government or their instrumentalities.

   [6]   The Second IFR also states that “receipts generally are considered “total income” (or in the case of a sole proprietorship, independent contractor, or self-employed individual “gross income”) plus “cost of goods sold,” and exclude net capital gains or losses as these terms are defined and reported on IRS tax return forms.”

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Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors:

Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Roscoe Jones, Jr. – Washington, D.C. (+1 202-887-3530, [email protected])
Alisa Babitz – Washington, D.C. (+1 202-887-3720, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

In an unprecedented year for UK regulated firms and the Financial Conduct Authority (“FCA”), the regulatory agenda has at times seemed dominated by the global pandemic. However, regulated firms should be mindful of the regulatory direction of travel. This client alert assesses the regulatory landscape, now and in the coming years, through the prism of three areas of increasing regulatory focus: governance, culture and individual accountability; conduct and enforcement; and operational and financial resilience. This client alert provides practical guidance to firms to ensure continuing compliance with regulatory expectations in each of these three areas. The regulatory landscape has also been impacted as a result of the ending of the Brexit transition period on 31 December 2020. The FCA’s actions over last year will be shown to be indicators of the type of regulator that the FCA may seek to be post-Brexit.

The Gibson Dunn UK Financial Services Regulation team looks forward to discussing the matters outlined in this alert in further detail. For more analysis, please join us for our upcoming complimentary webinar presentation on 27 January 2021: UK Financial services regulatory update: what happened in 2020 and what to expect in 2021 and beyond (to register, click here).

Executive Summary

Governance, culture and individual accountability It is important that firms have strong governance frameworks that allow their culture and values to drive decision-making across the business. A key barometer that a firm is meeting the FCA’s expectations is the effective  implementation of the Senior Managers and Certification Regime (“SMCR”). In 2021 and beyond, we anticipate an increase in enforcement action from the FCA in this area, as we move away from the implementation phase of the SMCR for solo-regulated firms. Conduct and enforcement Working from home poses particular challenges for firms when monitoring the conduct of staff. However, the FCA expects firms to have appropriate systems and controls in place to manage the enhanced conduct risks that arise in the context of the pandemic and it is likely that there will be a regulatory review of how firms treated clients at the time. The regulatory direction of travel has been to push firms to think more broadly in terms of what types of misconduct they need to tackle with an increased focus on non-financial misconduct and how this reflects the culture of the firm. Operational and financial resilience These have been a particular area of FCA focus for some time. The pandemic is indicative of the type of scenario that firms must be prepared for, however, it is only one of many scenarios which the FCA would expect firms to factor into risk assessments and business continuity plans. We anticipate that the FCA will conduct a detailed retrospective review of firms’ operational and financial resilience throughout 2021. Post-Brexit UK regulatory outlook Prior to the conclusion of the EU-UK free trade agreement (discussed further below), the government produced a number of documents that indicate what a post-Brexit UK regulatory framework may look like. The UK approach is intended to “to ensure that [the UK] regulatory regime has the agility and flexibility needed to respond quickly and effectively to emerging challenges and to help UK firms seize new business opportunities in a rapidly changing global economy.” The UK Government’s willingness to diverge from the EU in certain regulatory matters raises important questions regarding the likelihood of any future EU equivalence decisions.

The year in review

2020 was an unprecedented year for both UK regulated firms and the FCA. Both had to adjust to a “new normal”, which in most cases included initiating working from home contingency planning. The regulatory agenda for the year was in many ways dominated by the global pandemic. This is illustrated by the FCA’s annual Business Plan[1], which was heavily influenced by tackling the impact of COVID-19. In response to the pandemic, the FCA delayed certain regulatory initiatives and indicated regulatory forbearance in a number of areas, while maintaining the emphasis on the importance of treating customers fairly[2].

However, the FCA continued to advance certain areas of regulatory focus. It is, therefore, possible to identify key themes that the FCA focused on during 2020 and is likely to pursue in the coming months and years. In particular, this client alert will focus on three important areas of regulatory interest: (1) governance, culture and individual accountability; (2) conduct and enforcement; and (3) operational and financial resilience. These key areas can be assessed in terms of the FCA’s developments during 2020 but also what regulated firms need to be aware of in terms of each of these areas going forward.

(1)  Governance, culture and individual accountability

“The specifics of your culture, like your strategy, remain up to you as leaders. But there is a growing consensus that healthy cultures are purposeful, diverse and inclusive.”[3]

Governance, culture and individual accountability are inextricably linked. As the quote above from the FCA suggests, the FCA will not dictate what a firm’s governance model or culture should be. Both are firm-specific, however, firms should be wary of the FCA’s expectations.

The FCA’s Approach to Supervision document[4] notes that the key cultural drivers in firms are: purpose; leadership; approach to rewarding and managing people; and governance. Last year the FCA reiterated the importance of these factors in its annual Business Plan and in a discussion paper on driving purposeful cultures.[5]

The importance of good governance, in particular, forms a common thread through the FCA’s supervisory correspondence to key industry sectors. For example, the FCA has emphasised that it is “important that firms have strong governance frameworks that allow their culture and values to drive decision-making across the business, including its approach to dealing with all kinds of misconduct. It is also critical that firms are headed by effective boards, with a suitable mix of skills and experience, to conduct appropriate oversight of the firms’ risks, strategy, policies and controls”.[6]

A key barometer that a firm is meeting the FCA’s expectations is the effectiveness of its implementation of the  Senior Managers and Certification Regime (“SMCR”). The introduction of the SMCR was driven by a perceived lack of individual accountability and governance failings post-financial crisis. For the majority of solo-regulated firms, the SMCR has now applied for over a year, whilst a similar regime for banks and insurers has applied since 2016. The implementation of the SMCR is an iterative process. What constituted adequate implementation for 9 December 2019 will not necessarily be sufficient now. Firms should be considering how their implementation can be tested and enhanced.

Key practical steps for firms Take stock of the firm’s current governance arrangements to identify any areas in which there is a need for improvement. For example: are there clear accountabilities for those activities which affect outcomes, with appropriate delegation and escalation? is a robust risk framework in place under which accountable individuals identify, monitor and mitigate key risks of harm? is there strong and independent Board oversight and challenge? From a “firm culture” perspective, whilst the focus is now also on the “tone from above” (such as immediate line managers), it is clear that “tone from the top” still remains crucial. Firms should think about what their CEOs, business line heads and other senior individuals say – and what they do not say – in this context. Further, are messages from the top, including corporate purpose and values, translated in a meaningful way to the specific roles and responsibilities, targets and objectives at the individual and unit level across the firm? One year on from the coming into force of the SMCR for solo-regulated firms, review the firm’s implementation of the regime to identify any weaknesses and take any required remedial action.

(2)  Conduct and enforcement

“We will remain vigilant to potential misconduct. There may be some who see these times as an opportunity for poor behaviour – including market abuse, capitalising on investors’ concerns or reneging on commitments to consumers…Where we find poor practice, we will clamp down with all relevant force.”[7]

A key indicator of a firm’s culture is its practical response to compliance issues and, in particular, instances of potential misconduct. Market abuse (including the handling of confidential information)[8] and personal account dealing[9] remain perennial areas of regulatory focus. Working from home poses particular challenges for firms when monitoring the conduct of staff. However, the FCA expects firms to have appropriate systems and controls in place to manage the enhanced conduct risks that arise in the context of the pandemic.[10]

The pandemic undoubtedly had an impact on enforcement action, for example, instances of regulatory forbearance and the FCA holding back on searches / warrants.  The FCA issued the lowest number of fines since its establishment in 2013:

However, the FCA took a number of high-profile enforcement actions against firms. For example, in 2020, the FCA continued to take action against firms for market misconduct[11], failures to show forbearance and due consideration to customers in financial difficulty[12] and took the first UK enforcement action under the Short Selling Regulation.[13]

The regulatory direction of travel has been towards an increased focus on non-financial misconduct and how this is tackled by firms. A increasing challenge for regulated firms is how to address non-financial misconduct and, in particular, non-financial misconduct that takes place outside of the workplace.[14] In response to the Me Too movement in 2018, firms introduced corrective responses to this important issue. However, in 2021 the FCA would expect a thorough and well-thought out response. Diversity and inclusion are now rightly integral to the FCA’s assessment of a firm’s culture.

Key practical steps for firms As required under the SMCR, check that the firm has a robust process to ensure that senior managers and certification staff are “fit and proper”, both on joining and on an ongoing basis. Review the firm’s processes for the handling and escalation of misconduct. For example, review the firm’s whistleblowing procedures and make sure that staff are appropriately trained and have an understanding of their obligations to inform the firm of relevant matters.[15] Consider whether the firm’s remuneration structure incentivises appropriate or inappropriate behaviour.

(3)  Operational and financial resilience

“We expect all firms to have contingency plans to deal with major events and that these plans have been properly tested.” “…financial pressures could give rise to harm to customers if firms cut corners on governance or their systems and controls – for example, increasing the likelihood of financial crime, poor record keeping, market abuse and unsuitable advice and investment decisions.”[16]

It will come as no surprise that the FCA focused on regulated firms’ operational and financial resilience during 2020. For example, the FCA issued statements to firms outlining its expectations on financial crime systems and controls and information security during the pandemic.[17] In addition, in June and August 2020, the FCA issued a COVID-19 impact survey to help gain a more accurate view of firms’ financial resilience. This mandatory survey was repeated in November 2020 to understand the change in firms’ financial positions with time.[18]

However, the regulatory focus on operational and financial resilience goes beyond the pandemic. In December 2019 the FCA, alongside the Prudential Regulation Authority and the Bank of England, published a joint consultation paper on operational resilience.[19] The pandemic is indicative of the type of scenario that firms must be prepared for, but it is one of many scenarios for which the FCA would expect firms to factor into risk assessments and business continuity plans.

Similarly, the FCA’s focus on financial resources is wider than in the context of the pandemic. The FCA has indicated that it will implement its own version of the Investment Firms Regulation and that the new regime will come into force on 1 January 2022. The FCA has also published final guidance on a framework to help financial services firms ensure they have adequate financial resources and to take effective steps to minimise harm.[20] In particular, the FCA notes that the guidance does not place specific additional requirements on firms because of COVID-19, but the crisis underlines the need for all firms to have adequate resources in place and to assess how those needs may change in the future.

Key practical steps for firms Review the firm’s business continuity plan and risk assessment to ensure that they are comprehensive and stand up to scrutiny. For example, make sure any risks associated with “working from home” are incorporated and mitigated as far as possible. Re-visit the firm’s assessment of its adequacy of financial resources, in light of the FCA’s published guidance, referred to above.

Forward looking regulatory priorities

Looking to the future, it is very likely indeed that the FCA’s priorities will, at least in part, mirror those areas of focus in 2020 (being: (1) governance, culture and individual accountability; (2) conduct and enforcement; and (3) operational and financial resilience).

(1) Governance, culture and individual accountability

Whilst the FCA has been relatively quiet from an enforcement perspective to date, firms should not be drawn into a false sense of security. This is particularly the case given that the extension of the regime brought within scope a significant number of firms (approximately 47,000). Additionally, a number of these firms are also more likely to be viewed as “low hanging fruit” by the FCA – some firms will perhaps have less sophisticated governance procedures in place (meaning potentially more breaches) and it will be much easier for the FCA to identify the decision-making processes of these solo-regulated firms when it is investigating breaches.

As at 17 August 2020, there were 25 open FCA investigations relating to senior managers. Of these, the majority related to retail misconduct, wholesale misconduct and senior manager conduct rule breaches.

It appears that resolution of these matters has been delayed by the pandemic but we expect to see some of these senior manager outcomes in 2021. We also anticipate an increase in new enforcement action from the FCA in this area, as we move away from the implementation phase of the SMCR for solo-regulated firms.

(2) Conduct and enforcement

As noted above, there is evidence to suggest that the pandemic has had some impact on enforcement action, for example, instances of regulatory forbearance and the FCA holding back on searches / warrants. However, it is likely that there will be a regulatory review of how firms treated clients during pandemic. As the FCA’s pronouncements since March 2020 have indicated, regulatory forbearance in certain areas does not replace regulated firm obligations under the regulatory system and, in particular, to treat customers fairly. It is highly likely that the FCA will conduct a retrospective review of firms’ conduct.|

This will likely include a review of firms’ financial crime controls during the pandemic.  In Guidance it issued in May, the FCA acknowledges operational issues faced by firms but was clear that firms should not adjust their risk appetites in the face of new risks.[21]  There will undoubtedly be a focus on fraud and other crimes committed during the pandemic, and firms will face scrutiny if there were red flags that were missed or not escalated.  Firms may wish to, therefore, take the opportunity now to review the efficacy of the controls they have in place, as a general “health check”.

As at 17 August 2020, there were 571 open FCA investigations, with a significant focus on consumers, with retail misconduct accounting for 192 of these investigations. Other common areas responsible for investigations included: unauthorised business (103); insider dealing (60); financial crime (57); financial promotions (49) and wholesale conduct (33). We would, therefore, expect a number of these investigations to crystallise into final notices producing a series of messages around expected standards throughout the course of 2021.

Another potential area of regulatory focus in the conduct space is the transition from LIBOR. The FCA has already indicated that a member of senior management should be responsible for LIBOR transition, where applicable to the business.[22] Firms need to consider whether any LIBOR-related risks are best addressed within existing conduct risk frameworks or need a separate, dedicated program. Amongst other things, firms should keep appropriate records of management meetings or committees that demonstrate they have acted with due skill, care and diligence in their overall approach to LIBOR transition and when making decisions impacting customers.

(3) Operational and financial resilience

As noted above, whilst the pandemic firmly brought the operational and financial resilience of firms into the FCA’s cross-hairs, this was a particular area of interest of the regulator pre-COVID-19. As stated by the FCA’s Executive Director of Supervision: Investment, Wholesale and Specialist in December 2019, the “[FCA’s] intention is to bring about change in how the industry thinks about operational resilience – a shift in mindset as it were – informed and driven by the public interest”.[23]

The industry disruption caused by the pandemic, however, provides the FCA with an invaluable opportunity in a “real life” context, as opposed to simulated scenario, to kick the tyres of firms’ policies and procedures in order to determine how they coped with the operational and financial stresses brought about during the unprecedented circumstances of 2020. Whereas in 2020, the focus of the regulator was much more reactive, in terms of (for example) issuing statements outlining its expectations on financial crime systems and controls, we anticipate that 2021 will be much more centred around retrospective reviews of firms – for example, through looking at their business continuity plans, amongst other things.

Post-Brexit UK regulatory framework

The route map

A long awaited free trade agreement between the UK and EU was agreed on 24 December 2020, governing their relationship post-Brexit transition period. The financial services industry is addressed in the agreement, albeit to a much lighter extent than for goods and other services. The contents of the provisions on financial services are unlikely to come as a great surprise to the industry – amongst other things, the agreement does not provide for passporting rights nor address equivalence decisions. It is worth noting, however, that a joint declaration  draft states that the parties will, by March 2021, agree a memorandum of understanding establishing the framework for structured regulatory co-operation on financial services. The aim of this is to provide for transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions.

In the months leading up to the eventual conclusion of the free trade agreement, the UK government produced a number of documents that indicate what a post-Brexit UK regulatory framework may look like. The Financial Services Bill[24] states that the UK Government has a number of objectives including: (1) enhancing the UK’s world-leading prudential standards and promoting financial stability; (2) promoting openness between the UK and overseas markets; and (3) maintaining the effectiveness of the financial services regulatory framework and sound capital markets. The UK Government has also published the Phase II consultation of its Financial Services Future Regulatory Framework Review.[25] The UK Government’s approach is intended to “to ensure that [the UK] regulatory regime has the agility and flexibility needed to respond quickly and effectively to emerging challenges and to help UK firms seize new business opportunities in a rapidly changing global economy.”

In its response to the global pandemic, the FCA’s actions are also indicative of the type of regulator it may be post-Brexit. Through its exercise of regulatory forbearance, for example, the FCA has proven itself to be more nimble and pragmatic.

Regulatory divergence

The UK approach in an environmental, social and governance (“ESG”) setting is another sign as to what the industry might expect in a post-Brexit world. Rather than onshore the EU Sustainable Finance Disclosure Regulation, the UK has announced that it will introduce disclosure rules aligning with the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”).[26] This will make the UK the first country in the world to make TCFD-aligned disclosures mandatory. It was also announced that the UK will implement a green taxonomy – a common framework for determining which activities can be defined as environmentally sustainable. This will take the scientific metrics in the EU taxonomy as its foundation and a UK Green Technical Advisory Group will be established to review these metrics to ensure they are appropriate for the UK market.

Whilst this by no means signals a radical departure from the EU in terms of regulatory approach – indeed, the UK Government has flagged the need in the ESG sphere for, where possible, consistency between UK and EU requirements – the UK Government’s willingness to diverge from the EU in certain regulatory matters raises important questions regarding the likelihood of any future EU equivalence decisions.

The global stage

Perhaps in common with the UK’s desire to remain a key player on the global stage post-Brexit, despite not forming a part of the more influential EU, the FCA is also keen not to become isolated from other regulators across the world and to keep working closely on matters spanning different jurisdictions. By way of an example, the TFS-ICAP final notice[27] (under which the FCA fined TFS-ICAP Ltd, an FX options broker, £3.44 million for communicating misleading information to clients), indicated that the FCA continues to work in tandem with overseas regulators (in this instance, the Commodity Futures Trading Commission in the United States).

Conclusion

Firms may be lured into a false sense of security that they can in some way “take the foot off the gas” from a regulatory perspective after having made it through a tumultuous 2020. However, this could not be further from the truth. Whilst 2020 was an unprecedented year, the FCA by no means gave firms carte blanche when it came to regulatory compliance, particularly in instances where there is a risk of customer detriment. It is in 2021 that we expect to see action from the FCA towards those firms who did not meet its expectations. This will be the case not just for firms but also, as we move away from the implementation phase of the SMCR for solo-regulated firms, individuals as well.

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Gibson Dunn’s UK Financial Services Regulation team looks forward to discussing the matters outlined in this alert in further detail in a client webinar in the near future, details of which will be provided shortly. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, or any of the following authors:

Michelle M. Kirschner (+44 (0) 20 7071 4212, [email protected])
Matthew Nunan (+44 (0) 20 7071 4201, [email protected])
Steve Melrose (+44 (0) 20 7071 4219, [email protected])
Martin Coombes (+44 (0) 20 7071 4258, [email protected])
Chris Hickey (+44 (0) 20 7071 4265, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On January 11, 2021, the Supreme Court in a summary disposition vacated the U.S. Court of Appeals for the Second Circuit’s major insider trading decision in United States v. Blaszczak, 947 F.3d 19 (2d Cir. 2019), remanding the case to the Second Circuit for further consideration in light of the Supreme Court’s recent decision in Kelly v. United States, 140 S.Ct. 1565 (2020). See Blaszczak v. United States, 2021 WL 78043 (Jan. 11, 2021); Olan v. United States, 2021 WL 78042 (Jan. 11, 2021). The Supreme Court’s decision raises important questions regarding whether, and to what extent, the Second Circuit will retreat from the significant expansion of insider trading liability it enunciated in Blaszczak barely more than one year ago.

United States v. Blaszczak

As we described in greater detail in a prior client alert, in Blaszczak, the U.S. Department of Justice (“DOJ”) alleged that, between 2009 and 2014, certain Centers for Medicare & Medicaid Services (“CMS”) employees disclosed confidential information relating to planned changes to medical treatment reimbursement rates to David Blaszczak, a former CMS employee who became a “political intelligence” consultant for hedge funds. Blaszczak allegedly provided this “predecisional” confidential information to employees of the hedge fund Deerfield Management Company, L.P., which then shorted stocks of healthcare companies that would be hurt by the planned reimbursement rate changes.

The DOJ indicted Blaszczak, one CMS employee, and two Deerfield employees for the alleged insider trading scheme. After an April 2018 trial, the jury returned a split verdict, acquitting all the defendants on certain counts, but finding the defendants guilty on other counts, including conversion, wire fraud, and (except for the CMS employee) Title 18 securities fraud. The defendants appealed.

