For more than forty years, California’s Density Bonus Law (Government Code Section 65915 et seq.) has been a mechanism to encourage developers to incorporate affordable units within a residential project in exchange for density bonuses and relief from other base development standards. Effective as of January 1, 2021, Assembly Bill 2345 (“AB 2345”) amends the Density Bonus Law to expand and enhance development incentives for projects with affordable and senior housing components. AB 2345 is modeled after the City of San Diego’s Affordable Homes Bonus Program, and is intended to be another tool to address the state’s ongoing housing crisis.

Under the Density Bonus Law, developers are entitled to a density bonus corresponding to specified percentages of units set aside for very low income, low-income, or moderate-income households. Prior to 2021, the Density Bonus Law permitted a maximum density bonus of thirty-five percent (35%) for a housing development in which (a) at least eleven percent (11%) of the total units are for very low income households, (b) at least twenty percent (20%) of the total units are for low income households, or (c) at least forty percent (40%) of the total for-sale units are for moderate income households.

AB 2345 amends the Density Bonus Law to increase the maximum density bonus from thirty-five percent (35%) to fifty percent (50%). To be eligible for the maximum bonus, a project must set aside at least (i) fifteen percent (15%) of total units for very low income households, (ii) twenty-four percent (24%) of total units for low income households, or (iii) forty-four percent (44%) of for-sale units for moderate income households. Levels of bonus density between thirty-five percent (35%) and fifty percent (50%) are granted on a sliding scale.

Maximum Density Bonus Tiers
	Pre-2021 Density Bonus Law	AB 2345 Amendments
Very Low Income	35% bonus for 11% set aside	50% bonus for 15% set aside
Low Income	35% bonus for 20% set aside	50% bonus for 24% set aside
Moderate Income	35% bonus for 40%* reserve	50% bonus for 44%* reserve
*For-sale units only

As a state-level regulation, projects satisfying the requirements of the Density Bonus Law are eligible for the corresponding bonus notwithstanding potential resistance to densification efforts at the local level. Further, as localities continue to adopt inclusionary housing requirements, it is important to note that units required pursuant to a local inclusionary zoning ordinance also qualify as affordable units for purposes of meeting the requirements on the Density Bonus Law.

In addition to the density bonuses outlined above, projects satisfying the requirements of the Density Bonus Law are entitled to one or more development incentives or concessions that will result in identifiable and actual cost reductions to provide for affordable housing costs, so long as the incentive or concession will not have specific unmitigable adverse impacts upon public health and safety, the physical environment or on historic properties, and the incentive or concession is not contrary to state or federal law. The local approving government has the burden of proof in defending the denial of a requested concession or incentive. These additional incentives or concessions could include any of the following:

A reduction in site development standards or a modification of zoning or architectural design requirements that exceed minimum building standards approved by the California Building Standards Commission (e.g. a reduction in setback and square footage requirements);
Approval of mixed-use zoning; or
Any other regulatory incentives or concessions that would result in identifiable and actual cost reductions. The number of incentives or concessions to which a project is entitled is based on the percentage of affordable units set aside. AB 2345 amends the Density Bonus Law to decrease the set aside requirement for low income households as shown in the table below.

Incentives and Concessions Tiers
Number Entitled	Very Low Income	Low Income	Moderate Income
1	5%	10%	10%
2	10%	20% → 17%	20%**
3	15%	30% → 24%	30%**
** applies to a common interest development, as defined in Section 4100 of the Civil Code

In addition to the incentives and concessions summarized above, a local government is prohibited from applying any development standard that would physically preclude construction of the development with the density bonus and incentives and concessions to which the project is entitled.

Further, the Density Bonus Law provides that, upon a developer’s request, a locality must utilize state-mandated parking ratios (inclusive of handicapped and guest parking) for qualifying projects. AB 2345 amends these parking ratios to decrease requirements for two and three bedroom units, as shown in the table below.

Maximum Parking Requirements
Rooms	Number of spaces required
Studio / 1 bedroom	1 space
2 bedroom / 3 bedroom	2 space → 1.5 space
4 bedroom	2.5 space

Finally, AB 2345 amends the Density Bonus Law to provide local governments discretion to grant additional waivers or reductions in development standards for projects located within a one-half mile radius of a major transit stop and provide further reduced parking standards for eligible residential projects that (i) provide unobstructed access to a major transit stop or (ii) are restricted to for-rent housing for individuals who are 62 years of age or older with paratransit service or unobstructed access to a fixed bus route that operates at least eight (8) times per day.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. For additional information on these recent changes to the Density Bonus Law, please contact any member of the firm’s Real Estate or Land Use practice groups, or the following authors:

Doug Champion – Los Angeles (+1 213-229-7128, dchampion@gibsondunn.com)
Amy Forbes – Los Angeles (+1 213-229-7151, aforbes@gibsondunn.com)
Ben Saltsman – Los Angeles (+1 213-229-7480, bsaltsman@gibsondunn.com)
Lauren Traina – Los Angeles ( +1 213-229-7951, ltraina@gibsondunn.com)
Matthew Saria – Los Angeles (+1 213-229-7988, msaria@gibsondunn.com)

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

Introduction

In December 2020, California Attorney General Xavier Becerra was announced to be President-Elect Joseph R. Biden, Jr.’s pick to lead the Department of Health and Human Services. The California Attorney General’s Office is the second largest Justice Department in the United States, second only to the U.S. Department of Justice, and California Attorney General Xavier Becerra was the first Latino Attorney General in California’s history. Before becoming the Attorney General of California, Becerra had a 24-year career in the U.S. House of Representatives.[1] In 2017, Governor Jerry Brown appointed Becerra to the last two years of Kamala Harris’s term as Attorney General, after she won election to the United States Senate. Now, Governor Gavin Newsom will appoint a successor to complete the remaining two years of Becerra’s term, assuming he is confirmed by the U.S. Senate.[2]

In his time as California’s Attorney General, Becerra investigated and brought lawsuits against businesses across a wide range of industries, products, and practices, including over-the-counter medications, alleged wire fraud scams, for-profit colleges, alleged opioid abuse, oil and gas mergers, and contracting practices in the healthcare field.[3] Since winning his first statewide election at the end of 2018, AG Becerra and his Office have been particularly active in the following areas: antitrust, privacy, environmental, and consumer protection, and his Office’s stated priorities have also included the opioid epidemic, gun control and public safety, and challenging the Trump administration. Gibson Dunn provides this January 2021 end-of-term update summarizing the most significant recent work of AG Becerra’s elected term in office, and providing some initial thoughts about how his successor will deploy the Office’s resources in 2021 and beyond as California finds a new partner in the incoming Biden Administration.

Antitrust

AG Becerra’s antitrust section has investigated, litigated, and entered into settlements of multiple cases involving major healthcare and technology companies and generic drug manufacturers, and sought to enforce California’s primary antitrust statute (the Cartwright Act) and the Unfair Competition Law.

Healthcare Mergers

The California Department of Justice monitors and regulates healthcare mergers within California. AG Becerra highlighted this area in a recent tweet paired with the conditional approval of a merger between two hospitals in Los Angeles County, emphasizing his view that, “[a]s our hospital systems get bigger by affiliating with one another, it is critical that they continue to provide quality services at affordable prices to the families that count on them in times of crisis.”[4] In October 2019, the California Department of Justice issued a letter denying a proposed partnership between Adventist System/West and St. Joseph Health System on the grounds that the merger might increase costs or limit access to health care services.[5] Similarly, in August 2020, AG Becerra announced a settlement with Verity Health System of California, Inc., and Prime Healthcare Services, Inc., that imposed additional conditions on the sale of St. Francis Medical Center in Los Angeles.[6] The settlement required Prime to provide additional funding for charity care and community benefit services.[7] Aiming to expand his authority in this sphere, AG Becerra also supported SB 977, which would expand the Attorney General’s authority to review certain transactions, such as acquisitions or change-of-control transactions, involving health care facilities.[8] The bill, which has already passed the state Senate, also authorizes the Attorney General to file civil suits to slow hospital mergers under certain circumstances.

Sutter Health

This longstanding case, along with the parallel class action lawsuit on behalf of self-managed healthcare plans, against Sutter Health was announced to have reached a settlement on December 19, 2020.[9] Under the terms of the settlement, Sutter Health would pay $575 million to the plaintiff class and agreed to end practices that the private plaintiffs and California Attorney General alleged stifled competition, such as all-or-nothing contracting deals and patient steering practices. Sutter would also be required to limit what it charged patients for out-of-network services, increase its transparency on pricing information, and limit the bundling of certain services. A provision within the settlement required that a monitor be established to ensure Sutter abide by the settlement terms. In June 2020, Sutter Health attempted to delay final approval of the settlement due to catastrophic losses stemming from the COVID-19 pandemic.[10] On July 9, 2020, the court ultimately denied Sutter’s motion to delay the final settlement hearing, which would take place in August. As of the publishing of this alert, the court had rejected the proposed settlement and sent the proposal back to the parties in order to select a monitor with a more diverse background. This case is just one of the many now being handled by AG Becerra’s new Healthcare Rights and Access Section, which is charged with increasing and protecting the affordability, accessibility, and quality of healthcare in the State of California including healthcare and prescription drug marketing, nonprofit healthcare transactions, alleged violations of antitrust laws in the healthcare context, and healthcare privacy and healthcare civil rights, such as reproductive rights and LGBTQ healthcare-related rights.

Google

This year, in July 2020, it was reported that the Office had launched an antitrust investigation into Google—and had declined to join in either of the two ongoing investigations involving 48 other state attorneys general.[11] The investigation follows both the ongoing state AG investigations as well as other publicly announced investigations by federal prosecutors and Congressional subcommittees. On July 11, 2020, AG Becerra filed to join the Department of Justice’s antitrust suit against Google, which alleges that Google violated antitrust laws by entering into exclusionary business agreements that shut out competitors and suppressed innovation.[12]

While the various investigations have not concluded, this recent action may signal the Office’s further interest in policing alleged anticompetitive conduct under novel interpretations of the Cartwright Act and Unfair Competition Law.

