29 June 2017 - Post by:
The U.S. Supreme Court recently ruled, in Kokesh v. SEC, that a five-year statute of limitations applies to claims for disgorgement in SEC enforcement proceedings. It is an important decision that is likely to impact the SEC’s enforcement program, particularly in Foreign Corrupt Practices Act (FCPA) cases.
Below, we suggest five changes that are likely to play out in post-Kokesh FCPA investigations and enforcement actions. These real world consequences might require the SEC to revise its FCPA enforcement playbook; they might also require corporations and their counsel to reconsider conventional defense strategies.
To recap, in Kokesh v. SEC, the Supreme Court was asked to determine whether SEC claims for disgorgement are subject to the five-year statute of limitations set out in 28 U.S.C. § 2462, which applies to any ‘civil fine, penalty, or forfeiture, pecuniary or otherwise’. The Court found that disgorgement is a form of ‘penalty’ subject to the statute of limitations because ‘[i]t is imposed as a consequence of violating a public law and it is intended to deter, not to compensate’. As such, SEC claims for disgorgement are now subject to the five-year limitations period. (The Supreme Court reached the same conclusion about the limitations period applicable to civil monetary penalties in the 2013 case Gabelli v. SEC.)
The limitation announced in Kokesh is particularly significant in FCPA cases, where disgorgement is included as a remedy in the vast majority of SEC actions, and the conduct at issue is often more than five years old. The Kokesh ruling sets a date certain when potential disgorgement liability ends, potentially narrowing the time period for which corporations may be required to disgorge ill-gotten gains. An SEC enforcement action must be commenced within five years of the date on which the relevant misconduct occurred and the SEC cannot claim disgorgement relating to conduct that occurred outside the five-year window.
In our view, imposing a five-year statute of limitations on disgorgement claims will result in significant changes to the way the SEC conducts, and corporations defend, FCPA investigations and enforcement actions.
Corporations often agonize over when—or whether—to voluntarily disclose potential misconduct to the SEC. It can be a difficult strategic decision and, after Kokesh, the calculus is more complicated.
The incentive for voluntary disclosure, of course, is cooperation credit. A company that self-reports potential misconduct, cooperates in the SEC’s investigation, and takes adequate remedial steps might secure narrower charges, a declination, or other favorable treatment in an SEC enforcement action.
Before Kokesh, the SEC routinely sought disgorgement for conduct more than five years old and, given the potential benefits of self-reporting, voluntary disclosure often made sense. That may no longer be true in many FCPA cases.
When all of the conduct at issue appears to be more than five years old, companies must now wrestle with whether it makes sense to self-report at all. The question is tougher still when some, but not all, of the conduct appears to have occurred outside the limitations period. After all, the SEC may no longer obtain civil monetary penalties or disgorgement relating to conduct of that vintage.
Questions about whether to self-report old conduct can only be answered on a case-by-case basis, in the context of the particular factual circumstances. Nonetheless, corporations and their counsel should be prepared to grapple with this issue in the post-Kokesh enforcement era.
2. Expect more requests for tolling agreements.
The moment the SEC learns of potential FCPA violations, the enforcement staff is on the clock. Kokesh only increases the time pressure. As a practical matter, the added pressure is likely to result in more requests for tolling agreements, earlier in the investigation.
This dynamic will create questions—and, perhaps, opportunities—for corporations and their counsel. It may be the case that the best strategy is to refuse to sign a tolling agreement. (This is probably appropriate in only limited circumstances, because this hardball tactic is likely to strain relations with the enforcement staff, who may respond with wide-ranging, time-sensitive demands for documents, information, and witness testimony.)
Short of a refusal to sign a tolling agreement, companies should think carefully about what exactly the SEC wants to toll, and negotiate the scope of the agreement accordingly. A tolling agreement should be narrowly construed to address only the conduct at issue. This attention to detail could meaningfully mitigate a corporation’s exposure to SEC sanctions.
3. Investigations will operate on tighter timetables.
Because Kokesh puts the SEC under greater time pressure, investigations are likely to operate on accelerated timetables. The days of slow-paced investigations and liberal extensions of production deadlines may be gone.
The enforcement staff is now likely to set—and stick to—demanding schedules for the production of documents, information, and witness testimony. (Especially when a corporation declines to enter into a tolling agreement.)
As such, to the extent possible, corporations and their counsel should be prepared to play a faster-paced game when it comes to FCPA investigations.
4. The SEC will have less leverage in settlement negotiations.
A significant upshot of the Kokesh decision is a momentum shift in settlement negotiations. Simply put, the SEC now has less leverage in settlement discussions.
When disgorgement was on the table for ill-gotten gains realized more than five years ago, defendants faced potentially significant disgorgement liability for old conduct. Indeed, nearly all of the settled FCPA enforcement actions against corporations in 2016 included disgorgement relating to conduct that was more than five years old.
Before Kokesh, defendants might have haggled with the SEC to narrow the period of time for which they would be required to disgorge ill-gotten gains. In that context, the amount of disgorgement—or the time period for which disgorgement was claimed—became a bargaining chip.
After Kokesh, however, the bargaining paradigm has shifted. The time period for which the SEC may seek disgorgement is set; disgorgement liability for ill-gotten gains obtained outside the five-year limitations period is now off the table. Corporations and their counsel, therefore, need to think carefully about what sanctions the SEC can actually obtain, and consider coming to the negotiating table with a lower settlement figure.
In several important ways, Kokesh weakens the SEC’s posture in FCPA investigations and enforcement actions. The SEC must proceed with greater speed, or toll the statute of limitations. The SEC may claim less disgorgement than it once could. And in some cases, the SEC may not be able to obtain any monetary sanctions for the conduct at issue.
But the enforcement staff will surely look for ways to sidestep Kokesh restrictions.
The staff may advance fraudulent concealment arguments to delay the tolling of the limitations period—perhaps, in cases where a corporation declines to self-report potential misconduct that occurred outside the five-year statute of limitations.
The staff might demand higher civil monetary penalties to offset diminished disgorgement liability—meaning the bargaining in settlement negotiations may shift from the amount of disgorgement to the amount of the civil monetary penalty.
Or the staff might test other tools in their enforcement toolbox that may not be subject to the five-year statute of limitations—like injunctive relief, director and officer bars, or the imposition of corporate monitors.
This is a developing area. The tactics the SEC will develop to avoid Kokesh problems will play out over time, but corporations and counsel should pay attention to strategic maneuvers around the edges of Kokesh.
The Kokesh decision is surely a game changer for the SEC’s FCPA enforcement program. Corporations and their counsel would be well advised to bear in mind the changes that are likely to flow from Kokesh and adjust their defense tactics to take advantage of new strategic opportunities.
This blog post was co-authored by William E. White, a partner in Allen & Overy’s Washington D.C. office.