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November 29, 2018 |
SEC Imposes Civil Penalties for ICO Registration Violations; Suggests a Path for Future Compliance

Click for PDF On November 16, 2018, the Securities and Exchange Commission (SEC) announced settled charges in its first cases imposing civil penalties solely for registration violations related to initial coin offerings (ICOs).[1]  The SEC brought charges against CarrierEQ Inc. (AirFox) and Paragon Coin Inc. (Paragon) for their respective ICOs conducted in 2017 on the basis that (i) the digital tokens sold in those ICOs were securities under Section 2(a)(1) of the Securities Act of 1933 (Securities Act) and (ii) those securities were neither registered nor exempt from registration under Section 5 of the Securities Act. Both AirFox and Paragon issued unregistered tokens in spite of an earlier warning from the SEC that certain tokens, coins or other digital assets can be considered securities under the federal securities laws and, consequently, issuers who offer or sell such securities must register the offering and sale with the SEC or qualify for an exemption.[2]  The cases follow the SEC’s first non-fraud registration case, Munchee, Inc., in which the SEC halted a coin sale by means of cease-and-desist order and no monetary penalties were imposed. In 2017, AirFox raised approximately $15 million worth of digital assets to finance its development of a token-denominated “ecosystem,” and Paragon raised approximately $12 million worth of digital assets to develop and implement its business plan related to the cannabis industry. After reviewing the nature of these tokens, the SEC concluded that they were securities under the Howey test, thereby making those offerings subject to the requirements of Section 5 of the Securities Act and related rules. The resolution of these charges has been suggested as a “model for companies that have issued tokens in ICOs . . . to seek to comply with the federal securities laws,” according to Steven Peiken, Co-Director of the SEC’s Enforcement Division.  The remedy has three parts.  First, both Airfox and Paragon agreed to pay monetary penalties of $250,000 each.  Second, in a nod to the statutory remedies provided by Section 12(a)(1) of the Securities Act, both companies agreed to distribute a “claim form” to their respective investors whereby purchased tokens could be exchanged for the amount of consideration paid plus interest and, for those investors no longer in possession of their purchased tokens, damages.  The  “claim form” approach was agreed to over another potential remedy used by other companies in the past, a “rescission offer” in which the companies would offer to repurchase issued tokens and, in the event an investor declined that offer, such investor would hold freely tradable tokens.  Third, perhaps most significantly, both companies agreed to register the tokens as securities under the Exchange Act and file periodic reports with the SEC, thereby granting investors the disclosure protections of the securities laws in deciding whether to put their securities.  It is likely that compliance with this regime will likely impose significant compliance burdens, particularly on smaller issuers.  It remains to be seen whether other ICO issuers who have conducted unregistered securities offerings will opt for this remedy following discussions with the SEC. [1]   See SEC Release No. 10574 and Release No. 10575. [2]   See Report of Investigation Pursuant To Section 21(a) Of The Securities Exchange Act of 1934: The DAO (Exchange Act Rel. No. 81207) (July 25, 2017)). See also www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?List=f3551fe8-411e-4ea4-830c-d680a8c0da43&ID=297&Web=97364e78-c7b4-4464-a28c-fd4eea1956ac. The following Gibson Dunn lawyers assisted in preparing this client update: Arthur Long, Alan Bannister, Nicolas Dumont, and Jordan Garside. 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, Capital Markets or Securities Enforcement practice groups, or the following: Financial Institutions and Capital Markets Groups: Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) J. Alan Bannister – New York (+1 212-351-2310, abannister@gibsondunn.com) Nicolas H.R. Dumont – New York (+1 212-351-3837, ndumont@gibsondunn.com) Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Securities Enforcement Group: Marc J. Fagel – San Francisco (+1 415-393-8332, mfagel@gibsondunn.com) Mark K. Schonfeld – New York (+1 212-351-2433, mschonfeld@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 29, 2018 |
Five Gibson Dunn Attorneys Named Among Washingtonian Magazine’s 2018 Top Lawyers

Washingtonian magazine named five DC partners to its 2018 Top Lawyers, featuring “[t]he area’s star legal talent” in their respective practice areas: Karen Manos was named a Top Lawyer in Government Contracts – Karen is Chair of the firm’s Government Contracts Practice Group.  She has nearly 30 years’ experience on a broad range of government contracts issues, including civil and criminal fraud investigations and litigation, complex claims preparation and litigation, bid protests, qui tam suits under the False Claims Act, defective pricing, cost allowability, the Cost Accounting Standards, and corporate compliance programs Eugene Scalia was named a Top Lawyer in Employment Defense – Co-Chair of the Administrative Law and Regulatory Practice Group, Gene has a national practice handling a broad range of labor, employment, appellate, and regulatory matters. His success bringing legal challenges to federal agency actions has been widely reported in the legal and business press Jason Schwartz was recognized as a Top Lawyer in Employment Defense – Jason’s practice includes sensitive workplace investigations, high-profile trade secret and non-compete matters, wage-hour and discrimination class actions, Sarbanes-Oxley and other whistleblower protection claims, executive and other significant employment disputes, labor union controversies, and workplace safety litigation F. Joseph Warin is a Top Lawyer in Criminal Defense, White Collar – Co-chair of the firm’s global White Collar Defense and Investigations Practice Group. His practice includes complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation Joseph West was named a Top Lawyer in Government Contracts – Joe concentrates his practice on contract counseling, compliance/enforcement, and dispute resolution.  He has represented both contractors and government agencies, and has been involved in cases before various United States Courts of Appeals and District Courts, the United States Court of Federal Claims, numerous Federal Government Boards of Contract Appeals, and both the United States Government Accountability Office and Small Business Administration The list was published in the December 2018 issue.

November 1, 2018 |
Glass Lewis Issues 2019 Proxy Voting Policy Updates

Click for PDF On October 24, 2018, Glass Lewis released its updated U.S. proxy voting policy guidelines for 2019, including guidelines for shareholder proposals.  The updated U.S. guidelines are available here, and the guidelines on shareholder proposals are available here.  The most significant updates to the guidelines are summarized below. The updated U.S. proxy voting guidelines include discussion of two previously announced policy changes that will take effect for meetings held after January 1, 2019, relating to board gender diversity and virtual-only annual meetings. Board Gender Diversity As previously announced, for a company that has no female directors, Glass Lewis generally will begin recommending votes “against” the nominating/governance committee chair, and may also recommend votes “against” other committee members depending on factors such as the company’s size, industry, state of headquarters, and governance profile. Glass Lewis will “carefully review a company’s disclosure of its diversity considerations” and may not recommend votes “against” directors when the board has provided a “sufficient rationale” for the absence of any female board members.  Such rationale may include any notable restrictions on the board’s composition (e.g., the existence of director nomination agreements with significant investors) or disclosure of a timetable for addressing the board’s lack of diversity. In light of California’s recently enacted legislation requiring a minimum number of women on public company boards (discussed here), which includes having at least one woman by the end of 2019, Glass Lewis will recommend votes “against” the nominating/governance committee chair at companies headquartered in California that do not have at least one woman on the board and do not disclose a “clear plan” for addressing this issue before the end of 2019. Conflicting Shareholder Proposals Glass Lewis updated its policy on conflicting shareholder proposals to address special meeting proposals specifically.  These updates respond to developments during the 2018 proxy season, when the Securities and Exchange Commission (the “SEC”) staff permitted companies to exclude “conflicting” special meeting shareholder proposals when seeking shareholder ratification of an existing special meeting right with a higher ownership threshold. The updated policy states that Glass Lewis generally favors a 10%-15% special meeting right and will generally recommend votes “for” shareholder and company proposals within this range.  When companies exclude a special meeting shareholder proposal by seeking ratification of an existing special meeting right, Glass Lewis will recommend votes “against” both the company’s ratification proposal and the members of the nominating/governance committee. When the proxy statement includes both shareholder and company proposals on special meetings: Where the proposals have different thresholds for requesting a special meeting, Glass Lewis will generally recommend voting “for” the lower threshold (typically the shareholder proposal); and Where the company does not currently have a special meeting right, Glass Lewis may recommend that shareholders vote “for” the shareholder proposal and abstain from the company proposal seeking to establish a special meeting right.  Glass Lewis views the practice of abstaining as a means for shareholders to signal their preference for an appropriate special meeting threshold while not directly opposing establishment of a special meeting right. While it appears that the special meeting threshold will be the primary focus of Glass Lewis’s analysis, Glass Lewis also will consider the company’s overall governance profile, including its responsiveness to and engagement with shareholders. Director Voting Recommendations Based on Excluded Shareholder Proposals With respect to the exclusion of shareholder proposals more generally, Glass Lewis states in the updated policy that “it generally believe[s] that companies should not limit investors’ ability to vote on shareholder proposals that advance certain rights or promote beneficial disclosure.”  In light of this, Glass Lewis will make note of instances where a company has successfully petitioned the SEC to exclude shareholder proposals and, “in certain very limited circumstances,” may recommend votes “against” the members of the nominating/governance committee if it believes exclusion of a shareholder proposal was “detrimental to shareholders.” Environmental and Social Risk Oversight Glass Lewis believes that companies should have “appropriate board-level oversight of material risks” to their operations, including those that are environmental and social in nature.  For large cap companies or companies where Glass Lewis identifies “material oversight issues,” Glass Lewis will seek to identify the directors or committees charged with oversight of environmental and social issues, and will note instances where companies have not clearly defined this oversight in their governance documents. Where Glass Lewis believes that a company has not properly managed or mitigated environmental or social risks “to the detriment of shareholder value,” Glass Lewis may recommend votes “against” directors who are responsible for oversight of environmental and social risks.  If there is no explicit board oversight of environmental and social issues, Glass Lewis may recommend votes “against” members of the audit committee.  Ratification of Auditor: Additional Considerations Glass Lewis’s policies list situations in which it may recommend votes “against” ratification of the outside auditor.  Under the 2019 policy updates, Glass Lewis will consider factors that may call into question an auditor’s effectiveness, including auditor tenure, any pattern of inaccurate audits, and any ongoing litigation or controversies.  In “limited cases,” these factors may lead to a recommendation “against” auditor ratification. Virtual-Only Shareholder Meetings As previously announced, Glass Lewis’s new policy on virtual-only shareholder meetings will take effect January 1, 2019.  Under this policy, for a company that chooses to hold a virtual-only meeting, Glass Lewis will analyze the company’s disclosure of its virtual meeting procedures and may recommend votes “against” the members of the nominating/governance committee if the company does not provide “effective” disclosure assuring that shareholders will have the same opportunities to participate at the virtual meeting as they would at in-person meetings. Examples of effective disclosure include descriptions of how shareholders can ask questions during the meeting, the company’s guidelines on how questions and comments will be recognized and disclosed to meeting participants, procedures for posting questions and answers on the company’s website as soon as practical after the meeting, and how the company will deal with any potential technical issues regarding accessing the virtual meeting including providing technical support. Director Recommendations Based on Company Performance Glass Lewis typically recommends that shareholders vote against directors who have served on boards or as executives at companies with “indicators of mismanagement or actions against the interests of shareholders.”  One instance where Glass Lewis may issue an “against” recommendation is where a company’s performance for the past three years has been in the bottom quartile of the sector and the board has not taken reasonable steps to address the poor performance.  For 2019, Glass Lewis has clarified that rather than looking solely at stock price performance, it will also consider the company’s overall corporate governance, pay-for-performance alignment, and board responsiveness to shareholders, in order to assess whether “the company performed significantly worse than its peers.” Directors Who Provide Consulting Services Under its voting policies on conflicts of interest, Glass Lewis recommends that shareholders vote “against” directors who provide, or whose immediate family members provide, material professional services to the company, including legal, consulting or financial services.  Beginning in 2019, Glass Lewis will generally refrain from voting against directors who provide consulting services if they do not serve on the audit, compensation or nominating/governance committees and Glass Lewis has not identified “significant governance concerns” at the company. Executive Compensation Glass Lewis clarified or amended several executive compensation policies: Say-on-pay voting recommendations.  Glass Lewis has provided additional guidance on how it evaluates executive compensation programs in making recommendations on say-on-pay proposals.  In particular, Glass Lewis evaluates both the structure of a company’s program and the company’s disclosures, in each case using a rating scale of “Good,” “Fair” and “Poor.”  According to Glass Lewis, most companies receive a “Fair” rating for both structure and disclosure, and the other two ratings primarily highlight companies that are outliers. Peer group and other practices.  Glass Lewis’s say-on-pay policy identifies practices that may lead to an “against” recommendation for say-on-pay proposals.  The 2019 updates clarify that these practices may also influence Glass Lewis’s evaluation of the structure of a company’s compensation program.  The updates also provide more detail on the peer group practices that Glass Lewis views as problematic.  These practices now will include the use of outsized peer groups and compensation targets set well above peers. Pay-for-performance assessment.  Glass Lewis uses a grading system of “A” through “F” to benchmark executive pay and company performance against a peer group.  The updated voting policies clarify that the grades represent the relationship between a company’s percentile rank for pay and its percentile rank for performance.  In other words, a grade of “A” reflects that a company’s percentile rank for pay is significantly less than its percentile rank for performance, while a grade of “F” reflects that the pay ranking is significantly higher than the performance ranking.  Separately, the analysis in Glass Lewis’s proxy papers reflects a comparison between a company and its peer group, with respect to both pay levels and performance. Added excise tax gross-ups.  Glass Lewis may recommend votes “against” all members of the compensation committee if executive employment agreements contain new excise tax gross-up provisions, particularly if the company had previously committed not to provide gross-ups.  New gross-up provisions related to excise taxes on excess parachute payments also may lead to votes “against” a company’s say-on-pay proposal. Sign-on and severance arrangements.  Glass Lewis has clarified the terms of sign-on and severance arrangements that may contribute to negative voting recommendations on say-on-pay proposals.  Glass Lewis will consider the size and design of any contractual payments, as well as U.S. market practice.  Excessive sign-on awards may support or drive a negative voting recommendation, and multi-year guaranteed bonuses may drive “against” recommendations on their own.  In addition to the size of contractual payments, Glass Lewis will consider their terms.  Key man clauses, board continuity conditions, or excessively broad change in control triggers may help drive a negative voting recommendation.  In general, Glass Lewis will be wary of terms that are “excessively restrictive” in favor of an executive or could incentive behaviors that are not in a company’s best interests.  Glass Lewis believes companies should abide by pre-determined severance amounts in most circumstances, and will consider severance amounts actually paid and in “special cases,” their appropriateness given the circumstances of the executive’s departure. Grants of front-loaded awards.  Glass Lewis has added a new discussion of “front-loading,” or providing large grants intended to serve as compensation for multiple years.  In making recommendations on say-on-pay proposals, Glass Lewis will apply particular scrutiny to front-loaded awards.  It will consider a company’s rationale for front-loaded awards and expects companies to include a firm commitment not to grant additional awards for a defined period.  If a company breaks this commitment, Glass Lewis may recommend “against” the company’s say-on-pay proposal unless the company provides a “convincing” rationale. Clawbacks.  Glass Lewis will begin looking beyond the minimum legal requirements for clawbacks and considering the specific terms of companies’ clawback policies.  According to the updated voting policies, Glass Lewis believes that clawbacks “should be triggered, at a minimum, in the event of a restatement of financial results or similar revision of performance indicators upon which bonuses were based.”  Clawback policies that simply track minimum legal requirements “may inform” Glass Lewis’s overall view of a company’s compensation program. Discretionary short-term incentives.  Glass Lewis will not recommend votes “against” a say-on-pay proposal solely based on a company’s use of discretionary short-term bonuses if there is meaningful disclosure of the rationale behind the use of a discretionary mechanism and the bonus amount determinations.  However, other “significant” issues, such as a disconnect between pay and performance, may help drive a negative voting recommendation. Equity plans that cover directors.  Glass Lewis continues to believe that equity grants to directors should not be performance-based.  Where an equity plan covers non-management directors exclusively or primarily, the updated voting policies state that the plan should not provide for any performance-based awards.  Where non-management director grants are made under a broad-based equity plan, Glass Lewis will continue to use its proprietary model to guide its voting recommendations.  However, beginning in 2019, if a broad-based plan allows or explicitly provides for performance-based awards to directors, Glass Lewis may recommend “against” the plan on this basis, particularly if the company has granted performance-based awards to directors in the past. Reduced executive compensation disclosure for smaller reporting companies.  Glass Lewis may recommend votes “against” all compensation committee members when the board has “materially decreased” proxy disclosure about executive compensation practices in a manner that “substantially impacts” shareholders’ ability to make an informed assessment of a company’s executive compensation practices.  In its summary of the 2019 policy updates, Glass Lewis indicates that this new policy applies to smaller reporting companies, in light of recent SEC rule changes to the definition of “smaller reporting company” that expand the number of registrants qualifying for scaled disclosure accommodations in their SEC filings, including in the area of executive compensation. Shareholder Proposals In addition to special meeting shareholder proposals (discussed above), Glass Lewis has also updated its policies on other shareholder proposals in several respects: Environmental and social proposals.  Glass Lewis has formalized the role that financial materiality will play in its consideration of environmental and social proposals.  In the discussion of its “Overall Approach” to these proposals, Glass Lewis states that it will evaluate shareholder proposals on environmental and social issues “in the context of the financial materiality of the issue to the company’s operations” and will “place a significant emphasis on the financial implications of a company adopting, or not adopting” a proposal.  Glass Lewis believes that all companies face risks associated with environmental and social issues, but that these risks manifest themselves differently at different companies, based on factors including a company’s operations, workforce, structure and geography.  Glass Lewis plans to use the standards developed by the Sustainability Accounting Standards Board (“SASB”) to assist it in determining financial materiality. Written consent proposals.  If a company has adopted a special meeting right of 15% or lower and reasonable proxy access provisions, Glass Lewis will generally recommend that shareholders vote “against” a shareholder proposal seeking the right for shareholders to act by written consent. Workforce diversity.  Glass Lewis has adopted a formal policy on shareholder proposals asking companies to provide disclosure about workforce diversity or efforts to promote diversity within the workforce.  In making voting recommendations, Glass Lewis will consider a company’s industry and the nature of its operations, the company’s current disclosures on issues involving workforce diversity, the level of disclosure at peer companies, and any lawsuits or accusations of discrimination within the company. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance and Executive Compensation and Employee Benefits practice groups: Securities Regulation and Corporate Governance Group Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) Aaron Briggs – San Francisco (+1 415-393-8297, abriggs@gibsondunn.com) Maia Gez – New York (+1 212-351-2612, mgez@gibsondunn.com) Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com) Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) Executive Compensation and Employee Benefits Group Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Michael J. Collins – Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Krista Hanvey – Dallas (+1 214-698-3425; khanvey@gibsondunn.com)  © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 30, 2018 |
Webcast: Spinning Out and Splitting Off – Navigating Complex Challenges in Corporate Separations