Generic Drugs

AG Becerra reached settlement agreements with three pharmaceutical companies (Teva, Endo, and Teikoku) for allegedly entering into so-called “pay-for-delay agreements,” wherein brand-name drug companies compensate generic drug manufacturers for not introducing a generic version of a brand-name drug for some period of time in order to avoid unnecessary and burdensome litigation costs.[13] In addition to these alleged “pay for delay” and other price fixing conspiracies,[14] AG Becerra was instrumental in pushing through AB 824, which was signed into law by Governor Newsom in October 2019. The law increases antitrust scrutiny of patent settlement agreements between branded and generic pharmaceutical manufacturers. Not only does the law cover the traditional “pay-for-delay” agreement under the Hatch-Waxman Act, but it also covers settlements brought under the Biologics Price Competition and Innovation Act (BPCIA). The California Attorney General’s Office is granted specific enforcement capabilities under the new law but has yet to bring any enforcement action under AB 824. It has been reported that AG Becerra is investigating various pharmaceutical companies over a multitude of drugs.

For more information on AB 824, please find a detailed client alert prepared by Gibson Dunn here.

T-Mobile/Sprint Merger

Last year, AG Becerra, along with New York Attorney General Letitia James, led a coalition of fourteen states that unsuccessfully sued to enjoin the merger between T-Mobile and Sprint.[15] The trial was an uphill battle as the Department of Justice and the Federal Communications Commission approved the proposed merger, with qualifications, before the trial started. As part of the efforts to gain the federal government’s approval to the merger, T-Mobile and Sprint agreed to set up satellite TV company Dish as a new cellular competitor. The coalition of states, however, argued this was not an adequate replacement for Sprint. Additionally, the state AGs alleged that the merger would harm consumers by reducing competition in the shrinking wireless telecommunications market and result in higher prices and/or reduced services.[16] Ultimately, a New York federal judge disagreed with the states and allowed the merger to close.[17] Under previously agreed-to settlement terms with various states that individually settled, T-Mobile agreed to reimburse the state-led working group $15 million and agreed to provide various consumer benefits such as freezing prices in California for five years and offering free internet and Wi-Fi hot spots to low-income households.

In a statement made after the defense verdict was announced, one of the attorneys from the California Attorney General’s Office stated that moving forward, the Office may not “put too much faith in the economics,” noting that she believed the decision did not consider the complicated economic theory and models put forth by the States.[18] “The economics went out the window, so anyone that comes in to talk to [the California Attorney General] needs more than just an economic story.”[19]

Employment

The Office appeared as an amicus in support of employees in labor actions. In Bernstein v. Virgin America, Inc., the district court awarded a class of flight attendants $77 million.[20] The court found that Virgin America was subject to California’s labor laws, both as to work done in California and based on employment policies decided from Virgin’s California headquarters, and that the plaintiff flight attendants had been undercompensated.[21] (Virgin’s meal break policy was not centralized, so meal break violations that happened outside California were not covered.) The Office appeared when Virgin appealed to the Ninth Circuit. The Office’s amicus brief in support of the flight attendants focused on California’s state labor policy and laws and argued that certain aspects of California’s labor laws are not preempted by federal law. Although the Ninth Circuit has not yet issued its decision in this case, it offers yet another example of how AG Becerra, apart from his enforcement authority, inserted himself into private litigation to advance a regulatory agenda.

AG Becerra, however, has not limited himself to amicus briefs. Recently, the Office became involved in litigation related to employee classification. In December 2019, AG Becerra announced an $800,000 settlement with Infosys stemming out of allegations that Infosys claimed that some of its foreign workers were covered by B-1 visas as opposed to H-1B visas.[22] H-1B visas, unlike B-1 visas, are subject to payroll taxes and require employers to pay workers at the prevailing local wage. The suit, brought under both California’s False Claims Act and Unfair Competition Law, demonstrated the range of legal approaches that AG Becerra has been willing to deploy, by seeking to enforce California’s labor laws even though such laws are primarily the province of the Labor Commissioner.

AG Becerra also moved to enforce AB 5, a recently enacted California statute that codifies the so-called “ABC test” for determining whether a worker is an employee or an independent contractor.[23] On May 5, 2020, the Office, along with the City Attorneys of Los Angeles, San Diego, and San Francisco, filed suit against rideshare companies, alleging violations of both California’s Unfair Competition Law and the Labor Code, even though Labor Code enforcement is traditionally the province of the Labor Commissioner.[24] Becerra sought injunctive relief under AB 5, seeking reclassification of rideshare drivers as employees and not independent contractors.[25] Becerra also sought restitution for drivers and civil penalties for alleged violations under the Unfair Competition Law.

Despite these enforcement efforts, California voters overwhelmingly approved Proposition 22 in the November election, passing it by the largest margin of any ballot initiative that year. Proposition 22 exempts app-based workers from AB 5 and definitively classifies them as independent contractors so long as basic guarantees of driver independence are satisfied. Proposition 22 can be seen as a rebuke of the Attorney General and City Attorneys’ attempt to stifle worker independence, and the outcome of the Office’s and City Attorneys’ suit may serve as a bellwether for future enforcement as to workers who do not fall within the Prop 22 exemption. If AG Becerra’s successor succeeds in using the Unfair Competition Law to enforce Labor Code provisions he lacks authority to directly enforce, this may signal more aggressive enforcement of the labor laws in the future, including the provisions of Prop 22.

Beyond AB 5, AG Becerra also obtained several employment-related settlements. In March 2020, he, along with other state attorneys general, announced three agreements with Burger King, Popeyes, and Tim Hortons in which they agreed to stop including “no-poach” provisions in their U.S. franchise agreements.[26] These follow similar settlements with Arby’s, Dunkin’, Five Guys, and Little Caesars in 2019,[27] and were part of AG Becerra’s attack on non-competes and similar agreements.[28]

Environmental

Shortly after winning election, in 2018 AG Becerra announced the creation of an Environmental Justice Bureau within the Environment Section of the California Department of Justice.[29] Charged with “protect[ing] people and communities that endure a disproportionate share of environmental pollution and public health hazards,” the Bureau launched investigations and actions seeking to recover damages for and abatement of alleged violations, including allegedly contaminated drinking water, purported exposure to lead and other toxins in the environment and consumer products, and claimed discharges to air and water.

In addition to the Office’s wide-ranging challenges to Trump administration environmental policies, AG Becerra coordinated with local district and city attorneys to secure a settlement with Autozone over allegations of improper waste disposal.[30] The settlement required Autozone to submit to a range of audits of its trash receptacles, prohibited unlawful waste, and required payment of $11 million to dozens of district attorneys’ offices throughout the state, including nearly a million dollars directly to his own Office.[31]

AG Becerra also lent the support of his Office to municipalities’ ongoing lawsuits against energy companies through his amicus submissions. In March 2019, the Office filed an amicus brief in the Ninth Circuit supporting Oakland and San Francisco in their suit against several major energy companies.[32] Oakland and San Francisco had sued the defendant energy companies for alleged injuries from sea-level rise induced by global warming. Opposing federal removal, the Office’s brief emphasized the need for state courts to be able to adjudicate climate-change related claims brought by state political subdivisions.[33] Similarly in July 2020, the Office filed a brief in support of an Oakland ordinance prohibiting the storage and handling of coal and petroleum coke within city limits.[34] The Office brief claimed broad authority of the State and municipalities to regulate activities that may contribute to climate change.[35] While his Office supported these suits, the Attorney General did not bring any such suits himself.

False Claims Act

Under AG Becerra, the Office’s False Claims Unit has investigated and prosecuted alleged overcharges by private companies to State agencies and pension funds, with some actions dating back more than a decade. One area of particular False Claims Act focus over the past decade, which continued during AG Becerra’s term, has been the recovery of investment losses suffered by California’s public pension funds during the 2008 financial crisis. In December 2017, AG Becerra announced a $120 million settlement with Royal Bank of Scotland (RBS), over alleged misrepresentations about residential mortgage-backed securities sold to California’s public employee and teacher pension funds.[36] In April 2019, the Office announced a $150 million settlement with Morgan Stanley for allegedly failing to provide adequate disclosures for mortgage-backed securities sold to those same pensions from 2003 to 2007.[37] The Office has pursued other pension-related False Claims Act cases, including a recent $7 million settlement with HSBC for alleged foreign currency trading overcharges to the California Public Employees Retirement System (CalPERS) in 2008 and 2009.[38] The Office has also participated in multi-state and federal Medicaid-related False Claims Act cases, including most recently a $40 million dollar nationwide settlement with Apria Healthcare over Medicaid reimbursements for ventilation machines that allegedly were unnecessary.[39]

Other recent settlements include a $102 million settlement with BP Energy Company over alleged natural gas contract overcharges dating from 2003 to 2012, which originated as a qui tam suit brought by a former employee and in which the Office intervened[40]; and a $4 million settlement with VMware for alleged overcharges to the State and local governments for information technology software spanning a period of six years.[41] Finally, AG Becerra has been a vocal supporter of legislation that would broaden the scope of the False Claims Act. In 2019 and 2020, he sponsored legislation that would have expanded the statute to cover tax fraud—creating a whole new class of claims for which private plaintiffs could profit through qui tam actions and for which the Attorney General could obtain treble damages and civil penalties. Each attempt to date has failed to pass in the Legislature despite Democratic majorities in both the Assembly and the Senate, due to significant concerns about creating financial incentives for private plaintiffs to file predatory qui tam lawsuits against unsuspecting businesses, and the potentially devastating financial cost associated with responding to even frivolous claims. Nevertheless, the bills’ author, Assembly Member Mark Stone, is expected to continue to attempt to expand the statute to cover tax claims.[42]