In December 2019, the Second Circuit upheld the convictions and, in doing so, heightened the risk of investigation and prosecution in certain types of insider trading cases in two significant respects. First, in traditional civil and criminal insider trading cases against both tippers and tippees for Title 15 securities fraud under the Securities Exchange Act, the government must prove, among other things, that the tipper breached a duty in exchange for a direct or indirect personal benefit, and that the downstream tippee knew that the tipper had done so. The Second Circuit held that, by contrast, there is no “personal benefit” requirement in criminal insider trading cases charging Title 18 offenses like wire fraud and the criminal securities fraud provisions added in 2002 in the Sarbanes-Oxley Act.

Second, the court held that the “predecisional” confidential information relating to planned medical treatment reimbursement rate changes constituted government “property” necessary to bring insider trader cases under an embezzlement or misappropriation theory. In so holding, the Second Circuit found that this confidential government information was more akin to The Wall Street Journal’s confidential business information that the Supreme Court held constituted property for insider trading purposes in Carpenter v. United States, 484 U.S. 19 (1987), than to the fraudulently-obtained Louisiana state video poker licenses that the Supreme Court found did not constitute property in Cleveland v. United States, 531 U.S. 12 (2000), because “the State’s core concern” in granting video poker licenses was “regulatory.”

The Second Circuit’s decision thus expanded potential criminal insider trading liability in cases where there was limited-to-no evidence of a personal benefit to the tipper or that the downstream tippee knew of such a benefit, as well as in cases involving disclosure of nonpublic government information.

Kelly v. United States

In May 2020, five months after the Second Circuit’s decision in Blaszczak, the Supreme Court in Kelly addressed the scope of government “property” under federal fraud statutes. Specifically, the Supreme Court reviewed the criminal convictions of two “Bridgegate” defendants on federal-program and wire fraud charges arising out of their alleged involvement in a scheme to limit the number of lanes in Fort Lee, New Jersey accessing the George Washington Bridge as political retribution against the city’s mayor. To convict under both fraud provisions, the government was required to show “that an object of their fraud was money or property.”

The Supreme Court reversed the convictions, holding that “[t]he realignment of the toll lanes was an exercise of regulatory power—something this Court has already held fails to meet the statutes’ property requirement. And the [traffic engineers and toll collectors’] labor was just the incidental cost of that regulation, rather than itself an object of the officials’ scheme.” In reaching this conclusion, the Supreme Court relied heavily on Cleveland, noting that the defendants “exercised the regulatory rights of ‘allocation, exclusion, and control,’” and “under Cleveland, that run-of-the-mine exercise of regulatory power cannot count as the taking of property.”

Blaszczak Appeal to Supreme Court

In September 2020, three of the Blaszczak defendants petitioned the Supreme Court for a writ of certiorari, arguing that the Second Circuit had improperly expanded criminal insider trading liability by holding that there was no “personal benefit” requirement in Title 18 insider trading cases and that, contrary to the Supreme Court’s rulings in Cleveland and Kelly, predecisional confidential information constituted government property. See Petition for a Writ of Certiorari, Blaszczak v. United States (Sept. 4, 2020) (No. 20-5649); Petition for a Writ of Certiorari, Olan v. United States, 2020 WL 5439755 (Sept. 4, 2020).

Rather than address the propriety of the Second Circuit’s decision head-on, the government in its response brief instead argued that “the appropriate course is to grant the petitions for writs of certiorari, vacate the decision below, and remand the case for further consideration in light of Kelly.” Mem. for the United States, Blaszczak v. United States (Nov. 24 2020) (Nos. 20-306 & 20-5649).

On reply, the petitioners argued that the Supreme Court should squarely rule on their petition, rather than vacate and remand, noting that the Second Circuit may only “reverse[] itself on the ‘property’ issue,” without needing to again address its prior holding that there was no personal benefit requirement in Title 18 insider trading cases. Reply Brief for Petitioners, Olan v. United States, 2020 WL 7345516 (Dec. 8, 2020). As a result, “unless the [Second Circuit’s] existing erasure of the personal-benefit requirement…is repudiated, prosecutors in the Second Circuit will continue to feel free to charge insider-trading crimes even where there is no proof of personal benefit. And district courts in the Circuit (where most insider-trading prosecutions are brought) would likely follow the Second Circuit’s lead even if it were not technically binding….”

Despite the concerns that petitioners raised, on January 11, 2021, the Supreme Court agreed to the course that the government proposed, granting certiorari and directing that “[t]he judgment is vacated, and the case is remanded to the…Second Circuit for further consideration in light of Kelly….” Blaszczak v. United States, 2021 WL 78043 (Jan. 11, 2021); Olan v. United States, 2021 WL 78042 (Jan. 11, 2021).

Implications of Supreme Court’s Blaszczak Decision

It is unclear at this juncture what effect, if any, the Supreme Court’s decisions in Kelly and Blaszczak will have on the Second Circuit’s expansion of insider trading liability. In an expansive reading, for example, the Second Circuit could distinguish the “exercise of regulatory power” in Kelly from the “predecisional” government information in Blaszczak and continue to analogize confidential government information to the confidential business information that the Supreme Court ruled in Carpenter constitutes property for insider trading purposes. In a narrower reading, the Second Circuit could find that the principle of Kelly should apply to predecisional government information and thus that it does not constitute property under Title 18 securities fraud.

If the Second Circuit concludes that, after Kelly, confidential government information does not constitute property, the Court could reverse the convictions on this ground while leaving unaddressed its prior holding that there is no personal benefit requirement in Title 18 insider trader cases. As the petitioners warned the Supreme Court, prosecutors in this scenario would likely treat this silence as a green light to continue to charge insider-trading crimes where there is little to no evidence of a personal benefit to the tipper, or tippee knowledge of that benefit. Of course, under such circumstances, prosecutors would not have the benefit of Blaszczak to rely on, and thus there could be litigation risk to the government depending on the facts of the particular case.

Clouding the picture even further is that the Second Circuit ruling in Blaszczak was a 2-1 decision. And one of the two judges who joined in the majority ruling has since retired. As a result, the outcome of Blaszczak could be impacted significantly by the views of the third judge assigned to the panel. Should that new judge join with the original dissenting judge, the Blaszczak holding will change substantially. In addition, regardless of how the Second Circuit rules on remand, the losing side may seek the Supreme Court’s review of that decision. Blaszczak will therefore continue to be an important case to monitor in the ongoing court battles to define the scope of insider trading liability.

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Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Securities Enforcement or White Collar Defense and Investigations practice groups, or the following authors:

Reed Brodsky – New York (+1 212-351-5334, [email protected])
Barry R. Goldsmith – New York (+1 212-351-2440, [email protected])
M. Jonathan Seibald – New York (+1 212-351-3916, [email protected])

Please also feel free to contact any of the following practice leaders:

Securities Enforcement Group:
Barry R. Goldsmith – New York (+1 212-351-2440, [email protected])
Richard W. Grime – Washington, D.C. (+1 202-955-8219, [email protected])
Mark K. Schonfeld – New York (+1 212-351-2433, [email protected])

White Collar Defense and Investigations Group:
Joel M. Cohen – New York (+1 212-351-2664, [email protected])
Nicola T. Hanna – Los Angeles (+1 213-229-7269, [email protected])
Charles J. Stevens – San Francisco (+1 415-393-8391, [email protected])
F. Joseph Warin – Washington, D.C. (+1 202-887-3609, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On January 9, 2021, the Ministry of Commerce of the People’s Republic of China (the “MOFCOM”) issued the MOFCOM Order No. 1 of 2021 on Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (the “Chinese Blocking Statute”). The Chinese Blocking Statute establishes the first sanctions blocking regime in China to counteract the impact of foreign sanctions on Chinese persons.[1] While the law is effective immediately, as noted below, it currently only establishes a legal framework. The law will become enforceable once the Chinese government denotes the specific extraterritorial measures—likely sanctions and export controls the United States is increasingly levying against Chinese companies—to which it then will apply.

The European Union has a comparable set of rules – known as the “EU Blocking Statute” – which seeks to restrict the impact on EU parties of unilateral, extraterritorial U.S. sanctions.[2] The new Chinese rules appear to borrow much from the European model.

There are several core components to the new Chinese rule:

Reporting Obligation: The Chinese Blocking Statute creates a reporting obligation for Chinese persons and entities impacted by extraterritorial foreign regulations. Under the new rules, when “a [Chinese] citizen, legal person or other organization … is prohibited or restricted by foreign legislation and other measures from engaging in normal economic, trade and related activities with a third State (or region) or its citizens, legal persons or other organizations,” the Chinese person or entity is required to report such matters to China’s State Council within 30 days.[3] Critically, this reporting obligation is applicable to Chinese subsidiaries of multinational companies.

A comparable reporting requirement, including the 30-day reporting obligation, is also found in the EU Blocking Statute.[4]

Implicated Foreign Laws: Unlike the EU Blocking Statute, the specific laws and measures covered by the Chinese Blocking Statute have yet to be identified. Specifically, the Chinese Blocking Statute establishes a mechanism for the government to designate specific foreign laws as “unjustified extraterritorial applications,” and subsequently issue prohibitions against compliance with these foreign laws. Under the Chinese Blocking Statute, a “working mechanism” led by the State Council is responsible for assessing and determining whether the foreign sanctions laws constitute “unjustified extra-territorial application of foreign legislation and other measures.” The law sets out an open-ended and largely undefined list of factors for the State Council to consider, including whether the law represent “a violation of principals of international relations,” impacts China’s “national sovereignty, security and development interests,” or effects the “legitimate rights and interests” of Chinese persons and entities, as well as “other factors that shall be taken into account.”[5] If the working mechanism confirms the existence of an “unjustified extraterritorial application” of a foreign law, it will direct the State Council to issue an order prohibiting parties in China from complying with the law.[6]

The EU Blocking Statute, in comparison, applies only to a specific set of laws specified in its Annex[7]–which presently consists principally of certain U.S. sanctions on Cuba and Iran. While the Chinese model may appear to provide individuals and entities with time to adjust and comply as the Chinese government will only list laws and measures in the future, the Chinese rules might eventually target substantially more foreign laws and measures.

Exemption Process: A Chinese person or entity will be able to apply for an exemption from compliance with the prohibition by submitting a written application to the State Council. Such request will need to provide the reasons for and the scope of the requested exemption. The State Council will then decide whether to approve such application within 30 days or less.[8] The format for applying for an exemption is not yet clear.

The EU Blocking Statute has a similar exemption mechanism. However, the EU Blocking Statute provides for approval “(…) without delay”[9]—which in practice can mean significantly more than 30 days.

Private Right of Action: Like the EU Blocking Statute, the Chinese rule creates a private right of action for Chinese persons or entities to seek civil remedies in Chinese courts from anyone who complies with prohibited extraterritorial measures, unless the State Council has granted an exemption to the prohibition order.[10] Under the EU Blocking Statute, EU entities are also entitled to sue for damages, including legal costs, arising from the application of the extraterritorial measures (enforcement of which claims may extend to seizure and sale of assets).[11]

A Chinese person or entity who suffers “significant losses” due to a counterparty’s compliance with a prohibited law may also obtain “necessary support” from the Chinese government[12].

Consequences of Non-Compliance: A Chinese person or entity who fails to comply with the reporting obligation or the prohibition order may be subject to government warnings, orders to rectify, or fines.[13] Under the EU Blocking Statute, individual member states exercise enforcement authority. In several such states, entities have been threatened with fines, and have even been subject to mandated specific performance of contractual obligations which may expose them to risk of liability under U.S. sanctions.

While the Chinese regulations remain nascent and the initial list of extra-territorial measures that the Blocking Statute will cover has yet to be published, the law marks a material escalation in the longstanding Chinese rhetoric threatening counter-measures against the United States (principally) by establishing a meaningful Chinese legal regime that will challenge foreign companies with operations in China. If the European model for the Blocking Statute continues to be Beijing’s inspiration, we will likely see both administrative actions to enforce the measures as well as private sector suits to compel companies to comply with contractual agreements, even if doing so is in violation of their own domestic laws.

U.S. authorities recognize the challenge posed by the EU Blocking Statute, and the recent increasingly robust public and private sector enforcement of it. However, the U.S. Government has not formally adjusted U.S. sanctions programs to account for the legal conflict faced by U.S. and European companies eager to remain on the right side of both U.S. and European regulations. The question for the United States with respect to this new Chinese law will be how to balance the progressively aggressive suite of U.S. sanctions and export control measures levied against China—which the U.S. Government is unlikely to pare back—against the growing regulatory risk for global firms in China that could be caught between inconsistent compliance obligations.

As has long been the case, international companies will continue to be on the front lines of Beijing-Washington tensions and they will need to remain flexible in order to respond to a fluid regulatory environment and maintain access to the world’s two largest economies.

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   [1]   MOFCOM Order No.1 of 2021 on Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures (January 9, 2021) (“Chinese Blocking Statute”), http://www.mofcom.gov.cn/article/b/c/202101/20210103029710.shtml (Chinese), http://english.mofcom.gov.cn/article/policyrelease/questions/202101/20210103029708.shtml (English)

   [2]   https://www.gibsondunn.com/new-iran-e-o-and-new-eu-blocking-statute-navigating-the-divide-for-international-business/

   [3]   Chinese Blocking Statute (Article 5)

   [4]   Article 2 of Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom.

   [5]   Chinese Blocking Statute (Articles 4 & 6)

   [6]   Id. (Article 7)

   [7]   Id. (Article 5); Annex of Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom. Under Article 11a, the European Commission has power to adopt legislation adding further foreign extraterritorial laws to the Annex to the EU Blocking Statute.

   [8]   Chinese Blocking Statute (Article 8)

   [9]   Article 5 of Commission Implementing Regulation (EU) 2018/1101 of 3 August 2018 laying down the criteria for the application of the second paragraph of Article 5 of Council Regulation (EC) No 2271/96 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom.

[10]   Chinese Blocking Statute (Article 9)

[11]   Article 6 of Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom.

[12]   Chinese Blocking Statute (Article 11)

[13]   Chinese Blocking Statute (Article 13)

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The following Gibson Dunn lawyers assisted in preparing this client update: Kelly Austin, Judith Alison Lee, Adam M. Smith, Patrick Doris, Ronald Kirk, Ning Ning, Chris Timura, Stephanie Connor, and Richard Roeder.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade practice group:

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, [email protected])
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, [email protected])
Jose W. Fernandez – New York (+1 212-351-2376, [email protected])
Marcellus A. McRae – Los Angeles (+1 213-229-7675, [email protected])
Adam M. Smith – Washington, D.C. (+1 202-887-3547, [email protected])
Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, [email protected])
Ben K. Belair – Washington, D.C. (+1 202-887-3743, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])
Laura R. Cole – Washington, D.C. (+1 202-887-3787, [email protected])
Jesse Melman – New York (+1 212-351-2683, [email protected])
R.L. Pratt – Washington, D.C. (+1 202-887-3785, [email protected])
Samantha Sewall – Washington, D.C. (+1 202-887-3509, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, [email protected])
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, [email protected])

Asia and Europe:
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
Fang Xue – Beijing (+86 10 6502 8687, [email protected])
Qi Yue – Beijing – (+86 10 6502 8534, [email protected])
Joerg Bartz – Singapore – (+65 6507 3635, [email protected])
Peter Alexiadis – Brussels (+32 2 554 72 00, [email protected])
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Nicolas Autet – Paris (+33 1 56 43 13 00, [email protected])
Susy Bullock – London (+44 (0)20 7071 4283, [email protected])
Patrick Doris – London (+44 (0)207 071 4276, [email protected])
Sacha Harber-Kelly – London (+44 20 7071 4205, [email protected])
Penny Madden – London (+44 (0)20 7071 4226, [email protected])
Steve Melrose – London (+44 (0)20 7071 4219, [email protected])
Matt Aleksic – London (+44 (0)20 7071 4042, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])
Richard W. Roeder – Munich (+49 89 189 33-160, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

The Trump administration recently finalized a rule that clarifies that the incidental killing of migratory birds is not punishable under the Migratory Bird Treaty Act (the “MBTA”).

Part of a multinational effort to protect migratory birds, the MBTA was enacted in 1918 as a response to concern over poaching and over-hunting.

The Act criminalizes the hunting, taking, capturing or killing of birds – “by any means or in any manner” – and does not expressly exempt activities whose underlying purpose is one other than inflicting such harm. The possibility of MBTA liability has therefore long lurked in the shadows of petroleum refineries, wind projects, electric transmission lines, and other energy and infrastructure projects whose normal business operations may result in inadvertent impacts to birds. Indeed, the federal government has, albeit infrequently, wielded the MBTA to hold parties accountable for accidental bird kills in the past, including several prosecutions of oil and gas industry actors during the Obama Administration. More often, regulators use the threat of MBTA liability to encourage energy projects and other operators to voluntarily adopt bird impact mitigation best practices.

The U.S. Department of the Interior (“DOI”) claims that its new regulation reaffirms the original meaning and intent of the MBTA and that it is consistent with the interpretation of “several” federal courts (more on that in a moment).[1] While the rule intends to provide legal certainty to landowners and business interests, it is likely to meet immediate resistance on multiple fronts.

Environmentalists and their political allies have been quick to voice their opposition to a regulatory move that DOI has conceded will likely result “in increased bird mortality.”[2] A senior official in the Biden transition team has already indicated that the new administration will work to roll back the regulation,[3] with reversal options including new rulemaking(s) or Congress’s use of the Congressional Review Act (the “CRA”) to rescind the rule. The CRA allows Congress, with Presidential approval, to rescind a rulemaking by simple majority within 60 legislative days of the rule’s finalization. Democrats’ recent clinching of Senate control increases the odds that the CRA option will be exercised.

In the meantime, environmentalists are likely to take their case to court, undeterred by the likely obstacle of agency deference, which would preserve DOI’s interpretation of the MBTA so long as a court deems the interpretation reasonable. Such deference was not on the table when a federal judge recently rejected an earlier DOI legal opinion from December 2017 that informally adopted the MBTA interpretation now codified via formal rulemaking. The U.S. District Court for the Southern District of New York concluded that the MBTA is broad enough to criminalize incidental bird impacts, and rejected the December 2017 legal opinion under the Administrative Procedure Act as contrary to law. The court recognized that the Court of Appeals for the Fifth Circuit had previously limited the MBTA’s prohibition to deliberate acts done directly and intentionally to migratory birds, but sided with prior opinions from the Second and Tenth Circuits that held that incidental impacts are also criminal.[4]

A circuit split will once again be the status quo if DOI’s rule is administratively, legislatively, or judicially undone, unless and until the Biden Administration goes a step further and promulgates a formal rule interpreting the MBTA as prohibiting the incidental take of migratory birds.

Assuming the new DOI rule is ultimately overturned, exactly how the Biden Administration will approach MBTA enforcement is uncertain. Environmentalists will bring pressure to take an aggressive approach to wildlife protection, but it is reasonable to expect that the President-elect’s friendly outlook toward the renewable energy sector, which potentially faces the most significant impact from a stringent application of the law, will result in continued leniency for wind energy operators and supporting facilities that implement bird protection best practices. Whether the Biden Administration would be inclined to extend such goodwill more broadly is less clear.

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  [1]   U.S. Fish and Wildlife Service Finalizes Regulation Clarifying the Migratory Bird Treaty Act Implementation, U.S. Fish & Wildlife Service (January 5, 2021), https://www.fws.gov/news/ShowNews.cfm?ref=us-fish-and-wildlife-service-finalizes-regulation–clarifying-the-&_ID=36829.

  [2]   Page 8 of Final Environmental Impact Statement, Regulations Governing Take of Migratory Birds, prepared by Fish & Wildlife Service, U.S. Department of Interior (November 2020).

  [3]   Lisa Friedman, Trump Administration, in Parting Gift to Industry, Reverse Bird Protections, New York Times (January 5, 2021), https://www.nytimes.com/2021/01/05/climate/trump-migratory-bird-protections.html.

  [4]   Nat. Res. Def. Council, Inc. v. U.S. Dep’t of the Interior, No. 18-CV-4596 (VEC), 2020 WL 4605235, at 7 (S.D.N.Y. Aug. 11, 2020). The Court also posited that the Eighth and Ninth Circuits, in separate decisions regarding MBTA liability, have both left the door open to finding that the MTBA creates criminal liability for incidental bird kills.

