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Defense Industry Initiative Best Practices Forum June 23, 2011 Dodd-Frank Act Sentencing Guidelines Trends in Administrative Agreements Iris E. Bennett,

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Presentation on theme: "Defense Industry Initiative Best Practices Forum June 23, 2011 Dodd-Frank Act Sentencing Guidelines Trends in Administrative Agreements Iris E. Bennett,"— Presentation transcript:

1 Defense Industry Initiative Best Practices Forum June 23, 2011 Dodd-Frank Act Sentencing Guidelines Trends in Administrative Agreements Iris E. Bennett, Partner Jenner & Block LLP

2 Dodd Frank Whistleblower Provisions  Overview of bounty provisions:  Apply to individuals who bring violations of securities and commodities laws and FCPA to attention of SEC or CFTC  Entitled to 10-30 percent of any recovery over $1 million  Payment is mandatory  No ability to file lawsuit (unlike FCA)  Can remain anonymous (if represented by attorney) until payment of award  SEC has established $450M whistleblower fund  Influx of tips (about one a day) 2

3 Dodd Frank Whistleblower Provisions  Types of violations potentially at issue:  Any action brought by the SEC or CFTC “under the securities laws,” and any “related action” o A “related action” could be one brought by, e.g., DOJ, or other regulatory authorities  For public companies, include FCPA anti-bribery and books & records violations 3

4 Dodd Frank Whistleblower Provisions  Whistleblower must submit “original information”  Original information is: o Based on whistleblower’s own “independent” knowledge or analysis o Unknown to the SEC at time of submission o Not exclusively from a public allegation o Submitted after effective date of Act  “Independent knowledge” generally means only that information not obtained from publicly available source 4

5 Dodd Frank Whistleblower Provisions  Interaction with internal reporting mechanisms:  Internal reporting may increase award o Conversely, unreasonable delay in reporting or interference with internal compliance systems may decrease award  If complaint reported internally, 120-day grace period applies for reporting the same information to the SEC  If whistleblower’s report is followed by a company self-report, recovery for the whistleblower may increase if penalty to company increases as a result of additional information disclosed 5

6 Dodd Frank Whistleblower Provisions  Interaction with internal reporting mechanisms:  Certain persons with compliance responsibilities presumptively excluded from collecting reward: o Officers and directors o Employees whose principal duties involve compliance or internal audits o Outside firms retained to perform compliance or certain accounting duties  Unless: o Reason to believe disclosure necessary to prevent further injury to the company o Reasonable basis to believe actions being taken to impede the investigation o Or 120 days have passed since the misconduct was reported internally 6

7 Dodd Frank Whistleblower Provisions  In general, individuals not eligible for whistleblower bounty awards include:  Those who conduct audits required for SEC filings  Employees of DOJ, law enforcement, regulatory agencies  Those convicted of crimes in connection with activity in question o BUT: those merely implicated in the conduct are not excluded, although their reward may be reduced  Attorneys, accountants, and certain others generally ineligible unless qualify for an exception 7

8 Dodd Frank Whistleblower Provisions  Key factors in determining reward amount:  Significance of the information  Degree of assistance provided by the whistleblower  Government’s interest in deterring such violations  Whether the whistleblower was involved in the wrongdoing (unless convicted, in which case no reward)  Whether the whistleblower reported the issue internally  Amount of recovery by the government 8

9 Dodd Frank Whistleblower Provisions  Anti-retaliation provisions:  Provide protections against retaliation for individuals who report alleged violations to the government  Extend to whistleblowers who offer information under: o The Dodd-Frank Act, Sarbanes-Oxley Act, Exchange Act, or o 18 U.S.C. § 1513(e), which broadly applies to providing truthful information relating to the commission or possible commission of any federal offense (e.g., FCPA, antitrust)  Apply to discharge and lesser harassment and discrimination  Apply to any “employer” (public and private) 9

10 Dodd Frank Whistleblower Provisions  What’s old  Need for effective compliance program  Effective internal reporting systems  Take whistleblowers seriously  What’s new  Increased pressure to make disclosures  Increased pressure to investigate quickly 10