Healthcare

In addition to the Office’s activity regulating healthcare mergers and alleged price-fixing agreements discussed above, AG Becerra obtained substantial awards based on allegedly deceptive marketing of certain health care products. In January 2019, AG Becerra announced a $120 million nationwide settlement—of which California will receive $8 million—with Johnson & Johnson related to purported misrepresentations as to the effectiveness and safety of hip implants devices.[43] In November 2019, the Office (along with the Los Angeles District Attorney and Los Angeles County Counsel) filed suit against JUUL Labs, for allegedly marketing and selling electronic cigarettes to minors.[44] And, in January 2020, the Office secured a $344 million judgment after a trial against Johnson & Johnson for deceptive marketing related to its pelvic mesh for women.[45]

Along the same lines, in late 2017, numerous pharmaceutical companies announced in public filings that the California Attorney General’s Office, along with other state attorneys general and federal prosecuting and enforcement agencies, were investigating the pricing and sales of insulin, which had increased in price over the preceding decade.[46] AG Becerra also recently announced a $11.8 million settlement with Novartis Pharmaceuticals, covering alleged violations of California’s False Claims Act as well as the federal False Claims Act and Anti-Kickback Statute related to the provision of various drugs to Medicare and Medi-Cal patients.[47]

Privacy and Cybersecurity

The Attorney General’s Office has long been active in investigating and prosecuting companies for data breaches that exposed consumers’ personally identifiable information. For example, over the last two years, the Office has announced various multi-million dollar settlements arising out of data breaches, including against large health insurance and retail companies for allegedly failing to maintain adequate data security measures.[48] In September 2020, the Attorney General’s Office also secured a settlement against an app developer in which no breach was alleged, but in which the design of the app was alleged to pose risks to the personal information of app users.[49]

During this time period, California’s privacy landscape also witnessed a sea change with the passage of two recent statutes: the California Consumer Privacy Act (“CCPA”), which went into effect on January 1, 2020 (and which the California Attorney General has been empowered to enforce as of July 1, 2020),[50] and the California Privacy Rights Act (“CPRA”), which California’s voters approved in the November 2020 general election. AG Becerra and his Office stand to play a pivotal role in their enforcement in the coming years.

Even before it was empowered to enforce the CCPA, the Office was vested with the duty under that statute to draft its implementing regulations—essentially, creating the regulations it would then enforce. The Office announced on June 1, 2020 that those regulations had been submitted to the California Office of Administrative Law,[51] which issued the final text of the regulations on August 14, 2020. At that time, the final regulations became enforceable.[52] To execute its enforcement power, the Office has the authority to bring a civil action for any violation of the CCPA, and can seek to impose civil penalties of up to $2,500 per violation or $7,500 per intentional violation (or violation involving a minor’s personal information). Beyond reports of compliance letters being issued by the Office, to date, no enforcement actions have been brought by the Office under the CCPA.

The CPRA is an initiative statute that was placed on the November 3, 2020 ballot and was passed by the voters. The CPRA amends the CCPA to clarify and broaden it, and imposes a January 1, 2023 deadline for businesses to come into compliance with the new CPRA provisions.[53] The Office preserves its authority to issue CCPA regulations during part of the time period before CPRA takes effect, until a new privacy agency, the California Privacy Protection Agency (“CPPA”)—the first enforcement agency in the United States focused solely on privacy—would be formed with its own rulemaking authority.[54] While the composition of the CPPA has not yet been announced, it is likely that at least some of its staff will come from the California Attorney General’s Office. The Office will continue to be tasked with enforcing the CCPA until January 1, 2023, at which time the California Privacy Protection Agency and the Office will have parallel authority to enforce the CPRA (CPPA from an administrative enforcement standpoint, and the Office maintaining its civil action enforcement authority). The CPRA contains various additional provisions governing the two enforcement bodies’ interactions and detailing their enforcement powers.

For more information on the CCPA or the CPRA, find Gibson Dunn Client Alerts here, here, and here.

Looking Forward Into 2021 and Beyond

California’s Constitution provides that the Governor fills any vacancy in the office of the Attorney General, to complete the remainder of the existing term, by nominating a candidate who must be confirmed by a majority of the state Assembly and state Senate.[55] Unlike other statewide offices such as Secretary of State, the Attorney General must be admitted to the California Bar, and for at least five years immediately preceding his or her appointment or election to that Office.[56] Numerous potential candidates have been named, and we expect Governor Newsom to consider carefully Becerra’s replacement as one piece of the larger reshuffling of California’s highest elected offices, which includes the appointment of Secretary of State Alex Padilla to replace Vice-President-Elect Harris in the U.S. Senate, and the appointment of Assemblywoman Shirley Weber to replace Padilla in his prior role. It is likely that Governor Newsom will announce his choice for Attorney General once Becerra is confirmed by the U.S. Senate.

Regardless of who Governor Newsom appoints to replace AG Becerra, we expect the next two years to look directionally similar to Becerra’s term. The incoming Biden Administration (including AG Becerra himself at the helm of the Department of Health and Human Services) will undoubtedly result in a shift in the Attorney General’s priorities. We expect to see litigation against the federal government to take a back burner as the Biden Administration rolls-back and ceases enforcement of Trump-era policies, and implements new policies that are more aligned with California’s elected officeholders. We also expect to see the Attorney General partner with federal agencies, including the Department of Justice, Federal Trade Commission, Environmental Protection Agency, and Consumer Financial Protection Bureau on various initiatives. As a result, the change in the occupant at the White House will likely shift the Attorney General’s focus away from challenging federal actions and toward greater litigation against private actors within California. The Office’s aggressive enforcement positions on antitrust, consumer protection, environmental, and labor issues, for example, are unlikely to change in the coming months and will require that companies pay careful attention to the incoming statements and actions of the new Attorney General—including the potential reshuffling of the Office’s senior leadership. The Office will likely continue to look for and seize upon opportunities in a broad range of areas.

______________________

[1] https://xavierbecerra.com/about/

[2] Numerous candidates have been mentioned in media reports as to possible replacements, and the potential field remains wide open. As of mid-January 2021, some of the reported potential candidates include Assembly member Rob Bonta, Contra Costa County District Attorney Diana Becton, San Francisco City Attorney Dennis Herrera, and California Supreme Court Justice Goodwin Liu.

[3] Id.

[4] @AGBecerra, Twitter, https://twitter.com/AGBecerra/status/1337180686810148867 (Dec. 10, 2020).

[5] Press Release, Cal. Attorney General, California Department of Justice Denies Transaction between Adventist Health and St. Joseph Health Systems (Oct. 31, 2019), available at https://oag.ca.gov/news/press-releases/california-department-justice-denies-transaction-between-adventist-health-and-st.

[6] Press Release, Cal. Attorney General, Attorney General Becerra Reaches Settlement with Verity Health on Conditions of Transfer of St. Francis Medical Center (Aug. 14, 2020), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-reaches-settlement-verity-health-conditions-transfer-st.

[7] In re Verity Health Sys. of Cal., Inc., No. 2:18-bk-20151-ER (C.D. Cal. Aug. 31, 2020) (Stipulation).

[8] Press Release, Cal. Attorney General, Attorney General Becerra and Senator Monning Announce That Legislation to Reduce Healthcare Costs, Increase Access to Affordable Care Passes Senate Health Committee (May 13, 2020), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-and-senator-monning-announce-legislation-reduce.

[9] Lesley Stahl, 60 Minutes, How a Hospital System Grew to Gain Market Power and Drove Up California Health Care Costs (December 13, 2020), available at https://www.cbsnews.com/news/california-sutter-health-hospital-chain-high-prices-lawsuit-60-minutes-2020-12-13/.

[10] Robert King, Fierce Healthcare, Sutter Health Seeks Delay of $575M Settlement to Assess Impact of COVID-19 (June 17, 2020), available at https://www.fiercehealthcare.com/hospitals/sutter-health-seeks-delay-575m-settlement-to-assess-impact-covid-19.

[11] Leah Nylen, Politico, California Investigating Google for Potential Antitrust Violations (July 9, 2020), available at https://www.politico.com/news/2020/07/09/california-google-anti-trust-investigation-355710.

[12] Press Release, Cal. Attorney General, Attorney General Becerra Moves to Join Federal Lawsuit Against Google for Anticompetitive Actions (December 11, 2020), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-moves-join-federal-lawsuit-against-google.

[13] Press Release, Cal. Attorney General, Attorney General Becerra Secures Nearly $70 Million against Several Drug Companies for Delaying Competition and Increasing Drug Prices (July 29, 2019), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-secures-nearly-70-million-against-several-drug.

[14] See Press Release, Cal. Attorney General, Attorney General Becerra Joins Price-Fixing Lawsuit Against Six Drug Companies (March 1, 2017), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-joins-price-fixing-lawsuit-against-six-drug-companies.

[15] State of New York et al. v. Deutsche Telekom AG et al., No. 1:19-cv-05434 (June 11, 2019 S.D.N.Y.)

[16] Id. (Complaint) at Dkt. 2.

[17] Id. (Complaint) at Dkt. 410.

[18] Matthew Perlman, Law360, Calif. Enforcer Sees Less Focus On Economics After T-Mobile (Sept. 10, 2020), available at https://www.law360.com/articles/1308930/calif-enforcer-sees-less-focus-on-economics-after-t-mobile.

[19] Id.

[20] Bernstein v. Virgin America, Inc., No. 15-cv-02277-JST, Doc. No. 365 (N.D. Cal. Jan. 16, 2019).