In the current strong market environment, spin-off deals have become a regular feature of the M&A landscape as strategic companies look for ways to maximize the value of various assets. Although the announcements have become routine, planning for and completing these transactions is a significant and multi-disciplinary undertaking. By its nature, a spin-off is at least a 3-in-1 transaction starting with the reorganization and carveout of the assets to be separated, followed by the negotiation of separation-related documents and finally the offering of the securities—and that does not even account for the significant tax, corporate governance, finance, IP and employee benefits aspects of the transaction. In this program, a panel of lawyers from a number of these key practice areas provided insights based on their recent experience structuring and executing spin-off transactions. They walked through the hot topics, common issues and potential work-arounds. View Slides (PDF) PANELISTS: Daniel Angel is a partner in Gibson Dunn’s New York office, Co-Chair of the firm’s Technology Transactions Practice Group and a member of its Strategic Sourcing and Commercial Transactions Practice Group. He is a transactional attorney who has represented clients on technology-related transactions since 2003. Mr. Angel has worked with a broad variety of clients ranging from market leaders to start-ups in a wide range of industries including financial services, private equity funds, life sciences, specialty chemicals, insurance, energy and telecommunications. Michael J. Collins is a partner in Gibson Dunn’s Washington, D.C. office and Co-Chair of the Executive Compensation and Employee Benefits Practice Group. His practice focuses on all aspects of employee benefits and executive compensation. He represents buyers and sellers in corporate transactions and companies in drafting and negotiating employment and equity compensation arrangements. Andrew L. Fabens is a partner in Gibson Dunn’s New York office, Co-Chair of the firm’s Capital Markets Practice Group and a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Fabens advises companies on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws, corporate governance issues and stock exchange listing obligations. He represents issuers and underwriters in public and private corporate finance transactions, both in the United States and internationally. Stephen I. Glover is a partner in Gibson Dunn’s Washington, D.C. office and Co-Chair of the firm’s Mergers and Acquisitions Practice Group. Mr. Glover has an extensive practice representing public and private companies in complex mergers and acquisitions, including spin-offs and related transactions, as well as other corporate matters. Mr. Glover’s clients include large public corporations, emerging growth companies and middle market companies in a wide range of industries. He also advises private equity firms, individual investors and others. Elizabeth A. Ising is a partner in Gibson Dunn’s Washington, D.C. office, Co-Chair of the firm’s Securities Regulation and Corporate Governance Practice Group and a member of the firm’s Hostile M&A and Shareholder Activism team and Financial Institutions Practice Group. She advises clients, including public companies and their boards of directors, on corporate governance, securities law and regulatory matters and executive compensation best practices and disclosures. Saee Muzumdar is a partner in Gibson Dunn’s New York office and a member of the firm’s Mergers and Acquisitions Practice Group. Ms. Muzumdar is a corporate transactional lawyer whose practice includes representing both strategic companies and private equity clients (including their portfolio companies) in connection with all aspects of their domestic and cross-border M&A activities and general corporate counseling. Daniel A. Zygielbaum is an associate in Gibson Dunn’s Washington, D.C. office and a member of the firm’s Tax and Real Estate Investment Trust (REIT) Practice Groups. Mr. Zygielbaum’s practice focuses on international and domestic taxation of corporations, partnerships (including private equity funds), limited liability companies, REITs and their debt and equity investors. He advises clients on tax planning for fund formations and corporate and real estate acquisitions, dispositions, reorganizations and joint ventures. 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 1.50 credit hours, of which 1.50 credit hours 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 Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@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 1.50 hours. 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.

October 17, 2018 |
SEC Warns Public Companies on Cyber-Fraud Controls

Click for PDF On October 16, 2018, the Securities and Exchange Commission issued a report warning public companies about the importance of internal controls to prevent cyber fraud.  The report described the SEC Division of Enforcement’s investigation of multiple public companies which had collectively lost nearly $100 million in a range of cyber-scams typically involving phony emails requesting payments to vendors or corporate executives.[1] Although these types of cyber-crimes are common, the Enforcement Division notably investigated whether the failure of the companies’ internal accounting controls to prevent unauthorized payments violated the federal securities laws.  The SEC ultimately declined to pursue enforcement actions, but nonetheless issued a report cautioning public companies about the importance of devising and maintaining a system of internal accounting controls sufficient to protect company assets. While the SEC has previously addressed the need for public companies to promptly disclose cybersecurity incidents, the new report sees the agency wading into corporate controls designed to mitigate such risks.  The report encourages companies to calibrate existing internal controls, and related personnel training, to ensure they are responsive to emerging cyber threats.  The report (issued to coincide with National Cybersecurity Awareness Month) clearly intends to warn public companies that future investigations may result in enforcement action. The Report of Investigation Section 21(a) of the Securities Exchange Act of 1934 empowers the SEC to issue a public Report of Investigation where deemed appropriate.  While SEC investigations are confidential unless and until the SEC files an enforcement action alleging that an individual or entity has violated the federal securities laws, Section 21(a) reports provide a vehicle to publicize investigative findings even where no enforcement action is pursued.  Such reports are used sparingly, perhaps every few years, typically to address emerging issues where the interpretation of the federal securities laws may be uncertain.  (For instance, recent Section 21(a) reports have addressed the treatment of digital tokens as securities and the use of social media to disseminate material corporate information.) The October 16 report details the Enforcement Division’s investigations into the internal accounting controls of nine issuers, across multiple industries, that were victims of cyber-scams. The Division identified two specific types of cyber-fraud – typically referred to as business email compromises or “BECs” – that had been perpetrated.  The first involved emails from persons claiming to be unaffiliated corporate executives, typically sent to finance personnel directing them to wire large sums of money to a foreign bank account for time-sensitive deals. These were often unsophisticated operations, textbook fakes that included urgent, secret requests, unusual foreign transactions, and spelling and grammatical errors. The second type of business email compromises were harder to detect. Perpetrators hacked real vendors’ accounts and sent invoices and requests for payments that appeared to be for otherwise legitimate transactions. As a result, issuers made payments on outstanding invoices to foreign accounts controlled by impersonators rather than their real vendors, often learning of the scam only when the legitimate vendor inquired into delinquent bills. According to the SEC, both types of frauds often succeeded, at least in part, because responsible personnel failed to understand their company’s existing cybersecurity controls or to appropriately question the veracity of the emails.  The SEC explained that the frauds themselves were not sophisticated in design or in their use of technology; rather, they relied on “weaknesses in policies and procedures and human vulnerabilities that rendered the control environment ineffective.” SEC Cyber-Fraud Guidance Cybersecurity has been a high priority for the SEC dating back several years. The SEC has pursued a number of enforcement actions against registered securities firms arising out of data breaches or deficient controls.  For example, just last month the SEC brought a settled action against a broker-dealer/investment-adviser which suffered a cyber-intrusion that had allegedly compromised the personal information of thousands of customers.  The SEC alleged that the firm had failed to comply with securities regulations governing the safeguarding of customer information, including the Identity Theft Red Flags Rule.[2] The SEC has been less aggressive in pursuing cybersecurity-related actions against public companies.  However, earlier this year, the SEC brought its first enforcement action against a public company for alleged delays in its disclosure of a large-scale data breach.[3] But such enforcement actions put the SEC in the difficult position of weighing charges against companies which are themselves victims of a crime.  The SEC has thus tried to be measured in its approach to such actions, turning to speeches and public guidance rather than a large number of enforcement actions.  (Indeed, the SEC has had to make the embarrassing disclosure that its own EDGAR online filing system had been hacked and sensitive information compromised.[4]) Hence, in February 2018, the SEC issued interpretive guidance for public companies regarding the disclosure of cybersecurity risks and incidents.[5]  Among other things, the guidance counseled the timely public disclosure of material data breaches, recognizing that such disclosures need not compromise the company’s cybersecurity efforts.  The guidance further discussed the need to maintain effective disclosure controls and procedures.  However, the February guidance did not address specific controls to prevent cyber incidents in the first place. The new Report of Investigation takes the additional step of addressing not just corporate disclosures of cyber incidents, but the procedures companies are expected to maintain in order to prevent these breaches from occurring.  The SEC noted that the internal controls provisions of the federal securities laws are not new, and based its report largely on the controls set forth in Section 13(b)(2)(B) of the Exchange Act.  But the SEC emphasized that such controls must be “attuned to this kind of cyber-related fraud, as well as the critical role training plays in implementing controls that serve their purpose and protect assets in compliance with the federal securities laws.”  The report noted that the issuers under investigation had procedures in place to authorize and process payment requests, yet were still victimized, at least in part “because the responsible personnel did not sufficiently understand the company’s existing controls or did not recognize indications in the emailed instructions that those communications lacked reliability.” The SEC concluded that public companies’ “internal accounting controls may need to be reassessed in light of emerging risks, including risks arising from cyber-related frauds” and “must calibrate their internal accounting controls to the current risk environment.” Unfortunately, the vagueness of such guidance leaves the burden on companies to determine how best to address emerging risks.  Whether a company’s controls are adequate may be judged in hindsight by the Enforcement Division; not surprisingly, companies and individuals under investigation often find the staff asserting that, if the controls did not prevent the misconduct, they were by definition inadequate.  Here, the SEC took a cautious approach in issuing a Section 21(a) report highlighting the risk rather than publicly identifying and penalizing the companies which had already been victimized by these scams. However, companies and their advisors should assume that, with this warning shot across the bow, the next investigation of a similar incident may result in more serious action.  Persons responsible for designing and maintaining the company’s internal controls should consider whether improvements (such as enhanced trainings) are warranted; having now spoken on the issue, the Enforcement Division is likely to view corporate inaction as a factor in how it assesses the company’s liability for future data breaches and cyber-frauds.    [1]   SEC Press Release (Oct. 16, 2018), available at www.sec.gov/news/press-release/2018-236; the underlying report may be found at www.sec.gov/litigation/investreport/34-84429.pdf.    [2]   SEC Press Release (Sept. 16, 2018), available at www.sec.gov/news/press-release/2018-213.  This enforcement action was particularly notable as the first occasion the SEC relied upon the rules requiring financial advisory firms to maintain a robust program for preventing identify theft, thus emphasizing the significance of those rules.    [3]   SEC Press Release (Apr. 24, 2018), available at www.sec.gov/news/press-release/2018-71.    [4]   SEC Press Release (Oct. 2, 2017), available at www.sec.gov/news/press-release/2017-186.    [5]   SEC Press Release (Feb. 21, 2018), available at www.sec.gov/news/press-release/2018-22; the guidance itself can be found at www.sec.gov/rules/interp/2018/33-10459.pdf.  The SEC provided in-depth guidance in this release on disclosure processes and considerations related to cybersecurity risks and incidents, and complements some of the points highlighted in the Section 21A report. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Securities Enforcement or Privacy, Cybersecurity and Consumer Protection practice groups, or the following authors: Marc J. Fagel – San Francisco (+1 415-393-8332, mfagel@gibsondunn.com) Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com) Please also feel free to contact the following practice leaders and members: Securities Enforcement Group: New York Barry R. Goldsmith – Co-Chair (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark K. Schonfeld – Co-Chair (+1 212-351-2433, mschonfeld@gibsondunn.com) Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Laura Kathryn O’Boyle (+1 212-351-2304, loboyle@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Avi Weitzman (+1 212-351-2465, aweitzman@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Washington, D.C. Richard W. Grime – Co-Chair (+1 202-955-8219, rgrime@gibsondunn.com) Stephanie L. Brooker  (+1 202-887-3502, sbrooker@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) San Francisco Marc J. Fagel – Co-Chair (+1 415-393-8332, mfagel@gibsondunn.com) Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tdavis@gibsondunn.com) Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8234, mwong@gibsondunn.com) Palo Alto Paul J. Collins (+1 650-849-5309, pcollins@gibsondunn.com) Benjamin B. Wagner (+1 650-849-5395, bwagner@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) Los Angeles Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas M. Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) Privacy, Cybersecurity and Consumer Protection Group: Alexander H. Southwell – Co-Chair, New York (+1 212-351-3981, asouthwell@gibsondunn.com) M. Sean Royall – Dallas (+1 214-698-3256, sroyall@gibsondunn.com) Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com) Christopher Chorba – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Richard H. Cunningham – Denver (+1 303-298-5752, rhcunningham@gibsondunn.com) Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com) Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com) H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com) Shaalu Mehra – Palo Alto (+1 650-849-5282, smehra@gibsondunn.com) Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com) Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com) Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com) Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com) Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 15, 2018 |
Flood v. Synutra Refines “Ab Initio” Requirement for Business Judgment Review of Controller Transactions