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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Environmental Litigation and Mass Tort practice group, or the authors:

Michael K. Murphy – Washington, D.C. (+1 202-955-8238, [email protected])
Kyle Neema Guest – Washington, D.C. (+1 202-887-3673, [email protected])

Please also feel free to contact the leaders of the Environmental Litigation and Mass Tort practice:

Stacie B. Fletcher – Washington, D.C. (+1 202-887-3627, [email protected])
Daniel W. Nelson – Washington, D.C. (+1 202-887-3687, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Recovering from a relatively slow start to the year, due in no small part to the global pandemic, the U.S. Foreign Corrupt Practices Act (“FCPA”) Units of the U.S. Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) closed the year with a bang. With 32 combined FCPA enforcement actions, 51 total cases including ancillary enforcement, and a record-setting $2.78 billion in corporate fines and penalties (plus billions more collected by foreign regulators), 2020 marks another robust year in the annals of FCPA enforcement.

This client update provides an overview of the FCPA and other domestic and international anti-corruption enforcement, litigation, and policy developments from 2020, as well as the trends we see from this activity. We at Gibson Dunn are privileged to help our clients navigate these challenges daily and are honored again to have been ranked Number 1 in the Global Investigations Review “GIR 30” ranking of the world’s top investigations practices, the fourth time we have been so honored in the last five years. For more analysis on the year in anti-corruption enforcement, compliance, and corporate governance developments, please view or join us for our complimentary webcast presentations:

• 11th Annual Webcast: FCPA Trends in the Emerging Markets of Asia, Russia, Latin America, India and Africa on January 12 (view materials; recording available soon);
• FCPA 2020 Year-End Update on January 26 (to register, Click Here); and
• 17th Annual Webcast: Challenges in Compliance and Corporate Governance (date to be announced).

FCPA OVERVIEW

The FCPA’s anti-bribery provisions make it illegal to corruptly offer or provide money or anything else of value to officials of foreign governments, foreign political parties, or public international organizations with the intent to obtain or retain business.  These provisions apply to “issuers,” “domestic concerns,” and those acting on behalf of issuers and domestic concerns, as well as to “any person” who acts while in the territory of the United States.  The term “issuer” covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d).  In this context, foreign issuers whose American Depository Receipts (“ADRs”) or American Depository Shares (“ADSs”) are listed on a U.S. exchange are “issuers” for purposes of the FCPA.  The term “domestic concern” is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has its principal place of business in the United States.

In addition to the anti-bribery provisions, the FCPA also has “accounting provisions” that apply to issuers and those acting on their behalf.  First, there is the books-and-records provision, which requires issuers to make and keep accurate books, records, and accounts that, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets.  Second, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.  Prosecutors and regulators frequently invoke these latter two sections when they cannot establish the elements for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations.  Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency.

Foreign corruption also may implicate other U.S. criminal laws. Increasingly, prosecutors from the FCPA Unit of DOJ have been charging non-FCPA crimes such as money laundering, mail and wire fraud, Travel Act violations, tax violations, and even false statements, in addition to or instead of FCPA charges. Perhaps most prevalent among these “FCPA-related” charges is money laundering—a generic shorthand term for several statutory provisions that together criminalize the concealment or transfer of proceeds from certain “specified unlawful activities,” including corruption under the FCPA or laws of foreign nations, through the U.S. banking system. DOJ now frequently deploys the money laundering statutes to charge “foreign officials”—most often, employees of state-owned enterprises, but occasionally political or ministry figures—who are not themselves subject to the FCPA. It is thus increasingly commonplace for DOJ to charge the alleged provider of a corrupt payment under the FCPA and the alleged recipient with money laundering violations. DOJ has even used these foreign officials to cooperate in ongoing investigations.

FCPA AND FCPA-RELATED ENFORCEMENT STATISTICS

The below table and graph detail the number of FCPA enforcement actions initiated by DOJ and the SEC, the statute’s dual enforcers, during each of the past 10 years.

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC 23 25 11 12 19 8 17 9 10 10 21 32 29 10 22 17 35 19 21 11

The regularity of non-FCPA charges brought by DOJ FCPA Unit prosecutors was noted by the OECD Working Group on Bribery, which published a thorough Phase 4 report on the United States in November 2020. It praised the United States for “further increas[ing] its strong enforcement of the [FCPA] [and] maintaining its prominent role in the fight against transnational corruption,” noting in particular that “U.S. enforcement authorities have made broad use of other statutes and offences to prosecute payments to foreign government officials and intermediaries either in addition to or instead of FCPA charges.” With 19 such actions in 2020 (vs. 21 FCPA cases), thus continues what has matured into a multi-year trend of substantial extra-FCPA enforcement by DOJ.

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC 24 25 12 12 21 8 23 9 12 10 27 32 36 10 48 17 54 19 40 11

2020 FCPA + FCPA-RELATED ENFORCEMENT TRENDS

In each of our year-end FCPA updates, we seek not merely to report on each of the year’s FCPA enforcement actions, but more so to distill the thematic trends that we see stemming from these individual events. For 2020, we have identified five key enforcement trends that we believe stand out from the rest:

1. Yet another high-water mark for corporate FCPA financial penalties;
2. The CFTC dives into FCPA waters;
3. The cautionary tale of Beam Suntory;
4. No FCPA-related monitorships in 2020; and
5. Spotlight on Latin America.

Yet Another High-Water Mark for Corporate FCPA Financial Penalties

For all of the fears expressed by some with respect to our 45th President—Donald J. Trump has been recorded as openly hostile to the FCPA—one that did not come to pass was diminishment of enforcement of the FCPA. Put simply, the modern era of FCPA enforcement largely has been indifferent to shifting political winds.

As just one measure of this phenomenon, one year ago we reported in these pages that corporate fines in FCPA cases had topped $2.5 billion for the first time in the history of the statute. In large part, this was because the record for highest single corporate FCPA resolution was set twice over in 2019—first, with the $850 million resolution with Mobile TeleSystems PJSC in March 2019, only to be outdone months later with the $1 billion resolution with Telefonaktiebolaget LM Ericsson in December 2019 (both covered in our 2019 Year-End FCPA Update). In 2020, the aggregate and individual records fell yet again.

Our readership is familiar with the long-running corruption investigation related to Malaysian sovereign wealth fund 1Malaysia Development Berhad (“1MDB”). From a massive civil forfeiture action seeking to recover allegedly misappropriated funds, to criminal FCPA actions against Malaysian businessperson Low Taek Jho (“Jho Low”) and former bankers Tim Leissner and Roger Ng Chong Hwa, even to charges under the Foreign Agents Registration Act (“FARA”) against individuals allegedly trying to lobby the Trump Administration on Jho Low’s behalf, the 1MDB scandal has resulted in significant enforcement activity and scrutiny over the last several years. Collectively, the former bankers and Jho Low allegedly participated in the diversion of more than $2.7 billion from 1MDB, between 2009 and 2014 and in connection with three separate bond offerings, for the illicit purposes of making payments to officials of state-owned investment funds of Malaysia and the UAE and embezzlement for their own personal benefit. Now added to the 1MDB enforcement list is the largest monetary corporate FCPA resolution ever. On October 22, 2020, global financial institution The Goldman Sachs Group Inc. reached a multi-billion dollar coordinated resolution in connection with the same core allegations with the SEC, DOJ, other U.S. authorities, as well as authorities in Singapore, the United Kingdom, and Hong Kong.

On the U.S. enforcement front, Goldman Sachs resolved the criminal case by entering into a three-year deferred prosecution agreement with DOJ alleging conspiracy to violate the FCPA’s anti-bribery provisions, while its Malaysian subsidiary pleaded guilty to one count of conspiracy to violate the anti-bribery provisions. The criminal penalty was calculated at $2.315 billion, but after a variety of offsets for payments to other regulators—domestic and foreign—Goldman Sachs agreed to pay $1.263 billion to DOJ. To resolve the civil case with the SEC, the bank consented to the entry of a cease-and-desist order charging anti-bribery, books-and-records, and internal controls violations, and agreed to pay a $400 million civil penalty, bringing the total FCPA financial resolution to $1,663,088,000. The SEC also ordered disgorgement of $606 million, but fully credited the amount against payments Goldman Sachs made under an earlier settlement in Malaysia pursuant to which the bank agreed to a $2.5 billion payment, as well as a guarantee of the return of $1.4 billion of 1MDB assets seized by authorities around the world.

Goldman Sachs also reached parallel resolutions with the Federal Reserve ($154 million), New York State Department of Financial Services ($150 million), UK Financial Conduct Authority ($63 million) and Prudential Regulation Authority ($63 million), Singaporean authorities ($122 million), and Hong Kong Securities and Futures Commission ($350 million). All told, total payments under the various resolutions exceed $5 billion.

In addition to Goldman Sachs and the Airbus and Novartis FCPA resolutions covered in our 2020 Mid-Year FCPA Update, two other 2020 corporate FCPA enforcement actions that topped the $100 million mark in combined penalties and disgorgement include:

• Herbalife Nutrition Ltd. – On August 28, 2020, DOJ and the SEC announced a combined $123 million FCPA resolution with U.S.-based global nutrition company Herbalife. According to the charging documents, over several years employees of Herbalife subsidiaries in China allegedly provided improper benefits, including cash, gifts, travel, and hospitality, to influence government officials in a variety of regulatory matters. To resolve the SEC investigation, Herbalife consented to the entry of an administrative cease-and-desist order charging FCPA accounting violations and agreed to pay more than $67 million in disgorgement and prejudgment interest. Herbalife also entered into a deferred prosecution agreement with DOJ and agreed to pay $55 million in criminal penalties to resolve a charge of conspiracy to violate the books-and-records provision of the FCPA. Herbalife received full credit for its cooperation and remediation, including steps to enhance its anti-corruption compliance program and accounting controls and take disciplinary actions against employees involved in the conduct. Herbalife will self-report on the status of its compliance program for a three-year period. Gibson Dunn represented Herbalife in connection with the joint resolutions.
• J&F Investimentos S.A. – On October 14, 2020, the SEC and DOJ announced a combined $155 million FCPA resolution with private Brazilian-based holding company J&F Investimentos S.A. and its affiliated global meat and protein producer and ADS-issuer JBS, S.A. J&F pleaded guilty to a single charge of conspiracy to violate the FCPA’s anti-bribery provisions based on allegations that over many years, millions in payments were made to high-level Brazilian officials, including high-ranking executives at state-owned banks and a state-controlled pension fund, to obtain hundreds of millions of dollars of financing and approval for a corporate merger. The SEC brought FCPA accounting charges against JBS and two of its executives: brothers Joesley and Wesley Batista. To resolve the criminal case, J&F agreed to a total fine of $256,497,026, but will pay only $128,248,513 (50%) of that to DOJ, with an offsetting credit applied against agreements in Brazil pursuant to which J&F agreed to pay approximately $3.2 billion. To resolve the SEC’s civil allegations, JBS agreed to pay $26.8 million in disgorgement and the Batistas agreed to pay civil penalties of $550,000 each. J&F and JBS will report on compliance and remedial measures for a three-year term.

Together with the other enforcement activity from 2020, corporate fines in FCPA cases reached a new height of $2.78 billion. A chart tracking the total value of corporate FCPA monetary resolutions by year, since the advent of blockbuster fines brought in with the 2008 Siemens resolution, follows:

Our Corporate FCPA Top 10 list currently reads as follows:

No.	Company*	Total Resolution	DOJ Component	SEC Component	Date
1	Goldman Sachs**	$1,663,088,000	$1,263,088,000	$400,000,000	10/22/2020
2	Ericsson	$1,060,570,432	$520,650,432	$539,920,000	12/06/2019
3	Mobile TeleSystems	$850,000,000	$750,000,000	$100,000,000	03/06/2019
4	Siemens AG***	$800,000,000	$450,000,000	$350,000,000	12/15/2008
5	Alstom S.A.	$772,290,000	$772,290,000	—	12/22/2014
6	KBR/Halliburton	$579,000,000	$402,000,000	$177,000,000	02/11/2009
7	Teva	$519,000,000	$283,000,000	$236,000,000	12/22/2016
8	Telia****	$483,103,972	$274,603,972	$208,500,000	09/21/2017
9	Och-Ziff	$412,000,000	$213,000,000	$199,000,000	09/29/2016
10	BAE Systems*****	$400,000,000	$400,000,000	—	02/04/2010

*  Our figures do not include the 2018 FCPA case against Petróleo Brasileiro S.A. – Petrobras (“Petrobras”), even though some sources have reported the resolution as high as $1.78 billion, because the first-of-its kind resolution negotiated by Gibson Dunn offset the vast majority of payments against a shareholders’ class action lawsuit and foreign regulatory proceeding, leaving only $170.6 million fairly attributable to the DOJ / SEC FCPA resolution.

**  Goldman Sachs’s U.S. FCPA resolutions were coordinated with numerous authorities in the United States, United Kingdom, Singapore, Hong Kong, and Malaysia, with total payments under the various resolutions exceeding $5 billion.

***  Siemens’s U.S. FCPA resolutions were coordinated with a €395 million ($569 million) anti-corruption settlement with the Munich Public Prosecutor.

****  Telia’s U.S. FCPA resolutions were coordinated with resolutions in the Netherlands and Sweden for a combined total of $965.6 million.

*****  BAE pleaded guilty to non-FCPA conspiracy charges of making false statements and filing false export licenses, but the alleged false statements concerned the existence of the company’s FCPA compliance program, and the publicly reported conduct concerned alleged corrupt payments to foreign officials.

The CFTC Dives into FCPA Waters

Our readers well know that as the prominence of international anti-corruption enforcement has grown, so too has the number of enforcers from around the world taking an active participation interest. Meetings with regulators are now coordinated across global time zones rather than a question of meeting at the Bond Building or at the SEC. But even as the waters of international anti-corruption enforcement were already crowded, a new entrant just caught its first big wave: the U.S. Commodity Futures Trading Commission (“CFTC”).

As covered in our 2019 Year-End FCPA Update, on March 6, 2019 the CFTC published an advisory on self-reporting and cooperation for “violations involving foreign corrupt practices,” and the same day the Enforcement Division Director delivered remarks announcing the CFTC’s intent to bring enforcement actions stemming from foreign bribery. Almost overnight, multiple companies then announced investigations by the CFTC with a potential foreign bribery nexus. And it did not take long for the first to reach a resolution.

On December 3, 2020, DOJ and the CFTC announced their first coordinated foreign corruption resolution, with Vitol Inc., the U.S. affiliate of one of the world’s largest energy trading firms. DOJ charged an alleged conspiracy to violate the FCPA’s anti-bribery provisions through payments to government officials in Brazil, Ecuador, and Mexico over a period of several years. To resolve the criminal case, Vitol entered into a deferred prosecution agreement and agreed to a $135 million fine, but will pay only $90 million of that to DOJ, with an offsetting credit applied to $45 million paid as part of a leniency agreement with Brazil’s Federal Public Ministry (“MPF”).

But perhaps most notable about the resolution is that, in a first-of-its-kind action, Vitol also consented to a cease-and-desist order by the CFTC for “manipulative and deceptive conduct” under the Commodity Exchange Act (“CEA”). According to the CFTC, Vitol paid the alleged bribes to state oil companies in Brazil, Ecuador, and Mexico in order to obtain preferential treatment, access to trades with the oil companies, and confidential information, including (in Brazil) specific prices at which Vitol understood it would win a particular bid or tender. The CFTC order, which also alleges that Vitol attempted to manipulate two oil benchmarks through separate trading activity, requires Vitol to pay more than $95 million in civil monetary penalties and disgorgement. However, so as not to impose duplicative penalties, the CFTC order provides a $67 million offsetting credit for the FCPA criminal fine, leaving Vitol to pay approximately $28.8 million.

Two former oil traders also were charged with FCPA and FCPA-related charges for their roles in the alleged criminal conspiracy. Javier Aguilar—a Mexican citizen, U.S. resident, and former Vitol oil trader—was charged in an indictment unsealed on September 22 with FCPA and money laundering conspiracy counts. Aguilar allegedly paid $870,000 to officials of Ecuador’s state-owned oil company, Petroecuador, in exchange for a contract to purchase $300 million in fuel oil. Aguilar pleaded not guilty in October 2020 and awaits trial in the Eastern District of New York. And on November 30, DOJ unsealed the February 2019 guilty plea of Rodrigo Garcia Berkowitz, a former oil trader of Petróleo Brasileiro S.A. (“Petrobras”), to money laundering conspiracy. Garcia Berkowitz allegedly accepted money from commodity trading companies, including Vitol, in exchange for directing Petrobras business to the companies, and also helped the companies determine the highest price they could charge to Petrobras and still win the bids. Berkowitz awaits sentencing.

The Cautionary Tale of Beam Suntory

In our 2018 Mid-Year FCPA Update, we reported on what appeared to be a rather modest FCPA resolution between the SEC and Chicago-based spirits producer Beam Suntory, Inc. The allegations were that senior executives at Beam’s Indian subsidiary directed efforts by third parties to make improper payments to increase sales, process license and label registrations, obtain better positioning on store shelves, and facilitate distribution. The SEC cited Beam’s voluntary disclosure—reportedly spawned by a series of proactive investigations initiated in the wake of competitor Diageo plc’s 2011 FCPA enforcement action in India—and reached what seemed like a favorable result for Beam, including a relatively modest combined penalty and disgorgement figure of just over $8 million. But there was mention of an ongoing DOJ investigation, with which Beam continued to cooperate. That investigation came to a less favorable end in 2020.

On October 27, 2020, DOJ announced its own, separate resolution with Beam arising from what appears to be substantially the same course of conduct in India with the lead corrupt payment allegation being a 1 million rupee (~ $18,000) payment to a senior government official in exchange for a license. The result was a deferred prosecution agreement on FCPA anti-bribery, internal controls, and books-and-records charges with a criminal fine of $19,572,885, none of which was credited against the prior SEC resolution.

Unlike the SEC, DOJ did not give Beam voluntary disclosure credit because it contended that the disclosure occurred only after a former employee sent a whistleblower complaint that copied U.S. and Indian authorities. DOJ further did not provide Beam with full cooperation credit, citing “positions taken by the Company that were not consistent with full cooperation, as well as significant delays caused by the Company in reaching a timely resolution and its refusal to accept responsibility for several years.” Finally, in support of a criminal internal controls charge (knowing and willful failure to implement and maintain internal controls), DOJ cited at length what it perceived to be an inadequate investigative response by certain in-house counsel to numerous red flags from audit reports and outside counsel opinions regarding the risks that third parties were paying bribes on Beam’s behalf. In one cited email, an in-house counsel allegedly wrote: “Beam Legal believes it is critical to approach a compliance review with the understanding that a U.S. regulatory regime should not be imposed on our Indian business and that acknowledges India customs and ways of doing business.” DOJ’s citation to and reliance on internal audit reports as evidence of internal controls breakdowns is troubling. Internal audit is, by definition, one of the lines of defense in a corporate control environment. Using it as a sword against a corporation is unfortunate and will lead to process changes within a corporation.

Had DOJ credited Beam’s voluntary disclosure and cooperation under the FCPA Corporate Enforcement Policy, and credited the penalty previously imposed by the SEC under the “Anti-Piling On” Policy, Beam’s criminal fine could have been less than $9 million rather than the more than $19.5 million fine imposed.

If one thing is clear it is that the public record does not disclose the full background and there surely is another side to the story. Nonetheless, Beam stands as a cautionary tale worthy of further study on subjects ranging from investigative response to red flags, to the challenges of educating business personnel on the need to conduct business in a compliant manner even in challenging markets, to the risks of unilaterally settling with one regulator while another investigation continues.

No FCPA Compliance Monitorships in 2020

Post-resolution oversight mechanisms long have been a mainstay of corporate FCPA enforcement. Early in the modern era of FCPA enforcement, it was commonplace for DOJ and/or the SEC to impose external compliance monitors in corporate FCPA resolutions. In more recent years, we observed a trend of the government employing a more diverse mix of post-resolution mechanisms, including requiring corporate self-assessments, which a company conducts itself and submits the findings of to the government (as covered in our 2009 and 2012 Year-End FCPA Updates), to using a “hybrid” approach whereby a company retains a monitor for part of the post-resolution period followed by a self-assessment period (as discussed in our 2014 Year-End FCPA Update).

