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Executives at Risk: Navigating Individual Exposure in Government Investigations - Volume II

White Collar Alert

Welcome back to Executives at Risk: Navigating Individual Exposure in Government Investigations. Our inaugural issue highlighted the Yates Memo, a policy issued by the Department of Justice (DOJ) requiring federal prosecutors to target individual executives in cases of corporate wrongdoing. While the full impact of the Yates Memo remains to be seen, it has the potential to trigger an even greater number of investigations and prosecutions of corporate executives in the months (and years) to come. In this issue of Executives at Risk, we discuss the immediate response to the Yates Memo and the most noteworthy recent cases and investigations implicating corporate executives.

The Yates Memo: Implications for Executives

DOJ Hopes the "Prospect of People Going to Prison" Will Discourage Corporate Criminal Activity: The day after DOJ released the Yates Memo, Deputy Attorney General Sally Yates delivered a speech at New York University School of Law emphasizing that DOJ will investigate and prosecute "the individuals through which . . . corporations act." Yates said if a company wants credit for cooperation, then it must "identify all individuals involved in the wrongdoing, regardless of their position, status or seniority in the company and provide all relevant facts about their misconduct," and described this requirement as "a substantial shift from [DOJ's] prior practice." While Yates acknowledged some of the difficulties inherent in bringing charges against individuals -- high-level executives are often insulated from day-to-day activity; investigators are usually forced to reconstruct events by sifting through documents; and certain foreign laws make it challenging to obtain evidence overseas -- she emphasized that DOJ's policy shift meant "[n]o more partial credit for cooperation that doesn't include information about individuals." "It's all or nothing," she elaborated. "No more picking and choosing what gets disclosed." She said corporations will no longer be permitted to "plead ignorance," meaning that "[i]f they don't know who is responsible, they will need to find out." 

Practitioners and Legal Scholars Debate the Practical Impact of the Yates Memo: At the same time that the DOJ launched a press offensive on its new policy, some legal experts questioned whether the Yates Memo will have a substantial effect on corporate criminal prosecutions. They noted the hurdles to individual prosecutions highlighted in Yates' speech at NYU, and suggested it will be difficult for DOJ to gather sufficient evidence to prosecute executives to meet the government's burden of proof. Some have pointed to DOJ's investigation into GM's ignition-switch defects as an example -- while the company recently reached a resolution with DOJ, no individual employees have been charged. (See comments in article published by GIR.)

Federal Judge Finds It "Shocking" That DOJ Has Not Prosecuted Individuals in GM Matter and Urges DOJ to Enter into Deferred Prosecution Agreements (DPAs) with Individuals: U.S. District Judge Emmet Sullivan of the U.S. District Court for the District of Columbia characterized the GM matter as "a shocking example of potentially culpable individuals not being criminally charged," and seemed to question why DOJ, which had issued the Yates Memo a week before it entered into its DPA with GM, failed to pursue the GM employees whose "reprehensible conduct . . . resulted in the deaths of many people." Judge Sullivan's decision, which came in a case unrelated to GM, also expressed his "disappoint[ment]" that DOJ was not using DPAs as a "second chance for deserving individuals." He stated that if DOJ "is sincere in its expressed desire to reduce over-incarceration and bolster rehabilitation, it will increase the use of other available resources."

DOJ Touts Indictment of Pharmaceutical Executive as Evidence of the Yates Memo at Work: A subsidiary of Warner Chilcott, a pharmaceutical company, recently pled guilty to a felony charge of healthcare fraud based on its illegal marketing of certain prescription drugs. Several corporate executives also pled guilty or were charged in connection with the company's misconduct, including W. Carl Reichel, a former president of the company. Reichel's indictment alleges that he offered and paid kickbacks to induce physicians to prescribe certain pharmaceuticals. Four other individuals face criminal charges, including three district managers and a doctor who has been charged with accepting kickbacks. Echoing the Yates Memo, DOJ's press release states that its prosecution of the case "demonstrate[s] that the government will seek not only to hold companies accountable, but will identify and charge corporate officials responsible for . . . fraud."