Click for PDF On October 9, 2018, in Flood v. Synutra Intth’l, Inc.,[1] the Delaware Supreme Court further refined when in a controller transaction the procedural safeguards of Kahn v. M & F Worldwide Corp.[2] (“MFW“) must be implemented to obtain business judgment rule review of the transaction.  Under MFW, a merger with a controlling stockholder will be reviewed under the deferential business judgment rule standard, rather than the stringent entire fairness standard, if the merger is conditioned “ab initio” upon approval by both an independent, adequately-empowered Special Committee that fulfills its duty of care, and the uncoerced, informed vote of a majority of the minority stockholders.[3]  Writing for the majority in Synutra, Chief Justice Strine emphasized that the objective of MFW and its progeny is to incentivize controlling stockholders to adopt the MFW procedural safeguards early in the transaction process, because those safeguards can provide minority stockholders with the greatest likelihood of receiving terms and conditions that most closely resemble those that would be available in an arms’ length transaction with a non-affiliated third party.  Accordingly, the Court held that “ab initio” (Latin for “from the beginning”) requires that the MFW protections be in place prior to any substantive economic negotiations taking place with the target (or its board or Special Committee).  The Court declined to adopt a “bright line” rule that the MFW procedures had to be a condition of the controller’s “first offer” or other initial communication with the target about a potential transaction. Factual Background Synutra affirmed the Chancery Court’s dismissal of claims against Liang Zhang and related entities, who controlled 63.5% of Synutra’s stock.  In January 2016, Zhang wrote a letter to the Synutra board proposing to take the company private, but failed to include the MFW procedural prerequisites of Special Committee and majority of the minority approvals in the initial bid.  One week after Zhang’s first letter, the board formed a Special Committee to evaluate the proposal and, one week after that, Zhang submitted a revised bid letter that included the MFW protections.  The Special Committee declined to engage in any price negotiations until it had retained and received projections from its own investment bank, and such negotiations did not begin until seven months after Zhang’s second offer. Ab Initio Requirement The plaintiff argued that because Zhang’s initial letter did not contain the dual procedural safeguards of MFW as pre-conditions of any transaction, the “ab initio” requirement of MFW was not satisfied and therefore business judgment standard of review had been irreparably forfeited.  The Court declined to adopt this rigid position, and considered that “ab initio” for MFW purposes can be assessed more flexibly.  To arrive at this view, the Court explored the meaning of “the beginning” as used in ordinary language to denote an early period rather than a fixed point in time.  The Court also parsed potential ambiguities in the language of the Chancery Court’s MFW opinion, which provided that MFW pre-conditions must be in place “from the time of the controller’s first overture”[4] and “from inception.”[5] Ultimately, the Court looked to the purpose of the MFW protections to find that “ab initio” need not be read as referring to the single moment of a controller’s first offer.  As Synutra emphasizes, the key is that the controller not be able to trade adherence to MFW protections for a concession on price.  Hence the “ab initio” analysis focuses on whether deal economics remain untainted by controller coercion, so that the transaction can approximate an arms’ length transaction process with an unaffiliated third party.  As such, the Court’s reasoning is consistent with the standard espoused by the Chancery Court in its prior decision in Swomley v. Schlecht,[6] which the Court summarily affirmed in 2015, that MFW requires procedural protections be in place prior to the commencement of negotiations.[7] In a lengthy dissent, Justice Valihura opined that the “ab initio” requirement should be deemed satisfied only when MFW safeguards are included in the controller’s initial formal written proposal, and that the “negotiations” test undesirably introduces the potential for a fact-intensive inquiry that would complicate a pleadings-stage decision on what standard of review should be applied.  Chief Justice Strine acknowledged the potential appeal of a bright line test but ultimately rejected it because of the Court’s desire to provide strong incentive and opportunity for controllers to adopt and adhere to the MFW procedural safeguards, for the benefit of minority stockholders.  In doing so, the Court acknowledged that its approach “may give rise to close cases.”  However, the Court went on to add, “our Chancery Court is expert in the adjudication of corporate law cases.”  The Court also concluded that the facts in Synutra did not make it a close case.[8] Duty of Care The Court also upheld the Chancery Court’s dismissal of plaintiff’s claim that the Special Committee had breached its duty of care by failing to obtain a sufficient price.  Following the Chancery Court’s reasoning in Swomley, Synutra held that where the procedural safeguards of MFW have been observed, there is no duty of care breach at issue where a plaintiff alleges that a Special Committee could have negotiated differently or perhaps obtained a better price – what the Chancery Court in Swomley described as “a matter of strategy and tactics that’s debatable.”[9]  Instead, the Court confirmed that a duty of care violation would require a finding that the Special Committee had acted in a grossly negligent fashion.  Observing that the Synutra Special Committee had retained qualified and independent financial and legal advisors and engaged in a lengthy negotiation and deal process, the Court found nothing to support an inference of gross negligence and thus deferred to the Special Committee regarding deal price.[10] Procedural Posture Synutra dismissed the plaintiff’s complaint at the pleadings stage.  In its procedural posture, the Court followed Swomley, which allowed courts to resolve the MFW analysis based on the pleadings.  The dissent noted that adoption of a bright-line test would be more appropriate for pleadings-stage dismissals.  However, the Court established that it would be willing to engage some degree of fact-finding at the pleadings stage in order to allow cases to be dismissed at the earliest opportunity, even using the Court’s admittedly more flexible view of the application of MFW. Takeaways Synutra reaffirms the Court’s commitment to promoting implementation of MFW safeguards in controller transactions.  In particular: The Court will favor a pragmatic, flexible approach to “ab initio” determination, with the intent of determining whether the application of the MFW procedural safeguards have been used to affect or influence a transaction’s economics; Once a transaction has business judgment rule review, the Court will not inquire further as to sufficiency of price or terms absent egregious or reckless conduct by a Special Committee; and Since the goal is to incentivize the controller to follow MFW at a transaction’s earliest stages, complaints can be dismissed on the pleadings, thus avoiding far more costly and time consuming summary judgment motions. Although under Synutra a transaction may receive business judgment rule review despite unintentional or premature controller communications that do not reference the MFW procedural safeguards as inherent deal pre-conditions, deal professionals would be well advised not to push this flexibility too far.  Of course, there can be situations where a controller concludes that deal execution risks or burdens attendant to observance of the MFW safeguards are too great (or simply not feasible), and thus is willing to confront the close scrutiny of an entire fairness review if a deal is later challenged.  However, if a controller wants to ensure it will receive the benefit of business judgment rule review, the prudent course is to indicate, in any expression of interest, no matter how early or informal, that adherence to MFW procedural safeguards is a pre-condition to any transaction.  Synutra makes clear that the availability of business judgment review under MFW will be a facts and circumstances assessment, but we do not yet know what the outer limits of the Court’s flexibility will be, should it have to consider a more contentious set of facts in the future. [1]       Flood v. Synutra Int’l, Inc., No. 101, 2018 WL 4869248 (Del. Oct. 9, 2018). [2]      Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014). [3]      Id. at 644. [4]      In re MFW Shareholders Litigation, 67 A.3d 496, 503 (Del. Ch. 2013). [5]      Id. at 528. [6]      Swomley v. Schlecht, 2014 WL 4470947 (Del. Ch. 2014), aff’d 128 A.3d 992 (Del. 2015) (TABLE). [7]      The Court did not consider that certain matters that transpired between Zhang’s first and second offer letters, namely Synutra’s granting of a conflict waiver to allow its long-time counsel to represent Zhang (the Special Committee subsequently hired separate counsel), constituted substantive “negotiations” for this purpose since the waiver was not exchanged for any economic consideration. [8]      Synutra, 2018 WL 4869248, at *8. [9]      Id. at *11, citing Swomley, 2014 WL 4470947, at 21. [10]     In a footnote, the Court expressly overruled dicta in its MFW decision that the plaintiff cited to argue that a duty of care claim could be premised on the Special Committee’s obtaining of an allegedly insufficient price.  Id. at *10, Footnote 81. The following Gibson Dunn lawyers assisted in preparing this client update: Barbara Becker, Jeffrey Chapman, Stephen Glover, Mark Director, Eduardo Gallardo, Marina Szteinbok and Justice Flores. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Mergers and Acquisitions practice group: Mergers and Acquisitions Group / Corporate Transactions: Barbara L. Becker – Co-Chair, New York (+1 212-351-4062, bbecker@gibsondunn.com) Jeffrey A. Chapman – Co-Chair, Dallas (+1 214-698-3120, jchapman@gibsondunn.com) Stephen I. Glover – Co-Chair, Washington, D.C. (+1 202-955-8593, siglover@gibsondunn.com) Dennis J. Friedman – New York (+1 212-351-3900, dfriedman@gibsondunn.com) Jonathan K. Layne – Los Angeles (+1 310-552-8641, jlayne@gibsondunn.com) Mark D. Director – Washington, D.C./New York (+1 202-955-8508/+1 212-351-5308, mdirector@gibsondunn.com) Eduardo Gallardo – New York (+1 212-351-3847, egallardo@gibsondunn.com) Saee Muzumdar – New York (+1 212-351-3966, smuzumdar@gibsondunn.com) Mergers and Acquisitions Group / Litigation: Meryl L. Young – Orange County (+1 949-451-4229, myoung@gibsondunn.com) Brian M. Lutz – San Francisco (+1 415-393-8379, blutz@gibsondunn.com) Aric H. Wu – New York (+1 212-351-3820, awu@gibsondunn.com) Paul J. Collins – Palo Alto (+1 650-849-5309, pcollins@gibsondunn.com) Michael M. Farhang – Los Angeles (+1 213-229-7005, mfarhang@gibsondunn.com) Joshua S. Lipshutz – Washington, D.C. (+1 202-955-8217, jlipshutz@gibsondunn.com) Adam H. Offenhartz – New York (+1 212-351-3808, aoffenhartz@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 5, 2018 |
What Employers Need to Know About California’s New #MeToo Laws