[21] Bernstein v. Virgin America, Inc., No. 15-cv-02277-JST, Doc. No. 97 (N.D. Cal. Jan. 5, 2017).

[22] Press Release, Cal. Attorney General, Attorney General Becerra Announces $800,000 Settlement Against Infosys for Misclassification of Foreign Workers and Tax Fraud (Dec. 17, 2019), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-announces-800000-settlement-against-infosys.

[23] Pursuant to AB5, Labor Code § 2750.3(a)(1) was amended to read:

[A] person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

[24] People v. Uber Techs., Inc., No. CGC-20-584402 (Cal. Super. Ct., S.F. Cty. May 5, 2020) (Complaint).

[25] Labor Code § 2750.3(j).

[26] Press Release, Cal. Attorney General, Attorney General Becerra Announces Multistate Settlements to Block “No-Poach” Contract Provisions That Harm Fast Food Workers (Mar. 2, 2020), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-announces-multistate-settlements-block-%E2%80%9Cno-poach%E2%80%9D.

[27] Press Release, Cal. Attorney General, Attorney General Becerra Announces Multistate Settlements Targeting “No-Poach” Policies that Harm Workers (Mar. 12, 2019), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-announces-multistate-settlements-targeting-%E2%80%9Cno-poach%E2%80%9D.

[28] Press Release, Cal. Attorney General, Attorney General Becerra Calls for Nationwide Ban on Non-Compete Agreements, Reminds Businesses of Existing Prohibition in California (Nov. 15, 2019), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-calls-nationwide-ban-non-compete-agreements-reminds.

[29] Press Release, Cal. Attorney General, Attorney General Becerra Establishes Bureau of Environmental Justice (Feb. 22, 2018), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-establishes-bureau-environmental-justice.

[30] Press Release, Cal. Attorney General, Attorney General Becerra Announces $11 Million Settlement Against Autozone for Illegal Disposal of Hazardous Waste Statewide (June 18, 2019), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-announces-11-million-settlement-against-autozone.

[31] California v. Autozone, Inc., No. RG19019395 (Cal. Super. Ct., Alameda Cty. June 18, 2019) (Final Judgment and Permanent Injunction on Consent).

[32] Press Release, Cal. Attorney General, Attorney General Becerra Filed Brief in Support of Lawsuit by Oakland and San Francisco Communities to Hold Oil and Coal Companies Accountable for Costs of Sea-Level Rise (Mar. 20, 2019), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-files-brief-support-lawsuit-oakland-and-san-francisco.

[33] City of Oakland v. BP P.L.C., No. 18-16663 (9th Cir. Mar. 20, 2019) (Brief of Amici Curiae States of California, Connecticut, Maryland, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont, and Washington, and the District of Columbia).

[34] Press Release, Cal. Attorney General, Attorney General Becerra Files Brief in Support of Oakland’s Authority to Protect Environmental Justice Communities (July 20, 2020), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-files-amicus-brief-support-oaklands-authority-protect.

[35] City of Oakland v. Oakland Bulk & Oversized Terminal, LLC, No. 18-16105 (9th Cir. July 20, 2020) (Brief of the State of California as Amicus Curiae)

[36] Press Release, Cal. Attorney General, Attorney General Xavier Becerra Announces $125 Million Settlement Against Royal Bank of Scotland For Misleading California’s Pension Funds (Dec. 22, 2017), available at https://oag.ca.gov/news/press-releases/attorney-general-xavier-becerra-announces-125-million-settlement-against-royal.

[37] Press Release, Cal. Attorney General, Attorney General Becerra Announces $150 Million Settlement Against Morgan Stanley for Misleading California’s Teachers and Workers with Pensions (April 25, 2019), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-announces-150-million-settlement-against-morgan-stanley.

[38] Press Release, Cal. Attorney General, Attorney General Becerra Announces $7 Million Settlement Against Multinational Bank HSBC for Overcharging CalPERS on Foreign Exchange Transactions (Sept. 24, 2020), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-announces-7-million-settlement-against-multinational.

[39] Press Release, Cal. Attorney General, Attorney General Becerra Announces $40 Million Nationwide Settlement with Apria Healthcare (January 22, 2021), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-announces-40-million-nationwide-settlement-apria.

[40] Press Release, Cal. Attorney General, Attorney General Becerra: BP Energy Company Pays $102 Million in Settlement for Overcharging Californians for Natural Gas (Jan. 11, 2018), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-bp-energy-company-pays-102-million-settlement.

[41] Press Release, Cal. Attorney General, Attorney General Becerra Announces Settlement Against Cloud Software Manufacturer VMware for Overcharging California (Oct. 23, 2020), available here.

[42] See AB 2570 False Claims Act (2019-2020), California Legislative Information, available here; AB 1270 False Claims Act (2019-2020), California Legislative Information, available at https://leginfo.legislature.ca.gov/faces/billStatusClient.xhtml?bill_id=201920200AB1270.

[43] Press Release, Cal. Attorney General, Attorney General Becerra Announces $120 Million Settlement against Johnson & Johnson for Deceptive Marketing of Hip Replacement Products (Jan. 21, 2019), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-announces-120-million-settlement-against-johnson.

[44] Press Release, Cal. Attorney General, Attorney General Becerra and Los Angeles Leaders Announce Lawsuit Against JUUL for Deceptive Marketing Practices Targeting Underage Californians and Endangering Users of Its Vaping Products (Nov. 18, 2019), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-and-los-angeles-leaders-announce-lawsuit-against-juul.

[45] Press Release, Cal. Attorney General, Attorney General Becerra Secures nearly $344 Million Judgment Against Johnson & Johnson for Endangering Patients through Deceptive Marketing of Pelvic Mesh Products (Jan. 30. 2020), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-secures-nearly-344-million-judgment-against-johnson.

[46] See, e.g., Sarah Jane Tribble, Kaiser Health News, Business Insider, States Are Investigating Drug Companies And Middlemen Involved In The Pricing Of A Key Diabetes Medicine (Oct. 30, 2017), available at https://www.businessinsider.com/federal-and-state-probes-target-insulin-drugmakers-and-middlemen-2017-10.

[47] See, e.g., Press Release, Cal. Attorney General, Attorney General Becerra Announces $11.8 Million Settlement Against Novartis Pharmaceuticals (Sept. 14, 2020), available here; Press Release, Cal. Attorney General, Attorney General Becerra Announces $17.5 Million Settlement Against Home Depot Over Credit Card Data Breach (November 24, 2020), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-announces-175-million-settlement-against-home-depot; Press Release, Cal. Attorney General, Attorney General Becerra Recovers Over $1 Million for California from Premera Blue Cross Health Records Data Breach (July 11, 2019), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-recovers-over-1-million-california-premera-blue-cross.

[48] Press Release, Cal. Attorney General, Attorney General Becerra Announces $8.69 Million Settlement Against Anthem, Inc., Over Failure to Protect Patients’ Personal Data (Sept. 30, 2020), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-announces-869-million-settlement-against-anthem-inc; Press Release, Cal. Attorney General, Attorney General Becerra Recovers Over $1 Million for California from Premera Blue Cross Health Records Data Breach (July 11, 2019), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-recovers-over-1-million-california-premera-blue-cross.

[49] Press Release, Cal. Attorney General, Attorney General Becerra Announces Landmark Settlement Against Glow, Inc. – Fertility App risks Exposing Millions of Women’s Personal and Medical Information (September 17, 2020), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-announces-landmark-settlement-against-glow-inc-%E2%80%93.

[50] Civ. Code § 1798.185(c).

[51] Cal. Attorney General, CCPA Regulations, available at https://www.oag.ca.gov/privacy/ccpa/regs.

[52] Id.

[53] Cal. Secretary of State, Official Voter Information Guide, Proposition 24, available at https://voterguide.sos.ca.gov/propositions/24/.

[54] Id.

[55] Cal. Const. Art. V, Sec. 5, subd. (b).

[56] Gov’t Code, § 12503. The Attorney General must also be a registered voter (Elections Code § 201), not been convicted of certain felonies (Elections Code § 20), and not already subject to term limits (Cal. Const. Art. V, Sec. 1).

The following Gibson Dunn lawyers assisted in the preparation of this client update: Victoria Weatherford, Abiel Garcia, Jacob Arber, Winston Chan, Benjamin Wagner, Alexander Southwell, Rachel Brass, Eric Vandevelde, Ryan Bergsieker, Cassandra Gaedt-Sheckter, and Katherine Warren Martin.

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, the authors, or the following lawyers in the firm’s White Collar Defense and Investigations Practice Group with significant experience with the California Attorney General’s Office:

San Francisco
Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Winston Y. Chan – San Francisco (+1 415-393-8362, wchan@gibsondunn.com)
Charles J. Stevens – San Francisco (+1 415-393-8391, cstevens@gibsondunn.com)
Michael Li-Ming Wong – San Francisco (+1 415-393-8234, mwong@gibsondunn.com)
Victoria L. Weatherford – San Francisco (+1 415-393-8265, vweatherford@gibsondunn.com)

Palo Alto
Benjamin Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)

Los Angeles
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Michael M. Farhang – Los Angeles (+1 213-229-7005, mfarhang@gibsondunn.com)
Douglas Fuchs – Los Angeles (+1 213-229-7605, dfuchs@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
James L. Zelenay Jr. – Los Angeles (+1 213-229-7449, jzelenay@gibsondunn.com)

New York
Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com)

Denver
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)

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

On January 13, 2021, the Office of the Comptroller of the Currency (“OCC”) conditionally approved the charter conversion application for Anchorage Trust Company (“Anchorage”), permitting Anchorage to become a national trust bank.[1] This is the first approval by the OCC of a virtual currency firm’s becoming a federally regulated banking institution and demonstrates the ongoing leadership that the OCC has shown with respect to virtual currency issues.