Executives in Cartel Investigations Excluded from Yates Memo: Although the Yates Memo states that DOJ must "not release individuals from civil or criminal liability when resolving a matter with a corporation," DOJ will not apply the policy outlined in the Yates Memo to the Antitrust Division's Corporate Leniency Program. The Leniency Program grants full amnesty to the first company to report involvement in illegal cartel conduct, and company employees receive amnesty as well. For companies that plead guilty to cartel conduct, the Antitrust Division immunizes all company employees except those expressly listed, or "carved out," in the plea agreement. While the Yates Memo appears to preserve the Leniency Program on its face, it is unclear how it will impact DOJ cartel investigations in practice.

Legislation Targets Executives "Complicit in . . . Cover-Ups": Meanwhile, two U.S. senators have introduced a bill that "would make it a crime for a corporate officer to knowingly conceal information about a corporate action or product that poses the danger of death or serious physical injury to consumers or workers," and would subject individuals to up to five years' imprisonment. The legislation, the Hide No Harm Act of 2015, was introduced in direct response to GM's settlement with DOJ, and is intended to "put in place common-sense, long-overdue reforms to ensure officers are held responsible for . . . acts that put lives at risk." The bill would require corporate executives to inform the "appropriate Federal agency" and warn employees and other individuals who may be exposed to "serious danger" in connection with a covered product or a covered service.

Extradition and Extraterritoriality Issues

For DOJ to make good on its promise to prosecute more corporate executives, it must be able to credibly argue that it can reach and effectively prosecute executives located abroad. Much of DOJ's recent focus has been on foreign bribery and antitrust -- two areas involving conduct that often occurs outside the United States, and often implicates foreign executives. Yet DOJ has experienced great difficulty in persuading other countries to extradite their citizens to the United States to face charges, as recent developments illustrate.

DOJ Forced to Agree to Light Sentence for Foreign Executive in Cartel Case Due to Extradition Difficulties: In November, five years after being indicted, former Chunghwa Picture Tubes Ltd. sales executive Chun Cheng "Alex" Yeh pled guilty to conspiring to fix prices for color display tubes (CTDs) used in computer monitors. The plea agreement provides for a term of imprisonment of just 8 months, far below the 12-16 months DOJ typically insists on in cartel cases, and nowhere near the average term of incarceration in cartel cases of 25 months. Yeh's guilty plea is the first the DOJ has secured in the CTD industry investigation. Five years ago, Yeh and four other Taiwanese nationals located in Taiwan were indicted. The United States, however, does not have an extradition treaty with Taiwan, and DOJ's agreement to a greatly discounted term of incarceration was the result of its inability to extradite Yeh.

DOJ Indicts Three More Japanese Auto Parts Executives Despite Its Inability to Extradite: In October, the DOJ indicted three more Japanese executives in the auto parts cartel investigation who apparently were unwilling to plead guilty. To date, DOJ has charged 58 executives in that investigation -- 30 pled guilty, but 28 others refused to do so and were indicted. In 2015, DOJ obtained only 2 guilty pleas from foreign auto parts executives while 9 others who reside outside the U.S. refused to plead guilty, and were indicted. It is unclear whether DOJ has requested that Japan extradite those who have been charged, and it is unlikely that the Department will succeed in extraditing any of them. The recent indictments illustrate that foreign executives are increasingly unwilling to plead guilty and serve time in U.S. jails, and that, depending upon where the executive is located, the U.S. has little power to bring them to the U.S. to face charges.

Indictment of Three Japanese Shipping Executives Casts Further Doubt on DOJ's Ability to Prosecute Executives Located in Japan: In October, the DOJ indicted three former executives of ocean freight shipping companies for allegedly engaging in a conspiracy to fix prices, rig bids and allocate the market for international ocean shipping services for roll-on, roll-off cargo. All three executives reside in Japan, and appear to have made the same decision that auto parts executives are making.