Click for PDF On September 30, 2018, Governor Edmund G. Brown signed several new workplace laws, and vetoed others, that arose out of the #MeToo movement.  We briefly review the newly signed legislation and also highlight bills that Governor Brown rejected.  Unless otherwise indicated, these new laws will take effect on January 1, 2019. New Requirements for Employers New Training Requirements Expanded Requirements for Harassment and Discrimination Training.  Most California employers are aware that, under existing California law, employers with 50 or more employees must provide at least two hours of prescribed training regarding sexual harassment within six months of an individual’s hiring or promotion to a supervisory position and every two years while an employee remains in a supervisory position.  SB 1343 expands this requirement in two critical ways: The training requirements now cover all employers with five or more employees, which includes temporary or seasonal employees, meaning that many smaller employers are now subject to California’s training requirements. All covered employers must now provide at least one hour of sexual harassment training to non-supervisory employees by January 1, 2020, and once every two years thereafter, which may greatly expand the scope of required training for employers with large line-level workforces. SB 1343 also requires the California Department of Fair Employment and Housing (DFEH) to make available online training courses that employers may use to meet these requirements.  However, employers may wish to work with their counsel and Human Resources departments to develop training that is specific to their business and industry, which is generally regarded as more effective than “one size fits all” trainings. Education and Training for Employees in Entertainment Industry.  AB 2338 requires, prior to the issuance of a permit to employ a minor in the entertainment industry, that the minor and the minor’s parents or legal guardians receive and complete sexual harassment training.  The law also requires that talent agencies ensure that minors have a valid work permit, and that agencies provide adult artists with accessible educational material “regarding sexual harassment prevention, retaliation, and reporting resources,” as well as nutrition and eating disorders. Anti-Harassment Legislation Restrictions on Non-Disclosure and Confidentiality Agreements and More Rigorous Sexual Harassment Standards.  SB 1300 amends California’s Fair Employment and Housing Act (FEHA) to prohibit an employer from requiring an employee to agree to a non-disparagement agreement or other document limiting the disclosure of information about unlawful workplace acts in exchange for a raise or bonus, or as a condition of employment or continued employment.  Employers are also prohibited from requiring an individual to “execute a statement that he or she does not possess any claim or injury against the employer” or to release “a right to file and pursue a civil action or complaint with, or otherwise notify, a state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity.”  Under the law, any such agreement is contrary to public policy and unenforceable.  (Some of these activities, such as reporting to law enforcement, are already protected, of course.)  While negotiated settlement agreements of civil claims supported by valuable consideration are exempted from these prohibitions, employers will want to review their various employee agreement templates to ensure none contain these or other types of prohibited clauses. SB 1300 also codifies several legal standards that may make it more challenging for employers to prevail on harassment claims before trial.  For example, the law provides that a single incident of harassing conduct may create a triable issue of fact in a hostile work environment case; that it is irrelevant to a sexual harassment case that a particular occupation may have been characterized by more sexualized conduct in the past; and that “hostile working environment cases involve issues ‘not determinable on paper.'”  Employers can expect to see SB 1300 cited in any plaintiff’s opposition to summary judgment in a sexual harassment case, and they will need to give serious consideration as to whether and how to seek summary judgment in light of the new law. Limitations on Confidentiality in Settlement Agreements.  SB 820 prohibits provisions in settlement agreements entered into on or after January 1, 2019 that prevent the disclosure of facts related to sexual assault, harassment, and discrimination claims that have been “filed in a civil action or a complaint filed in an administrative action.”  Note, however, that SB 820 does not prohibit provisions precluding the disclosure of the settlement payment amount, and the law carves out an exception for provisions protecting the identity of the claimant where requested by the claimant. Expanded Sexual Harassment Liability to Cover Certain Business Relationships.  Businesses in the venture capital, entertainment, and similar industries will want to be alert to SB 224, which modifies California Civil Code section 51.9 and would include within the elements in a cause of action for sexual harassment when the plaintiff proves, among other things, that the “defendant holds himself or herself as being able to help the plaintiff establish a business, service, or professional relationship with the defendant or a third party.”  The law identifies additional examples of potential defendants under the statute, such as investors, elected officials, lobbyists, directors, and producers. Limitations on Barring Testimony Related to Criminal Conduct or Sexual Harassment.  AB 3109 prohibits waivers of a party’s right to testify in an administrative, legislative, or judicial proceeding concerning alleged criminal conduct or sexual harassment by the other party to a contract, when the party has been required or requested to attend the proceeding pursuant to a court order, subpoena, or written request from an administrative agency or the legislature. Mandating Gender Diversity on Boards of Directors for Publicly Held Corporations SB 826 requires a minimum number of female directors on the boards of publicly traded corporations with principal executive offices in California.  The location of a corporation’s principal executive office will be determined by the Annual Report on Form 10-K. Under SB 826, a corporation covered by the law must have at least one female member on its board of directors by December 31, 2019, and additional female members by 2021 depending on the size of the board.  If the corporation has a board of directors with: four members or less, no additional female directors are required; five members, the board must have at least two female directors by December 31, 2021; and six or more members, at least three female directors are required to be in place by December 31, 2021. The California Secretary of State can impose fines of $100,000 for a first violation and $300,000 for subsequent violations. Potential challengers of this law argue that it suffers from numerous legal deficiencies, including that it violates the Commerce Clause and the Equal Protection Clause of the United States Constitution.  Indeed, Governor Brown himself acknowledged in his signing statement that this new law has “potential flaws that indeed may provide fatal to its ultimate implementation” and will likely be subject to challenge.  For more information on SB 826, please consult our Securities Regulation and Corporate Governance group’s analysis, available here. Bills Vetoed by Governor Brown Governor Brown also vetoed several bills relating to sexual harassment that could have significantly impacted employers in California, including: The closely watched AB 3080, which sought to forbid mandatory arbitration agreements in the workplace. AB 1867, which sought to require employers with fifty or more employees to “maintain records of employee complaints alleging sexual harassment” for a period of five years after the last day of employment of either “the complainant or any alleged harasser named in the complaint, whichever is later.” AB 1870, which sought to extend the deadline in which a complainant may file an administrative charge with the DFEH alleging employment discrimination from one year to three years. AB 3081, which sought to require a client employer and a labor contractor to share all “civil legal responsibility and civil liability for harassment” for all workers supplied by that labor contractor and prohibit an employer from shifting its duties or liabilities to a labor contractor. Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. We have been engaged by numerous clients recently to conduct investigations of #MeToo complaints; to proactively review sexual harassment policies, practices and procedures for the protection of employees and the promotion of a safe, respectful and professional workplace; to conduct training for executives, managers and employees; and to handle related counseling and litigation. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work or the following Labor and Employment or Securities Regulation and Corporate Governance practice group leaders and members: Labor and Employment Group: Catherine A. Conway – Co-Chair, Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com) Jesse A. Cripps – Los Angeles (+1 213-229-7792, jcripps@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Michele L. Maryott – Orange County (+1 949-451-3945,mmaryott@gibsondunn.com) Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com) Securities Regulation and Corporate Governance Group: Elizabeth Ising – Co-Chair, Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski – Co-Chair, New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 3, 2018 |
2018 Mid-Year Activism Update

Click for PDF This Client Alert provides an update on shareholder activism activity involving NYSE- and NASDAQ-listed companies with equity market capitalizations above $1 billion during the first half of 2018.  After a modest decline in activist activity in the second half of 2017, activism resumed a torrid pace during the first half of 2018.  Compared to the same period in 2017, which had previously been the most active half-year period covered by any edition of this report, this mid-year edition of Gibson Dunn’s Activism Update reflects a further increase in public activist actions (62 vs. 59) and companies targeted by such actions (54 vs. 50). In this edition of the Activism Update, our survey covers 62 total public activist actions, involving 41 different activist investors targeting 54 different companies.  Eight of those companies faced activist campaigns from two different investors, and five of those situations involved at least some degree of coordination between the activists involved.  Nine activist investors were responsible for two or more campaigns between January 1, 2018 and June 30, 2018, representing 30, or nearly half, of the 62 campaigns covered by this report. By the Numbers – 2018 Full Year Public Activism Trends *All data is derived from the data compiled from the campaigns studied for the 2018 M Activism Update. Additional statistical analyses may be found in the complete Activism Update linked below.  While changes in business strategy were the top goal of activist campaigns covered by Gibson Dunn’s Activism Update for the second half of 2017, changes to board composition have returned to prominence in the first half of 2018 (75.8% of campaigns), coinciding with a dramatic uptick in publicly filed settlement agreements during the same period.  Activists pursued governance initiatives, sought to influence business strategy, and took positions on M&A-related issues (including pushing for spin-offs and advocating both for and against sales or acquisitions) at nearly equal rates, representing 35.5%, 33.9%, and 32.3% of campaigns, respectively.  Demands for management changes (21.0% of campaigns), attempts to take control of companies (9.5% of campaigns), and requests for capital returns (6.1% of campaigns) remained relatively less common goals of activist campaigns over the first half of 2018.  The frequency of activists filing proxy materials remained relatively consistent with periods covered by recent editions of this report, with investors filing proxy materials in just over one in five campaigns.  While market capitalizations of target companies ranged from this survey’s $1 billion minimum threshold to $100 billion, activists’ focus remained largely on small-cap companies with market capitalizations below $5 billion, which represented 64.8% of the 54 target companies captured by our survey. The most significant development noted in our previous report, covering the second half of 2017, was the decrease in publicly filed settlement agreements between activist investors and target companies, which we attributed partially to the concurrent decline in campaigns involving activists seeking board seats.  This trend has been reversed.  As campaigns seeking board representation have returned to prominence, the number of publicly filed settlement agreements in the first half of 2018 has seen a fivefold increase from the previous half-year period, from four such agreements in the second half of 2017 to 21 in the first half of 2018.  Trends in the key terms of settlement agreements remain relatively steady.  Voting agreements, standstills, and ownership thresholds remain nearly ubiquitous.  Non-disparagement provisions dropped off slightly in the first half of 2018, while committee appointments for new directors and other strategic initiatives (e.g., replacement of management, spin-offs, governance changes) remained near their historical averages in prior editions of this report.  The increased frequency of expense reimbursement noted in our last report has also continued into 2018, with 62% of publicly filed settlement agreements containing such a provision compared to a historical average of just 36% from 2014 through the first half of 2017.  Further details and data on publicly filed settlement agreements may be found in the latter half of this report. We hope you find Gibson Dunn’s 2018 Mid-Year Activism Update informative. If you have any questions, please do not hesitate to reach out to a member of your Gibson Dunn team. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this publication.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following authors in the firm’s New York office: Barbara L. Becker (+1 212.351.4062, bbecker@gibsondunn.com) Richard J. Birns (+1 212.351.4032, rbirns@gibsondunn.com) Dennis J. Friedman (+1 212.351.3900, dfriedman@gibsondunn.com) Eduardo Gallardo (+1 212.351.3847, egallardo@gibsondunn.com) William Koch (+1 212.351.4089, wkoch@gibsondunn.com) Please also feel free to contact any of the following practice group leaders and members: Mergers and Acquisitions Group: Jeffrey A. Chapman – Dallas (+1 214.698.3120, jchapman@gibsondunn.com) Stephen I. Glover – Washington, D.C. (+1 202.955.8593, siglover@gibsondunn.com) Jonathan K. Layne – Los Angeles (+1 310.552.8641, jlayne@gibsondunn.com) Securities Regulation and Corporate Governance Group: Brian J. Lane – Washington, D.C. (+1 202.887.3646, blane@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, rmueller@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949.451.4343, jmoloney@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com) Lori Zyskowski – New York (+1 212.351.2309, lzyskowski@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 2, 2018 |
M&A Report – Fresenius Marks a Watershed Development in the Analysis of “Material Adverse Effect” Clauses