Although this development is significant in and of itself, the Anchorage approval relies on a new OCC Chief Counsel’s Interpretation, released as OCC Interpretive Letter 1176,[2] that substantially increases the trust powers of national banks, making them a more attractive business model generally and particularly for fintech firms. This Client Alert discusses these developments.

I. The Anchorage Approval – Virtual Currency Activities Are Permissible Fiduciary Activities under the National Bank Act

The OCC’s approval order affirms that the following virtual currency activities, which were fiduciary in nature under the law of Anchorage’s home state, South Dakota, are permissible under the National Bank Act:

Fiduciary custody of digital assets.
Custody of cash deposits (Anchorage holds such deposits at FDIC-insured banks, in omnibus accounts for its clients).
Providing on-chain governance services allowing Anchorage clients to participate in the governance of the underlying protocols on which their virtual assets operate.
Via an affiliate or otherwise, operating validator nodes, providing staking as a service, and providing clients the ability to delegate staking to third-party validators.
Settling transactions facilitated by its affiliates, other third-party brokers, and clients. Clients or their brokers may direct Anchorage Trust to receive digital assets into and to transfer digital assets out of their vaults from and to external accounts or digital asset addresses controlled by third parties, including but not limited to transfers made in connection with the settlement of a purchase or sale of digital assets.[3]

Tellingly, the OCC did not discuss each of these activities as fiduciary activities under its applicable regulation, 12 C.F.R. Part 9. Part 9 defines “fiduciary capacity” as follows:

Fiduciary capacity means: trustee, executor, administrator, registrar of stocks and bonds, transfer agent, guardian, assignee, receiver, or custodian under a uniform gifts to minors act; investment adviser, if the bank receives a fee for its investment advice; any capacity in which the bank possesses investment discretion on behalf of another; or any other similar capacity that the OCC authorizes pursuant to 12 U.S.C.§ 92a.

12 C.F.R. § 9.2(e).

Relying on Section 9.2(e) would have required analogies to have been drawn to the specific activities in that section. Rather than making such analogies, the approval order notes simply that “since ADB-NA will continue performing the current activities of Anchorage Trust, in a manner authorized by South Dakota law for a state trust company, ADB-NA will be a national bank whose operations are those of a trust company and activities related thereto. Accordingly, ADB-NA’s activities are permissible pursuant to the plain terms of 12 U.S.C. § 27(a).”[4]

II. New Expansion of National Bank Fiduciary Powers

12 U.S.C. § 27(a), which was enacted in 1978 in reaction to a federal district court case that called into question the propriety of the OCC’s chartering a non-depository trust bank under the National Bank Act, states that “[a] National Bank Association . . . is not illegally constituted solely because its operations are or have been required by the Comptroller of the Currency to be limited to those of a trust company and activities related thereto.”[5]

Section 27(a) thus clearly authorizes national trust banks. However, notwithstanding an apparently clear statutory command that national bank fiduciary powers include “any other fiduciary capacity in which State banks, trust companies, or other corporations which come into competition with national banks are permitted to act under the laws of the State in which the national bank is located,” 12 U.S.C. § 92a, the OCC has traditionally not exercised its legal authority to the full extent under that statute. Rather, as Interpretive Letter 1176 states, a prior OCC interpretation had required that the OCC look to state law “to determine whether a fiduciary capacity of national bank is permissible [only] after the activity is determined to be ‘fiduciary’ within the meaning of 12 U.S.C. § 92a.”[6]

Interpretive Letter No. 1176 reverses this at least 37-year-old position. For the OCC to use Section 92a’s so-called “bootstrap provision” and determine that an activity that a state’s law regards as being performed in a fiduciary capacity is a fiduciary capacity for purposes of 12 U.S.C § 92a, the OCC must determine that a national bank is engaging in the relevant activity, role, or function consistent with the parameters provided for in the relevant state law to the same extent as a state bank to qualify as a fiduciary capacity. This will make conversions of state trust companies much easier as a powers matter.

This new interpretation accords not only with the plain language of Section 92a, but also with its legislative history, when the relevant provision was added to the Federal Reserve Act in 1918.[7] As an example, under the New York Banking Law in 1918, a national bank was prohibited by state law from acting as a fiscal and paying agent in New York,[8] even though doing so was a permissible fiduciary activity for a New York state-chartered trust company. Section 92a was enacted to level this playing field.

III. Confirmation That National Trust Banks Are Not Limited to Performing Primarily in a Fiduciary Capacity and May Exercise Banking Powers

In addition, Interpretive Letter 1176 confirms that national trust banks may perform other national bank activities permitted under 12 U.S.C. § 24(SEVENTH), and, indeed, that fiduciary activities need not be their primary business activity: “ A national bank that only performs one fiduciary capacity under 12 U.S.C § 92a would need trust powers. Conversely, there is also no requirement that a national trust bank chartered under 12 U.S.C. § 27(a) perform primarily in a fiduciary capacity.”[9]

This confirmation – of what is clearly the case under the National Bank Act – is an important one. National trust banks are clearly authorized by Congress under 12 U.S.C. § 27(a), and they not “banks” within the meaning of the Bank Holding Company Act.

The OCC’s confirmation means that as long as a national trust bank has a valid fiduciary business, it may engage in a traditional bank power such as lending, with all of the preemption benefits of a national charter, without concern over whether such activities are beyond the OCC’s authority to permit as a matter of statutory interpretation.

IV. Confirmation That Certain State Trust Company Activities May Be Permissible for National Banks under Traditional Banking Powers

Interpretive Letter 1176 also confirms that the OCC may find that an activity of a state-chartered trust company is permissible under 12 U.S.C. § 24(Seventh), which permits national banks may engage in the business of banking and activities incidental to the business of banking.

When determining whether an activity is part of the business of banking, the OCC considers the following factors under 12 C.F.R. § 7.5001(c)(1):

Whether the activity is the functional equivalent to, or a logical outgrowth of, a recognized banking activity;
Whether the activity strengthens the bank by benefiting its customers or its business;
Whether the activity involves risks similar in nature to those already assumed by banks; and
Whether the activity is authorized for state-chartered banks.

The OCC stated that, given the fourth factor, “an activity permitted for state trust banks may be part of the business of banking under the authority of 12 U.S.C. § 24(Seventh) for national banks if the activity is authorized for state-chartered banks, and the OCC is satisfied that the remaining three factors are also sufficiently met.”[10]

V. Conclusion

The Anchorage approval came at the end of Brian Brooks’ tenure as Acting Comptroller of the Currency. It is another sign of the OCC’s leadership on virtual currency issues and Acting Comptroller Brooks’ pushing at the boundaries of the National Bank Act to facilitate innovation in financial services. In this case, the expansion of the national trust bank fiduciary and banking powers is well grounded in federal statutory law, and should benefit numerous companies, including fintech companies, that are seeking to benefit from a federal charter.

Gibson Dunn has extensive experience with the issues related to national trust bank chartering and would be pleased to discuss them with you.

____________________

[1] https://www.occ.treas.gov/news-issuances/news-releases/2021/nr-occ-2021-6a.pdf.

[2] https://occ.gov/topics/charters-and-licensing/interpretations-and-actions/2021/int1176.pdf.

[3] OCC Conditional Approval, Application by Anchorage Trust Company to Convert to a National Trust Bank (January 13, 2021).

[4] Id.

[5] 12 U.S.C. § 27(a).

[6] Interpretive Letter No. 1176, OCC Chief Counsel’s Interpretation on National Trust Banks (January 11, 2021) (emphasis added) (citing OCC Interpretive Letter No. 265, reprinted in [1983-1984 Transfer Binder] Fed. Banking L. Rep. (CCP) ¶ 85,429 (July 14, 1983)). Interpretive Letter 1176 states that Interpretive Letter 265’s position on this issue is superseded.

[7] Walter S. Logan, “Amendments to the Federal Reserve Act,” The Annals of the American Academy of Political and Social Science, Vol. 99, The Federal Reserve System – Its Purpose and Work (January 1922), pp. 114-121. The authority over national bank fiduciary powers was transferred from the Federal Reserve Board to the OCC in 1962.

[8] New York Banking Law, § 223 (1918) (currently, Section 131 of the New York Banking Law).

[9] Interpretive Letter No. 1176, OCC Chief Counsel’s Interpretation on National Trust Banks (January 11, 2021).

[10] Id.

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 in the firm’s Financial Institutions or Derivatives practice groups, or the following authors:

Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)

Please also feel free to contact the following practice group leaders and members:

Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com)
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)
Mylan L. Denerstein – New York (+1 212-351- 3850, mdenerstein@gibsondunn.com)
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)

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

Our year-end 2020 report provides an update on the application of Article III in class and other complex litigation. First, we discuss the significance of the Supreme Court’s recent grant of certiorari in TransUnion LLC v. Ramirez, No. 20-297, __ S. Ct. __, 2020 WL 7366280 (U.S. Dec. 16, 2020), which concerns the propriety of certifying class actions with uninjured class members.

Second, we review recent cases in which courts have continued to grapple with issues of Article III standing in the wake of Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), often reaching divergent conclusions in similar cases involving claims under consumer credit, privacy, and related laws.

I. The Supreme Court Will Resolve Whether Uninjured Class Members Can Be Part of a Certified Class Action

On December 16, 2020, the Supreme Court granted certiorari in TransUnion LLC v. Ramirez to resolve a very important class action issue that has split the federal courts of appeals for years: “whether either Article III or Rule 23 permits a damages class action where the vast majority of the class suffered no actual injury, let alone an injury anything like what the class representative suffered.”