Even as the frequency and mix of the different types of obligations have changed over time, it is rare to see a year go by without a single corporate monitor being imposed. In 2020, however, despite an overall record year in corporate FCPA fines and several large individual corporate resolutions, not a single FCPA-related monitorships was imposed. What may be the driving force for this shift is adherence to DOJ’s 2018 guidance concerning compliance monitors, covered in our 2018 Year-End FCPA Update. The “Benczkowski Memorandum” signaled that “the imposition of a monitor will not be necessary in many corporate criminal resolutions.” Among the considerations that should be taken into account in deciding whether to require a monitor are the company’s remediation efforts as well as the potential cost of a monitor and its impact on the company’s operations.

As can be seen from the following chart, which tallies the frequency of external monitors in corporate FCPA enforcement actions over the last five years, monitors are becoming relatively rarer oversight mechanisms in these cases.

Spotlight on Latin America

A headline from nearly 15 years ago, in our 2007 Year-End FCPA Update, read “China, China, China” to highlight the dramatic uptick in FCPA enforcement actions spawning from one of the world’s leading and most challenging economies. Then, five years ago, in our 2016 Year-End FCPA Update, we commented that it was “Still China, China, China . . . But Don’t Forget About Latin America,” to highlight that while China still remained the most prevalent situs of FCPA enforcement activity, Latin America was emerging as the new risk capital of anti-corruption compliance. That trend has continued, with more than 60% of the 51 FCPA and FCPA-related enforcement actions brought or announced in 2020 involving allegations of misconduct in Central or South America. Highlights not covered elsewhere include:

• Sargeant Marine, Inc. (“SMI”), a Florida-based asphalt company, on September 21, 2020 pleaded guilty to FCPA conspiracy related to its alleged conduct in several South American countries, including most prominently Brazil. DOJ alleged that SMI offered and paid bribes to officials in Brazil, Venezuela, and Ecuador in order to secure business contracts to provide asphalt to state-owned oil companies Petrobras, Petróleos de Venezuela, S.A. (“PDVSA”), and EP Petroecuador. The criminal penalty, reflecting a 25% discount off the bottom of the Sentencing Guidelines range for SMI’s cooperation and remediation, was $90 million, but DOJ reduced the penalty to $16.6 million by applying its “Inability to Pay” Policy. Relatedly, seven individuals have been charged in connection with the investigation of corrupt practices in the Latin American asphalt procurement market, including SMI part-owner and senior executive Daniel Sargeant; SMI traders Jose Tomas Meneses and Roberto Finocchi, SMI consultants Luiz Eduardo Andrade and David Diaz, and former PDVSA officials Hector Nuñez Troyano and Daniel Comoretto.
• On December 16, DOJ announced a superseding indictment bringing money laundering and money laundering conspiracy charges against two new defendants allegedly involved in corruption relating to Venezuela’s state-run currency exchanges: former National Treasurer of Venezuela Claudia Patricia Diaz Guillen and her husband, Adrian Jose Velasquez Figueroa. As covered in our 2018 Year-End FCPA Update, Diaz Guillen’s predecessor, former National Treasurer of Venezuela Alejandro Andrade Cedeno, pleaded guilty to money laundering after allegedly accepting bribes from Globovision news network mogul Raul Gorrin Belisario, who was indicted in August 2018, in exchange for conducting foreign exchange transactions on Gorrin’s behalf at artificially high government rates. According to the superseding indictment, when Diaz Guillen succeeded Andrade Cedeno as National Treasurer, she also succeeded him as Gorrin Belisario’s access point to Venezuela’s government currency exchanges, and she and her husband began accepting bribes from Gorrin to continue the scheme.
• On November 24, Venezuelan businessperson Natalino D’Amato became the latest defendant to face charges stemming from DOJ’s investigation of Venezuelan “pay for play” corruption. From 2015 to 2017, D’Amato allegedly bribed officials of multiple PDVSA subsidiaries to secure inflated supply contracts for D’Amato’s businesses. The PDVSA subsidiaries allegedly transferred over $160 million into Florida-based accounts controlled by D’Amato, and D’Amato allegedly paid out over $4 million of those funds in bribes to PDVSA officials. D’Amato now faces 11 counts of money laundering, money laundering conspiracy, and engaging in transactions involving criminally derived property.
• On August 6, DOJ unsealed an indictment against Jose Luis De Jongh Atencio, a new defendant in a separate branch of the Venezuela “pay for play” scheme detailed in our 2020 Mid-Year FCPA Update. Juan Manuel Gonzalez Testino and Tulio Anibal Farias-Perez pleaded guilty in May 2019 and February 2020, respectively, to FCPA charges for bribing officials of PDVSA subsidiary Citgo Petroleum Corporation in exchange for Citgo supply contracts. De Jongh, a former Citgo procurement officer and manager, allegedly was a recipient of those bribes. According to the indictment, De Jongh accepted Super Bowl, World Series, and concert tickets, in addition to approximately $2.5 million in payments used to purchase property in Texas. De Jongh was charged with money laundering and conspiracy to commit money laundering.
• Alexion Pharmaceuticals, Inc., a Boston-headquartered pharmaceutical company, settled an SEC-only cease-and-desist proceeding on July 2, 2020 arising from alleged violations of the FCPA’s accounting provisions primarily associated with the alleged bribery of Turkish and Russian officials to influence regulatory treatment and prescriptions for the company’s primary drug. The SEC also alleged that employees of Alexion’s subsidiaries in Brazil and Colombia created or directed third parties to create inaccurate records concerning payments that were used to cover employee personal expenses, though no bribery was alleged in these areas. Without admitting or denying the SEC’s findings, Alexion agreed to $17.98 million in disgorgement and prejudgment interest, as well as a $3.5 million penalty. Alexion earlier reported that DOJ had closed its five-year inquiry into the same conduct without any enforcement action.
• World Acceptance Corporation (“WAC”), a South Carolina-based consumer loan company, on August 6, 2020 agreed to resolve FCPA charges with the SEC arising from alleged misconduct in Mexico between 2010 and 2017. According to the settled cease-and-desist order, employees of WAC’s former Mexican subsidiary paid more than $4 million to Mexican government officials and union officials to secure the ability to make loans to government employees and then ensure those loans were repaid. To resolve these charges, and without admitting or denying the findings, WAC consented to the entry of an administrative order finding violations of the FCPA’s anti-bribery, books-and-records, and internal controls provisions and paid $19.7 million in disgorgement and prejudgment interest, as well as a $2 million civil penalty. Although the SEC order does not mention a voluntary self-disclosure, DOJ did recognize WAC’s voluntary disclosure, cooperation, and remediation in issuing a public declination pursuant to the FCPA Corporate Enforcement Policy.

Rounding Out the 2020 FCPA and FCPA-Related Enforcement Docket

Additional 2020 FCPA and FCPA-related enforcement actions not covered elsewhere in this update or our 2020 Mid-Year FCPA Update include:

           Deck Won Kang

On December 17, 2020, New Jersey resident and contractor to Korea’s Defense Acquisition Program Administration (“DAPA”) Deck Won Kang pleaded guilty to one count of violating the FCPA’s anti-bribery provisions. According to the charging document, DAPA solicited bids in connection with contracts to upgrade the Korean Navy’s fleet, and Kang paid $100,000 to a DAPA procurement official to obtain non-public information to help Kang’s companies secure and retain the contracts. Kang also has been sued in New Jersey state court by DAPA. The civil proceedings are ongoing, and Kang is scheduled to be sentenced on the FCPA charge in April 2021 in the District of New Jersey.

           Jeremy Schulman

In a matter that appears to have arisen out of an FCPA investigation, DOJ’s FCPA Unit announced on December 3, 2020 the indictment of Maryland attorney Jeremy Schulman on charges stemming from an alleged six-year conspiracy to misappropriate Somali sovereign assets held in accounts with U.S. financial institutions that had been frozen since the beginning of Somalia’s 1991 civil war. According to the charging documents, Schulman and his co-conspirators allegedly forged paperwork purporting to show that Schulman acted on the authority of the Central Bank of Somalia in repatriating these assets, which materials Schulman then presented to banks with requests to recover the frozen funds. Schulman and his co-conspirators learned the locations of the frozen assets from a former Governor of Somalia’s Central Bank, who was appointed as an advisor to the Transitional Government of Somalia’s President after the alleged conspiracy began; however, neither Schulman nor the former Governor were authorized to recover the funds. Schulman allegedly obtained control of approximately $12.5 million of the frozen Somali funds using his forged documents; his law firm retained approximately $3.3 million and the rest was remitted to the Somali government. Schulman now faces 11 counts of bank, mail, and wire fraud and money laundering, as well as associated conspiracy counts.

           Foreign Adoption Corruption

We reported in our 2019 Year-End FCPA Update on FCPA charges against Ohio-based adoption agent Robin Longoria, alleging that she and other U.S. adoption agents bribed Ugandan probation officers to recommend that certain children be placed into orphanages, then bribed Ugandan judges and court personnel to grant guardianship of these children to the adoption agency’s clients. On August 17, 2020, DOJ announced the indictment of three alleged co-conspirators, U.S. citizens Debra Parris and Margaret Cole, and Ugandan citizen Dorah Mirembe. The charges, which include FCPA bribery, visa fraud, mail fraud, money laundering, and false statements, relate to alleged corrupt payments to process international adoptions without following the correct procedures in Uganda (Parris and Mirembe) and Poland (Parris and Cole). Although Mirembe is a Ugandan citizen, for purposes of applying the FCPA she is alleged to be an “agent” of a “domestic concern”—the Ohio-based adoption agency to which she provided services. Parris and Cole have pleaded not guilty, while Mirembe has yet to be arraigned. Longoria is scheduled to be sentenced in January 2021.

Although this could be dismissed as a confined fact pattern, this is not the first time the FCPA Unit has brought charges related to corruption in international adoptions. In February 2014, DOJ announced charges against four former employees of an adoption agency (Alisa Bivens, James Harding, Mary Mooney, and Haile Ayalneh Mekonnen) for, among other things, allegedly conspiring to pay bribes to Ethiopian officials to facilitate adoptions. In August 2017, Mooney, Harding, and Bivens were sentenced—Mooney to 18 months, 3 years of supervised release, and $223,946 in restitution; Harding to 12 months, 3 years supervised release, and $301,224 in restitution; and Bivens to one year probation and $31,800 in restitution. Although they were not charged with FCPA violations (possibly because the foreign “officials” at issue included a teacher at a government school and a head of a regional ministry for women’s and children’s affairs), the DOJ FCPA Unit was involved in the prosecution.

2020 YEAR-END FCPA-RELATED ENFORCEMENT LITIGATION

Following the initiation of an FCPA or FCPA-related action, the lifecycle of criminal and civil enforcement proceedings can take years to wind through the courts. A selection of prior-year matters that saw enforcement litigation developments during 2020 follows.

Second Circuit Affirms Chi Ping Patrick Ho’s FCPA and Money Laundering Convictions

We reported in our 2018 Year-End FCPA Update on the trial conviction of Hong Kong businessman Chi Ping Patrick Ho arising from his alleged participation in two separate corruption schemes in Chad and Uganda. On December 29, 2020, the U.S. Court of Appeals for the Second Circuit affirmed all of the convictions in an important precedential opinion authored by the Honorable Richard J. Sullivan.

With respect to the FCPA charges, the Second Circuit rejected Ho’s argument that the evidence was insufficient to establish that he was acting on behalf of a “domestic concern” under § 78dd-2, where he had been an officer of a Virginia-based NGO but claimed the beneficiary of the scheme was a foreign business subject to § 78dd-3. The Court held § 78dd-2 does not require that a U.S. entity be the beneficiary of corruption, but rather only that the defendant act on behalf of a domestic concern to procure corrupt business “for . . . any person,” which may include a foreign entity. The Court further held that it is permissible for the Government to charge a defendant both with acting on behalf of a domestic concern under § 78dd-2 and with being “any person other than . . . a domestic concern” under § 78dd-3, as the two provisions are not mutually exclusive and the same person could fit both definitions where, as here, multiple courses of conduct are charged.

As or perhaps even more important, with respect to the money laundering charges, the Court held that a wire transfer from Hong Kong to Uganda, which passed through a correspondent U.S.-dollar bank account in New York, was sufficient on the facts to constitute a monetary transaction “to” or “from” the United States (rather than “through” the United States as Ho argued). Since the vast majority of the world’s U.S.-dollar transactions pass through correspondent banking accounts in New York, this is an expansive decision that could give DOJ global reach over U.S.-dollar denominated corruption anywhere, even with only the most fleeting of connections to the United States. With precedent (including Second Circuit precedent) pointing in the other direction, this is a hotly contested aspect of the money laundering statutes and ripe for further review. Less controversially, the Court also held that an FCPA violation under § 78dd-3 may serve as a “specified unlawful activity” pursuant to the money laundering statutes.

           José Carlos Grubisich Motion to Dismiss Denied

In our 2019 Year-End FCPA Update, we covered the arrest of Jose Carlos Grubisich, former CEO and board member of Brazilian petrochemical company and U.S. ADS-issuer Braskem S.A., on FCPA and related charges as he arrived at JFK Airport for vacation (unaware of a sealed indictment). After four months of preventive detention, and after bail was initially denied, Grubisich was released to home detention with the onset of the COVID-19 pandemic—though only after he posted a $30 million bond with $10 million cash bail. Grubisich thereafter filed a motion to dismiss the charges on, among other things, statute-of-limitations grounds because he left his role as CEO in 2008. Judge Raymond J. Dearie of the U.S. District Court for the Eastern District of New York denied the motion in a Memorandum and Order dated October 12, 2020, concluding that although the motion “raise[d] issues that may warrant critical attention after an evidentiary record has been established,” the arguments were fact-based and improper to resolve in a motion to dismiss.  

           PDVSA-Related Guilty Pleas

In our 2020 Mid-Year FCPA Update, we reported that Lennys Rangel, the procurement head of a PDVSA majority-owned joint venture, and Edoardo Orsoni, the former general counsel of PDVSA, had been charged with conspiracy to commit money laundering in connection with the alleged receipt of more than a million dollars each in cash and property in exchange for favorable treatment in PDVSA bidding processes. On August 11 and August 25, 2020, respectively, Rangel and Orsoni pleaded guilty. Both await 2021 sentencing dates.

           Mark T. Lambert Sentenced

In our 2019 Year-End FCPA Update, we covered the trial conviction of Mark T. Lambert, former president of Transport Logistics International Inc. (“TLI”), on FCPA and wire fraud counts associated with an alleged scheme to pay more than $1.5 million in bribes to an affiliate of Russia’s State Atomic Energy Corporation. On October 28, 2020, DOJ announced that Lambert had been sentenced to 48 months in prison and a $20,000 fine (which matched the four-year term to which the government official bribe recipient, Vadim Mikerin, was sentenced in 2015). Lambert has noticed an appeal to the Fourth Circuit, while his former co-president at TLI, Daren Condrey, is scheduled for sentencing in 2021, nearly six years after his 2015 guilty plea.

Corpoelec Defendants Receive 40% Reductions in Prison Sentences for Substantial Cooperation in the Prosecution of Others

As outlined in our 2019 Year-End FCPA Update, on June 24, 2019, Jesus Ramon Veroes and Luis Alberto Chacin Haddad each pleaded guilty to FCPA conspiracy charges arising from an alleged scheme to pay bribes to senior officials at Venezuela’s state-owned electric company, Corporación Eléctrica Nacional, S.A. (“Corpoelec”), in exchange for the award of contracts worth $60 million. Shortly thereafter, the Honorable Cecilia Altonaga of the U.S. District Court for the Southern District of Florida sentenced each defendant to 51 months of imprisonment. But on October 13, 2020, Judge Altonaga approved prosecutors’ request to reduce by nearly two years Chacin’s and Veroes’ respective sentences, finding that the two had provided prosecutors detailed information about the bribery and money laundering scheme at issue, which resulted in the indictment of Luis Alfredo Motta Dominguez and Eustiquio Jose Lugo Gomez, respectively the President and Procurement Director of Corpoelec.

            Probationary Sentence in Petrobras Corruption Case

As reported in our 2019 Year-End FCPA Update, Brazilian citizen Zwi Skornicki pleaded guilty in early 2019 to a single count of FCPA bribery conspiracy in connection with a scheme to pay $55 million to officials of Petrobras and the Brazilian Workers’ Party. On August 4, 2020, the Honorable Kiyo Matsumoto of the U.S. District Court for the Eastern District of New York sentenced Skornicki, 70, to 18 months of probation, which the Court allowed Skornicki to serve remotely from Brazil. In addition, Skornicki will have to pay a $50,000 fine. In issuing the sentence, Judge Matsumoto noted that he had considered a six-month prison sentence Skornicki had served in Brazil, and the $25 million fine he had already paid in Brazil. Judge Matsumoto also acknowledged Skornicki’s age and the increased risk of travel in light of the ongoing COVID-19 pandemic in allowing Skornicki to complete his probation remotely.

            Alstom Defendants Sentenced to Time Served

In our 2019 Year-End FCPA Update, we described that, following the trial conviction of former Alstom executive Lawrence Hoskins, DOJ unsealed charges against former Alstom Indonesia Country President Edward Thiessen and Regional Sales Manager Larry Puckett. Both Thiessen and Puckett had entered into plea agreements years prior, but their agreements remained non-public until their cooperation completed with testimony at Hoskins’s trial. On July 20, 2020, the Honorable Janet Bond Arterton of the U.S. District Court for the District of Connecticut sentenced Thiessen to time served and a $15,000 fine, noting in part that Thiessen had cooperated extensively with U.S. prosecutors, including by providing trial testimony against Hoskins. Earlier in the year, Judge Arterton similarly sentenced Puckett to time served. Finally, another former Alstom executive, David Rothschild, who had pleaded guilty in November 2012, was similarly sentenced to time served on July 27, 2020.

2020 YEAR-END FCPA-RELATED POLICY DEVELOPMENTS

            Two SEC Commissioners Rebuff Extensive Use of Internal Controls Provision

We observe often that the SEC employs aggressive theories of liability by utilizing the FCPA’s accounting provisions (most recently in our 2019 Year-End FCPA Update). Although not in a foreign corruption case, the FCPA defense bar took note when, in November 2020, SEC Commissioners Hester M. Peirce and Elad L. Roisman issued a statement disapproving of the SEC’s settled action with Andeavor LLC. The SEC Staff alleged that Andeavor had violated the FCPA’s internal controls provision—though the case involved alleged insider trading, not foreign bribery. Insider trading cases typically are brought under Exchange Act Section 10(b) and Rule 10b-5 thereunder, which “would have required finding that Andeavor acted with scienter despite the steps it took to confirm that it did not possess material nonpublic information.” Sounding in many of the themes presented by expansive civil FCPA internal controls cases, the Staff alleged that Andeavor used an “abbreviated and informal process” leading to an internal controls failure.

Commissioners Peirce and Roisman highlighted that the FCPA “requires not ‘internal controls’ but ‘internal accounting controls.’” And they noted that although Andeavor was “unprecedented” in applying the internal controls provision to insider trading compliance, the SEC has resolved other recent matters based on theories of deficient internal controls that “go well beyond the realm of ‘accounting controls.’” Although this viewpoint was not sufficient to carry a majority, and the settlement was approved, the articulate dissent of Commissioners Peirce and Roisman provides a roadmap for advocates and is worthy of continued monitoring.

            SEC Approves Amendments to Whistleblower Program Rules

On September 23, 2020, the SEC approved a set of amendments to the rules governing its whistleblower program, which, according to the SEC, are meant to “provide greater clarity to whistleblowers and increase the program’s efficiency and transparency.” Significant changes to the rules include:

1. Revising the definition of “whistleblower” to cover only those individuals who report information in writing to the SEC, consistent with the U.S. Supreme Court’s 2018 decision in Digital Realty Trust v. Somers;
2. Procedural changes designed to facilitate more efficient resolution of frivolous claims and to allow the SEC to bar individuals who have filed false or frivolous claims from participating in the program;
3. Clarifying that deferred prosecution agreements, non-prosecution agreements, and SEC settlements not resolved through administrative or judicial proceedings are among the resolutions eligible for whistleblower awards;
4. Providing interpretive guidance explaining the “independent analysis” expected of whistleblowers in order to be eligible for awards; and
5. Amendments to the award determination process, which allow the SEC to revise small awards upward and further clarify the scope of the SEC’s discretion in determining awards.
6. These rules became effective 30 days later, on October 23, 2020. For additional details regarding these revisions, please see our separate Client Alert, “SEC Amends Whistleblower Rules.”