Click for PDF On October 1, 2018, in Akorn, Inc. v. Fresenius Kabi AG,[1]  the Delaware Court of Chancery determined conclusively for the first time that a buyer had validly terminated a merger agreement due to the occurrence of a “material adverse effect” (MAE). Though the decision represents a seminal development in M&A litigation generally, Vice Chancellor Laster grounded his decision in a framework that comports largely with the ordinary practice of practitioners. In addition, the Court went to extraordinary lengths to explicate the history between the parties before concluding that the buyer had validly terminated the merger agreement, and so sets the goalposts for a similar determination in the future to require a correspondingly egregious set of facts. As such, the ripple effects of Fresenius in future M&A negotiations may not be as acute as suggested in the media.[2] Factual Overview On April 24, 2017, Fresenius Kabi AG, a pharmaceutical company headquartered in Germany, agreed to acquire Akorn, Inc., a specialty generic pharmaceutical manufacturer based in Illinois. In the merger agreement, Akorn provided typical representations and warranties about its business, including its compliance with applicable regulatory requirements. In addition, Fresenius’s obligation to close was conditioned on Akorn’s representations being true and correct both at signing and at closing, except where the failure to be true and correct would not reasonably be expected to have an MAE. In concluding that an MAE had occurred, the Court focused on several factual patterns: Long-Term Business Downturn. Shortly after Akorn’s stockholders approved the merger (three months after the execution of the merger agreement), Akorn announced year-over-year declines in quarterly revenues, operating income and earnings per share of 29%, 84% and 96%, respectively. Akorn attributed the declines to the unexpected entrance of new competitors, the loss of a key customer contract and the attrition of its market share in certain products. Akorn revised its forecast downward for the following quarter, but fell short of that goal as well and announced year-over-year declines in quarterly revenues, operating income and earnings per share of 29%, 89% and 105%, respectively. Akorn ascribed the results to unanticipated supply interruptions, added competition and unanticipated price erosion; it also adjusted downward its long-term forecast to reflect dampened expectations for the commercialization of its pipeline products. The following quarter, Akorn reported year-over-year declines in quarterly revenues, operating income and earnings per share of 34%, 292% and 300%, respectively. Ultimately, over the course of the year following the signing of the merger agreement, Akorn’s EBITDA declined by 86%. Whistleblower Letters. In late 2017 and early 2018, Fresenius received anonymous letters from whistleblowers alleging flaws in Akorn’s product development and quality control processes. In response, relying upon a covenant in the merger agreement affording the buyer reasonable access to the seller’s business between signing and closing, Fresenius conducted a meticulous investigation of the Akorn business using experienced outside legal and technical advisors. The investigation revealed grievous flaws in Akorn’s quality control function, including falsification of laboratory data submitted to the FDA, that cast doubt on the accuracy of Akorn’s compliance with laws representations. Akorn, on the other hand, determined not to conduct its own similarly wide-ranging investigation (in contravention of standard practice for an FDA-regulated company) for fear of uncovering facts that could jeopardize the deal. During a subsequent meeting with the FDA, Akorn omitted numerous deficiencies identified in the company’s quality control group and presented a “one-sided, overly sunny depiction.” Operational Changes. Akorn did not operate its business in the ordinary course after signing (despite a covenant requiring that it do so) and fundamentally changed its quality control and information technology (IT) functions without the consent of Fresenius. Akorn management replaced regular internal audits with “verification” audits that only addressed prior audit findings rather than identifying new problems. Management froze investments in IT projects, which reduced oversight over data integrity issues, and halted efforts to investigate and remediate quality control issues and data integrity violations out of concern that such investigations and remediation would upend the transaction. Following signing, NSF International, an independent, accredited standards development and certification group focused on health and safety issues, also identified numerous deficiencies in Akorn’s manufacturing facilities. Conclusions and Key Takeaways The Court determined, among others, that the sudden and sustained drop in Akorn’s business performance constituted a “general MAE” (that is, the company itself had suffered an MAE), Akorn’s representations with respect to regulatory compliance were not true and correct, and the deviation between the as-represented condition and its actual condition would reasonably be expected to result in an MAE. In addition, the Court found that the operational changes implemented by Akorn breached its covenant to operate in the ordinary course of business. Several aspects of the Court’s analysis have implications for deal professionals: Highly Egregious Facts. Although the conclusion that an MAE occurred is judicially unprecedented in Delaware, it is not surprising given the facts. The Court determined that Akorn had undergone sustained and substantial declines in financial performance, credited testimony suggesting widespread regulatory noncompliance and malfeasance in the Akorn organization and suggested that decisions made by Akorn regarding health and safety were re-prioritized in light of the transaction (and in breach of a highly negotiated interim operating covenant). In In re: IBP, Inc. Shareholders Litigation, then-Vice Chancellor Strine described himself as “confessedly torn” over a case that involved a 64% year-over-year drop-off in quarterly earnings amid allegations of improper accounting practices, but determined that no MAE had occurred because the decline in earnings was temporary. In Hexion Specialty Chemicals, Inc. v. Huntsman Corp., Vice Chancellor Lamb emphasized that it was “not a coincidence” that “Delaware courts have never found a material adverse effect to have occurred in the context of a merger agreement” and concluded the same, given that the anticipated decline in the target’s EBITDA would only be 7%. No such hesitation can be found in the Fresenius opinion.[3] MAE as Risk Allocation Tool. The Court framed MAE clauses as a form of risk allocation that places “industry risk” on the buyer and “company-specific” risk on the seller. Explained in a more nuanced manner, the Court categorized “business risk,” which arises from the “ordinary operations of the party’s business” and which includes those risks over which “the party itself usually has significant control”, as being retained by the seller. By contrast, the Court observed that the buyer ordinarily assumes three others types of risk—namely, (i) systematic risks, which are “beyond the control of all parties,” (ii) indicator risks, which are markers of a potential MAE, such as a drop in stock price or a credit rating downgrade, but are not underlying causes of any MAE themselves, and (iii) agreement risks, which include endogenous risks relating to the cost of closing a deal, such as employee flight. This framework comports with the foundation upon which MAE clauses are ordinarily negotiated and underscores the importance that sellers negotiate for industry-specific carve-outs from MAE clauses, such as addressing adverse decisions by governmental agencies in heavily regulated industries. High Bar to Establishing an MAE. The Court emphasized the heavy burden faced by a buyer in establishing an MAE. Relying upon the opinions that emerged from the economic downturns in 2001 and 2008,[4]  the Court reaffirmed that “short-term hiccups in earnings” do not suffice; rather, the adverse change must be “consequential to the company’s long-term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months.” The Court underscored several relevant facts in this case, including (i) the magnitude and length of the downturn, (ii) the suddenness with which the EBITDA decline manifested (following five consecutive years of growth) and (iii) the presence of factors suggesting “durational significance,” including the entrance of new and unforeseen competitors and the permanent loss of key customers.[5] Evaluation of Targets on a Standalone Basis. Akorn advanced the novel argument that an MAE could not have occurred because the purchaser would have generated synergies through the combination and would have generated profits from the merger. The Court rejected this argument categorically, finding that the MAE clause was focused solely on the results of operations and financial condition of the target and its subsidiaries, taken as a whole (rather than the surviving corporation or the combined company), and carved out any effects arising from the “negotiation, execution, announcement or performance” of the merger agreement or the merger itself, including “the generation of synergies.” Given the Court’s general aversion to considering synergies as relevant to determining an MAE, buyers should consider negotiating to include express references to synergies in defining the concept of an MAE in their merger agreements. Disproportionate Effect. Fresenius offers a useful gloss on the importance to buyers of including “disproportionate effects” qualifications in MAE carve-outs regarding industry-wide events. Akorn argued that it faced “industry headwinds” that caused its decline in performance, such as heightened competition and pricing pressure as well as regulatory actions that increased costs. However, the Court rejected this view because many of the causes of Akorn’s poor performance were actually specific to Akorn, such as new market entrants in Akorn’s top three products and Akorn’s loss of a specific key contract. As such, these “industry effects” disproportionately affected and were allocated from a risk-shifting perspective to Akorn. To substantiate this conclusion, the Court relied upon evidence that Akorn’s EBITDA decline vastly exceeded its peers. The Bring-Down Standard. A buyer claiming that a representation given by the target at closing fails to satisfy the MAE standard must demonstrate such failure qualitatively and quantitatively. The Court focused on a number of qualitative harms wrought by the events giving rise to Akorn’s failure to bring down its compliance with laws representation at closing, including reputational harm, loss of trust with principal regulators and public questioning of the safety and efficacy of Akorn’s products. With respect to quantitative measures of harm, Fresenius and Akorn presented widely ranging estimates of the cost of remedying the underlying quality control challenges at Akorn. Using the midpoint of those estimates, the Court estimated the financial impact to be approximately 21% of Akorn’s market capitalization. However, despite citing several proxies for financial performance suggesting that this magnitude constituted an MAE, the Court clearly weighted its analysis towards qualitative factors, noting that “no one should fixate on a particular percentage as establishing a bright-line test” and that “no one should think that a General MAE is always evaluated using profitability metrics and an MAE tied to a representation is always tied to the entity’s valuation.” Indeed, the Court observed that these proxies “do not foreclose the possibility that a buyer could show that percentage changes of a lesser magnitude constituted an MAE. Nor does it exclude the possibility that a buyer might fail to prove that percentage changes of a greater magnitude constituted an MAE.” Fresenius offers a useful framework for understanding how courts analyze MAE clauses. While this understanding largely comports with the approach taken by deal professionals, the case nevertheless offers a reminder that an MAE, while still quite unlikely, can occur. Deal professionals would be well-advised to be thoughtful about how the concept should be defined and used in an agreement.    [1]   Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL (Del. Ch. Oct. 1, 2018).    [2]   See, e.g., Jef Feeley, Chris Dolmetsch & Joshua Fineman, Akorn Plunges After Judge Backs Fresenius Exit from Deal, Bloomberg (Oct 1, 2018) (“‘The ruling is a watershed moment in Delaware law, and will be a seminal case for those seeking to get out of M&A agreements,’ Holly Froum, an analyst with Bloomberg Intelligence, said in an emailed statement.”); Tom Hals, Delaware Judge Says Fresenius Can Walk Away from $4.8 Billion Akorn Deal, Reuters (Oct. 1, 2018) (“‘This is a landmark case,’ said Larry Hamermesh, a professor at Delaware Law School in Wilmington, Delaware.”).    [3]   The egregiousness of the facts in this case is further underscored by the fact that the Court determined that the buyer had breached its own covenant to use its reasonable best efforts to secure antitrust clearance, but that this breach was “temporary” and “not material.”    [4]   See, e.g., Hexion Specialty Chems. Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008); In re: IBP, Inc. S’holders Litig., 789 A.2d 14 (Del. Ch. 2001).    [5]   This view appears to comport with the analysis highlighted by the Court from In re: IBP, Inc. Shareholders Litigation, in which the court determined that an MAE had not transpired in part because the target’s “problems were due in large measure to a severe winter, which adversely affected livestock supplies and vitality.” In re: IBP, 789 A.2d at 22. In this case, the decline of Akorn was not the product of systemic risks or cyclical declines, but rather a company-specific effect. The following Gibson Dunn lawyers assisted in preparing this client update:  Barbara Becker, Jeffrey Chapman, Stephen Glover, Mark Director, Andrew Herman, Saee Muzumdar, Adam Offenhartz, and Daniel Alterbaum. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Mergers and Acquisitions practice group: Mergers and Acquisitions Group / Corporate Transactions: Barbara L. Becker – Co-Chair, New York (+1 212-351-4062, bbecker@gibsondunn.com) Jeffrey A. Chapman – Co-Chair, Dallas (+1 214-698-3120, jchapman@gibsondunn.com) Stephen I. Glover – Co-Chair, Washington, D.C. (+1 202-955-8593, siglover@gibsondunn.com) Dennis J. Friedman – New York (+1 212-351-3900, dfriedman@gibsondunn.com) Jonathan K. Layne – Los Angeles (+1 310-552-8641, jlayne@gibsondunn.com) Mark D. Director – Washington, D.C./New York (+1 202-955-8508/+1 212-351-5308, mdirector@gibsondunn.com) Andrew M. Herman – Washington, D.C./New York (+1 202-955-8227/+1 212-351-5389, aherman@gibsondunn.com) Eduardo Gallardo – New York (+1 212-351-3847, egallardo@gibsondunn.com) Saee Muzumdar – New York (+1 212-351-3966, smuzumdar@gibsondunn.com) Mergers and Acquisitions Group / Litigation: Meryl L. Young – Orange County (+1 949-451-4229, myoung@gibsondunn.com) Brian M. Lutz – San Francisco (+1 415-393-8379, blutz@gibsondunn.com) Aric H. Wu – New York (+1 212-351-3820, awu@gibsondunn.com) Paul J. Collins – Palo Alto (+1 650-849-5309, pcollins@gibsondunn.com) Michael M. Farhang – Los Angeles (+1 213-229-7005, mfarhang@gibsondunn.com) Joshua S. Lipshutz – Washington, D.C. (+1 202-955-8217, jlipshutz@gibsondunn.com) Adam H. Offenhartz – New York (+1 212-351-3808, aoffenhartz@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 27, 2018 |
SEC Streamlines Disclosure Requirements As Part of Its Overall Disclosure Effectiveness Review