In Ramirez, the plaintiff asserted that TransUnion violated the Fair Credit Reporting Act (FCRA) by inaccurately labelling class members as potential terrorists, drug traffickers, and other threats to national security on their consumer credit reports. See Ramirez v. TransUnion LLC, 951 F.3d 1008, 1017 (9th Cir. 2020). After a jury awarded $60 million in damages, TransUnion appealed, arguing that the verdict “cannot stand because only Sergio Ramirez, the representative plaintiff, suffered a concrete and particularized injury as a result of TransUnion’s unlawful practice.” Id.

As discussed in a prior update, the Ninth Circuit agreed with TransUnion on this point and held that “each member of a class certified under Rule 23 must satisfy the bare minimum of Article III standing at the final judgment stage of a class action in order to recover monetary damages in federal court.” Id. at 1023. Citing Chief Justice Roberts’s observation that “‘Article III does not give federal courts the power to order relief to any uninjured plaintiff, class action or not,’” the Ninth Circuit reasoned that a contrary rule would “transform the class action—a mere procedural device—into a vehicle for individuals to obtain money judgments in federal court even though they could not show sufficient injury to recover those judgments individually.” Id. at 1023–24 (quoting Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1053 (2016) (Roberts, C.J., concurring)); see also Castillo v. Bank of Am., NA, 980 F.3d 723, 730 (9th Cir. 2020) (reiterating that a district court has the duty to ensure that any proposed “class is not defined so broadly as to include a great number of members who for some reason could not have been harmed by the defendant’s allegedly unlawful conduct”).

Nonetheless, the Ninth Circuit upheld the verdict upon finding that each class member had Article III standing. Ramirez, 951 F.3d at 1017. The court reasoned that even though plaintiff had stipulated that more than 75% of the absent class members did not have a credit report disseminated to any third party during the class period, FCRA was enacted to protect consumers’ concrete interests and “the fact that TransUnion made the reports available to numerous potential creditors,” along with “the highly sensitive and distressing nature of the [Office of Foreign Assets Control] alerts,” was “sufficient to show a material risk of harm to the concrete interests of all class members.” Id. at 1027.

In a separate opinion, Judge McKeown disagreed with the certification of absent class members’ claims. In particular, she was troubled by the lack of evidence that any absent class members were injured at all: although the named plaintiff and “a limited number of class members” had their “credit report[s] disclosed to third parties, there was no evidence of any harm or damages to remaining class members.” Id. at 1038 (McKeown, J., concurring-in-part and dissenting-in-part). Thus, not only did the named plaintiff’s “stark atypicality as the lone class representative” “strain Rule 23’s typicality requirements,” but the absence of evidence regarding the actual experiences of the absent class members made the “harm as to the bulk of the class … conjectural,” and therefore falling far short of showing a constitutionally cognizable injury. Id. at 1038–40.

The disagreement between the majority panel’s decision in Ramirez and Judge McKeown’s dissent highlights an issue that frequently arises in class litigation: whether and to what extent (including at what stage of the case) absent class members must satisfy Article III standing requirements. Different courts have reached different conclusions on this question. Compare Denney v. Deutsche Bank AG, 443 F.3d 253, 264 (2d Cir. 2006) (“[N]o class may be certified that contains members lacking Article III standing.”), with Kohen v. Pac. Inv. Mgmt. Co., 571 F.3d 672, 676 (7th Cir. 2009) (“[A]s long as one member of a certified class has a plausible claim to have suffered damages, the requirement of standing is satisfied.”). By agreeing to review Ramirez, the Supreme Court will have an opportunity to address this important issue and provide guidance on whether uninjured class members can be part of a certified class action.

II. Courts Continue to Reach Diverging Results on What Constitutes a Concrete Injury Sufficient to Establish Standing Under Spokeo, Inc. v. Robins

As reported in our second quarter 2019 update, in Muransky v. Godiva Chocolatier, Inc., a three-judge panel of the Eleventh Circuit held that a retailer’s failure to truncate a credit card number on a receipt in violation of the Fair and Accurate Credit Transactions Act (FACTA) was sufficient to create standing. 922 F.3d 1175 (11th Cir. 2019). In October 2020, the Eleventh Circuit reversed that decision en banc, holding that a bare procedural violation of FACTA, devoid of any claim of individual injury, is insufficient to confer Article III standing. Muransky v. Godiva Chocolatier, 979 F.3d 917 (11th Cir. 2020) (en banc).

The panel had noted that Congress set forth the remedial procedures in FACTA to minimize a risk of harm to a concrete interest (namely, preventing identity theft), and held that any violation presenting even a marginal risk of harming that interest should be “sufficient to constitute a concrete injury.” 922 F.3d at 1188. The en banc Eleventh Circuit disagreed, and criticized the panel’s standard as essentially adopting a presumption that statutory injury alone can constitute Article III injury, which was what the Supreme Court had rejected in Spokeo. 979 F.3d at 930. Instead, the en banc court focused on whether the violation in question caused actual harm or posed a material risk of harm to the plaintiff.

The en banc court concluded that even though the plaintiff had received a noncompliant receipt that contained his private information, he had not alleged any actual harm more concrete than time spent “safeguarding” his receipt and experiencing a “breach of confidence.” Id. at 931. The court rejected both theories. As for “safeguarding” the receipt, the court noted that under Clapper v. Amnesty International USA, 568 U.S. 398, 416 (2013), self-inflicted harm alone cannot constitute injury under Article III. Id. at 931. As for the “breach of confidence,” the court was skeptical that the analogy to the common law breach of confidence was appropriate, and even if it were, it would require third-party disclosure of private information, and the plaintiff had not alleged that anyone else had seen the receipt. Id. at 931–32.

The Sixth Circuit took a markedly different approach when addressing similar facts in Donovan v. FirstCredit, Inc., 983 F.3d 246 (6th Cir. 2020). The plaintiff alleged that a creditor sent a letter inside an envelope with an envelope window that revealed language describing the plaintiff as a debtor. Id. at 249. The plaintiff sued under the Fair Debt Collection Practices Act’s (FDCPA) provisions regulating the language and symbols debt collectors may employ on envelopes when communicating with consumers, alleging that the letter had violated these provisions by revealing the plaintiff’s status as a debtor. Id.

The Sixth Circuit held that the exposure of information through an envelope window, even if “benign,” created a sufficient risk that the plaintiff’s status as a purported debtor would be disclosed, which established an injury-in-fact under the FDCPA. Id. at 252–53. The court reasoned that because the letter had actually been sent in the mail, and an invasion of privacy is a “harm that has traditionally been regarded as providing a basis for a lawsuit,” the mailing of the letter with the exposed information provided “a degree of risk sufficient to meet the concreteness requirement” under Spokeo. Id. at 253.

The Seventh and Ninth Circuits this past quarter also addressed standing in putative class actions. In Fox v. Dakkota Integrated Systems, LLC, 980 F.3d 1146 (7th Cir. 2020), the Seventh Circuit addressed allegations that the defendant had failed to develop, publicly disclose, and comply with a data-retention schedule and guidelines for the permanent destruction of biometric data under the Illinois Biometric Information Privacy Act (BIPA). In particular, the plaintiff alleged that the defendant had retained her biometric data after her employment ended, in violation of BIPA’s requirements. Id. at 1149.

The Seventh Circuit acknowledged that in a prior related case, it had held that merely alleging the non-disclosure of data-retention and data-destruction policies was insufficient to show injury-in-fact under Article III. Id. at 1153–54 (citing Bryant v. Compass Grp. US, Inc., 958 F.3d 617, 619 (7th Cir. 2020)). But the court noted that in this specific case, the defendant’s alleged failure to disclose those policies had led to an unlawful retention of the plaintiff’s handprint and also to her biometric data being unlawfully shared with a third party. Id. at 1154. Analogizing this unlawful retention of data to the unlawful collection of data (which the court had previously found conferred standing in Bryant), the court reasoned that “the invasion of a legally protected privacy right, though intangible, is personal and real,” and therefore sufficient to plead an injury in fact. Id. at 1155.

The Ninth Circuit addressed standing in McGee v. S-L Snacks National, 982 F.3d 700 (9th Cir. 2020), a putative consumer class action. The plaintiff alleged that she had purchased and consumed defendant’s popcorn containing trans fats, despite the FDA’s determination that trans fats are no longer “generally recognized as safe,” and she brought claims under both California’s Unfair Competition Law and for present and future physical injury from the ingestion of trans fats. Id. at 703. In support of her claim for physical injury, the plaintiff estimated that she had consumed 0.2 grams of trans fats per day, and cited studies showing a link between consuming trans fats and organ damage. Id. at 709.

The Ninth Circuit held that the plaintiff did not have standing to bring claims for her alleged physical injury. Id. at 710. Even though the plaintiff’s cited studies showed a connection between trans fats and organ damage, they did not show that the consumption of trans fats invariably lead to such damage, which is required to establish concrete injury without any individual medical evidence of harm. Id. at 708. As for future injury, the court noted that the plaintiff cited studies involving far greater levels of trans fats consumption, such that the plaintiff had alleged no substantial risk of future health consequences to her. Id. at 710.

The following Gibson Dunn lawyers contributed to this client update: Christopher Chorba, Theane Evangelis, Kahn Scolnick, Bradley Hamburger, Lauren Blas, Jillian London, Wesley Sze, Jessica Pearigen, and Jonathan Haderlein.

Gibson Dunn attorneys 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 in the firm’s Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers:

Theodore J. Boutrous, Jr. – Co-Chair, Litigation Practice Group – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com)
Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com)
Theane Evangelis – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com)
Kahn A. Scolnick – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com)
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, bhamburger@gibsondunn.com)
Lauren M. Blas – Los Angeles (+1 213-229-7503, lblas@gibsondunn.com)

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With the swearing in of a new president and a new Congress, this presentation will explore the policy agenda of the Biden Administration and the legislative agenda of how the 117th Congress could impact the private sector. The presentation will discuss the upcoming Washington agenda, potential roadblocks, and what to expect in the new legislative and regulatory environment. The presentation will highlight the new heads of federal regulatory agencies and powerful congressional committees.