Switzerland Agrees to Extradite Executives in FIFA Corruption Scandal: Swiss authorities have agreed to extradite several high-ranking Fédération Internationale de Football Association (FIFA) officials previously detained in Switzerland. The decision turned on a determination that the acts charged under U.S. law are also crimes under Swiss law. The individuals approved for extradition include: Rafael Esquivel, former head of the Venezuelan soccer federation; Eduardo Li, former president of the Costa Rican soccer federation; Costas Takkas, former secretary general of the Cayman Islands soccer association; and Julio Rocha, former head of Nicaragua's soccer federation. Two other executives, José Maria Marin, former president of the Brazilian football confederation, and Jeffrey Webb, former FIFA vice president, voluntarily agreed to be extradited to the U.S. and subsequently pled not guilty in U.S. federal court. Eugenio Figueredo, a former FIFA vice president, was recently extradited to Uruguay, which had challenged U.S. extradition based on a "recently revived [Uruguayan] case against Figueredo that pre-dated [DOJ's] sweeping prosecution." (See CBS News report.)

UK Refuses DOJ Request for Evidence in London Interbank Offered Rate (LIBOR) Trial: In September, the UK's Serious Fraud Office (SFO) denied DOJ's request to turn over witness statements introduced in the UK trial of former UBS and Citigroup trader Tom Hayes. In August, a UK court convicted Hayes of manipulating LIBOR, a benchmark rate that leading banks charge each other for short-term loans. DOJ requested Hayes' statements through a U.S. court under the mutual legal assistance treaty between the U.S. and UK. DOJ argued that it needed the evidence to further its prosecution of two former Rabobank traders, Anthony Conti and Anthony Allen, for LIBOR manipulation. However, the SFO denied the request out of concern that handing over the evidence would jeopardize its own ongoing prosecutions in the LIBOR case. As discussed below, a U.S. federal jury ultimately convicted Conti and Allen on multiple conspiracy and wire fraud charges in November.

DOJ Vows to Pursue Foreign Evidence: In remarks following the release of the Yates Memo, Assistant Attorney General Leslie Caldwell stated that DOJ's efforts to gather evidence will not be stymied by companies' claims that foreign data-protection laws prevent them from cooperating fully. She noted that DOJ can still resort to mutual legal assistance treaties to access information, which it recently did to obtain evidence in its investigation of BNP Paribas. (See comments in article published by GIR.)

Enforcement Actions Against Executives

CEOs Held Criminally Liable for Corporate Crimes

CEO of Peanut Company Gets 28 Years in Jail for Selling Peanut Products Containing Salmonella: In 2014, a federal jury in the Middle District of Georgia found the CEO of the Peanut Corporation of America guilty of multiple counts for conduct relating to the contamination of peanut products the company sold. Nine people died as a result of salmonella poisoning, and companies that were forced to recall product from Peanut Corporation lost more than $100 million in spoiled food they purchased. Federal Judge W. Louis Sands recently sentenced former CEO Stewart Parnell to 28 years in prison. This extraordinarily long sentence was likely in part the result of an email Parnell sent, after being alerted to the contamination, telling subordinates to ship product that had not been tested for salmonella.

In a Split Verdict, Former CEO of Mining Company Is Acquitted of Felony Charges and Convicted of Single Misdemeanor for Conspiring to Violate Mine Safety Standards: After a trial in federal court in West Virginia, a jury returned a split verdict for Don Blankenship, the former CEO of Massey Energy. Following a mine disaster that killed 29 miners, Blankenship was charged with fraud and making false statements, both of which are felonies, and a misdemeanor charge of criminal conspiracy to violate mine safety standards. After a five-and-a-half week trial and 10 days of jury deliberations, Blankenship was acquitted of the felony counts and convicted of the misdemeanor. He faces a maximum sentence of one year in prison. Sentencing is scheduled for April 6.