Click for PDF This client alert provides an overview of changes to existing disclosure requirements recently adopted by the Securities and Exchange Commission (the “Commission”).  On August 17, 2018, the Commission adopted several dozen amendments (available here) to existing disclosure requirements to “simplify compliance without significantly altering the total mix of information” (the “Final Rules”).  In Release No. 33-10532, the Commission characterized the amended requirements as redundant, duplicative, overlapping, outdated or superseded, in light of subsequent changes to Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (“GAAP”), International Financial Reporting Standards (“IFRS”) and technology developments.  The Final Rules are largely consistent with the changes outlined in the Commission’s July 13, 2016 proposing release, available here (the “Proposed Rules”).  They form part of the Commission’s ongoing efforts in connection with the Disclosure Effectiveness Initiative relating to Regulations S-K and S-X and the Commission’s mandate under the Fixing America’s Surface Transportation (“FAST”) Act to eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated, or unnecessary. The Commission adopted the amendments addressed in the Proposed Rules with few exceptions. The Final Rules will become effective 30 days from publication in the Federal Register.  In the short term, issuers and registrants will need to revise their disclosure practices and compliance checklists in light of the amendments before filing a registration statement or periodic report following effectiveness of the Final Rules. I.   Summary of Adopted Changes For certain disclosure requirements that are related to, but not the same as, U.S. GAAP, IFRS, or other Commission disclosure requirements, the Commission: (i) deleted those disclosure requirements that convey reasonably similar information to or are encompassed by the disclosures that result from compliance with overlapping U.S. GAAP, IFRS, or Commission disclosure requirements; and (ii) integrated those disclosure requirements that overlapped, but required information that was incremental to, other Commission disclosure requirements. A.   Deletions of Requirements Covered Otherwise The Commission eliminated the following disclosure requirements, as proposed:[1] Amount Spent on R&D.  The Commission deleted the requirement to disclose amounts spent on research and development activities for all years presented (Item 101(c)(1)(xi) of Regulation S-K) because it is already covered by U.S. GAAP. Financial Information by Segment.  The Commission deleted the requirement to disclose financial information (specifically, revenues from external customers, a measure of profit or loss and total assets) about segments for the last three years (Item 101(b) of Regulation S-K),[2] because it is already covered by U.S. GAAP. Financial Information by Geographic Area.  The Commission deleted the requirement to disclose financial information by geographic area (Item 101(d)(2) of Regulation S-K) and risks associated with an issuer’s foreign operations and any segment’s dependence on foreign operations (Item 101(d)(3) of Regulation S-K), because it is already covered by U.S. GAAP. Dividend History.  The Commission deleted the requirement to disclose the frequency and amount of cash dividends declared (Item 201(c)(1) of Regulation S-K), because this information is already covered by amended Rule 3-04 of Regulation S-X. Ratio of Earnings to Fixed Charges.  The Commission deleted the requirement to provide a ratio of earnings to fixed charges (Items 503(d) and 601(b)(12) of Regulation S-K; Instruction 7 to Exhibits of Form 20-F), because U.S. GAAP already provides the disclosure of the components commonly used to calculate these ratios.  Issuers no longer need to include this information in an exhibit to their 10-K or in their registration statements. B.   Integrations of Duplicative Requirements The Commission integrated the following duplicative disclosure requirements, as proposed: Restrictions on Dividends.  The Commission consolidated several disclosure requirements related to the restriction of dividends and related items.  Where formerly the disclosure requirements were located in parts of both Regulation S-K and Regulation S-X, the Commission consolidated such disclosure requirements for domestic issuers under a single requirement in revised Rule 4-08(e)(3) of Regulation S-X. The disclosure will now only appear in the notes to the financial statements. Discussion of Geographic Areas.  The Commission integrated the requirement to discuss facts indicating why performance in certain geographic areas may not be indicative of current or future operations by eliminating the requirement from Item 101(d)(4) of Regulation S-K and revising Item 303 of Regulation S-K (which currently requires a discussion regarding elements of income that are not indicative of the issuer’s ongoing business), to add an explicit reference to “geographic areas.”  In addition, the Commission adopted the following clarification as suggested by the commenters: the discussion of income from certain geographic areas under revised Item 303 of Regulation S-K is not required in all circumstances, but only when management believes such discussion would be appropriate to an understanding of the business. C.   Deletions of Outdated Disclosure Requirements[3] The Commission also eliminated provisions that have become outdated as a result of the passage of time or changes in the regulatory, business, or technological environment (such as stale transition dates and moot income tax instructions), including the following: Available Information. The Commission deleted the requirement (contained in Item 101(e)(2) and Item 101(h)(5)(iii) of Regulation S-K, Forms S-1, S-3, S-4, S-11, F-1, F-3, and F-4,  Item 1118(b) of Regulation AB, and Forms SF-1, SF-3, N-1A, N-2, N-3, N-5, N6, and N-8B-2) to identify the Public Reference Room and disclose its physical address and phone number. The Commission retained the requirement (contained in Item 101(e)(2) of Regulation S-K, and Forms S-1, S-3, S-4, S-11, F-3, F-4, SF-1, SF-3, and N-4) to disclose the Commission’s Internet address and a statement that electronic SEC filings are available there and expanded this requirement to Forms 20-F and F-1. The Commission added a requirement to Items 101(e) and 101(h)(5) of Regulation S-K, and Forms S-3, S-4, F-1, F-3, F-4, 20-F, SF-1, and SF-3 that all issuers disclose their Internet addresses (or, in the case of asset-backed issuers, the address of the specified transaction party). Exchange Rate Data. The Commission deleted the requirement in Item 3.A.3 of Form 20-F  that foreign private issuers provide exchange rate data when financial statements are prepared in a currency other than the U.S. dollar insofar as this data is widely available on the internet. Age of Financial Statements. The Commission added language clarifying the facts and circumstances when foreign private issuers may comply with the aging requirement to include audited financial statements in an initial public offering that are not older than 15 months compared to the 12 months aging requirement. They also deleted the reference to a waiver in Instruction 2 to Item 8.A.4 of Form 20-F. Market Price. The Commission eliminated the detailed disclosure requirement under Item 201(a)(1) of Regulation S-K related to historical high and low sale prices in light of the fact that the daily market price of most publicly traded securities are easily accessible free of charge on numerous websites that provide more information than is required under Regulation S-K.  Such requirements remain in place for issuers with no class of common equity traded in an established trading market; however, for issuers with established trading markets, the Final Rules require the disclosure of the trading symbols used for each class of common equity and the principal foreign public trading market in the case of foreign issuers.  In addition, issuers with common equity that is not traded on an exchange are required to indicate, as applicable, that any over-the-counter quotations reflect inter-dealer prices and may not necessarily represent actual transactions. The Final Rules also amended Item 9.A.4 of Form 20-F to be consistent with the adopted amendments to Item 201(a). D.   Amendments to Superseded Disclosure Requirements[4] The Commission amended disclosure requirements that were inconsistent with recent legislation and more recently updated U.S. GAAP and Commission disclosure requirements.  In addition to updating references to auditing standards in numerous rules and Commission forms and eliminating non-existent or incorrect references and typographical errors, the Final Rules include several substantive changes with both generally applicable and industry-specific effects in light of changes to U.S. GAAP requirements, including the following: Sale of REIT Property.  The Commission eliminated the requirement that REITs present separately all gains and losses on the sale of properties outside of continuing operations (Rule 3-15(a)(1) of Regulation S-X), insofar as U.S. GAAP rules require only the presentation of gains and losses on the disposal of “discontinued operations.” Insurance Companies.  The Final Rules include changes applicable to Insurance Company issuers. The Commission removed elements of disclosure requirements regarding reinsurance recoverable on paid losses and the reporting of separate account assets (Rules 7-03(a)(6) and 7-03(a)(11) of Regulation S-X) that conflict with U.S. GAAP. Consolidated and Combined Financial Statements.  The Final Rules include several changes to Regulation S-X related to the presentation of consolidated and combined financial statements in order to reflect changes to U.S. GAAP. Specifically, the Commission corrected for numerous inconsistencies with respect to Differences in Fiscal Periods (Rule 3A-02 of Regulation S-X), the Bank Holding Act of 1956 (Rule 3A-02 of Regulation S-X), Intercompany Transactions (Rules 3A-04 and 4-08 of Regulation S-X) and Dividends Per Share in Interim Financial Statements (Rules 3-04, 8-03, and 10-01 of Regulation S-X). E.   Deletion of Redundant or Duplicative Requirements[5] The Commission deleted all duplicative requirements identified in the Proposed Rules, primarily under Regulation S-X, that require substantially similar disclosure as required under U.S. GAAP, IFRS, or other Commission requirements (with the exception of the requirements in Rule 3-20 of Regulation S-X related to the foreign currency disclosure in the financial statements of foreign private issuers).  These minor amendments deleted duplicative language covering a wide variety of disclosure topics, including the following: Consolidation. The Commission deleted Rule 4-08(a) of Regulation S-X requiring compliance with Article 3A (duplicative of Article 3A), Rule 3A-01 of Regulation S-X stating the subject matter of Article 3A (duplicative of Article 3A), language in Rule 3A-02(b)(1) of Regulation S-X permitting consolidation of an entity’s financial statements for its fiscal period if the period does not differ from that of the issuer by more than 93 days (duplicative of ASC 810-10-45-12), language in Rule 3A-02(d) of Regulation S-X requiring consideration of the propriety of consolidation under certain restrictions (duplicative of ASC 810-10-15-10), language in Rule 3A-02 and 3A-03(a) of Regulation S-X requiring disclosure of the accounting policies followed in consolidation or combination (duplicative of ASC 235-10-50-1 and ASC 810-10-50), and language in  Rule 3A-04 of Regulation S-X requiring the elimination of intercompany transactions (duplicative of ASC 323-10-35-5a and ASC 810-10-45). Income Tax Disclosure. The Commission deleted language in Rule 4-08(f) of Regulation S-X requiring income tax rate reconciliation (duplicative of ASC 740-10-50-12) and language in Rule 4-08(h)(2) of Regulation S-X permitting income tax rate reconciliation to be presented in either percentages or dollars (duplicative of ASC 740-10-50-12). Earnings Per Share. The Commission deleted language in Rule 10-01(b)(2) of Regulation S-X requiring presentation of earnings per share on interim income statement (duplicative of ASC 270-10-50-1b) and Item 601(b)(11) of Regulation S-K and Instruction 6 to “Instructions as to Exhibits” of Form 20-F requiring disclosure of the computation of earnings per share in annual filings (duplicative of ASC 260-10-50-1a, Rule 10-01(b)(2) of Regulation S-X, and IAS 33, paragraph 70). Interim Financial Statements. The Commission deleted Rule 10-01(b)(5) of Regulation S-X requiring  disclosure of the effect of discontinued operations on interim revenues, net income, and earnings per share for all periods presented (duplicative of ASC 205-20-50-5B, ASC 205-20-50-5C, ASC 260-10- 45-3, and ASC 270-10-50-7) and language in Rule 10-01(b)(3) of Regulation SX requiring that common control transactions be reflected in current and prior comparative periods’ interim financial statements (duplicative of ASC 805-50-45-1 to 5). Bank Holding Companies. The Commission deleted Rule 9-03.6(a) of Regulation S-X requiring disclosure of the carrying and market values of securities of the U.S. Treasury and other U.S. Government agencies and corporations, securities of states of the U.S. and political subdivisions, and other securities (duplicative of ASC 320-10-50-1B, ASC 320-10-50-2, ASC 320-10-50-5, and ASC 942-320-50-2), Rule 9-03.7(d) of Regulation S-X requiring  disclosure of changes in the allowance for loan losses (duplicative of ASC 310-10-50-11B(c)), and language in Rule 9-04.13(h) of Regulation S-X requiring disclosure of the method followed in determining the cost of investment securities sold (duplicative of ASC 235-10-50-1 and ASC 320-10-50-9b). II.   Summary of Proposed Rules Not Adopted A.   Retained Requirements The Commission originally proposed to delete the following overlapping disclosure requirements, but instead chose to retain the requirements without amendment: Pro-Forma Dispositions.  The Commission retained the requirement under Rule 8-03(b)(4) of Regulation S-X to present pro forma financial information regarding business dispositions. This decision was in response to commenter concerns that the disclosure would not be sufficiently substituted by Regulation S-K, because Item 9.01 of Form 8-K only references significant acquisitions rather than dispositions.  The Commission determined that the issue warranted additional analysis and consideration and opted not to amend the requirement. Seasonality.  The requirement to discuss seasonality under Item 101(c)(1)(v) of Regulation S-K was retained without amendment. This decision was in response to concerns about the potential loss of information in the fourth quarter about the extent to which an issuer’s business is seasonal because U.S. GAAP may not elicit this disclosure. Legal Proceedings.  The Commission declined to adopt amendments to the legal proceedings disclosure required under Item 103 of Regulation S-K or to refer the disclosure requirements under Item 103 to the FASB for potential incorporation into U.S. GAAP.  The Commission cited several differences between the Regulation S-K requirement and its parallel requirement under U.S. GAAP, and emphasized that integration could have broad implications such as expanding costly audit reviews and increasing the disclosure of immaterial items. Mutual Life Insurance Companies. The Commission did not adopt the proposed change to Rule 7-02(b) of Regulation S-X, which would have eliminated the ability of mutual life insurance companies to prepare financial statements in accordance with statutory accounting requirements. B.   Potential Changes Referred to FASB For Prompt Review The Commission originally proposed to delete the following overlapping disclosure requirements, but instead opted to retain these requirements and refer them to the Financial Accounting Standards Board (“FASB”), with a request that FASB complete its review within 18 months of the publication of the Final Rules in the Federal Register: Repurchase and Reverse Repurchase Agreements.  The Commission retained  the Regulation S-X disclosure requirements related to repurchase and reverse repurchase agreements (such as the separate presentation of repurchase liabilities on the balance sheet).  The Commission emphasized that several commenters had expressed concern that deletion of this requirement would eliminate disclosures that are material and not otherwise available to investors in the repo market. Equity Compensation Plans.  The Commission also retained the requirement under Item 201(d) of Regulation S-K to discuss securities authorized under equity compensation plans in an information table, noting commenter concerns that U.S. GAAP does not require certain information, such as the number of securities available for issuance under an equity compensation plan, which may be material to investors. C.   Retained Requirements Referred to FASB for Potential Review For disclosure requirements that overlapped with, but required information incremental to, U.S. GAAP, the Commission elected to solicit further comment before determining whether to retain, modify, eliminate, or refer them to FASB for potential incorporation into U.S. GAAP.[6]  In the Final Rules, the Commission generally retained and referred such requirements to FASB to be considered in its normal standard-setting process.  For example: Major Customers.  The Commission retained the requirement to discuss major customers under Item 101(c)(1)(vii) of Regulation S-K despite it being substantially similar to U.S. GAAP requirements, because Regulation S-K (unlike U.S. GAAP) contains an incremental requirement to disclose the name of a major customer in certain instances.  The Commission referred this particular requirement to FASB because it continues to believe the identity of major customers represents material information to investors and allows investors to better assess the risks associated with a particular customer. Revenue from Products and Services.  While Regulation S-K and U.S. GAAP both require the disclosure of the amount of revenue from products and services, Item 101(c)(1)(i) of Regulation S-K only requires this information if a certain threshold is met, while U.S. GAAP includes a “practicability” exception.  Accordingly, the Commission retained and referred the Regulation S-K requirement to FASB for potential incorporation into U.S. GAAP. Conclusion The amendments contained in the Final Rules are highly technical and are explicitly intended to avoid any substantive changes to the “total mix of information provided to investors.” Nonetheless, these changes should reduce the cost and time of issuer compliance both by eliminating specific outdated and superfluous disclosure requirements and by reducing the overall number of rules to consider. In the short term, issuers and registrants will need to revise their disclosure practices and compliance checklists in light of the amendments before filing a registration statement or periodic report following effectiveness of the Final Rules. Furthermore, issuers should expect additional changes in the future as part of the Commission’s ongoing efforts to clean up and modernize disclosure requirements in connection with its Disclosure Effectiveness Initiative.    [1]   For a complete discussion on final adoptions for overlapping disclosure requirements proposed to be deleted, see page 37 of the Final Rules.    [2]   Additionally, the Commission eliminated Rule 3-03(e) of Regulation S-X as suggested by a commenter (which was not in the Proposed Rules), because it is likewise redundant with U.S. GAAP (see page 71 of the Final Rules).    [3]   A complete discussion of adopted amendments for outdated disclosure requirements begins on page 100 of the Final Rules.    [4]   A complete discussion of adopted amendments for superseded disclosure requirements begins on page 108 of the Final Rules.    [5]   A complete discussion of adopted amendments for redundant or duplicative disclosure requirements begins on page 28 of the Final Rules.    [6]   For a complete discussion on overlapping disclosure requirements where the Commission solicited comments see page 83 of the Final Rules. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Capital Markets or Securities Regulation and Corporate Governance practice groups, or the authors: Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com) Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) Michael A. Mencher – New York (+1 212-351-5309, mmencher@gibsondunn.com) Maya J. Hoard – Orange County, CA (+1 949-451-4046, mhoard@gibsondunn.com) Please also feel free to contact any of the following practice leaders: Capital Markets Group: Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com) Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) J. Alan Bannister – New York (+1 212-351-2310, abannister@gibsondunn.com) Securities Regulation and Corporate Governance Group: Elizabeth Ising – Co-Chair, Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney – Co-Chair, Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) © 2018 Gibson, Dunn &amp Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 6, 2018 |
SEC Proposes Streamlined Financial Disclosures for Certain Guaranteed Debt Securities and Affiliates Whose Securities Are Pledged to Secure a Series of Debt Securities