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PANELISTS:

Roscoe Jones Jr., Michael Bopp, Ashley Rogers & Caeli Higney

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 CLE@gibsondunn.com 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.

The California Privacy Rights Act (CPRA) was passed in November by California voters and will take effect January 1, 2023. In this webinar, we will walk through the most significant additions and how businesses should consider these changes in light of their current CCPA compliance programs. We will also discuss expectations regarding the new enforcement regime, as well as examine the first year of private litigation under the CCPA and what we expect to see in the coming year.

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PANELISTS:

Cassandra Gaedt-Sheckter, Eric Vandevelde & Jeremy Smith

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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.

Palo Alto partner H. Mark Lyon and associate Cassandra L. Gaedt-Sheckter and Los Angeles associate Frances A. Waldmann are the authors of “United States: Artificial Intelligence,” [PDF] published in the Global Data Review Insight Handbook 2021 in December 2020.

In the second in the series of three ESG focused webinars, members of the ESG Practice Group of Gibson Dunn’s London and New York offices will provide some insights specifically to address the ESG issues for Private Fund Managers including the following areas:

Regulatory overview – Global, Europe, UK
Approach to SFDR and regulatory change
Engaging with investors, investor reporting and trends
Integrating ESG into investment processes and portfolio companies
Sustainability as an asset class

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PANELISTS:

Michelle Kirschner is a Partner in Gibson Dunn’s financial regulatory team. 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. Ms. Kirschner has extensive experience in advising clients on areas such as systems and controls, market abuse, conduct of business and regulatory change management, including MiFID II, MAR and Senior Managers & Certification Regime. Following the EU referendum, she has spent considerable time advising regulated clients in relation to their options for conducting business in / into the EU following Brexit. She has also conducted internal investigations, in particular reviews of corporate governance and systems and controls in the context of EU and UK regulatory requirements and expectations.

Selina Sagayam is a Partner in Gibson Dunn’s international corporate team. Her practice focuses on international corporate finance transactional work, including public and private M&A, joint ventures, international equity capital markets offerings and advisory work focused on corporate governance, shareholder activism and securities law advice. Regarded as one of the leading public M&A advisers in the UK, Ms. Sagayam has advised on hostile, competitive and recommended takeovers. Ms. Sagayam is also noted for her expertise in financial services and regulatory advice. She advises boards and senior management of international corporations, exchanges, regulators, investment banks, and financial sponsors (private equity and hedge funds) on such issues. Her experience as a senior secondee at the UK takeover Panel and also as a non-executive director of a FTSE250 company has positioned her uniquely in her practice area. Ms. Sagayam established and co-chairs the firm’s UK ESG Practice Group.

John Senior is a Partner in the corporate department based in New York. He has extensive experience counselling sponsors on the organisation and operation of private investment funds, including buyout, infrastructure, real estate, natural resources, social impact and venture capital funds; co-investment funds; independent sponsor transactions and investment club programs. He was named a Rising Star for Investment Funds by IFLR1000 (2021). Mr. Senior also advises sponsors on internal partnership arrangements, strategic secondary and spin-out transactions, regulatory compliance and negotiations with service providers.

Chris Hickey is an Associate in the London office and is a member of the firm’s Financial Institutions Practice Group. He advises on a range of UK and EU financial services regulatory matters. This includes the regulatory elements of corporate transactions, regulatory change management and ongoing compliance requirements to which firms are subject. His clients include, among others, private equity firms, institutional asset managers, corporate finance boutiques and investment banks.

Partners Debra Wong Yang, Co-Chair of the Crisis Management Practice Group, and Diana Feinstein, provide an overview of Gibson Dunn’s Crisis Management Practice Group and the firm’s long history of guiding clients through crisis management. James Keshavaraz, Global Wellness Director, will then explain how Gibson Dunn’s Global Wellness Department integrated crisis management principals of adaptation, innovation, and resilience to deliver wellness strategies and activities to our attorneys and staff.

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PANELISTS:

Deb Yang & Diana Feinstein

MCLE CREDIT INFORMATION:

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.

This webcast explores the antitrust policy agenda of the Biden Administration and what legislative reforms to the antitrust laws may be on the horizon under the 117th Congress. Our panelists discuss what the change in administration means for ongoing enforcement efforts and potential new initiatives in both merger and non-merger enforcement. Finally, the webcast covers President Biden’s nominations for leadership positions at the Department of Justice Antitrust Division and the Federal Trade Commission and the impact that those choices will have on antitrust law and enforcement over the next four years.

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PANELISTS:

Rachel S. Brass is a partner in the San Francisco office of Gibson, Dunn & Crutcher and co-chair of the Firm’s Antitrust and Competition Practice Group. She is a member of the firm’s Litigation Department where her practice focuses on investigations and litigation in the antitrust, labor, and employment areas. Ms. Brass has extensive experience representing international and domestic clients in high-stakes appellate litigation in the Supreme Court, as well as Federal and state appellate courts throughout the United States. Her extensive antitrust and competition experience includes litigation and trial of indirect and direct purchaser claims, international cartel matters, mergers and acquisitions, grand jury investigations, and other antitrust investigations by the Federal Trade Commission, United States Department of Justice, European Commission, Canadian Competition Bureau, Korean Fair Trade Commission, Japan Fair Trade Commission and Australian Competition and Consumer Commission, as well as litigation in trial and appellate courts.

Caeli A. Higney is a partner in the San Francisco office of Gibson, Dunn & Crutcher and a member of the firm’s Antitrust and Competition Practice Group. Ms. Higney has experience handling a wide variety of antitrust matters in a broad range of industries, such as semiconductors, consumer electronics, retail food, consumer products, automotive parts, and financial services. She has represented companies before appellate and trial courts in matters alleging a range of antitrust-based claims, including allegations of price fixing, monopolization and attempted monopolization, tying, bundling, exclusive dealing, and refusal to deal.

Richard Parker is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of the firm’s Antitrust and Competition Practice Group. Mr. Parker is a leading antitrust lawyer who has successfully represented clients before both enforcement agencies and the courts. As an experienced antitrust trial and regulatory lawyer, Mr. Parker has been involved in many major antitrust representations, including merger clearance cases, cartel matters, class actions, and government civil investigations. He has extensive experience representing clients in matters before the Federal Trade Commission (FTC) and the U.S. Department of Justice Antitrust Division.

MCLE CREDIT INFORMATION:

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.

On January 20, 2021, the inaugural day of the new presidency, the Biden administration issued a series of across-the-board regulatory directives. These directives press pause on federal rulemakings, rescind Trump-era executive orders on the regulatory process, and set a framework for “modernizing” review of regulatory actions.

First, the new administration issued a memorandum freezing rulemakings pending review. Covered agencies are not to “propose or issue” any rule “until a department or agency head appointed or designated” by President Biden “approves the rule,” unless the rule falls into an exception “for emergency situations or other urgent circumstances relating to health, safety, environmental, financial, or national security matters,” as permitted by the Director of the Office of Management and Budget (“OMB”). For rules that have been published in the Federal Register but have not yet taken effect, agencies should consider “postponing the rules’ effective dates for 60 days” and opening a new “30-day comment period” to evaluate the rules further. After the 60-day delay, if a rule raises “substantial questions of fact, law, or policy,” agencies should “take further appropriate action in consultation” with the Director of OMB. This memorandum applies broadly to all “substantive action by an agency” that is anticipated to lead to “a final rule or regulation.” It does not appear to include independent agencies, though there is some ambiguity; while the memorandum is addressed to executive departments and agencies, its definition of “rule” is expansive enough that it could be read to cover actions by independent agencies such as the SEC. Either way, this memorandum will likely cause reconsideration of a wide variety of rules proposed or issued in the final days of the Trump administration.

This memorandum is similar to the regulatory freeze put in place on the first day of the Trump administration four years ago, though there are notable differences. For example, the Trump administration left agencies with no choice but to postpone by 60 days the effective date of any regulations published in the Federal Register that had not yet taken effect. By contrast, and as noted above, the Biden administration’s freeze instructs agencies to “consider” instituting this 60-day delay for such rules, which gives them more flexibility. Even with this added flexibility, it is still expected that many agencies will exercise the option to delay rules.

Second, President Biden issued an Executive Order revoking a number of Trump-era orders on the regulatory process, including:

Executive Order 13771 “Reducing Regulation and Controlling Regulatory Costs” (Jan. 30, 2017), which created the 2-for-1 rule requiring agencies to repeal two regulations for every one new regulation they issued. This order also established a budgeting process that required agencies to limit the incremental cost of new regulations under supervision of the OMB Director.
Executive Order 13777 “Enforcing the Regulatory Reform Agenda” (Feb. 24, 2017), which required each agency to designate a Regulatory Reform Officer and establish a Regulatory Reform Task Force to oversee regulatory reform initiatives and recommend regulations to be repealed. The order further required agencies to measure and report their progress in implementing these reforms.
Executive Order 13875 “Evaluating and Improving the Utility of Federal Advisory Committees” (June 14, 2019), which required each executive department and agency (independent regulatory agencies excepted) to review, reduce, and limit the number of federal advisory committees, terminating at least one-third of these committees by September 30, 2019. The order also capped the government-wide total number of advisory committees at 350.
Executive Order 13891 “Promoting the Rule of Law Through Improved Agency Guidance Documents” (Oct. 9, 2019), which required agencies to treat guidance documents as “non-binding both in law and in practice,” maintain an online database of all guidance documents, rescind outdated guidance documents, and establish procedures for issuing new guidance documents, including a clear statement of their non-binding effect, opportunities for the public to petition for withdrawal or modification of guidance documents, and a 30-day period of notice and comment for certain significant guidance documents.
Executive Order 13892 “Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication” (Oct. 9, 2019), which limited agencies’ ability to enforce standards of conduct that were not publicly stated or issued in formal rulemakings. It also provided that agencies issuing notices of noncompliance provide an affected party the opportunity to be heard, encouraged “self-reporting of regulatory violations . . . in exchange for reductions or waivers of civil penalties,” and imposed requirements governing administrative inspections and certain statutory obligations.
Executive Order 13893 “Increasing Government Accountability for Administrative Actions by Reinvigorating Administrative PAYGO” (Oct. 10, 2019), which sought to ensure compliance with the “pay-as-you-go” requirement (“PAYGO”) first adopted in 2005. PAYGO mandates that agencies propose ways to reduce mandatory spending whenever they undertake a discretionary action that would increase mandatory spending. Executive Order 13893 required agencies to submit proposed discretionary actions and proposals for compliance with PAYGO to the OMB Director for review.