11 Sentencing Guidelines  Under the Federal Sentencing Guidelines, the adequacy of a company’s pre-existing compliance program is relevant to how harshly to sanction a company with a criminal law violation  The Guidelines give credit in corporate sentencing where offense committed despite existence of an adequate corporate compliance program  Company must: o Exercise due diligence to prevent and detect criminal conduct, o Promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law, o Have a compliance program that is consistent with the elements set forth in the Guidelines for effective programs 11

12 Sentencing Guidelines 12  DOJ considered pre-existing compliance programs in: U.S. v. Universal Leaf Tabacos Ltd. (E.D. Va. Aug. 6, 2010) o “The agreed upon disposition partly reflects credit given for Universal’s pre-existing compliance program” o BUT: No specific/express deduction in the penalty Noble Corporation (S.D. Tex. Nov. 4, 2010) o “Noble's pre-existing compliance program and steps taken by Noble's Audit Committee to detect and prevent improper conduct from occurring” were a factor in entering FCPA non- prosecution agreement

13 Sentencing Guidelines  The Guidelines for corporate entities were amended effective November 2, 2010  Modified certain factors under the Guidelines for determining if a corporate entity deserves credit for having an effective program: 1.Encourage direct reporting by the company’s chief compliance officer (CCO) to the Board of Directors (or committee thereof) – company may receive Guidelines credit for effective compliance program even where a high-level company officer was involved in the offense so long as certain elements are met: 13

14 Sentencing Guidelines 14 1(a). Compliance program gives CCO with day-to-day responsibility for the program the ability to communicate directly with the Board or equivalent, or appropriate sub-group, promptly on any matter involving criminal conduct or potential criminal conduct, and at least annually on the implementation and effectiveness of the compliance program; 1(b). The compliance program detected the violation or potential violation prior to discovery or reasonable likelihood of discovery from outside the organization; 1(c). The organization promptly disclosed the matter to the appropriate authorities; and 1(d). No one with day-to-day operational responsibility for the compliance program was involved in the offense.

15 Sentencing Guidelines  Other notable Amendment changes:  Expressly encourage remediation by aiding victims o Remediation of violation “may include, where appropriate, providing restitution to identifiable victims”; and  Expressly encourage (but do not require) use of outside compliance advisors o Preventing future criminal conduct “may include the use of an outside professional advisor to ensure adequate assessment and implementation of any modifications” to the company’s compliance program 15

16 Sentencing Guidelines  Review whether your existing program comports with factors set forth under the Guidelines, as amended  Consider adjustments if not in line with Amendments  According to an April 2010 survey, only 41% of publicly-traded companies have their CCO report directly to the Board of Directors. “The Relationship between the Board of Directors and the Compliance and Ethics Officer,” Society of Corporate Compliance and Ethics, April, 2010 16

17 Trends in Administrative Agreements  Compliance-oriented provisions, e.g., in agreements with Air Force SDO, are a recurring feature of administrative agreements  Recent trends reveal SDO view of compliance program best practices 17

18 Trends in Administrative Agreements  Compliance program internal operation requirements:  Written ethics code  Centralized management and oversight of compliance program  Regular compliance training for employees o Sometimes required to be live  Ethics certificates  Anonymous hotline  Gifts & gratuities policies  Performance evaluation process for managers incorporates ethics and compliance metrics  Multi-lingual materials 18

19 Trends in Administrative Agreements  External review requirements  Independent compliance program review  Independent ombudsman 19

20 Trends in Administrative Agreements  Supplier-related requirements  Preferred supplier program o More onerous: requirement that company’s program require that its suppliers and subcontractors have instituted compliance and values-based ethics programs. o Less onerous: requirement that company reward in some manner suppliers and subcontractors who have instituted and maintain compliance and values-based ethics programs.  Letters to major suppliers and major subcontractors: requirement of regular written notification to suppliers and subcontractors of certain compliance-related items 20

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