Click for PDF On July 24, 2018, the Securities and Exchange Commission (the “Commission”) proposed amendments to Rules 3-10 and 3-16 of Regulation S-X (available here) (the “Proposal”) in an effort to “simplify and streamline” the financial disclosures required in offerings of certain guaranteed debt and debt-like securities (collectively referred to as “debt securities”), as well as offerings of securities collateralized by securities of an affiliate of the registrant, registered under the Securities Act of 1933, as amended (the “Securities Act”). These proposed changes would, if implemented, facilitate greater speed to market for such public offerings, significantly reducing the Securities Act disclosure burdens for such registrants, as well as reducing the registrant’s disclosure obligations in its subsequent annual and interim reports required under Securities Exchange Act of 1934, as amended (the “Exchange Act”). Background Current Alternative Disclosure Regime for Certain Guaranteed Debt Securities.  For purposes of the Securities Act and the Exchange Act, guarantees of securities are deemed separate securities from the underlying security that is guaranteed.  As a result, absent a regulatory exception or exemption, a prospectus prepared for a public offering of guaranteed debt securities registered under the Securities Act is required to include the full separate financial statements of (and disclosure regarding) each guarantor (in addition to those of the issuer of the guaranteed debt security) in the form and for the periods required for registrants under Regulation S-X, and each such guarantor (like the issuer of the guaranteed debt security) is also required to be registered under the Exchange Act and thereafter file annual and interim reports under that Act just as any other registrant.  Recognizing the substantial burdens of such disclosures that would otherwise be imposed in connection with registered public offerings of certain guaranteed debt securities involving parent companies and their wholly-owned subsidiaries, much of which would be duplicative, the SEC has embraced exceptions (as currently set out in Regulation S-X Rule 3-10 (“S-X 3-10”)) to instead permit the parent company in a qualifying offering of such guaranteed debt securities to file only its consolidated financial statements, together with certain condensed consolidating financial information (“Consolidating Financial Information”) intended to allow investors to distinguish between the obligor and non-obligor components of the consolidated group of companies represented in the parent’s consolidated financial statements.  S-X 3-10 also requires the registrant to include specified textual disclosure, where applicable,  about the limited nature of the assets and operations of the issuer, guarantor(s) or non-guaranteeing subsidiaries, as the case may be, and describing any material limitations on the ability of the parent or any guarantor to obtain funds (whether by dividend, loan or otherwise) from its subsidiaries and any other relevant limitations on any subsidiary’s use of its fund (together with the Consolidating Financial Information, the “Alternative Disclosure”).  The Alternative Disclosure is required to be included in a note to the parent’s consolidated audited financial statements and must cover the same periods for which the parent is required to include its consolidated financial statements.  The parent company is required to include the Alternative Disclosure in its annual and quarterly Exchange Act reports filed after the guaranteed debt securities are issued and to continue to do so as long as the securities remain outstanding, even for periods in which the issuer(s) and guarantors have no Exchange Act reporting obligation with respect to such securities.  In addition, for certain significant recently-acquired subsidiary guarantors, S-X 3-10 currently requires that the registration statement for the offering include the separate audited financial statements for such subsidiaries’ most recent fiscal year and unaudited financial statements for any interim period for which the parent is required to include its interim financial statements. Pursuant to Rule 12h-5, each guarantor or issuer subsidiary in any such qualifying transaction is exempt from the separate ongoing Exchange Act reporting obligations otherwise applicable to a registrant. Notwithstanding the advantages offered by the exception provided by S-X 3-10, the conditions to the current regulation, including that the subsidiaries be 100% owned by the parent and that all guarantees be full and unconditional, the often time-consuming process of producing and auditing the Consolidating Financial Information, as well as the requirement that the parent continue to include the Alternative Disclosure for as long as any of the guaranteed debt securities remain outstanding, have limited the range of subsidiaries that are used as guarantors, delayed offerings and/or led to reliance on Rule 144A for life offer structures for some guaranteed debt offerings to avoid registration. Current Disclosure Requirements for Securities Collateralized by Affiliate Securities.  Current Regulation S-X Rule 3-16 (“S-X 3-16”) requires a registrant to provide separate audited annual financial statements, as well as unaudited interim financial statements, for each affiliate whose securities constitute a “substantial portion”[1] of the collateral pledged for such registrant’s registered securities as though such affiliate were itself a registrant, and thereafter file annual and interim reports under the Exchange Act for such affiliate.  The production of the financial statements required by S-X 3-16 is often time consuming and costly to the issuer and the requirement is triggered entirely by the outcome of the substantial portion test, without regard to the comparative importance of the relevant affiliate to the registrant’s business and operations as a whole or the materiality of such financial statements to an investment decision.  To avoid the burden of preparing separate full financial statements for each affiliate whose securities are pledged as collateral, issuers often reduce collateral packages or structure collateralized securities as unregistered offerings.  Additionally, debt agreements are sometimes structured to specifically release collateral if and when such collateral may trigger the S-X 3-16 financial statement requirements. Proposed Amendments In the SEC’s effort to streamline the disclosure requirements in connection with certain guaranteed debt securities offered and sold in public offerings registered under the Securities Act, as well as simplify the current number of myriad offer structures entitled to disclosure relief, the amendments proposed to S-X 3-10 would: replace the current detailed list of offer structures permitted relief under S-X 3-10 with a more simple requirement that the debt securities be either: issued by the parent or co-issued by the parent, jointly and severally, with one or more of its consolidated subsidiaries; or issued by a consolidated subsidiary of the parent (or co-issued with one or more other consolidated subsidiaries of the parent) and fully and unconditionally guaranteed by the parent; replace the condition currently included in S-X 3-10 that a subsidiary issuer or guarantor be 100% owned by the parent company, requiring instead that the subsidiary merely be consolidated in the parent company’s consolidated financial statements in accordance with U.S. GAAP or, in the case of foreign private issuer, IFRS (as promulgated by the IASB).  As a result, in addition to 100% owned subsidiaries, controlled subsidiaries and joint ventures which are consolidated in the parent’s financial consolidated financial statements could be added as issuers or guarantors in such offerings and take advantage of the reduced disclosure permitted under the Proposal, provided the other conditions of the revised regulation are met; modify the requirement that all guarantees be full and unconditional, requiring only that the parent guarantee (in the case of a subsidiary issuer) be full and unconditional.  The proposal would thereby allow greater flexibility with the extent and nature of guarantees to be given by subsidiary guarantors, provided the terms and limitations of such guarantees are adequately disclosed; eliminate the Consolidating Financial Information currently required to be included in the registration statement and the parent’s Exchange Act annual and (where applicable) quarterly reports under S-X 3-10, and, in lieu thereof, add a new Rule 13-01 of Regulation S-X requiring such parent companies to include (i) certain summary financial information (the “Summary Financial Information”) for the parent and guarantors (the “Obligor Group”) on a combined basis (after eliminating intercompany transactions among members of this Obligor Group), and (ii) certain non-financial disclosures, including expanded qualitative disclosures about the guarantees and factors which could limit recovery thereunder, and any other quantitative or qualitative information that would be material to making an investment decision about the guaranteed debt securities (the Summary Financial Information and such non-financial disclosures, the “Proposed Alternative Disclosure”); require that the Summary Financial Information conform to the current provisions of Regulation S-X Rule 1-02(bb) and include summarized information as to the assets, liabilities and results of operations of the Obligor Group only; reduce the periods for which the Summary Financial Information must be provided, requiring such information for only the most recent fiscal year and any interim period for which consolidated financial statements of the parent are otherwise required to be included; permit the parent flexibility as to the location of the Summary Financial Information and other Proposed Alternative Disclosures, including in the notes to it consolidated financial statements, in the “management’s discussion and analysis of financial condition and results of operations” or immediately following “risk factors” (if any”) or the pricing information in the Securities Act registration statement and related prospectus and in Exchange Act reports on Forms 10-K, 20-F and 10-Q required to be filed during the fiscal year in which the first bona fide sale of the guaranteed debt securities is completed.  By permitting such flexibility, the parent issuers may realize greater speed to market for such offering as the Summary Financial Information would not be required to be audited if located outside the notes to its consolidated financial statements; by allowing a parent company the option to exclude the Summary Financial Information from the notes to its audited financial statements, such parent may realize greater speed to market for such offerings as the Summary Financial Information would not be required to be audited as part of the offer process; such Summary Financial Information would, however, be required to be included in a footnote to the parent’s annual and (where applicable) quarterly reports (and thus audited), beginning with its annual report filed on Form 10-K or 20-F for the fiscal year during which the first bona fide sale of the guaranteed debt securities is completed.  Thus, for example, for guaranteed debt securities issued in the second quarter of fiscal 2018, the Summary Financial Information would first be required to be included in the notes to the parent’s financial statements filed in its annual report filed on Form 10-K for its fiscal year 2019; eliminate the current requirement that, for so long as the guaranteed debt securities remain outstanding, a parent company continue to include the Consolidating Financial Information within its annual and interim reports (including for periods in which the Obligor Group is not then  subject to the reporting requirements of the Exchange Act).  Under the Proposal, the Summary Financial Information and other Proposed Alternative Disclosures would not be required to be included in the parent’s annual and quarterly reports for such periods in which the Obligor Group is not then subject to the reporting requirements of the Exchange Act.  Nonetheless, some parent companies with an Obligor Group that issues guaranteed debt securities on a regular basis may elect to continue to prepare and include the Revised Alternative Disclosure in its Exchange Act reports to ensure a more rapid access to the market for future transactions; and eliminate, with respect to recently-acquired subsidiary guarantors or issuers, the current requirement under S-X 3-10 that the parent include in the registration statement for the offering separate audited financial statements for the most recent fiscal year of the recently-acquired subsidiary (as well as separate unaudited interim financial statements for any relevant interim periods).  Note, however, that other provisions of Regulation S-X regarding the impact of recent material acquisitions and the potential requirement thereunder to include separate financial statements of the acquired entity (and, in some cases, pro forma consolidated financial information regarding the acquisition) remain unchanged by the Proposal. The proposed amendments to S-X 3-16 would: replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with a requirement to include the Summary Financial Information and any additional non-financial information material to investment decisions about the affiliate(s) (if more than one affiliate, such information could be provided on a combined basis) and the collateral arrangement(s).  The elimination of the requirement to include the affiliate’s separate audited financial statements would significantly decrease the cost and burden of an offering secured by the securities of an affiliate of the registrant; permit the proposed financial and non-financial affiliate disclosures to be located in filings in the same manner (and for reports for the same corresponding periods) as described above for the disclosures related to guarantors and guaranteed securities, which would bring the level and type of disclosure for collateralized securities in line with other forms of credit enhancement; and replace the requirement to provide disclosure only when the pledged securities meet or exceed a numerical threshold relative to the securities registered or being registered with a requirement to provide the applicable disclosures in all cases, unless they are immaterial to holders of the collateralized security, which would replace the arbitrary numerical cutoff with a consideration of materiality to investors. Set forth below, we summarizing the current requirements, and proposed changes to such requirements, for the use of abbreviated disclosure for subsidiary issuer/guarantors of certain guaranteed debt securities and for issuers of securities collateralized by securities of affiliates. Guaranteed Debt Securities:  Summary of Current Requirements for Abbreviated Disclosure and Proposed Revisions Current Provisions of S-X 3-10: Proposed Provisions: Offer Structures Permitted Disclosure Relief Finance subsidiary issuer of debt securities guaranteed by  parent; Operating subsidiary issuer of debt securities guaranteed by parent; Subsidiary issuer of debt securities guaranteed by  parent and one or more other subsidiaries; Single subsidiary guarantor of debt securities issued by parent; or Multiple subsidiary guarantors of debt securities issued by parent Debt securities: Issued by parent or co-issued by parent, jointly and severally, with one or more of its consolidated subsidiaries; or Issued by a consolidated subsidiary of parent (or co-issued with one or more other consolidated subsidiaries) and fully and unconditionally guaranteed by parent Conditions to Relief Each subsidiary issuer or guarantor must be 100% owned by parent; and All guarantees must be full and unconditional Subsidiary issuer/guarantors must be consolidated in the parent’s consolidated financial statements Only the parent guarantee, if any, must be full and unconditional Alternative Disclosure Condensed Consolidating Financial  Information, and certain textual disclosure Summary Financial Information for Obligor Group on a combined basis (after eliminating transactions between Obligors) and certain textual disclosure Periods for which Disclosure Required in Registration Statement For each year and any interim periods for which parent is required to include financial statements The most recent fiscal year and any interim period for which the parent is required to include financial statements Locations of Disclosure The Alternative Disclosure must be included in the notes to the parent’s audited consolidated financial statements (and in its unaudited interim financial statements where such financial statements are required to be included) In the Registration Statement and in Exchange Act reports filed during the fiscal year in which the debt securities are first bona fide offered to the public, the parent has the choice of including them in the notes to its consolidated financial statements or elsewhere, including within “management’s discussion and analysis of financial condition and results of operations” or immediately following “risk factors” For the parent’s annual report for the fiscal year in which the debt securities were first offered to the public, and all Exchange Act reports required to be filed thereafter, the Proposed Alternative Disclosures must be included in the notes to the parent’s consolidated financial statements How Long is Exchange Act Disclosure Required For so long as any of the debt securities remain outstanding Only for periods in which the Obligors are required to file Exchange Act reports in respect of the debt securities Additional Requirements For Recently Acquired Subsidiary Guarantor/Issuers Parent must include separate audited financial statements of the recently acquired subsidiary issuer/guarantor for the most recent fiscal and any interim period for which the parent is required to include financial statements No separate financial statements of a recently acquired subsidiary issuer/guarantor is required for relief under the Proposal Summary of Current Disclosure Requirements for Securities Collateralized by Securities of Affiliates and the Proposed Revisions Current Provisions of S-X 3-16: Proposed Provisions: Offer Structure Triggering Disclosure Requirement Securities issued by a registrant and collateralized with the securities of its affiliates where such collateral constitutes a “substantial portion” of the collateral for any class of securities Securities issued by a registrant and collateralized with the securities of its affiliates, unless such collateral is immaterial to making an investment decision about the registrant’s securities Additional Disclosure Required If the pledged securities of an affiliate constitute a “substantial portion” of the collateral for the secured class of securities, separate audited annual financial statements, as well as unaudited interim financial statements, for such affiliate as though such affiliate were itself a registrant Summary Financial Information with respect to any affiliate whose securities are pledged to secure a class of securities, and any additional non-financial information material to investment decisions about the affiliate(s) and the collateral arrangement Basis of Presentation Separate financial statements for each affiliate whose securities constitute a “substantial portion” of the collateral Summary Financial Information of affiliates consolidated in the registrant’s financial statements can be presented on combined basis If information is applicable to a subset of affiliates (but not all) separate Summary Financial Information required for such affiliates Periods for which Disclosure Required in Registration Statement For each year and any interim period as if affiliate were a registrant The most recent fiscal year and any interim period for which the registrant is required to include consolidated financial statements Locations of Disclosure Separate financial statements required to be included in the registration statement in the registrant’s annual report on Form 10-K or 20-F Disclosure not required in quarterly reports of the registrant In the Registration Statement and in Exchange Act reports filed during the fiscal year in which the first bona fide sale is completed, the registrant has the choice of including them in the notes to its consolidated financial statements or elsewhere, including within “management’s discussion and analysis of financial condition and results of operations” or immediately following “risk factors” For the registrant’s annual report for the fiscal year in which the first sale was completed, and all Exchange Act reports required to be filed thereafter, the required information must be included in the notes to the registrant’s consolidated financial statements   The SEC is seeking public comments on its proposal for a period of 60 days from July 24, 2018. Comments can be submitted on the internet at http://www.sec.gov/rules/other.shtml; via email to  rule-comments@sec.gov (File Number S7-19-18 should be included on the subject line); or via mail to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.    [1]   E.g., if the aggregate principal amount, par value or book value of the pledged securities as carried by the issuer of the collateralized securities, or market value, equals 20% or more of the aggregate principal amount of the secured class of securities offered. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Capital Markets or Securities Regulation and Corporate Governance practice groups, or the authors: J. Alan Bannister – New York (+1 212-351-2310, abannister@gibsondunn.com) Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Alina E. Iarve – New York (+1 212-351-2406, aiarve@gibsondunn.com) Michael J. Scanlon – Washington, D.C. (+1 202-887-3668, mscanlon@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 31, 2018 |
Webcast: Strategies Regarding Corporate Veil Piercing and Alter Ego Doctrine