            DOJ Issues First FCPA Opinion Procedure Release in Six Years (20-01)

By statute, DOJ must provide a written opinion at the request of an issuer or domestic concern stating whether DOJ would prosecute the requestor under the anti-bribery provisions for prospective (not hypothetical) conduct it is considering. Published on DOJ’s FCPA website, these releases once provided valuable insights into how DOJ interprets the FCPA, although only parties who join in the requests may rely upon them authoritatively. But although such releases were once a staple of these semi-annual updates, they have fallen out of use in recent years (until 2020, the last one had issued in 2014).

On August 14, 2020, DOJ released its first FCPA opinion procedure release in nearly six years (and its 62nd overall). The requestor was a U.S.-based multinational investment advisor. In 2017, the requester sought to acquire assets from a foreign subsidiary—identified as “Country A Office”—of a foreign bank that was majority owned by a foreign government. To facilitate the transaction, the requester engaged a different foreign subsidiary—identified as “Country B Office”—of the aforementioned bank and a local investment firm. Upon completion of the transaction, Country B Office requested a fee of $237,500, which equaled 0.5% of the face value of the purchased assets, for services rendered in connection with the transaction.

DOJ’s opinion concluded that, as the facts were presented by the requester and assuming that the Country B Office is an instrumentality of a foreign government, it would not bring an enforcement action based on payment of the fee. DOJ found persuasive that the fee would be paid to a government entity and not an individual. DOJ’s conclusion also was aided in part by a certification by Country B Office’s chief compliance officer that the fee would be used for general corporate purposes and not be diverted to any individual government officials or other entities. Finally, DOJ’s conclusion rested in part on the same chief compliance officer’s certification that Country B Office provided legitimate services and that the fee was commercially reasonable.

DOJ’s conclusion breaks no new ground and is consistent with prior opinion releases that did not apply the FCPA to payments to government entities. That DOJ relied in part on the compliance officer’s certification that such a diversion did not occur further supports the importance of documenting sound compliance efforts to address corruption-related risks.

2020 YEAR-END KLEPTOCRACY FORFEITURE ACTIONS

The second half of 2020 saw continued activity in the Kleptocracy Asset Recovery Initiative spearheaded by DOJ’s Money Laundering and Asset Recovery Section (“MLARS”) Unit, which uses civil forfeiture actions to freeze, recover, and, in some cases, repatriate the proceeds of foreign corruption.

On July 15, 2020, DOJ filed a civil complaint in the U.S. District Court for the District of Maryland seeking the forfeiture of a Potomac mansion owned by former Gambian President Yahya Jammeh. The complaint alleges the property was purchased with $3.5 million obtained through the embezzlement of public funds and solicitation of bribes while Jammeh was in power from 1994 to 2017.

On August 6, 2020, DOJ filed two civil forfeiture complaints in the U.S. District Court for the Southern District of Florida seeking to seize commercial property linked to Ukrainian oligarchs Igor Kolomoisky and Gennadiy Boholiubov. On December 30, 2020, DOJ filed a third complaint in the Southern District of Florida, seeking to seize additional property linked to the pair. The complaints allege that Kolomoisky and Boholiubov used front companies to buy office buildings in Louisville, Dallas, and Cleveland—with a combined value of more than $60 million—with funds allegedly embezzled from Ukrainian lender PrivatBank. The complaints further allege that businesspeople Uriel Laber and Mordechai Korf helped the oligarchs acquire the properties.

Finally, with further 1MDB-related developments, on September 16, 2020 DOJ announced that it is seeking an additional $300 million linked to funds allegedly misappropriated from 1MDB. The assets include funds held in escrow in the United Kingdom linked to money misappropriated from 1MDB through a joint venture with PetroSaudi, as well as four dozen promotional movie posters allegedly purchased by Malaysian film producer Riza Aziz with money traceable to funds misappropriated from 1MDB. The complaint followed a recent settlement between DOJ and Aziz over another $60 million in assets linked to 1MDB, announced on September 2, 2020. To date, the United States has sought forfeiture of more than $2.1 billion in assets associated with 1MDB, and has recovered almost $1.1 billion of that amount.

2020 YEAR-END PRIVATE CIVIL LITIGATION

As we have been reporting for many years, although the FCPA does not provide for a private right of action, civil litigants continue to pursue a variety of causes of action in connection with FCPA-related conduct, with varying degrees of success.  A selection of matters with developments during the second half of 2020 follows.

            Select Shareholder Lawsuits

• Glencore PLC – On July 31, 2020, the Honorable Susan D. Wigenton of the U.S. District Court for the District of New Jersey dismissed a complaint filed against Glencore and certain executives alleging that the defendants made false and/or misleading statements and failed to disclose facts relating to alleged bribery schemes in the Democratic Republic of Congo, Venezuela, and Nigeria. The Court dismissed the suit on forum non conveniens grounds, concluding that the plaintiff’s choice of forum was accorded less deference because Glencore did not have offices or subsidiaries in the forum and the alleged conduct giving rise to the plaintiff’s claims allegedly occurred in foreign nations. An amended complaint was not filed after the ruling and the case has been closed.
• Tenaris S.A. – On October 9, 2020, the Honorable Raymond J. Dearie of the U.S. District Court for the Eastern District of New York granted in part and denied in part Tenaris’s motion to dismiss a putative securities fraud class action, in which shareholders alleged that the company’s public filings and employee codes of conduct were materially misleading in light of bribery allegations that became public in 2018. In connection with what became known as the “Notebooks” case, Tenaris’s CEO was charged in 2018 by an Argentine court with bribery in connection with alleged bribes paid to Argentinian government officials in return for their lobbying of the Venezuelan government to prevent the nationalization of the asset of Tenaris’s Venezuelan subsidiary. Although the court dismissed some claims relating to statements contained in the company’s code of ethics, Judge Dearie held that the plaintiffs’ assertions with regard to statements in the code of conduct, as well as references to the code in the company’s filings, were actionable. Tenaris filed its answer to plaintiffs’ amended complaint on December 1, 2020.
• Ternium S.A. – In another U.S. civil lawsuit arising from the Argentinian “Notebooks” scandal, on September 14, 2020, the Honorable Pamela K. Chen of the U.S. District Court for the Eastern District of New York dismissed a shareholder suit against Ternium, a Luxembourg steel product manufacturer, as well as individual officers and a director. In ruling on Ternium’s motion to dismiss, the court agreed with the defendants’ position that their statements regarding the relevant transaction did not create a duty to disclose the alleged bribery, explaining that the statements “‘accurately report[ed] income derived from illegal sources’ . . . without ‘attribut[ing] [the transaction’s] success to a particular cause’ . . . thereby relieving Ternium of any obligation to disclose the bribery scheme.” Judge Chen subsequently dismissed the case with prejudice on November 17, 2020, after plaintiffs failed to file an amended complaint.
• Sociedad Química y Minera de Chile SA (“SQM”) – On November 11, 2020, Chilean mining company SQM announced its agreement to pay $62.5 million to resolve a class action lawsuit brought by investors in March 2017, following SQM’s $30 million settlement with DOJ and the SEC to resolve related foreign bribery charges covered in our 2017 Mid-Year FCPA Update. The investors sued the company for not disclosing the alleged bribery scheme in its securities filings, against which SQM had argued that revelations of the alleged fraud did not cause statistically significant negative reactions in its stock price. The parties briefed summary judgment earlier this year, but settled before a decision was reached by the court. On December 18, 2020, the court held a hearing and preliminarily approved the settlement agreement but set a schedule for briefing in support of the settlement and a settlement conference for 2021.

            Select Civil Fraud / RICO Actions

• Harvest Natural Resources, Inc. – As reported most recently in our 2020 Mid-Year FCPA Update, in February 2018 now-defunct Houston energy company Harvest Natural Resources filed suit in the U.S. District Court for the Southern District of Texas alleging RICO and antitrust violations against various individuals and entities affiliated with the Venezuelan government and PDVSA. In late 2018, Harvest voluntarily dismissed the case as to all defendants except Rafael Darío Ramírez Carreño, Venezuela’s former Minister of Energy and former President of PDVSA. Chief Judge Lee H. Rosenthal then granted a default $1.4 billion judgment in the action against Ramírez after he failed to appear. Upon Ramírez’s later appearance and motion to vacate the default judgment, Judge Rosenthal reopened the case and vacated the default judgment but denied his motion to dismiss. On August 26, 2020, Harvest filed a notice voluntarily dismissing Ramírez from the case, which Judge Rosenthal granted, thereby dismissing Ramírez and concluding all pending litigation.

            Select Employment Lawsuits

• Landec Corp. – On September 2, 2020, Ardeshir Haerizadeh, a former Landec subsidiary executive, sued the company in California state court alleging that Landec unfairly terminated and attempted to make him a scapegoat in connection with an internal investigation into potential bribery in Mexico. In January 2020, Landec disclosed in a securities filing that it had identified potential FCPA violations by recently acquired company Yucatan Foods, a Los Angeles-based guacamole maker founded by Haerizadeh. Landec said in the filing that the potential misconduct began before the acquisition, which was completed in late 2018 for approximately $80 million, and that the company had made a disclosure to DOJ and the SEC. Since the initial complaint filing, Landec has filed an answer and cross-complaint, to which Haerizadeh has not yet responded.

            Select Arbitration-Related Litigation

• Petrobras – On July 16, 2020, the U.S. Court of Appeals for the Fifth Circuit upheld an international arbitration award requiring Petrobras to pay more than $700 million to offshore drilling company Vantage Drilling International for terminating a contract allegedly procured through bribery. The underlying allegations and associated FCPA resolutions—which arose out of Brazil’s Operation Car Wash—were covered in our 2018 Year-End FCPA Update. In July 2018, an internal arbitration tribunal issued the award in favor of Vantage, finding that Petrobras breached the parties’ contract. Petrobras later filed a motion to vacate the arbitration award in the U.S. District Court for the Southern District of Texas, arguing that the award violated U.S. public policy. The Fifth Circuit affirmed the district court’s confirmation of the award, agreeing with the arbitration tribunal’s findings that Petrobras had knowingly ratified the contract with Vantage after Petrobras became aware of the bribery allegations.

            Select Anti-Terrorism Act Suits

• Certain Pharmaceutical and Medical Device Companies – On July 17, 2020, the Honorable Richard J. Leon of the U.S. District Court for the District of Columbia dismissed a lawsuit brought by U.S. service members and their families in late 2017, alleging that a number of pharmaceutical and medical device companies violated the Anti-Terrorism Act (“ATA”) and state laws. According to the suit, the defendants purportedly bribed officials at the Iraqi Ministry of Health, which was controlled by the terrorist group Jaysh al-Mahdi (“JAM”), and JAM used these funds and medical goods to perpetuate attacks against the plaintiffs. Judge Leon ruled that the Court lacked personal jurisdiction over the foreign defendants, because all of the alleged conduct occurred outside of the United States, and further held that the plaintiffs did not adequately plead a violation under the ATA with respect to any defendants because: (1) plaintiffs did not “establish the substantial connection between defendants and JAM necessary for proximate causation”; (2) defendants could not have aided and abetted a foreign terrorist organization because JAM is not designated as such; and (3) plaintiffs did not show that the defendants provided substantial assistance to the attacks. On August 14, 2020, the plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the D.C. Circuit.
• Certain Defense Contractors and Telecommunications Companies – On December 27, 2019, U.S. citizens who were killed or wounded in Taliban terrorist attacks while serving in Afghanistan, and their family members, brought a suit in the U.S. District Court for the District of Columbia against American and foreign defense contractors, and international telecommunications companies, under the ATA. The lawsuit accuses the companies of providing material support to and aiding and abetting terrorist attacks against Coalition forces by paying “protection money” to the Taliban. According to the complaint, at least one defendant used funds from the World Bank’s International Finance Corporation to make the payments, and also allegedly “went beyond financing,” engaging in “active coordination” by deactivating its cellular network at night at the request of the Taliban, thereby hindering Coalition intelligence-gathering efforts. The defendants filed motions to dismiss in late April 2020, which were rendered moot by an amended complaint filed on June 5, 2020, that included additional U.S. company defendants. On September 10, 2020, the contractors filed separate motions to dismiss the amended complaint, arguing that the plaintiffs failed to state a claim and/or on jurisdictional grounds. The Court has yet to rule as of the date of this publication.

2020 YEAR-END INTERNATIONAL ANTI-CORRUPTION DEVELOPMENTS

Multilateral Development Banks

            MDBs signal long-term shift to prevention, not just investigative work

Officials from various MDBs’ anti-corruption teams have made public statements recently in which they have signaled that their respective institutions are shifting away from the traditional investigate-after-the-fact model of compliance to a more proactive and preventive approach focusing on due diligence and ongoing monitoring of bank-financed projects. For example, the Head of the African Development Bank’s (“AfDB”) integrity and anticorruption unit, Alan Bacarese, recently highlighted the AfDB’s emphasis of “proactive integrity reviews” in major AfDB-financed projects. As part of this initiative, the AfDB took the extraordinary step of embedding an anti-corruption official in the project from the outset, with the stated purpose of avoiding any procurement problems before they evolve into sanctionable misconduct. Bacarese explained: “We’re not in the business of investigating and debarring – although that is part of our mandate. We are as interested, if not more interested, in working with companies and working with our colleagues within the bank to bring good business ethics into development finance.”

Other MDBs have echoed this approach. For her part, the chief compliance officer of the European Bank for Reconstruction and Development, Lisa Rosen, recently remarked that she believes that it was incorrect to think the key tool in the fight against corruption in MDB-financed projects is “the investigation and debarment function of MDBs.” She suggested, instead, that prevention is more effective. Laura Profeta, the Inter-American Development Bank’s anti-corruption chief similarly remarked in the context of the COVID-19 pandemic that her team had developed “a very intense focus on the prevention side of our work.”

World Bank Announces Prospective Shift in Process for Evaluating Corporate Compliance Programs

The World Bank’s Integrity Vice Presidency (“INT”) recently announced that, for a period of several months, it been developing what it described as a “major initiative” to improve its processes for evaluating a company’s compliance efforts. The apparent aim of the program is to ensure that companies receive “the kind of mitigation credit they deserve if they have a compliance program.” As part of this effort, the office of the Integrity Compliance Officer (“ICO”) will work collaboratively with INT before a sanction is imposed as part of a settlement agreement to determine the breadth, scope, and effectiveness of a company’s compliance program, which could in turn result in a reduction in the proposed debarment period and/or post-debarment obligations. The proposed initiative will represent a shift in the current paradigm, in which the ICO typically becomes involved in a matter after settlement to work with debarred companies to improve their compliance programs.

Europe and the Former CIS

            United Kingdom

SFO 2020 Deferred Prosecution Agreement Guidance

On October 23, 2020, the UK Serious Fraud Office (“SFO”) published guidance on its approach to deferred prosecution agreements (“DPAs”) and how it engages with companies when a DPA is possible. As discussed in our separate Client Alert, “The UK Serious Fraud Office 2020 Deferred Prosecution Agreement Guidance: Something Old and Something New,” the underlying statute creating DPAs is clear that a party need not admit guilt, and this new guidance also makes plain that this is unnecessary. The DPA Code of Practice remains in force as the lead document for consideration in connection with DPAs. Aspects of the new guidance not already in the DPA Code of Practice can be found in other guidance or in judgments given by the court in prior DPAs. As such, the guidance does not provide significant new insights but is instead a consolidation of other source material.

Former Unaoil executive sentenced for paying bribes to win $1.7 billion worth of contracts

As covered in our 2019 Year-End and 2020 Mid-Year FCPA Updates, Monaco-based oil services company Unaoil has been at the center of a developing cluster of anti-corruption enforcement that has grown to include enforcement activity on both sides of the Atlantic.

On October 8, 2020, Basil Al Jarah, Unaoil’s former Iraqi partner, was sentenced to 40 months’ imprisonment. Al Jarah pleaded guilty in July 2019 to five offenses of conspiracy to give corrupt payments in excess of $17 million to public officials at the South Oil Company and Iraqi Ministry of Oil. Co-conspirators Stephen Whiteley and Ziad Akle were found guilty in July 2020 of one and two counts, respectively, of conspiring to give corrupt payments. Akle was sentenced to five years’ imprisonment and Whiteley to three years’ imprisonment. Another individual, Paul Bond, faces retrial in January 2021.

            Russia

On December 8, 2020, the Prosecutor General’s Office of the Russian Federation reported that in 2020 the overall damage from corruption offenses claimed in initiated criminal cases in the country exceeded 45 billion rubles (~$612 million), down from 55.5 billion rubles (~$850 million) reported for 2019.  As of October 2020, Russian prosecutors had filed 6.6 billion rubles (~$102 million) worth of civil damage recovery claims linked to corruption offenses.  The Prosecutor General’s Office reported a total recovery of more than 2.3 billion rubles (~$35.7 million) in corruption-related damages through criminal and civil proceedings.

Russian authorities also reported a number of high-profile corruption cases initiated against officials at the governor and deputy governor levels, many of them involving fraud and embezzlement related to contracts with entities affiliated with government officials.  Against this backdrop of reported steady progress of anti-corruption enforcement, Russian authorities have faced significant criticism in connection with the suspected poisoning of Alexei Navalny, a high-profile anti-corruption activist and opposition leader.  On August 20, 2020, Navalny fell violently ill during a flight from Siberia to Moscow and was rushed for treatment to a hospital in Germany.

As we reported in our 2020 Mid-Year FCPA Update, numerous arrests were made in connection with a scheme involving senior Deposit Insurance Agency (“DIA”) officials allegedly taking kickbacks from contractors tasked with bank restructurings.  In the second half of 2020, more information has come to light regarding the scheme.  With the Russian Central Bank invoking a zero-tolerance policy for corrupt banks, many banks have seen their licenses revoked.  Under Russian law, the DIA would then take control and contract with companies to handle all aspects of the bankruptcy.  But to be hired, contractors allegedly had to pay a substantial bribe—and after the banks’ assets were up for auction, they were sold at well below fair market value.  DIA officials allegedly accumulated billions of rubles.  Since these findings came to light, the DIA has been forbidden from handling new bailouts, and the Federal Antimonopoly Service has pushed for the passage of a law requiring increased transparency in DIA operations.

            Ukraine

President Volodymyr Zelensky’s anti-corruption efforts were dealt a major blow recently when the Constitutional Court of Ukraine (“CCU”) struck down a key anti-corruption initiative signed into law by President Zelensky a year ago. In a ruling made public on October 28, 2020, the CCU held, among other things, that Ukraine’s National Agency on Corruption Prevention may not seek criminal lability for government officials, including judges, for failing accurately to report all of their assets and explain their sources. This is not the first time the CCU has struck down such a law—the version signed into law by President Zelensky was passed in response to the CCU striking down an earlier iteration. The revised version of the law was declared unconstitutional partly because it gave anti-corruption officials authority over judges, which the CCU found to interfere with the judiciary’s independence. As a result of the CCU’s ruling in October, more than 100 corruption investigations had to be closed. The Ukrainian parliament, however, quickly responded on December 4, 2020, by passing another version of the law, which attempts to address some of the CCU’s concerns by decreasing penalties and increasing thresholds for criminal liability.

            Uzbekistan

On September 11, 2020, Switzerland and Uzbekistan announced the signing of an agreement for the return of funds seized in connection with a money laundering investigation against Gulnara Karimova, the daughter of former President Islam Karimov, who has been imprisoned since 2017. The framework agreement provides for the return to Uzbekistan of $131 million, which were confiscated from Swiss bank accounts held by Karimova, conditional on ensuring transparency and appropriate monitoring of the funds’ use. The details of the restitution are set to be agreed upon under a second agreement, but the framework agreement makes clear that the restituted funds “shall be used for the benefit of the people of Uzbekistan.” The $131 million comprises part of the approximately $880 million that Swiss authorities froze in 2012 in connection with criminal proceedings against Karimova. The framework agreement also will apply to the restitution of any of the remaining frozen funds.