Accounting Fraud

Stiff Prison Terms and Fines for Financial and Accounting Fraud: In recent sentencing proceedings, two federal courts imposed significant sentences and monetary fines against corporate financial officers. In one case, the former Chief Operating Officer and Chief Credit Officer of United Commercial Bank was convicted by a jury after a six-week trial and sentenced to more than eight years in prison for actions arising out of the 2008 financial crisis. In the other, the former Chief Financial Officer of Arrow Trucking Co. was sentenced to almost three years and ordered to pay more than $21 million in restitution for his role in a fraudulent tax reporting and bank fraud scheme. The company's former president and CEO had been previously sentenced to serve seven-and-a-half years in prison for the same scheme and was likewise ordered to pay more than $21 million in restitution.


Former Rabobank Executives Found Guilty in LIBOR Manipulation Scheme: In November, a federal jury found two former Rabobank executives guilty of multiple conspiracy and wire fraud counts in the first U.S. trial against individuals accused of rigging LIBOR. Anthony Allen, former global head of liquidity and finance, and Anthony Conti, a former senior trader, are scheduled to be sentenced in March but have announced their intent to appeal. Three other former Rabobank traders previously pled guilty to their involvement in the conspiracy, and two others have been indicted.

Former Water Treatment Executive Pleads Guilty to Price-Fixing and Bid-Rigging Scheme: Frank A. Reichl, a former executive of a water treatment chemicals manufacturer, pled guilty in October to participating in a 13-year conspiracy to fix prices, rig bids, and allocate the market for liquid aluminum sulfate supplied to municipalities and pulp and paper companies in the U.S. On the heels of the plea agreement, the city of Newark, New Jersey filed a putative civil class action against Reichl and his former company, Toronto-based General Chemical Corp., in New Jersey federal court. The plaintiffs argue that they paid artificially inflated prices for aluminum sulfate and seek treble damages.

Court Upholds Five-Year Sentence for Executive in Cartel Case: In October, the First Circuit upheld the five-year sentence of former Sea Star President Frank Peake for his participation in a scheme to fix prices on cargo shipped between the continental U.S. and Puerto Rico. Peake was convicted after a two-week jury trial in 2013. He argued on appeal that the district court judge had improperly calculated his sentence based on revenue Sea Star had earned during the conspiracy period that had not been attributable to the misconduct. He also sought to overturn the underlying conviction, arguing that the prosecutor had made improper remarks at trial, and that the district court had permitted prejudicial testimony, among other things. The five-year sentence is the longest imposed in a cartel case.

UK Court Imposes Short Sentence for Antitrust Misconduct: In September, a UK court sentenced Nigel Snee, former Managing Director of Franklin Hodge Industries, to six months in jail for participating in a scheme to fix prices, rig bids and allocate the market for galvanized steel tanks for water storage in the UK. Snee pled guilty to the cartel conduct in 2014 and later testified as a witness for the government in trials of two other individuals. The judge indicated that he reduced Snee's possible sentence from two years to six months, in part based on Snee's cooperation as a witness.

Government Contracts Fraud

Executive Sentenced to More Than Seven Years in Prison for Making Bribes to Obtain Government Contracts: In October, the former Chief Technology Officer of Virginia-based Nova Datacom LLC was sentenced to 88 months in prison and ordered to pay $14 million in restitution and forfeiture for his role in a government contracts bribery scheme. In 2011, Young N. Cho pled guilty to one count each of bribery and conspiracy to commit bribery, money laundering and fraud for paying nearly $18 million in bribes to U.S. Army Corps of Engineers officials in return for almost $1 billion in federal government contracts that were intended for small businesses. Nineteen other individuals have pled guilty.

