2014 was a good year for:

  • Whistleblowers:  Whistleblower awards by the Securities & Exchange Commission ("SEC" or "the Commission") increased in number and dollars in 2014.  On September 22, the Commission authorized an award of over $30 million to a whistleblower who provided information that led to a successful SEC enforcement action and successful related actions.  The SEC's Office of the Whistleblower indicated in its annual report1 that the award would have been even larger had the whistleblower not showed "unreasonable" delay in coming forward.  Although most whistleblower tips come from U.S. sources, this was the fourth SEC award to a whistleblower living in a foreign country.  Since the creation of the Office of the Whistleblower in 2011, the SEC has authorized awards to only 14 whistleblowers out of the more than 10,000 tips it has received. Nevertheless, 9 of those awards were made in FY 2014. 
  • Preserving attorney-client privilege in internal investigations (but stay tuned): On June 27, in In re Kellogg Brown & Root, Inc.2, the U.S. Court of Appeals for the D.C. Circuit reversed a district court decision that had ordered a government contractor to produce reports from an internal investigation sought by a relator in a qui tam False Claims Act case.  The D.C. Circuit held that the reports were protected by the attorney-client privilege, even though outside counsel was not present in employee interviews, many of the interviews had been conducted by non-attorneys, employees who were interviewed were not told that the purpose of the interview was to help the company obtain legal advice, and the confidentiality agreements signed by employees did not state that the purpose of the investigation was to obtain legal advice. The D.C. Circuit further held that, even if the contractor undertook the investigation to comply with its obligations under its contract with the Department of Defense, obtaining or providing legal advice need not be the sole purpose of an internal investigation in order to protect privilege. Rather, it was sufficient that obtaining legal advice was "one of the significant purposes of [the contractor's] investigation."3  Many lauded the decision as restoring the status quo to the application
    of attorney-client privilege in internal investigations, but discovery and privilege issues continue to be litigated at the district court level.
  • Prosecuting individuals in enforcement actions: U.S.Department of Justice ("DOJ") officials have made clear their intent to target more individuals for criminal prosecution in cases involving corporate wrongdoing, and the SEC's Director of Enforcement has likewise predicted that the Commission will bring more cases against individuals in the coming year. Even compliance officers came under attack, as evidenced by the $1 million penalty sought by the federal government against MoneyGram's former chief compliance officer for allegedly failing to ensure that MoneyGram implemented and maintained an effective Anti-Money Laundering program and complied with certain reporting requirements. In September, a high-ranking DOJ official noted that companies making voluntary disclosures to DOJ must, "[i]f you want full cooperation credit, make your extensive efforts to secure evidence of individual culpability the first thing you talk about when you walk in the door to make your presentation [to the government]."4  Conversely, when BNP Paribas pleaded guilty this year to violating U.S. sanctions laws (for which they received an $8.9 billion penalty) prosecutors noted that the size of the fine was due not only to what they characterized as "prolonged misconduct," but also to the bank's alleged failure to cooperate, which DOJ claimed had "significantly impacted" the government's ability to bring charges against individuals.5
  • Committee on Foreign Investment in the United States ("CFIUS") challenges: On July 15, the U.S. Court of Appeals for the District of Columbia Circuit held in Ralls v. Committee on Foreign Investment in the United States that the Ralls Corporation (a Chinese-owned and controlled company) had been deprived of its property without due process when the President (at the recommendation of CFIUS) ordered Ralls to divest its interests in certain U.S. wind farm projects located near sensitive U.S. defense installations. The court held that Ralls was entitled to receive both the unclassified evidence that was the basis for the government's decision and an opportunity to respond to this evidence.  The case is ongoing, and its full impact remains to be seen. 

2014 was a bad year for:

  • Post-Acquisition Headaches: Two agency actions this year made clear that U.S. buyers are at risk if acquired firms have a history of violations of U.S. law:
    • Wind River Systems, a subsidiary of Intel, settled an administrative action brought by the U. S. Commerce Department's Bureau of Industry and Security ("BIS"), alleging 55 violations of the Export Administration Regulations, reportedly including 4 exports to companies on the Entity List. 30 of these violations allegedly occurred in the two years that followed Intel's acquisition of Wind River, but settlement papers also said 25 of the violations occurred before Intel bought the company. Wind River agreed to pay BIS a civil penalty of $750,000. The six-figure penalty, large for BIS prosecutions, demonstrates the risks of prosecution for pre-acquisition export-law violations, as well as the importance of vigorous oversight post-acquisition. In announcing the settlement, the Assistant Secretary of Commerce for Enforcement noted that he had approved the penalty because "the violations were ongoing over a period of several years."6 Even then, however, the penalty was reduced because the violations were voluntarily reported.
    • In a matter involving the U.S. Foreign Corrupt Practices Act ("FCPA"), the DOJ issued Opinion Procedure Release 14-02, declining action against a U.S. company that, in performing pre-acquisition due diligence of a foreign target, had identified numerous "likely improper payments" to foreign government officials, and "substantial weaknesses in accounting and recordkeeping."7 DOJ concluded that none of the improper payments "had a discernible jurisdictional nexus to the United States," noting that the seller and the target "largely confine their operations to [the foreign country], have never been issuers of securities in the United States, and have had negligible business contacts, including no direct sale or distribution of their products, in the United States."8  At the same time, the Opinion Release took pains to point out that, even if U.S. jurisdiction is otherwise present, a purchaser could be subject to successor liability for the target's pre-acquisition FCPA violations. DOJ outlined the steps it encourages companies to take in acquisitions, including but not limited to conducting thorough FCPA and anti-corruption due diligence, promptly integrating the subsidiary into its compliance structure, and disclosing to DOJ "any corrupt payments discovered during the due diligence process."9
  • U.S. exports to Russia: 2014 saw a series of increasingly restrictive U.S. and foreign sanctions on Russian trade in response to Russian involvement in Ukraine.
    • On December 18, 2014, the President signed into law the Ukraine Freedom Support Act (Pub. L. 113-272, H.R. 5859), which grants him expansive authority to impose sanctions on various sectors of the Russian economy.10 
    • On December 19, the President issued Executive Order 13685, which prohibits, among other things, the import and export of most goods, services, or technology to or from the Crimean region of Ukraine, annexed by Russia in 2014.11

The Crimea-related executive order goes beyond the prohibitions previously imposed by the Ukraine- related sanctions program, which chiefly targets individuals close to Russian President Vladimir Putin, sectors of the Russian economy (such as the energy and banking sectors), and certain types of transactions (such as long-term debt financing). In August, the Office of Foreign Assets Control ("OFAC") issued its "50 Percent Guidance," making clear that sanctions reach any entity in which sanctioned parties have a 50 percent or greater interest, including entities in which multiple sanctioned parties collectively have a 50 percent or greater interest.12 The OFAC guidance emphasizes the importance of due diligence to confirm the ownership of Russian customers and business partners, especially where there are indications that the company may be owned by sanctioned parties.

  • Any foreign investor hoping to minimize U.S. government paperwork: On November 24, the Department of Commerce Bureau of Economic Analysis issued a rule that (with limited exceptions) requires reporting within 45 days by U.S. companies that receive foreign direct investment ("FDI") or that (1) have foreign parents or foreign direct investment and (2) acquire or start U.S. businesses, or expand their operations.13  The rule defines FDI as "the ownership or control by one foreign person (foreign parent) of 10 percent or more of the voting securities of an incorporated U.S. business or enterprise, or an equivalent interest of an unincorporated U.S. business enterprise, including a branch."14 The rule reaches more than investments in U.S. businesses.  It also covers real estate, improved and unimproved, except residential real estate held exclusively for personal use and not for profit-making purposes.  Going forward, attention to this rule should be part of the checklist for U.S. acquisitions and expansions that involve foreign and "foreign-controlled" companies.

1 See http://colreaction.stroock.com/reaction/7904/FN1.pdf.

2 See http://colreaction.stroock.com/reaction/7904/FN2.pdf.

3 Id. (emphasis added).

4 See http://colreaction.stroock.com/reaction/7904/ FN4.pdf.

5 See http://colreaction.stroock.com/reaction/7904/ FN5.pdf.

6 See http://colreaction.stroock.com/reaction/7904/ FN6.pdf.

7 See http://colreaction.stroock.com/reaction/7904/FN7.pdf (citing DOJ & SEC A Resource Guide to the U.S. Foreign Corrupt Practices Act (Nov. 14, 2012), at 28) (http://colreaction.stroock.com/reaction/7904/FN7.2.pdf) ("[I]f an issuer were to acquire a foreign company that was not previously subject to the FCPA's jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuer.")

8 Opinion Procedure Release 14-02(emphasis added).

9 Id. DOJ noted that these actions, "may, among several other factors, determine whether and how the Department would seek to impose post-acquisition successor liability in case of a putative violation." Id.

10 See http://colreaction.stroock.com/reaction/7904/FN10.pdf.

11 See http://colreaction.stroock.com/reaction/7904/FN11.pdf.

12 See http://colreaction.stroock.com/reaction/7904/FN12.pdf.

13 See http://colreaction.stroock.com/reaction/7904/
(79 Fed. Reg. 69,759 (Nov. 24, 2014)) (providing notice of the approval by the Office of Management and Budget and resulting effectiveness of 79 Fed. Reg. 47,573 (Aug. 14, 2014) (http://colreaction.stroock.com/reaction/7904/FN13.2.pdf)).

14 79 Fed. Reg. at 47,575 (http://colreaction.stroock.com/reaction/7904/FN13.2.pdf).

For More Information

For additional information or a copy of any of the documents referenced in this Stroock Special Bulletin, please contact any member of the National Security/CFIUS/Compliance Practice Group.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.