The Americas

            Argentina

In the second half of 2020, proceedings continued in connection with the “Notebooks” scandal reported in our prior updates, related to former President Cristina Fernández de Kirchner and her administration. In November 2020, a federal judge acquitted Fernández in one corruption trial after determining that the notebooks—belonging to the chauffeur of a high-ranking official in Fernández’s administration and allegedly describing various bribes the chauffeur delivered to Fernández and others—were inadmissible. Appeals are ongoing. The acquittal came shortly after Fernández’s former top aide, a key witness and the uncle of one of the prosecutors involved, was found murdered.

Another longstanding investigation with Argentinian touchpoints saw developments in the second half of the year. In connection with investigations of corruption involving international soccer federation officials, in October 2020 the Swiss Office of the Attorney General announced the seizure of $40 million from Argentinians Nicolás Leoz and Eduardo Deluca, respectively the former president and secretary general of the South American Football Confederation (“CONMEBOL”), who were accused of exploiting their positions to unlawfully enrich themselves. The case against Leoz ended with his death in August 2019; Deluca was convicted of aggravated criminal mismanagement in 2019. Swiss authorities concluded that the funds were unlawfully acquired and should be returned to CONMEBOL.

            Brazil

In Brazil, the years-long Operation Car Wash continued as Brazilian prosecutors extended existing investigations, launched new phases, and brought additional suits.

In November 2020, federal prosecutors filed suit against oil trading company Trafigura and several individuals related to alleged bribes paid to Petrobras executives in return for favorable treatment on 31 deals dating to 2012 and 2013. The Federal Public Ministry (“MPF”) is seeking to recover a minimum of R$403 million, and has sought to freeze up to R$1 billion of the named parties’ assets. Several of the people named in the complaint previously were named in other bribery actions or signed leniency agreements with the government.

On December 3, 2020, the Operation Car Wash task force announced that Vitol Inc. had entered into a leniency agreement with the MPF, agreeing to pay approximately $45 million to Petrobras as damages in connection with alleged bribes in exchange for favorable treatment and bidding advantages. The agreement, which needs to be approved by the MPF’s Chamber to Combat Corruption, also will require Vitol to adopt certain transparency measures and to report on compliance-, corruption-, and money laundering-related risks. This resolution was coordinated with Vitol’s U.S. resolutions with DOJ and the CFTC noted above.

In August 2020, Brazilian enforcement authorities announced a “technical cooperation agreement” that articulates principles and procedures for joint action against corruption and aims to promote more effective cooperation among Brazil’s public agencies executing leniency agreements, which have been a significant tool in recent corruption investigations. Brazil’s Comptroller-General’s Office, Attorney General’s Office, Ministry of Justice and Public Security, and Federal Court of Accounts executed the agreement. The agreement provides, among other things, that Brazil’s Comptroller-General’s Office and federal Attorney General’s Office will negotiate leniency agreements under Brazil’s Anti-Corruption Law, and that they must share information after the agreements’ execution. The MPF has not executed the agreement, and the MPF’s 5th Chamber issued a Technical Note advising against execution on the grounds that the agreement unconstitutionally limits the role of the MPF in negotiating and executing leniency agreements, among other critiques.

            Colombia

Colombia continued to deal with the impact of investigations related to Brazilian construction company Odebrecht S.A. In October 2020, Colombia’s highest administrative court upheld a Bogotá Chamber of Commerce award nullifying an Odebrecht consortium’s contract for a billion-dollar highway construction—a project that also led to ICC claims and an investment treaty dispute—because of corruption. Relatedly, the Odebrecht-related indictment of Juan Carlos Granados Becerra, former governor of Boyacá and recently elected magistrate judge on the National Commission for Judicial Discipline, has been indefinitely postponed. Just days before the hearing, Granados revoked the power of the attorney representing him, forcing a delay due to his lack of representation.

On the legislative front, Colombia’s Congress introduced Bill 341/20 on October 27, 2020, seeking to create more stringent corporate transparency requirements and tackle corruption by creating a beneficial ownership registry. The bill intends to bring Colombia in line with international recommendations, which recognize that transparency regarding “beneficial owners” (i.e., natural persons with more than 5% ownership of a company) is important to efforts to counter corruption, money laundering, and terrorism financing. If passed, the bill will standardize and streamline reporting across government agencies in the country.

            Ecuador

In September 2020, a three-judge panel of Ecuador’s National Court of Justice ratified former President Rafael Correa’s eight-year prison sentence for breaking campaign finance laws. As reported in our 2020 Mid-Year FCPA Update, Correa was found guilty of bribery and corruption and sentenced in absentia in April 2020. The sentence also required $14.7 million of reparations to the state and stripped Correa’s citizenship rights. The decision effectively blocks Correa’s efforts to participate in Ecuador’s 2021 election as a vice presidential candidate.

            El Salvador

In November 2020, the El Salvadoran Attorney General executed more than 20 raids on government offices in response to alleged improper spending of emergency pandemic funds by the administration of President Nayib Bukele, including allegedly overpaying relatives for medical equipment and, in some instances, improperly making payments to companies not specializing in medical equipment.

            Guatemala

As discussed in our 2019 Year-End FCPA Update, Guatemala’s commitment to anti-corruption efforts has been uncertain, with the country’s major anti-corruption organization, the International Commission Against Impunity (known by its Spanish acronym “CICIG”), being disbanded in late 2019. In October 2020, Guatemala’s Attorney General approved nine administrative complaints against Guatemala’s remaining anti-corruption organization, the Special Prosecutor’s Office Against Impunity (known by its Spanish acronym “FECI”). FECI has suggested that the complaints, some of which were filed by its investigative targets, are politically motivated. This development follows the Guatemalan Attorney General’s previous decision to remove FECI from investigations into allegations of financial mismanagement at the country’s social security administration and into a high-profile narcotics trafficking operation.

            Haiti

Haiti’s Superior Court of Auditors and Administrative Disputes, which functions as a government accountability office, published a report in August 2020 finding that more than $2 billion in petrodollars from Venezuela’s PetroCaribe petroleum-import finance program were embezzled over eight years. The program, created at former President Hugo Chavez’s behest, allows Latin American and Caribbean countries to obtain Venezuelan loans through a system of preferential oil delivery. The report found that most of the millions Haiti received in response to the devastating 2010 earthquake was wasted, embezzled, and poorly managed as it went to hundreds of projects that did little to improve the lives of Haitians. Despite the report, recommendations from the High Court of Auditors, and popular protests, Haiti has not yet pursued prosecution of former ministers and high-ranking officials involved in the PetroCaribe scandal.

            Honduras

In early 2020, Honduras allowed the mandate for its anti-corruption body, the Mission to Support the Fight against Corruption and Impunity in Honduras (known by its Spanish acronym “MACCIH”) to expire. The decision reportedly was backed by supporters of President Juan Orlando Hernández Alvarado. President Hernandez’s term in office has been marred by allegations of corruption; he allegedly received bribes and improperly protected his brother, Juan Antonio “Tony” Hernandez, from extradition after he was found guilty of narcotics-related charges in a U.S. court.

            Panama

Panama recently enacted a number of initiatives to strengthen its anti-corruption efforts. In August 2020, following high-profile corruption-related arrests related to former Panamanian President Ricardo Martinelli, Panamanian and U.S. officials announced an agreement to create a joint anti-money laundering task force. The countries agreed that the U.S. Federal Bureau of Investigation would provide training to Panamanian prosecutors, law enforcement, and other regulatory officials to target money laundering networks and strengthen Panama’s capacity to investigate, disrupt, and prosecute corruption and related issues. In November 2020, Panama also launched the “Observatorio Ciudadano de la Corrupcion” (“OCC”), a public-private partnership within the framework of Panama’s National Action Plan for Open Government. The OCC writes reports and releases statistics monitoring the judiciary’s performance, and seeks to prevent corruption by promoting transparency and efficiency. These analyses and reports are made available to the public on the OCC’s website.

            Peru

In recent years, former President Martin Alberto Vizcarra Cornejo emerged as Peru’s most vocal proponent of measures to end decades of entrenched corruption in Peruvian politics, often sparring with the country’s more conservative legislature. In July 2020, Vizcarra introduced constitutional amendments that, among other things, would ban persons convicted of serious crimes from seeking office, criminalize illegal funding for political parties, require open internal party elections, and pave the way toward removing immunity for members of congress. Some measures passed, and Congress voted the following month to create a temporary commission to investigate corruption in Peru’s construction sector, which already has resulted in charges against four former presidents who allegedly accepted $20 million in bribes in connection with the Odebrecht scandal. National anger erupted, however, after the revelation that Congress inserted an exception in an immunity-related bill for actions involving the performance of congressional duties.

Amid these moves, tension between the President and Congress grew. When allegations emerged that Vizcarra had taken bribes from a construction company during his time as a governor, Peru’s legislature voted to impeach and remove him, citing the corruption allegations as one justification for the move. Following the vote, thousands of supporters protested in the streets of Lima. Vizcarra denied the accusations and, to date, has not been charged. The new President, Manuel Merino, was forced to resign a mere six days into his term due to national anger over the death of two young protesters at the hands of police. This incident paved the way for the country’s current President, Francisco Sagasti, to assume office on November 17, 2020. Given this significant unrest—including a week when Peru was led by three different presidents—additional anti-corruption reforms likely will be stalled for the foreseeable future.

Asia

            China

In December 2020, the National People’s Congress promulgated amendments to the Criminal Law of the People’s Republic of China. The amendments revised the maximum criminal penalties for private individuals convicted of commercial bribery, embezzlement, and graft of corporate assets and funds, placing them on par with fines and potential prison sentences for government officials found guilty of similar misconduct. In addition to increasing potential penalties, the amendments set out similar sentencing guidelines for embezzlement and graft of corporate assets and funds.

Over the last year, President Xi Jinping’s ongoing anti-corruption campaign focused on senior domestic security personnel and members of the judiciary, resulting in investigations into the Shanghai chief of police and at least 21 other high-level police and judicial officials. The chief of police of the Chongqing municipality also is under investigation for “seriously violating disciplinary rules and the law,” a phrase the Chinese Communist Party often uses to describe graft and corruption. We also continue to see investigations, arrests, and convictions of government officials and state-owned enterprise executives in the energy, finance, and manufacturing sectors. In October, for example, enforcement authorities announced a corruption probe into Liu Baohua, the deputy director of China’s National Energy Administration. In November, China’s anti-graft watchdog announced an investigation into Shen Diancheng, a former executive at China National Petroleum Corporation. Also in December, authorities announced two high-profile corruption investigations involving government officials in the financial sector in China’s Chongqing municipality: Jiang Bin, a former official of the Export-Import Bank of China who was dismissed from his post in 2019, is under investigation for allegedly accepting bribe payments in exchange for authorizing illegal loans. Mao Bihua, the former party secretary and director of the Chongqing division of the China Securities Regulatory Commission, is also under investigation.

            India

The Government of India recently released a report detailing statistics for enforcement actions brought under the Prevention of Corruption Act, 1988 (“PCA”) in 2019, the first full year following landmark PCA amendments passed in 2018. These statistics show a continued downward trend in the number of corruption cases registered against public officials under the PCA. Registered corruption investigations have dropped from 632 (involving 1,142 officials) in 2017, to 460 cases (involving 867 officials) in 2018, to 396 cases (involving 607 officials) in 2019. Some commentators have noted that the dip in cases may be related to Section 17A of the PCA, one of the 2018 amendments, which bars investigations by anti-corruption enforcement agencies into a public official without the prior sanction of the state or central government.

The local enforcement numbers, however, do not necessarily reflect the situation on the ground, as evidenced by continued corruption scandals and public perception that graft remains endemic. Indian authorities recently charged the former CEO of ICICI Bank, Chanda Kochhar, and her husband with providing favorable bank loans to private companies, which in turn invested funds in businesses held by the couple. Further, the results of Transparency International’s latest Global Corruption Barometer survey show that 89% of Indians polled believe that corruption is a “big problem” in the country, and 39% reported paying bribes to access public services within the last 12 months, the largest percentage among all Asian jurisdictions polled.

On the regulatory side, the Securities and Exchange Board of India (“SEBI”) passed rules that may impact listed companies seeking to conduct internal investigations. In September 2020, SEBI determined that companies listed on Indian stock exchanges must disclose information regarding the initiation of any forensic audit—irrespective of materiality. While the rules, applicability, and reporting mechanisms await further clarification, under the decision, listed companies must disclose the following: (1) that it has initiated a forensic audit; (2) the name of entity initiating the forensic audit and reasons for initiating the audit; and (3) the final forensic audit report (other than for forensic audits initiated by regulatory or enforcement agencies), along with any comments from company management.

            South Korea

This past year, President Moon Jae-In, who was swept into power on the heels of a corruption scandal that resulted in the impeachment of his predecessor, found himself mired in corruption allegations involving his own justice ministers and his newly appointed prosecutor general. In 2019, President Moon appointed Yoon Seok-Youl as the country’s top prosecutor, charging him with rooting out public corruption that has plagued Korean government agencies for decades. Shortly thereafter, Yoon launched an investigation into Cho Kuk, President Moon’s justice minister, on allegations of falsifying investment documents and other financial irregularities. The investigation resulted in Cho’s resignation, and eventual criminal indictments including bribery, document falsification, and manipulation of evidence.

In November, Choo Mi-Ae, then-justice minister and Cho’s successor, suspended Yoon, alleging a number ethical and criminal violations, including breaching prosecutorial neutrality and illegal surveillance operations. The Justice Ministry’s Inspection Committee, however, found the allegations to be baseless and reinstated Yoon. Choo nevertheless continued to call for Yoon to be sanctioned, a move criticized by the public, which overwhelmingly backed Yoon and viewed Choo as attempting to obstruct Yoon’s efforts to root out corruption within the Justice Ministry. On December 30, 2020, President Moon accepted Choo’s resignation, and appointed Park Beom-Kye, a member of the National Assembly from President Moon’s Democratic Party, as Korea’s new justice minister. The scandal caused President Moon’s approval rating to plummet to the lowest levels of his presidency.

            Japan

Japanese authorities have arrested House of Representatives member Tsukasa Akimoto on several occasions in connection with allegations that he accepted bribes from 500.com Ltd., a Chinese online gaming company. Prosecutors suspect Akimoto of receiving the payments in connection with 500.com Ltd.’s bid to obtain a license to build an integrated resort in Japan.

A former Liberal Democratic Party Justice Minister, Katsuyuki Kawai, and his wife, Anri Kawai, were indicted on charges that they paid cash to Hiroshima legislators to secure Ms. Kawai’s seat on the House of Councilors. Prosecutors allege that Ms. Kawai paid approximately $16,000 to five local assembly members in advance of her July 2019 victory in the Upper House election. Her husband is accused of providing approximately $280,000 to 100 individuals. Both await trial.

            Indonesia

Corruption at the highest levels of government took center stage in Indonesia in 2020. In December, Indonesia’s Social Affairs Minister, Juliari Batubara, surrendered to authorities after the country’s anti-corruption agency, Komisi Pemberantasan Korupsi (“KPK”), accused him and two other officials of accepting kickbacks from private contractors hired to supply aid packages to those affected by the COVID-19 pandemic. The accusations against Batubara followed the arrest of Edhy Prabowo, the Minister of Maritime Affairs and Fisheries, whom the KPK accused of receiving kickbacks from private companies in exchange for lobster larvae export permits. In June, Imam Nahrawi, a former Sports Minister, was sentenced to seven years in prison after being found guilty of accepting bribes worth more than $800,000 in exchange for approving grants given by the Indonesian Sports Council. The KPK announced that 109 total people were arrested in relation to anti-corruption investigations during 2020.

In May, an Indonesian court convicted Emirsyah Satar, former CEO of Garuda Indonesia, Indonesia’s state-owned airline, of corruption and money laundering after finding that, between 2005 and 2014, Satar received bribes from Airbus and Rolls-Royce in exchange for procurement contracts for aircraft and aircraft parts. Satar was sentenced to eight years in prison and ordered to pay a fine of $1.4 million.

            Malaysia

As reported in our 2020 Mid-Year FCPA Update, Malaysian authorities charged former Prime Minister Najib Razak with 42 counts of corruption, abuse of power, and money laundering in five criminal cases linked to the 1MDB scandal. In the verdict of the first trial, delivered in July 2020 and involving seven of the charges, the court found Najib guilty on all counts, namely criminal breach of trust, money laundering and abuse of power. The court sentenced Najib to 12 years imprisonment. In separate proceedings, Malaysian authorities accused Najib’s wife, Datin Seri Rosmah Mansor, of accepting bribes in exchange for government contracts. The prosecution’s case concluded in December 2020, and the defense is scheduled for early January 2021.

Malaysian authorities also charged former Finance Minister Lim Guan Eng with both seeking and receiving a bribe in connection with the appointment of a contractor to manage an infrastructure project in Penang. According to the Malaysian Anti-Corruption Commission, Lim, who served as finance minister between 2008 and 2018, allegedly received bribes of more than $1 million in exchange for contracts connected to the Penang underseas tunnel project.

On the legislative front, new amendments to the Malaysian Anti-Corruption Commission Act 2009, effective June 1, 2020, made corporations and their management potentially liable for the corrupt acts of their employees. Under the new Section 17A, a “commercial organization” is deemed to have committed an offense if a person associated with the organization “corruptly gives, agrees to give, promises or offers” any gratification to any person to obtain or retain business for the organization. Under the law, businesses may be fined no less than 10 times the amount of the gratification or MYR 1 million (~$247,000), whichever is higher, as well as prison terms of up to 20 years for those involved. Section 17A also provides a defense for corporations where they can prove they had “adequate procedures” in place to prevent employees from undertaking such misconduct. Along with the amendment, the Government of Malaysia published a series of guidance documents, including case studies, to assist companies in implementing compliance programs designed to prevent bribery. The guidance lists, among other things, management commitment to compliance, regular risk assessments, and training as examples of adequate procedures. The new law also holds directors, controllers, officers, and partners strictly liable for the offenses of their companies unless they can show the offense was committed without their consent and connivance, and that they exercised “due diligence” to prevent the commission of the offense.

Australia, the Middle East, and Africa

            Australia

In November 2020, Australian police made an arrest in connection with the years-long probe into bribery related to Monaco-based oil services company Unaoil, which, as noted above has been at the center of a developing body of anti-corruption enforcement around the world. Former Leighton Offshore executive Russell Waugh was arrested on charges related to allegations that he conspired to pay bribes to Iraqi officials and falsified corporate books. Charges against additional former executives reportedly are expected, with former Unaoil CEO Cyrus Allen Ahsani and COO Saman Ahsani cooperating with the Australian government following their March 2019 FCPA guilty pleas.

            Israel

Prosecutors faced a setback in their long pursuit of corruption charges against Israeli Prime Minister Benjamin Netanyahu. As covered most recently in our 2019 Year-End FCPA Update, the Israeli Attorney General announced indictments in February 2019 stemming from three separate allegations of wrongdoing (referred to as Case 1000, Case 2000, and Case 4000).

In a partial victory for Netanyahu, the judge recently ordered prosecutors to amend their indictment in Case 4000, indicating that he agreed with the defense’s argument that the indictment improperly grouped Netanyahu’s alleged misconduct with that of his wife and son. At the same time, however, the Court rejected Netanyahu’s claim that he was immune from the charges. Netanyahu cheered the ruling in Case 4000 and continues to claim that the charges against him amount to nothing more than a political witch hunt. This month, prosecutors filed a revised indictment listing more than 300 incidents in which members of the Netanyahu family or their intermediaries allegedly sought more positive media coverage, including 150 in which the Prime Minister himself was involved. Netanyahu’s trial is expected to resume next month, shortly before Israel’s March 2021 national elections.