In sum, this sweeping order undoes many of the reforms implemented by the Trump administration that were designed to reduce regulatory burdens, cut costs, shrink the size of government, and increase agency transparency.

Third, the Biden Administration issued a memorandum on “Modernizing Regulatory Review,” which instructs the Director of OMB to make “recommendations for improving and modernizing” review of regulations. Such recommendations should provide “concrete suggestions” on how to “promote public health and safety, economic growth, social welfare, racial justice, environmental stewardship, human dignity, equity, and the interests of future generations” in the regulatory process. Specifically, these recommendations should ensure that policies “reflect new developments in scientific and economic understanding,” account for “regulatory benefits that are difficult or impossible to quantify,” and do not cause detrimental “deregulatory effects.” OMB is also instructed to evaluate ways that the Office of Information and Regulatory Affairs (“OIRA”) can partner with agencies to support “regulatory initiatives that are likely to yield significant benefits” and to identify reforms that further the “efficiency” and “transparency” of the interagency review process.

* * * *

We will continue to monitor changes to the regulatory and rulemaking process taken by the new administration and keep you apprised of significant developments.

The following Gibson Dunn lawyers assisted in the preparation of this client update: Helgi C. Walker, Lucas Townsend, Michael Bopp, Jessica Wagner, Matt Gregory, Robert Batista, and Matthew Butler.

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 Administrative Law and Regulatory Practice Group or Congressional Investigations Practice Group, or the following authors:

Helgi C. Walker – Chair, Administrative Law and Regulatory Practice, Washington, D.C. (+1 202-887-3599, hwalker@gibsondunn.com)

Michael D. Bopp – Chair, Congressional Investigations Practice, Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)

Lucas C. Townsend – Member, Administrative Law and Regulatory Practice, Washington, D.C. (+1 202-887-3731, ltownsend@gibsondunn.com)

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

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.

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, mkirschner@gibsondunn.com)

Martin Coombes (+44 (0) 20 7071 4258, mcoombes@gibsondunn.com)

Chris Hickey (+44 (0) 20 7071 4265, chickey@gibsondunn.com)

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

Gibson Dunn presents a panel discussion regarding recently adopted and proposed SEC rulemakings and what to expect for the upcoming proxy season.

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PANELISTS:

Michael Titera, Daniela Stolman, & Aaron Briggs

MCLE CREDIT INFORMATION:

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.

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.

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PANELISTS:

Marcellus McRae, Ben Wagner & Frances Waldmann

MCLE CREDIT INFORMATION:

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.

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.

______________________

[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/.

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, jcohen@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)
Patrick F. Stokes – Washington, D.C. (+1 202-955-8504, pstokes@gibsondunn.com)
Lawrence J. Zweifach – New York (+1 212-351-2625, lzweifach@gibsondunn.com)
Emily A. Cross – New York (+1 212-351-4068, ecross@gibsondunn.com)
Darcy C. Harris – New York (+1 212-351-3894, dharris@gibsondunn.com)

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

Derivatives Group:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)

Securities Enforcement Group:
Barry R. Goldsmith – New York (+1 212-351-2440, bgoldsmith@gibsondunn.com)
Richard W. Grime – Washington, D.C. (+1 202-955-8219, rgrime@gibsondunn.com)
Mark K. Schonfeld – New York (+1 212-351-2433, mschonfeld@gibsondunn.com)

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

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.

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.

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, jcox@gibsondunn.com)

Georgia Derbyshire (+44 (0)20 7071 4013, gderbyshire@gibsondunn.com)

Charlotte Fuscone (+44 (0)20 7071 4036, cfuscone@gibsondunn.com)

Heather Gibbons (+44 (0)20 7071 4127, hgibbons@gibsondunn.com)

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.

2020 Year-End Update on Corporate Non-Prosecution Agreements and Deferred Prosecution Agreements - Chart 1

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 Year-End Update on Corporate Non-Prosecution Agreements and Deferred Prosecution Agreements - Chart 2

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]

2020 Year-End Update on Corporate Non-Prosecution Agreements and Deferred Prosecution Agreements - Chart 3

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.

____________________

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.

The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Kendall Day, Courtney Brown, Melissa Farrar, Michael Dziuban, Benjamin Belair, William Cobb, Laura Cole, Chelsea D’Olivo, Brittany Garmyn, Cate Harding, Amanda Kenner, Teddy Kristek, Madelyn La France, William Lawrence, Elizabeth Niles, Tory Roberts, Blair Watler, Brian Williamson, and former associate Kelley Pettus.

Gibson Dunn’s White Collar Defense and Investigations Practice Group successfully defends corporations and senior corporate executives in a wide range of federal and state investigations and prosecutions, and conducts sensitive internal investigations for leading companies and their boards of directors in almost every business sector. The Group has members across the globe and in every domestic office of the Firm and draws on more than 125 attorneys with deep government experience, including more than 50 former federal and state prosecutors and officials, many of whom served at high levels within the Department of Justice and the Securities and Exchange Commission, as well as former non-U.S. enforcers. Joe Warin, a former federal prosecutor, is co-chair of the Group and served as the U.S. counsel for the compliance monitor for Siemens and as the FCPA compliance monitor for Alliance One International. He previously served as the monitor for Statoil pursuant to a DOJ and SEC enforcement action. He co-authored the seminal law review article on NPAs and DPAs in 2007. M. Kendall Day is a partner in the Group and a former white collar federal prosecutor who spent 15 years at the Department of Justice, rising to the highest career position in the DOJ’s Criminal Division as an Acting Deputy Assistant Attorney General.

The Group has received numerous recognitions and awards, including its recent ranking as No. 1 in the Global Investigations Review GIR 30, an annual guide to the world’s top 30 cross-border investigations practices. GIR noted, “Gibson Dunn & Crutcher is the premier firm in the investigations space. On Foreign Corrupt Practices Act (FCPA) matters alone, Gibson Dunn regularly advises around 50 companies, four of which are in the Fortune 20.” The list was published on October 25, 2019.

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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.

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]

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.

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.

Securities Enforcement Practice Group Leaders:
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Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com)
Douglas M. Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com)
Nicola T. Hanna (+1 213-229-7269, nhanna@gibsondunn.com)
Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com)

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.

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PANELISTS:

Robert Klyman, Michael Neumeister, Allison Kidd & Matthew Bouslog

MCLE CREDIT INFORMATION:

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.

Summary and analysis of the significant and high-profile cases before the Supreme Court this Term, particularly those affecting the business community.

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PANELISTS:

Blaine Evanson & Lauren Blas

MCLE CREDIT INFORMATION:

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.

Introduction

Antitrust

Healthcare Mergers

Sutter Health

Google

Generic Drugs

T-Mobile/Sprint Merger

Employment

Environmental

False Claims Act

Healthcare

Privacy and Cybersecurity

Looking Forward Into 2021 and Beyond

I. The Anchorage Approval – Virtual Currency Activities Are Permissible Fiduciary Activities under the National Bank Act

II. New Expansion of National Bank Fiduciary Powers

III. Confirmation That National Trust Banks Are Not Limited to Performing Primarily in a Fiduciary Capacity and May Exercise Banking Powers

IV. Confirmation That Certain State Trust Company Activities May Be Permissible for National Banks under Traditional Banking Powers

V. Conclusion

I. The Supreme Court Will Resolve Whether Uninjured Class Members Can Be Part of a Certified Class Action

II. Courts Continue to Reach Diverging Results on What Constitutes a Concrete Injury Sufficient to Establish Standing Under Spokeo, Inc. v. Robins

The Vitol Settlement

CFTC’s Foreign Corrupt Practices Initiative

Implications of Settlement

APPENDIX

APPENDIX: 2020 Non-Prosecution and Deferred Prosecution Agreements

I. Introduction: Themes and Notable Developments

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

B. Commissioner and Senior Staffing Update

C. Legislative Developments: Disgorgement

D. Whistleblower Awards

II. Public Company Accounting, Financial Reporting and Disclosure Cases

A. Financial Reporting Cases

B. Disclosure Cases

C. Cases Involving Both Misleading Disclosures and Financial Reporting

D. Internal Controls

III. Investment Advisers

A. Payment for Order Flow

B. Mutual Fund Share Classes

C. Exchange-Traded Products

D. Puerto Rico Bonds

E. Disclosure Violations

F. Single Broker Quotes

G. Cherry Picking

IV. Broker-Dealers and Financial Institutions

A. Financial Reporting and Recordkeeping

B. Trade Manipulation

C. Best Execution and Payment for Order Flow

V. Cryptocurrency and Digital Assets

A. Significant Developments

B. Registration Cases

C. Fraud Cases

VI. Insider Trading

VII. Actions Against Attorneys

VIII. Offering Frauds

A. Frauds Targeting Senior Citizens and Retirees

B. Frauds Targeting Affinity Groups

C. Fraud Related to Online Retailers and Technology Providers