Three Executives Plead Guilty to Fraudulently Obtaining More than $18 Million in Small Business Set-Aside Contracts: In October, three executives pled guilty to one count each of conspiracy to commit wire fraud for their involvement in a scheme to defraud the U.S. Department of Transportation of $18.7 million in contracts designated for small and disadvantaged businesses (DBEs). Weber Steel owners Dennis and Dale Weber admitted they set up Karen Construction Company Inc. as a sham DBE in order to secure approximately 224 highway construction projects that had been designated for DBEs for more than 15 years. Separately, Karen Construction president Judy Noll admitted to securing $11.9 million in subcontracts from 133 federally funded construction projects. The executives have not yet been sentenced.

Third Circuit Adopts Pro-Defense View of Loss in Small Business Administration (SBA) Fraud Cases: In United States v. Nagle, the Third Circuit vacated the sentences of two co-owners of a company who conspired to use a minority-owned front company to win $136 million in federal construction contracts. The Court found that the loss calculation in a small business government contracts fraud case should consider the value the government received. Thus, the Court held that loss should be calculated based on net loss by "taking the face value of the contracts and subtracting the fair market value of the services rendered under those contracts." In August, the Ninth Circuit reached a similar result and held that courts must offset any loss amount by the value of the services rendered to the government in cases involving disadvantaged business set-aside contracts. The defendants from both cases moved for immediate release from prison, arguing that they had already served the maximum time allowed. The respective district courts handling the cases denied their requests.

Sham HUBZone Owner Sentenced to One Year in Prison: A federal court sentenced construction owner William "Buster" Richardson III to a year in prison and a $6.76 million fine for misrepresenting that his company qualified for federal contracts under the Historically Underutilized Business Zone (HUBZone) set-aside program. The HUBZone program gives businesses located in designated urban and rural communities preferential access to certain federal contracts. Richardson's company, TAB Construction Co., allegedly received contracts with several federal agencies over a seven-year period based on Richard's misrepresentation that the company qualified for HUBZone contracts.


Corporate Recruiter Pleads Guilty to Tax Evasion: In October, a former vice president for talent acquisition at Burlington Coat Factory pled guilty to a charge of federal tax evasion corresponding to almost $500,000 in payments the corporate recruiter funneled to her shell company. Starting in 2008, Barbara Ames formed a fake headhunting company to which she funneled corporate funds and approved bogus invoices. Illustrating how prosecutors will use the U.S. Tax Code to combat corporate fraud, Ames is being prosecuted in New Jersey federal district court for failing to report and pay tax on her ill-gotten gains.

Pennsylvania Federal Jury Clears Executive of $200M Corporate Tax Fraud: A federal jury in Philadelphia acquitted an ex-managing director of an investment firm of charges that he conspired to defraud the government and corruptly endeavored to obstruct and impede federal tax laws. The government alleged that Donald Stevenson and his business partners evaded $200 million in federal tax through a complex scheme whereby the group purchased companies with large anticipated federal tax liabilities and subsequently created fake losses and received tax refunds.

More Grand Jury Subpoenas for Caterpillar in Tax Probe: A recent SEC filing by Caterpillar revealed that it has received more subpoenas relating to an ongoing federal grand jury investigation in the Central District of Illinois. The company has been in the spotlight since 2014 when the U.S. Senate Permanent Subcommittee on Investigations grilled executives on Caterpillar's use of a Swiss affiliate. The Subcommittee concluded that Caterpillar used the Swiss company to redirect profits from the sale of replacement parts and avoid $2.4 billion in federal tax liability. A financial disclosure by Caterpillar has revealed that in January 2015, the IRS proposed tax increases and penalties of approximately $1 billion. Caterpillar asserts that it has fully complied with federal law and that the new subpoenas do not represent an expansion of the current probe.