            Mozambique

Manuel Chang, the ex-Finance Minister of Mozambique charged by DOJ along with others in March 2019 with an assortment of wire fraud, securities fraud, and money laundering conspiracy charges, and arrested in South Africa (as covered in our 2019 Year-End FCPA Update), continues to be subject to competing extradition requests from the United States and Mozambique. Chang has been held in South Africa for the last two years. The United States requested Chang’s extradition in 2019. An extradition request by Mozambique followed, but with no underlying charges in the country to support it. In November 2020, Chang was charged in Mozambique for his involvement in the same $2 billion dollar debt scandal. Chang now awaits the decision of South African Justice Minister Ronald Lamola on extradition.

CONCLUSION

As is our semiannual tradition, in the following weeks Gibson Dunn will be publishing a series of enforcement updates for the benefit of our clients and friends as follows:

• Tuesday, January 12: 2020 Year-End Update on California Labor and Employment;
• Wednesday, January 13: 2020 Year-End Update on Corporate NPAs and DPAs;
• Thursday, January 14: 2020 Year-End UK Financial Services Regulation Update;
• Friday, January 15: 2020 Year-End German Law Update;
• Tuesday, January 19: 2020 Year-End Securities Enforcement Update;
• Wednesday, January 20: 2020 Year-End UK Labor & Employment Update;
• Thursday, January 21: 2020 Year-End False Claims Act Update;
• Friday, January 22: 2020 Year-End Class Actions Update;
• Wednesday, January 27: 2020 Year-End Privacy & Cybersecurity Update (United States);
• Thursday, January 28: 2020 Year-End Privacy & Cybersecurity Update (International);
• Friday, January 29: 2020 Year-End AI & Related Technologies Update;
• Thursday, February 4: 2020 Year-End Sanctions Update;
• Monday, February 8: 2020 Year-End Shareholder Activism Update; and
• Tuesday, February 9: 2020 Year-End Securities Litigation Update.

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The following Gibson Dunn lawyers assisted in preparing this client update:  F. Joseph Warin, John Chesley, Christopher Sullivan, Richard Grime, Patrick Stokes, Reuben Aguirre, Brian Anderson, Chaplin Carmichael, Claire Chapla, Josiah Clarke, Austin Duenas, Tessa Gellerson, Julie Hamilton, Patricia Herold, Jabari Julien, Amanda Kenner, Derek Kraft, Nicole Lee, Allison Lewis, Warren Loegering, Jenny Lotova, Andrei Malikov, Megan Meagher, Jesse Melman, Katie Mills, Alayna Monroe, Caroline Monroy, Erin Morgan, Alexander Moss, Jaclyn Neely, Ning Ning, Joshua Robbins, Jeff Rosenberg, Liesel Schapira, Jason Smith, Pedro Soto, Laura Sturges, Karthik Ashwin Thiagarajan, Oleh Vretsona, Oliver Welch, Dillon Westfall, and Caroline Ziser Smith.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues.  We have more than 110 attorneys with FCPA experience, including a number of former federal prosecutors and SEC officials, spread throughout the firm’s domestic and international offices.  Please contact the Gibson Dunn attorney with whom you work, or any of the following:

Washington, D.C.
F. Joseph Warin (+1 202-887-3609, [email protected])
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Patrick F. Stokes (+1 202-955-8504, [email protected])
Judith A. Lee (+1 202-887-3591, [email protected])
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Daniel P. Chung (+1 202-887-3729, [email protected])
Stephanie Brooker (+1 202-887-3502, [email protected])
M. Kendall Day (+1 202-955-8220, [email protected])
Adam M. Smith (+1 202-887-3547, [email protected])
Oleh Vretsona (+1 202-887-3779, [email protected])
Christopher W.H. Sullivan (+1 202-887-3625, [email protected])
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Jason H. Smith (+1 202-887-3576, [email protected])
Ella Alves Capone (+1 202-887-3511, [email protected])
Pedro G. Soto (+1 202-955-8661, [email protected])

New York
Zainab N. Ahmad (+1 212-351-2609, [email protected])
Matthew L. Biben (+1 212-351-6300, [email protected])
Reed Brodsky (+1 212-351-5334, [email protected])
Joel M. Cohen (+1 212-351-2664, [email protected])
Lee G. Dunst (+1 212-351-3824, [email protected])
Mark A. Kirsch (+1 212-351-2662, [email protected])
Alexander H. Southwell (+1 212-351-3981, [email protected])
Lawrence J. Zweifach (+1 212-351-2625, [email protected])
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Denver
Robert C. Blume (+1 303-298-5758, [email protected])
John D.W. Partridge (+1 303-298-5931, [email protected])
Ryan T. Bergsieker (+1 303-298-5774, [email protected])
Laura M. Sturges (+1 303-298-5929, [email protected])

Los Angeles
Debra Wong Yang (+1 213-229-7472, [email protected])
Marcellus McRae (+1 213-229-7675, [email protected])
Michael M. Farhang (+1 213-229-7005, [email protected])
Douglas Fuchs (+1 213-229-7605, [email protected])
Nicola T. Hanna (+1 213-229-7269, [email protected])

San Francisco
Winston Y. Chan (+1 415-393-8362, [email protected])
Thad A. Davis (+1 415-393-8251, [email protected])
Charles J. Stevens (+1 415-393-8391, [email protected])
Michael Li-Ming Wong (+1 415-393-8333, [email protected])

Palo Alto
Benjamin Wagner (+1 650-849-5395, [email protected])

London
Patrick Doris (+44 20 7071 4276, [email protected])
Charlie Falconer (+44 20 7071 4270, [email protected])
Sacha Harber-Kelly (+44 20 7071 4205, [email protected])
Michelle Kirschner (+44 20 7071 4212, [email protected])
Matthew Nunan (+44 20 7071 4201, [email protected])
Philip Rocher (+44 20 7071 4202, [email protected])
Steve Melrose (+44 20 7071 4219, [email protected])

Paris
Benoît Fleury (+33 1 56 43 13 00, [email protected])
Bernard Grinspan (+33 1 56 43 13 00, [email protected])
Jean-Philippe Robé (+33 1 56 43 13 00, [email protected])

Munich
Benno Schwarz (+49 89 189 33-110, [email protected])
Michael Walther (+49 89 189 33-180, [email protected])
Mark Zimmer (+49 89 189 33-130, [email protected])

Hong Kong
Kelly Austin (+852 2214 3788, [email protected])
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This past year saw the enactment of a variety of new employment laws in California, including new disclosure requirements for employers and changes to the independent contractor landscape. In addition, the COVID-19 pandemic has touched nearly every sector of society, in nearly every corner of the world, and employment law in California is certainly no exception. The pandemic has ushered in a new legal landscape marked by heightened requirements for employers stretching from 2020 into 2023.

Below, we outline four new laws that require attention from California employers in the new year: (1) the new requirements for California employers in reporting wage and hour data; (2) the continuing evolution of the worker classification standard and the recent passage of Proposition 22; (3) the new COVID-19 notice requirements that will require employers to notify employees of possible exposure; and (4) the new Workers’ Compensation Disputable Presumption under SB 1159. We also highlight California’s current plan for rolling out the recently approved COVID-19 vaccines, a strategy that will no doubt develop more in the next few months as essential workers become eligible to receive the vaccine.

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Table of Contents

I.        California Employers Required to File Equal Pay Report to California DFEH (SB 973)

II.       Amendment to ABC Test Under Assembly Bill 2257 and Proposition 22

III.     COVID-19 Notice Requirements Under Assembly Bill 685

IV.      Workers’ Compensation Disputable Presumption Under Senate Bill 1159

V.        COVID-19 Vaccine – Who Will Get It and When?

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I.  California Employers Required to File Equal Pay Report to California DFEH (SB 973)

On September 30, 2020, California Governor Gavin Newsom signed Senate Bill 973 (“SB 973”) into law, which requires employers to submit pay and hours data for various categories of employees to California’s Department of Fair Employment and Housing (“DFEH”). The stated goals of SB 973 are to decrease gender and racial pay disparities in California and fill the gap of the currently suspended federal effort to collect data for these purposes.

A.  Background on SB 973 – From President Obama to Governor Newsom

Since the 1960s, employers with 100 or more employees have been required to report certain demographic data to the Equal Employment Opportunity Commission (“EEOC”). The Obama Administration expanded the reporting requirements in 2016, adding hours and pay data to the report, which would be broken down by job category, race, ethnicity and gender. The EEOC collected this data until September 2019, when it announced that it would no longer collect the information. SB 973 was enacted in an effort to continue the Obama Administration’s equal pay policies by imposing largely the same requirements that existed under those policies.

B.  When Does the Law Take Effect?

The law took effect on January 1, 2021, and the first report is due on March 31, 2021, with subsequent reports due each year thereafter. Employers should begin compiling the relevant data as soon as possible to ensure compliance. The DFEH has stated that it intends to issue standard forms that employers will be able to use to prepare the reports.

C.  Who Does the Law Apply To?

The law applies to private employers with 100 or more employees, or employers who are required to file a federal Employer Information Report EEO-1 form. According to current DFEH guidelines, employees both inside and outside of California are counted when determining whether an employer has 100 or more employees. Temporary workers will also count toward the determination of whether an employer meets 100 employees, if the employer is required to include the temporary workers in an EEO-1 report, and if the employer is required to withhold federal social security taxes from their wages.

D.  What Information Does the Report Require?

Employers will need to create a “snapshot,” counting all employees (part and full-time) in a given category during a single pay period of the employer’s choice between October 1 and December 31 of the prior calendar year (the “Reporting Year”). To prepare the report, employers should first count and record the number of employees by race, ethnicity, and gender organized by job categories (which are the same categories used by the federal government in the EEO-1 report).[1]

Second, employers will need to further break down the data by separating employees in each category by pay band.[2] To determine what pay band an employee falls into, the employer should look at the employee’s W-2 earnings for the entire Reporting Year, regardless of whether that employee worked for the full calendar year.

Third, using the same general format, the employer must include the total number of hours worked by each employee counted in each pay band during the Reporting Year.

The employer will be permitted, but not required, to provide clarifying remarks. The report must be in searchable and sortable format. If the employer has multiple establishments, it will need to submit a separate report for each establishment, as well as a consolidated report. Each report should include the employer’s North American Industry Classification System (NAICS) code.

If an employer fails to submit a report, the DFEH may seek an order requiring the employer to comply with the requirements and will be entitled to recover the costs associated with seeking the order for compliance.

E.  What Does the Law Mean For Employers, Besides Additional Reporting?

While the intent is for the DFEH to use the reported data to “more efficiently identify wage patterns and allow for targeted enforcement of equal pay or discrimination laws,” in reality, these goals are more likely to be impeded than helped by the data collected. This is because W-2 data is not a precise—or even remotely reliable—measure of wages paid.

For instance, W-2 compensation reflects an employee’s reported income for a calendar year, which is not necessarily tied to the number of hours worked or the employee’s earnings in that year. Identically compensated employees may have a wide variance in W-2 data in any given year for reasons other than differences in wage rates. For example, if an employee’s compensation package includes equity grants, such compensation will not be reflected on a W-2 until the stock option is exercised or the rights vest, which may be years later (and potentially after unforeseen or unpredictable events that may significantly increase or decrease the value of the equity). Other non-wage compensation, such as reimbursement of relocation expenses or payment of recruitment bonuses, will also be reflected in the W-2, but do not have any meaningful tie to compensation level.

W-2 data also does not report hours worked, or account for employees who worked only part of the year (for example, employees who took a leave of absence, or were hired or quit in the middle of the year). SB 973 tries to account for these potential gaps by requiring employers to report the hours worked by the employee. But many employers do not track hours of exempt employees, and will be forced to either leave that portion blank or estimate hours, which may skew the analysis.

Additionally, the pay data report asks employers to categorize employees based on the federal EEO-1 job categories. But those categories do not account for different skills required between jobs in the same category for which the market dictates different compensation. The job categories also do not account for differences in an employee’s education, training or experience within the same job category, all variables that greatly affect compensation and which the law acknowledges should be considered in evaluating wage rates under the Equal Pay Act.[3]

As a result of these many deficiencies of the reported W-2 data, many employers who are actively and conscientiously working to ensure equitable compensation may nevertheless face allegations of pay discrimination. To reduce this risk, employers should consider providing clarifying remarks, as is permitted by the statute, but should work closely with experienced counsel to determine how much and what kind of clarifying data they should provide.

II.  Amendment to ABC Test Under Assembly Bill 2257 and Proposition 22

In 2018, the California Supreme Court in the Dynamex case articulated a new test for classification of independent contractors, which the legislature codified in Assembly Bill 5 (“AB 5”) a year later—albeit with numerous exemptions of varying complexity. The Legislature this year passed Assembly Bill 2257 (“AB 2257”), which provides still more exemptions than already existed under AB 5, and revises many of the exemptions that AB 5 had put in place the previous year. And just recently, California voters passed Proposition 22, which further narrowed the reach of AB 5. Thus, while 2020 has brought some clarity concerning classification of independent contractors, many questions remain that will need to be addressed in 2021 and thereafter.

A.  History of the Worker Classification Test and the Adoption of the ABC Test

In 2018, the California Supreme Court imported a new legal standard for determining worker classification for purposes of California wage orders: the “ABC test.” In contrast to the flexible, multi-factor analysis that had been in place for nearly three decades, the Court in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018), held that companies seeking to classify workers as independent contractors must prove three elements:

1. The worker remains free from the hiring entity’s control and direction in connection with the performance of the work, both under the contract and in fact;
2. The worker performs work that is outside the usual course of the hiring entity’s business; and
3. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

On September 18, 2019, Governor Newsom signed AB 5 into law, declaring it “landmark legislation” for “workers and our economy.” AB 5 not only codified the ABC test, but also clarified that this test applies broadly to claims arising under the Labor Code and Unemployment Insurance Code, and not just the narrower wage orders to which Dynamex is limited. But AB 5 also exempted many industries from its otherwise broad reach and permitted those industries to continue using the more employer-friendly test in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989)—the standard before Dynamex.[4] Notably, truck drivers, journalists, and on-demand app-based workers, such as ride-share workers, were not expressly exempted.

B.  AB 2257—Providing More Exemptions to AB 5

On September 4, 2020, AB 2257 was signed into law. Among other things, AB 2257 widened the business-to-business and referral agency exemptions, and introduced 109 additional categories of workers exempted from AB 5. The business-to-business exemption involves business entities such as corporations and partnerships contracting with other businesses to provide services, while the referral agency exemption applies to business entities that perform services through a referral agency. These business entities prefer to be labeled as an independent contractor, and not employee, of the referral agencies. Yet, even though these exemptions were broadened, once again, gig economy workers were not among the many expressly exempted industries.

C.  Prop 22—Creating a Safe Harbor for App-Based Workers and Companies

In November, California voters passed the Protect App-Based Drivers and Services Act (Prop 22) to ameliorate the threat of AB 5 for on-demand, app-based rideshare and delivery companies in California. Prop 22 ensures AB 5 cannot be applied to “app-based workers,” enabling “network compan[ies]” to continue classifying app-based workers as independent contractors.

Companies can classify workers as independent contractors and take advantage of Prop 22’s safe harbor as long as they qualify as a Delivery Network Company or Transportation Network Company and meet the requirements of Prop 22’s four-element independent contractor standard:

1. The network company does not unilaterally prescribe specific dates, times of day, or minimum number of hours during which the app-based driver must be logged into the network company’s online enabled platform;
2. The network company does not require the app-based driver to accept any specific rideshare service or delivery service request as a condition of maintaining access to the network company’s online-enabled application or platform;
3. The network company does not restrict the app-based driver from performing rideshare services or delivery services through other network companies except during engaged time; and
4. The network company does not restrict the app-based driver from working in any other lawful occupation or business.

Prop 22 also requires network companies to provide workers with certain levels of compensation and specific benefits to ensure the “economic security” of app-based rideshare and delivery drivers. These benefits include hourly compensation of at least 120% of the local minimum wage plus $0.30 per mile; a healthcare subsidy consistent with contributions required under the Affordable Care Act for certain qualifying workers; occupational accident insurance; and protection against discrimination and sexual harassment.

D.  What Questions Remain Regarding Worker Classification After AB 2257 and Prop 22?

While AB 2257 and Prop 22 have provided more clarity regarding the classification of independent contractors in California, many questions remain. Thus, over the next year, we expect to see courts addressing the reaches of both the ABC Test and Prop 22. For example, we expect decisions regarding:  

• Retroactive Application of Dynamex’s ABC Test: On November 3, 2020, the California Supreme Court heard oral arguments in Vazquez v. Jan-Pro Franchising International, Inc., No. S258191 (filed Sept. 26, 2019), where it is poised to determine whether Dynamex applies retroactively.
• Federal Preemption of the ABC Test Under the FAAAA: Parties have challenged the ABC Test, both under Dynamex and AB 5, as preempted by federal law. In particular, trucking groups and companies have challenged AB 5 as preempted by the FAAAA, which regulates motor carriers. See California Trucking Association, et al. v. Xavier Becerra, et al., 433 F. Supp. 3d 1154 (S.D. Cal. 2020) (issuing preliminary injunction of AB 5 as applied to motor carriers in California because of FAAAA preemption); see also People v. Superior Court of Los Angeles County (Cal Cartage Transportation Express, LLC), 57 Cal.App.5th 619 (Cal. Ct. App. 2020), petition for review pending (finding that the ABC test is not preempted by the FAAAA).
• Reach of Prop 22: Parties have already begun filing cases concerning whether Prop 22 can apply retroactively and whether it is a partial repeal of AB 5, among other questions.

The focus on worker classification issues is not likely to fade in 2021. Companies with independent contractor workforces should review their practices and contracts to make sure that they can comply with the applicable legal standard, and should stay apprised of the many developments we expect to see in this area over the coming year.

III.  COVID-19 Notice Requirements Under Assembly Bill 685

On September 17, 2020, Assembly Bill 685 (“AB 685”) was signed into law by Governor Newsom in order to strengthen access to information regarding the spread of COVID-19. AB 685 imposes two new notice requirements on employers regarding COVID-19, effective January 1, 2021. First, employers are required to notify certain employees and representatives concerning a possible exposure to COVID-19. Second, should the number of cases reach an “outbreak” as defined by the State Department of Public Health, the employer must notify the local public health agency.

A.  Notice of Potential Exposure

When an employer is aware of potential exposure to COVID-19 at a worksite, the employer must provide written notice of the potential exposure to all employees who were on the same worksite as the qualifying individual who caused the potential exposure, as well as notice to all employers of subcontracted employees, and to any exclusive representatives (e.g. union representatives) of potentially exposed employees.

1.  What counts as a potential exposure?

If an employee, or an employee of a subcontractor, has been on the premises at the same worksite as a qualifying individual within the infectious period of COVID-19, that is a potential exposure. A qualifying individual is a person who has: (1) a laboratory-confirmed positive case; (2) a diagnosis from a licensed health care provider; (3) received an isolation order from a public health official; or (4) died due to COVID-19. If the individual developed symptoms, the infectious period begins 2 days before the symptoms were first developed, and ends when 10 days have passed since the symptoms first appeared, 24 hours have passed with no fever, and other symptoms have improved. If the individual never developed symptoms, the infectious period begins 2 days before the specimen that tested positive was collected, and ends 10 days after the specimen was collected.[5]

2.  What kind of notice must be provided?

The required notice must be written, and given in a manner normally used by the employer to communicate employment-related information. This could include personal service, email, or text message if it can reasonably be anticipated to be received by the employee within one business day. The notice must be in both English and the language understood by the majority of the employees.

Each notice must include the following information:

• That the employee may have been exposed to COVID-19;
• Information regarding COVID-19 related benefits and employee protections, including protections from discrimination and retaliation for disclosing a positive diagnosis; and
• Information on the disinfection and safety plan that the employer will implement and complete per CDC guidelines.

The notice must not include the name, or any other identifying information, of the qualifying individual.

3.  Are there any penalties for failing to provide notice?

The statute provides that the Division of Occupational Safety and Health (“Cal OSHA”) may issue a citation and civil penalties to employers who fail to provide the required notice of potential exposure, or if the notice does not include information regarding the employer’s disinfection and safety plan.

B.  Notice in Case of an “Outbreak”

AB 685 also requires non-healthcare employers to notify the local public health agency in the jurisdiction of the affected worksite within 48 hours in the case of a COVID-19 outbreak.