Privilege Issues

Federal Court of Appeals Holds That the Crime-Fraud Exception Defeats Privilege for Communications With Corporate Counsel, as Well as With Defendant's Personal Attorney: In a criminal case against the owner of Legion Construction, Inc. involving allegedly fraudulent representations concerning the status of Legion as a Service-Disabled Veteran Owned Small Business Entity (SDVOSB), a federal district court ordered the company's outside counsel at Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C. (Mintz Levin) to produce certain documents relating to the alleged fraud. Defendant David Gorski and Legion appealed the order, which held that the documents had to be produced pursuant to the crime-fraud exception. DOJ cross-appealed, arguing that the government is also entitled to documents from Gorski's personal lawyer, Elizabeth Schwartz. The First Circuit stated that its decision neither "reflect[ed] a finding on the ultimate question of whether Gorski acted wrongfully" nor "bear[ed] on the conduct or intent of the lawyers involved, because the crime-fraud exception is triggered by the intent of the client." It held that it was appropriate to compel production of documents from Mintz Levin, because "Gorski allegedly orchestrated an ongoing scheme in which, for five years, he maintained the outward appearance that Legion was compliant with SDVOSB regulations while retaining actual control for himself. Mintz Levin was retained to restructure Legion to maintain that supposed compliance with changing SDVOSB regulations." Gorski's communications with Schwartz were likewise discoverable. Even though Schwartz apparently had no role in Legion's submissions to the SBA, "Gorski's intent with regard to Schwartz was arguably the same as his intent with regard to Mintz Levin: to perpetuate an ongoing scheme to conceal the true ownership and control of Legion over a five-year time period."

District Court Rules That Corporate Executive's Defense in Civil Case Must Cede to the Company's Attorney-Client Privilege: The U.S. District Court for the Southern District of New York concluded that Kurt Lofrano, a defendant in a federal False Claims Act case involving government-backed residential mortgage loans, could not pursue an advice-of-counsel defense. Doing so would require the disclosure of privileged information, but Lofrano's employer (Wells Fargo Bank) owns the privilege and refuses to waive it. The court recognized that the "result is arguably harsh in this particular case, as it may well deprive Lofrano of his best defense to liability for tens of millions of dollars," but nonetheless concluded that this was "the price that must be paid for society's commitment to the values underlying the attorney-client privilege." The court found the question to be a "difficult one because it involves a conflict between two indisputably weighty principles": the opportunity to present every available defense, versus one of the oldest recognized privileges for confidential communications. The decision hinged in large part on Supreme Court precedent holding that a defendant does not have an unfettered right to offer testimony that is privileged. While Lofrano "may well have taken actions on Wells Fargo's behalf in the good-faith belief that he was acting in compliance with the law," he will not be permitted to make that argument at trial in light of Wells Fargo's refusal to waive its attorney-client privilege.

Whistleblower Cases

Fired General Counsel Brings Whistleblower Claims: Whistleblower issues will be front and center in California federal district court in the pending litigation of Sarbanes-Oxley claims against Bio-Rad, a life sciences research firm. The whistleblower -- a former Bio-Rad general counsel -- asserts that he was fired from his position after investigating and internally reporting alleged Foreign Corrupt Practices Act violations by the company. In an October decision, a federal magistrate judge let the claims proceed against the firm and its CEO, but tossed claims against board members who had not been individually named in the original complaint. The case will address important issues relating to the duties of in-house counsel, the handling of internal reports of allegedly illegal activities and the protection of whistleblowers.

Misappropriation of Corporate Data

Federal Initiative to Address Misappropriation of Corporate Information: An enforcement program initiated by the U.S. Attorney's Office for the District of Massachusetts led to the September sentencing of a former executive of a Verizon wireless retailer who provided protected internal financial data to a financial services research firm under an undisclosed consulting agreement. James Dunham was sentenced to five months in prison and five months of home confinement, and he was ordered to pay fines and forfeiture. The misappropriated data was not used for purposes of insider trading, but the case demonstrated the harm that can result from the unauthorized release of confidential, internal data -- in this case, a significant one-day decline in BlackBerry's stock price. 

Editors: Lauren E. Briggerman, Dawn E. Murphy-Johnson, Kirby D. Behre, Charles F. B. McAleer,* Jr., Andrew C. Strelka*, Jonathan D. Kossak*

*Former Miller & Chevalier attorney

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