1.  What counts as an “outbreak”?

According to the current guidelines from the California Department of Health, a “COVID-19 outbreak in a non-healthcare workplace is defined as at least three COVID-19 cases among workers at the same worksite within a 14-day period.”[6] Whether a COVID-19 case exists is determined consistent with the criteria for a qualifying individual outlined above.

2.  What information must be given to the local public health agency?

The employer must provide the names, total number, occupation and worksite of the employees who are qualifying individuals. In addition, the employer must report the business address of the worksite and the North American Industry Classification System (NAICS) industry code.[7] The employer must continue to notify the agency of any subsequent cases, and the employer must provide the agency with any additional information it might request as part of the investigation.

C.  Takeaways

In order to meet the notice requirements in the time constraints under AB 685, employers should take immediate steps to:

1. Implement a policy requiring employees working on-site to report COVID-19 positive tests and a process to then track those reports in a manner that will meet the standards required by AB 685 while also preserving employee privacy. This process should seek to incentivize employees to report results swiftly to the employer. The tracking method used should have the capacity to quickly determine what the infectious period is for each case.
2. Draft a notice template that can be filled out and sent quickly that includes all of the required information.
3. Implement a strategy for rapidly providing notice to employees (and subcontractors and union representatives) in case of exposure that meets the requirements of AB 685. This will require the capability to determine quickly which employees were on-site with the qualifying individual during the infectious period in order to generate the contact list for the notice that must be received within one business day.
4. Implement a process to streamline communications with the local public health agency. This may include steps such as designating a point person ahead of time who will manage communications and send required notices to the agency, determining the appropriate contacts at the local health agency, and preparing templates in advance that can be quickly generated.

IV.  Workers’ Compensation Disputable Presumption Under Senate Bill 1159

Governor Newsom also signed Senate Bill 1159 into law on September 17, 2020. The bill creates a disputable (rebuttable) presumption that an illness or death resulting from COVID-19 is an injury that arises out of and in the course of employment, and is thus compensable under California’s workers’ compensation laws. The presumption only applies to certain claims from July 6, 2020 through January 1, 2023.

A.  What Conditions Create a Presumption?

For most employers, the presumption only applies if the employer maintains 5 or more employees, and an employee tests positive for COVID-19 within 14 days after reporting to their specific place of employment during an “outbreak.” A “specific place of employment” means the location where an employee performs work, but does not include the employee’s home or residence, unless the employee provides home health care services to another individual at the employee’s home or residence.

An “outbreak” exists for the purpose of the presumption if one of the following occurs:

1. For employers with 100 employees or fewer at a specific place of employment, if 4 employees test positive for COVID-19 within 14 calendar days;
2. For employers with more than 100 employees at a specific place of employment, if 4% of the number of employees who reported to the specific place of employment test positive for COVID-19 within 14 calendar days; or
3. A specific place of employment is ordered to close by a local public health department, the State Department of Public Health, the Division of Occupational Safety and Health, or a school superintendent due to a risk of infection with COVID-19.

B.  How Can Employers Rebut the Presumption?

Employers can rebut the presumption that the injury or death arose out of employment by submitting evidence which tends to dispute the claims. For example, the employer can offer evidence of the measures it established to reduce potential transmission of COVID-19, or of the employee’s nonoccupational risks of COVID-19 infection.

C.  Are There Any Other Changes to the Workers’ Compensation Process?

Under SB 1159, the claims administrator only has 45 days to deny a claim based on COVID-19 once filed, as opposed to the typical 90 day period. If the claim is not denied, the illness is presumed compensable, and only evidence discovered subsequent to the 45-day period may be used to rebut this presumption. Thus, it is vital that employers work quickly to gather the necessary information as soon as a claim is filed.

D.  Additional Requirement: Report to Claims Administrator

The bill also requires an employer that knows or reasonably should know that an employee has tested positive for COVID-19 to submit a report containing the below information to its workers’ compensation claims administrator within three business days:

• Notice that an employee has tested positive (the employee should not be identified unless the employee asserts the infection is work-related or has already filed a claim);
• The date the employee tested positive;
• The address of the employee’s specific place of employment during the 14-day period before the date the employee tested positive; and
• The highest number of employees who reported to work at the specific place of employment of the employee who tested positive in the 45-day period preceding the last day that the employee worked.

Reporting this information to a claims administrator provides the claims administrator with information to determine whether an outbreak has occurred. If an employer intentionally submits false or misleading information or fails to submit information when reporting, the Labor Commissioner can impose a civil penalty of up to $10,000.

E.  First Responders and Healthcare Workers

The bill instituted a similar set of provisions for certain first responders such as firefighters, some peace officers, paramedics and EMTs, and healthcare workers, but with a few key distinctions. Crucially, no outbreak at the workplace is required to give rise to the presumption that a positive COVID-19 test arose from the first responder or healthcare worker’s employment, and the presumption is not limited to employers of a certain size. Moreover, healthcare employers may not rebut the presumption through evidence of preventative measures or the employee’s nonoccupational risks, but may rebut the presumption “by other evidence.” Finally, the claim administrator must deny the claim within 30 days of its being filed to avoid a presumption that the injury is compensable, instead of the 45-day period outlined above.

F.  Claims that Arose Before July 6, 2020.

For COVID-19 related claims between March 19, 2020 and July 5, 2020, there is still a disputable presumption that an injury from COVID-19 is presumed to have arisen out of and in the course of employment. An employee must, within 14 days of being present at the place of employment, either test positive for COVID-19 or be diagnosed by a licensed medical doctor, with the diagnosis confirmed by a test within 30 days. The presumption is disputable and may be controverted by other evidence. Employers are not required by the law to report employees who tested positive in this time frame to claim administrators.

G.  Takeaways

To best meet the requirements of SB 1159, several critical steps should be taken:

1. Review records for confirmed COVID-19 illnesses or deaths from July 6, 2020, through the present. Implement a process to reliably and quickly record and report employee COVID-19 illnesses to your workers’ compensation claims administrator within three business days.
2. Determine if any “outbreaks” have occurred since July 6, 2020. If there has been no outbreak, there is no presumption (except in the limited cases noted above). Create a method to automatically flag when an outbreak has occurred or might be imminent.
3. Implement a strategy to dispute the presumption that an infection occurred in the workplace when appropriate. This should include preparing information regarding safety measures taken by the company to prevent transmission of COVID-19. Additionally, the company should employ an appropriate investigation strategy to determine if an employee was subject to any nonoccupational risks of exposure to COVID-19.

V.  COVID-19 Vaccine – Who Will Get It and When?

Finally, perhaps the most pressing question for employers and employees alike is when to expect the vaccines to rollout in California, and what this process will look like. The U.S. Food and Drug Administration has issued Emergency Use Authorization for two COVID-19 vaccines, with the possibility that more vaccines will be authorized in early 2021. California, with guidance from the CDC, has outlined a scalable, three-phased approach, starting with healthcare workers, and ending with the general population.[8]

A.  Phase 1-A: Healthcare Residents and Workers

Due to the currently limited availability of the vaccine, Phase 1-A includes three different tiers in order to provide gradual distribution. The first tier of potential vaccine recipients includes residents of skilled nursing facilities, assisted living facilities, and other similar long-term care settings for medically vulnerable or older populations. Also in the first tier are healthcare workers who come into direct contact with COVID-19 patients, and generally those medical professionals who are most at risk in terms of exposure, which include workers at correctional and psychiatric hospitals, nursing homes, acute care centers, and dialysis centers, as well as paramedics and emergency medical technicians.

The second tier within Phase 1-A includes those healthcare workers who work in intermediate care facilities, primary care clinics, urgent care clinics, rural health centers, correctional facility clinics, as well as home health care workers and public health field staff.

The third tier of healthcare workers includes workers in dental offices, specialty clinics, laboratories, and pharmacy staff not included in higher tiers.

B.  Phase 1-B: Frontline Essential Workers & Adults Age 65 and Older

Phase 1-B is slated to take place once the healthcare workers in Phase 1-A are mostly vaccinated. According to the CDC, this group should include “workers in essential and critical industries” such as teachers, child care workers, and first responders, among others.[9]

Similar to Phase 1-A, the Advisory Committee on Immunization Practices (“ACIP”) has proposed taking a tiered approach within Phase 1-B.[10] This proposal recommends that adults 75 and older as well as non-healthcare “frontline essential workers,” such as first responders, teachers, grocery store workers, food and agriculture workers, and manufacturing employees, among others, should take priority in Phase 1-B. This would then push the remaining essential non-frontline workers, such as those who work in construction, transportation, food services, IT, finance, the legal industry, and the media industry, among others, to Phase 1-C, along with adults age 65 or older (but under age 75) and adults with high-risk medical conditions. “Frontline essential workers,” for purposes of this proposal, has only been defined as including workers “in sectors essential to the functioning of society and are at substantially higher risk of exposure to SARS-CoV-2.”[11] So far, California seems to largely mirror the ACIP’s approach (which is accepted by the CDC), as California’s Community Vaccine Advisory Committee has agreed that non-healthcare frontline workers should be prioritized in Phase 1-B. Moreover, California’s approach separates Phase 1-B into two tiers: the first tier includes workers in education, childcare, emergency services, and food and agriculture industries and individuals age 75 and older, while the second tier within Phase 1-B includes workers in transportation and logistics, the industrial, commercial, and residential facilities and services industry, and critical manufacturing, along with individuals 65 to 74 years of age.[12]

C.  Phase 1-C: Non-Frontline Essential Workers, Adults Age 50 and Older, & High Risk Adults

This group includes adults 50 to 64 years of age, individuals with preexisting conditions that put them at high risk of getting severely ill from COVID-19, and the non-frontline essential workers excluded from Phase 1-B in industries such as water and wastewater, defense, energy, chemical and hazardous materials, financial services, communications and IT, government operations and community-based essential functions.[13]

D.  Remaining Phases

Phases 2 and 3 would include the general public and nonessential workers, although these categories are not fully fleshed out yet, and depend on a substantial increase in vaccine supply.

Overall, it is important to keep in mind that this is an evolving situation. On the state-wide level, there is no definitive guidance as to what exactly separates these frontline essential workers in the first tier of Phase 1-B from the other essential workers in California for purposes of the vaccine rollout. Moreover, the California Department of Public Health has not yet determined the details for allocation in Phase 1-B, as it has not yet released the allocation guidelines that tend to provide clarity to this rapidly changing process. Even if this tiered approach for Phase 1-B is carried out, essential workers will all be covered under Phase 1, whether in groups 1-A, 1-B, or 1-C, thus putting them ahead of the general population and nonessential workers in terms of eventually receiving the vaccine.[14]

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[1]  The job categories required by the statute are:

1. Executive or senior level officials and managers.
2. First or mid-level officials and managers.
3. Professionals.
4. Technicians.
5. Sales workers.
6. Administrative support workers.
7. Craft workers.
8. Operatives.
9. Laborers and helpers.
10. Service workers.

[2]  The pay bands are those used by the United States Bureau of Labor Statistics in the Occupational Employment Statistics survey, and include the following categories:   (1) $19,239 and under; (2) $19,240 – $24,439; (3) $24,440 – $30,679; (4) $30,680 – $38,999; (5) $39,000 – $49,919; (6) $49,920 – $62,919; (7) $62,920 – $80,079; (8) $80,080 – $101,919; (9) $101,920 – $128,959; (10) $128,960 – $163,799; (11) $163,800 – $207,999; and (12) $208,000 and over.

[3]  California Equal Pay Act, California Labor Code § 1197.5 (a): “An employer shall not pay any of its employees at wage rates less than the rates paid to employees of the opposite sex for substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions, except where the employer demonstrates: … (D) A bona fide factor other than sex, such as education, training, or experience.”

[4]  Some of the industry workers specifically exempted by AB 5 include physicians and other medical industry professionals, lawyers, accountants, engineers, architects, securities brokers, real estate agents, as well as certain professional service providers meeting six requirements (including workers in areas such as human resources and marketing, among others), and business-to-business contracting relationships that also satisfy certain conditions.

[5]  Employer Guidance on AB 685: Definitions, Cal. Dep’t of Public Health (last updated Oct. 16, 2020), https://www.cdph.ca.gov/Programs/CID/DCDC/Pages/COVID-19/Employer-Guidance-on-AB-685-Definitions.aspx.

[6]  Employer Guidance on AB 685: Definitions, Cal. Dep’t of Public Health (last updated Oct. 16, 2020), available at https://www.cdph.ca.gov/Programs/CID/DCDC/Pages/COVID-19/Employer-Guidance-on-AB-685-Definitions.aspx.

[7]  Companies can find their codes here: https://www.naics.com/search/.

[8]  State of California COVID-19 Vaccination Plan: Interim Draft, Cal. Dep’t of Pub. Health (Oct. 16, 2020), https://www.cdph.ca.gov/Programs/CID/DCDC/CDPH%20Document%20Library/COVID-19/COVID-19-Vaccination-Plan-California-Interim-Draft_V1.0.pdf.

[9]  How CDC is Making COVID-19 Vaccine Recommendations, Ctrs. for Disease Control and Prevention (last updated Dec. 23, 2020), https://www.cdc.gov/coronavirus/2019-ncov/vaccines/recommendations-process.html; see also Advisory Memorandum On Ensuring Essential Critical Infrastructure Workers’ Ability to Work During the COVID-19 Response, Cybersecurity & Infrastructure Sec. Agency (December 16, 2020), here.

[10]  The Advisory Committee on Immunization Practices’ Updated Interim Recommendation for Allocation of COVID-19 Vaccine – United States, December 2020, Ctrs. for Disease Control and Prevention (last updated December 22, 2020), https://www.cdc.gov/mmwr/volumes/69/wr/mm695152e2.htm.

[11]  ACIP COVID-19 Vaccines Work Group: Phased Allocation of COVID-19 Vaccines, Advisory Comm. on Immunization Practices (Dec. 20, 2020), https://www.cdc.gov/vaccines/acip/meetings/downloads/slides-2020-12/slides-12-20/02-COVID-Dooling.pdf.

[12]  Vaccines, Cal. ALL State Gov’t Website (Jan. 8, 2021), https://covid19.ca.gov/vaccines/#Vaccine-allocation-and-administration.

[13]  Id.

[14]  See Employer Playbook for the COVID “Vaccine Wars,” Gibson, Dunn & Crutcher LLP, https://www.gibsondunn.com/wp-content/uploads/2020/12/an-employer-playbook-for-the-covid-vaccine-wars.pdf.

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Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment practice group, or the authors:

Michele L. Maryott – Orange County (+1 949-451-3945, [email protected])
Jesse A. Cripps – Los Angeles (+1 213-229-7792, [email protected])
Katherine V.A. Smith – Los Angeles (+1 213-229-7107, [email protected])
Daniel Weiss – Los Angeles (+1 213-229-7388, [email protected])
Megan Cooney – Orange County (+1 949-451-4087, [email protected])
Kat Ryzewska – Los Angeles (+1 310-557-8193, [email protected])

Please also feel free to contact the following Labor and Employment practice group leaders:

Catherine A. Conway – Los Angeles (+1 213-229-7822, [email protected])
Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Social unrest, political upheaval, and economic instability and retrenchment defined the first year of the new decade, all against the backdrop of the COVID-19 pandemic. In emerging markets, these issues impacted efforts to reign in endemic corruption, as illustrated by headline-grabbing scandals, legislative changes, and enforcement actions. In China, for example, Chinese regulators began training their sights on corruption in key sectors, such as the pharmaceutical industry. In India, COVID-19 and the impact of recent legislative changes may be causing a reduction in local enforcement actions, even as massive corruption scandals continue and Indian citizens increasingly report that bribery and corruption are part of daily life. In Russia, the latest statistics show that law enforcement continues to focus on corruption as the country grapples with far-reaching amendments to the Constitution, severe economic losses and the spread of COVID-19. In Africa, high-profile cases involving corruption in both the public and private sector will keep regulatory focus on the continent for the foreseeable future. And in Latin America, after years of substantial anti-corruption activism resulting in sweeping legal reforms in many key markets, anti-corruption initiatives have largely stalled in the last year.

Join our team of experienced international anti-corruption attorneys to learn more about how to do business in Russia, Latin America, China, India and Africa without running afoul of anti-corruption laws, including the Foreign Corrupt Practices Act (“FCPA”).

Topics to be Discussed:

• An overview of FCPA enforcement statistics and trends for 2020;
• The corruption landscape in key emerging markets, including recent headlines and scandals;
• Lessons learned from local anti-corruption enforcement in Latin America, China, India, Africa and Russia;
• Key anti-corruption legislative changes in Latin America, China, India, Africa, and Russia;
• The effect of COVID-19 on corruption and anti-corruption efforts; and
• Mitigation strategies for businesses operating in high-risk markets.

View Slides (PDF)

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PANELISTS:

F. Joseph Warin is Co-Chair of Gibson Dunn’s global White Collar Defense and Investigations Practice Group, and he is chair of the Washington, D.C. office’s 200-person Litigation Department. Mr. Warin is ranked annually in the top-tier by Chambers USA, Chambers Global, and Chambers Latin America for his FCPA, fraud and corporate investigations experience. Mr. Warin has handled cases and investigations in more than 40 states and dozens of countries involving federal regulatory inquiries, criminal investigations and cross-border inquiries by international enforcers, including UK’s SFO and FCA, and government regulators in Germany, Switzerland, Hong Kong, and the Middle East. He has served as a compliance monitor or counsel to the compliance monitor in three separate FCPA monitorships, pursuant to settlements with the SEC and DOJ.

Kelly Austin is Partner-in-Charge of Gibson Dunn’s Hong Kong office and a member of the firm’s Executive Committee. Ms. Austin is ranked top-tier in the category “Corporate Investigations/Anti-Corruption: China” year after year by Chambers Asia Pacific and Chambers Global. Ms. Austin’s practice focuses on government investigations, regulatory compliance and international disputes. She has extensive expertise in government and corporate internal investigations, including those involving the FCPA and other anti-corruption laws, and anti-money laundering, securities, and trade control laws.

Joel Cohen is Co-Chair of Gibson Dunn’s global White Collar Defense and Investigations Practice Group. Mr. Cohen is highly-rated in Chambers and ranked a “Super Lawyer” in Criminal Litigationby Global Investigations Review. He has been lead or co-lead counsel in 24 civil and criminal trials in federal and state courts, and he is equally comfortable in leading confidential investigations, managing crises or advocating in court proceedings. Mr. Cohen’s experience includes all aspects of FCPA/anticorruption issues, in addition to financial institution litigation and other international disputes and discovery.

Benno Schwarz is a partner in the Munich office, where his practice focuses on white collar defense and compliance investigations. Mr. Schwarz is ranked as a leading lawyer for Germany in White Collar Investigations/Compliance by Chambers Europe 2020 and commenters have noted his “special expertise on compliance matters related to the USA and Russia”. For more than 25 years, Mr. Schwarz has advised companies on sensitive cases and investigations in the context of all compliance issues with international aspects, such as the implementation of German or international laws to prevent and avoid corruption, money laundering or avoiding economic sanctions in the corporate context. Especially noteworthy is Mr. Schwarz’ experience advising companies in connection with FCPA and NYDFS monitorships or similar monitor functions under U.S. legal regimes.

Patrick Stokes is a litigation partner in the Washington, D.C. office, where his practice focuses on internal corporate investigations and enforcement actions regarding corruption, securities fraud, and financial institutions fraud. Mr. Stokes is ranked nationally and globally by Chambers USA and Chambers Global as a leading attorney in FCPA. Prior to joining the firm, Mr. Stokes headed the DOJ’s FCPA Unit, managing the FCPA enforcement program and all criminal FCPA matters throughout the United States covering every significant business sector. Previously, he served as Co-Chief of the DOJ’s Securities and Financial Fraud Unit.

Oliver Welch is a partner in the Hong Kong office, where he represents clients throughout the Asia Pacific region in connection with government enforcement actions and corporate internal investigations, including those involving anti-corruption, anti-money laundering, and trade control laws. Mr. Welch also regularly guides companies on creating, implementing and maintaining effective compliance programs.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 2.0 credit hours, of which 2.0 credit hours may be applied toward the areas of professional practice requirement.

This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 2.0 hours.

California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.