Please join a panel of seasoned Gibson Dunn attorneys for a presentation on how a company can best protect itself against “veil-piercing” claims and “alter ego” liability.  We provide an overview of what it means to “pierce the corporate veil” and the circumstances that have prompted courts to ignore the corporate separateness of entities and impose “alter ego” liability. We also focus on strategies to minimize the risk of facing claims for veil piercing and alter ego liability and maximize your chances for success in connection with any such claims. View Slides [PDF] PANELISTS: Robert A. Klyman is a partner in Gibson Dunn’s Los Angeles office. He is Co-Chair of the Firm’s Business Restructuring and Reorganization practice group. Mr. Klyman represents debtors, acquirers, lenders, ad hoc groups of bondholders and boards of directors in all phases of restructurings and workouts. His experience includes advising debtors in connection with traditional, prepackaged and “pre-negotiated” bankruptcies; representing lenders and bondholders in complex workouts; counseling strategic and financial players who acquire debt or provide financing as a path to take control of companies in bankruptcy; structuring and implementing numerous asset sales through Section 363 of the Bankruptcy Code; and litigating complex bankruptcy and commercial matters arising in chapter 11 cases, both at trial and on appeal. John M. Pollack is a partner in Gibson Dunn’s New York office. He is a member of the Firm’s Mergers and Acquisitions, Private Equity, Aerospace and Related Technologies and National Security practice groups. Mr. Pollack focuses his practice on public and private mergers, acquisitions, divestitures and tender offers, and his clients include private investment funds, publicly-traded companies and privately-held companies. Mr. Pollack has extensive experience working on complex M&A transactions in a wide range of industries, with a particular focus on the aerospace, defense and government contracts industries. Lori Zyskowski is a partner in Gibson Dunn’s New York office. She is Co-Chair of the Firm’s Securities Regulation and Corporate Governance practice group. Ms. Zyskowski advises public companies and their boards of directors on corporate governance matters, securities disclosure and compliance issues, executive compensation practices, and shareholder engagement and activism matters. Ms. Zyskowski advises clients, including public companies and their boards of directors, on corporate governance and securities disclosure matters, with a focus on Securities and Exchange Commission reporting requirements, proxy statements, annual shareholders meetings, director independence issues, and executive compensation disclosure best practices. Ms. Zyskowski also advises on board succession planning and board evaluations and has considerable experience advising nonprofit organizations on governance matters. Sabina Jacobs Margot is an associate in Gibson Dunn’s Los Angeles office. She is a member of the Firm’s Business Restructuring and Reorganization and Global Finance practice groups. Ms. Jacobs Margot practices in all aspects of corporate reorganization and handles a wide range of bankruptcy and restructuring matters, representing debtors, lenders, equity holders, and strategic buyers in chapter 11 cases, sales and acquisitions, bankruptcy litigation, and financing transactions. Ms. Jacobs Margot also represents borrowers, sponsors, and lending institutions in connection with acquisition financings, secured and unsecured credit facilities, asset-based loans, and debt restructurings. 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 Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@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.

July 30, 2018 |
2018 Mid-Year Securities Enforcement Update

Click for PDF I.  Significant Developments A.  Introduction For a brief moment in time, after several years with as many as 3 of the 5 commissioner seats vacant, the SEC was operating at full force, with the January 2018 swearing in of newest commissioners Hester Peirce and Robert Jackson.  This situation was short-lived, as Commissioner Piwowar, a Republican appointee with a deregulatory bent who had pulled back on certain enforcement powers, stepped down at the beginning of July.  While the president has named a potential replacement, the Senate has not yet held confirmation hearings; with Democratic Commissioner Kara Stein also set to leave the agency sometime later this year, the Senate may defer consideration until both the Republican and Democratic nominees have been named.  The vacancy could cause the Commission, which has already split on several key rulemakings, to defer some more controversial regulatory initiatives and even some enforcement actions which pose thornier policy questions. Meanwhile, the most noteworthy Enforcement-related event came with the Supreme Court’s Lucia decision, in which the Court held that the agency’s administrative law judges have been unconstitutionally appointed, resolving a technical but significant legal issue which has dogged the SEC’s administrative proceedings for several years.  As discussed further below, the decision throws a wrench in the works for the Enforcement Division, which until the past couple years had been litigating a growing number of enforcement actions in its administrative forum rather than in federal court. In terms of enforcement priorities, the SEC has continued to pursue a relatively small number of significant public company cases; despite a push in recent years to increase its focus on accounting fraud, few new actions were filed in the first half of 2018.  In contrast, the Division filed a surprisingly large number of cases against investment advisers and investment companies, including advisers to individual retail clients, private fund managers, and mutual fund managers. And the SEC’s concentration on all things “cyber” continued to make headlines in the initial months of 2018.  The SEC rolled out guidance on appropriate cybersecurity disclosures, and filed its first (and to date only) case against a public company for allegedly failing to report a data breach to investors on a timely basis.  Additionally, the SEC continues to institute enforcement actions in the cryptocurrency space, though is focus remains primarily on outright frauds, leaving ongoing uncertainty as to the regulatory status of certain digital assets. B.  Significant Legal Developments On June 21, 2018, the Supreme Court ruled in Lucia v. SEC that the SEC’s administrative law judges (ALJs) were inferior officers of the United States for purposes of the Constitution’s Appointments Clause, and that the SEC had failed to properly appoint its ALJs in a manner consistent with the Clause.[1]  (Mr. Lucia was represented by Gibson Dunn before the Supreme Court.)  After several years in which the SEC had increasingly filed contested proceedings administratively rather than in federal district court, the agency reversed course in the face of mounting court challenges to the constitutionality of its ALJs (who had been appointed by a government personnel office rather than by the commissioners themselves).  Even with the reduced number of pending, litigated administrative proceedings, the SEC still faces the prospect of retrying dozens of cases which had been tried before improperly-appointed ALJs.  As this report went to press, the SEC had yet to determine how it would handle these pending cases, or how or when it would go about appointing ALJs to hear litigated administrative proceedings going forward. Even with Lucia resolving the primary legal question which had been floating about in recent years, other questions about the legality of ALJs may continue to complicate administrative proceedings, and thus for the time being the SEC has determined to pursue most litigated cases in court.  (Though the SEC continues to bring settled administrative proceedings, as such settled orders are issued by the Commission itself rather than by an ALJ.) Another Supreme Court decision that curtailed SEC enforcement actions, SEC v. Kokesh, continues to impact the enforcement program.  As detailed previously, in June 2017 the Supreme Court overturned a lower court ruling that required the defendant to disgorge $34.9 million for conduct dating back to 1995.  The Supreme Court found that disgorgement was a form of penalty and was therefore subject to a five-year statute of limitations.[2]  In March 2018, on remand, the Tenth Circuit determined that the statute of limitations still did not bar the SEC’s action since the “clock” restarted with each act of misappropriation.[3]  Moreover, notwithstanding Kokesh, the issue of whether SEC actions seeking injunctive relief or other non-monetary sanctions (such as industry bars) are governed by the five-year statute remains hotly contested.  In a May 2018 speech, Co-Enforcement Director Steven Peiken noted that the SEC continues to maintain that injunctive relief is not subject to the five-year statute of limitations under Kokesh, and admonished parties that the staff would not forgo pursuing actions based on such arguments.[4]  However, the issue is far from settled, and just this month a district court came to a different conclusion.[5] In June, the Supreme Court granted a petition of certiorari filed by Francis V. Lorenzo, an investment banker who copied and pasted his boss’s allegedly fraudulent email into a message to his clients and who the D.C. Circuit found liable for fraud as a result[6].  Mr. Lorenzo has argued that, based on the Supreme Court’s 2011 decision in Janus Capital Group Inc. v. First Derivative Traders, he should not be considered the “maker” of the allegedly fraudulent statements.  Mr. Lorenzo’s petition asserts that the D.C. Circuit decision allows the SEC to avoid the requirements of Janus by characterizing fraud claim as “fraudulent scheme” claims.  A circuit split exists as to whether a misstatement alone can form the basis of a fraudulent scheme claim. C.  Whistleblower Developments The first half of 2018 saw the SEC’s largest whistleblower bounties to date, as well as some related rulemaking proposals which could potentially cap such awards.  As of April, the SEC reported that it had paid more than $266 million to 55 whistleblowers since 2012.[7] In March, the SEC announced its highest-ever whistleblower awards, paying a combined $50 million to two individuals and an additional $33 million to a third.[8]  While the SEC may not disclose the identities of whistleblowers, their counsel subsequently publicly disclosed that the awards were paid in connection with a $415 million SEC settlement with a major financial institution alleged to have misused customer cash.[9]  In its Order granting the awards, the Commission declined to grant awards to additional putative whistleblowers and, in doing so, clarified the standard for finding that a tip “led to” the success of a particular action.[10]  For a tip to “significantly contribute[] to the success of an . . . action” and entitle the whistleblower to an award, the “information must have been ‘meaningful,'” i.e., must “‘make a substantial and important contribution’ to the success of the . . . action.”  The Commission declined to adopt a more flexible standard. In a separate action the following month, the SEC awarded $2.2 million to a former company insider.[11]  The SEC noted that the $2.2 million award was paid under the 120-day “safe harbor” rule, which provides that, when a whistleblower reports to another federal agency and then submits the same information to the SEC within 120 days, the SEC will treat the information as having been submitted on the day it was submitted to the other agency.  A week later, the SEC announced a $2.1 million award to a former company insider whose tips had led to “multiple” successful enforcement actions.[12] In addition to developments relating to award payments, the first half of 2018 also included a Supreme Court decision affecting the rights of whistleblowers pursuant to anti-retaliation protections.  In Digital Realty Trust, the Court overturned the Ninth Circuit’s decision (described in our 2017 Year-End Update) and found that Dodd-Frank’s anti-retaliation measures protect only whistleblowers who report their concerns to the SEC and not those who only report internally.[13] Finally, in a late June open meeting, the Commission voted to propose various amendments to its whistleblower program.[14]  In response to the record-breaking award noted above, the proposed rules would give the SEC discretion to limit the size of awards in cases resulting in monetary sanctions greater than $100 million (which, given a permissible award size of 10-30% of money collected by the SEC, would effectively create a $30 million award cap).  Other proposed amendments include: allowing awards based on deferred prosecution agreements and non-prosecution agreements entered into in criminal cases; permitting awards made when the Commission reaches a settlement outside the context of a judicial or administrative proceeding; allowing the SEC to bar individuals from later seeking awards after they submit false or frivolous claims; and, in response to Digital Realty, requiring a whistleblower to submit information in writing to receive retaliation protection. D.  Cybersecurity and Cryptocurrency In 2017, the SEC touted cybersecurity as a major enforcement priority and created a dedicated “Cyber Unit” to investigate and prosecute cyber-related threats.  The SEC’s cyber-focus continued in the first half of 2018 with its February release of interpretive guidance on public companies’ disclosure obligations regarding cybersecurity risks and incidents.[15]  The Guidance, which reaffirms and expands upon the SEC Division of Corporation Finance’s existing guidance on the topic from 2011, encourages companies to adopt “comprehensive policies and procedures related to cybersecurity,” and to consider how their insider trading policies address trading related to cybersecurity incidents.  While not creating any bright-line rules, it discusses that the “materiality of cybersecurity risks and incidents depends upon their nature, extent, and potential magnitude,” as well as “the range of harm that such incidents could cause,” including “harm to a company’s reputation, financial performance, and customer and vendor relationships, as well as the possibility of litigation or regulatory investigations or actions.”  The SEC further noted that the existence of an ongoing internal or external investigation into an incident “would not on its own provide a basis for avoiding disclosures” of an otherwise material incident.  As discussed further below, the Guidance was followed two months later by the SEC’s announcement of its first enforcement action against a company arising out of a data breach. Regarding the continuing proliferation of digital (or “crypto”) currencies, the staff of the SEC’s Divisions of Enforcement and Trading and Markets issued a statement in March reinforcing that digital platforms that trade securities and operate as an “exchange,” as defined by the federal securities laws, must register as a national securities exchange or operate under an exemption from registration.[16]  The statement also outlines a list of questions that potential investors should consider before deciding to trade on such platforms.  The statement came on the heels of a litigated enforcement action charging a bitcoin-denominated platform, BitFunder, and its founder with operating an unregistered securities exchange, defrauding users by misappropriating their bitcoins and failing to disclose a cyberattack, and making false and misleading statements in connection with an unregistered offering of securities.[17]  In a parallel criminal case, the U.S. Attorney’s Office charged BitFunder’s founder with perjury and obstruction of the SEC’s investigation. The SEC also brought a handful of initial coin offering (ICO) enforcement actions in the first half of 2018.  In January, the SEC obtained a court order halting an ICO it characterized as “an outright scam,” which had raised $600 million in just two months by claiming to be the world’s first “decentralized bank” and falsely representing that it had purchased an FDIC-insured bank.[18]  In April, the SEC charged two co-founders of a financial services start-up with orchestrating a fraudulent ICO by falsely claiming to offer a debit card backed by major credit card companies that would allow users to convert cryptocurrencies into U.S. dollars.[19]  The U.S. Attorney’s Office for the Southern District of New York brought parallel criminal actions against the co-founders, and the SEC later charged a third co-founder with fraud after discovery of text-messages revealing fraudulent intent.[20]  Then, in May, the SEC obtained a court order halting an ICO by a self-proclaimed “blockchain evangelist” who had fabricated customer testimonials and misrepresented having business relationships with the Federal Reserve and dozens of companies.[21] Additionally, in April, the SEC obtained a court order freezing over $27 million in proceeds raised by Longfin Corp. after the company and its CEO allegedly violated Section 5 by issuing unregistered shares to three other individuals so they could sell them to the public right after the company’s stock had risen dramatically due to announcement of acquisition of a cryptocurrency platform.[22] II.  Issuer and Auditor Cases A.  Accounting Fraud and Other Misleading Disclosures In March, the SEC settled charges of accounting fraud against a California-based energy storage and power delivery product manufacturer and three of its former officers.[23]  The SEC alleged that the company prematurely recognized revenue to better meet analyst expectations, that a former sales executive inflated revenues by executing secret deals with customers and concealing them from finance and accounting personnel, and that the former CEO and former controller failed to adequately respond to red flags that should have alerted them to the misconduct.  Without admitting or denying the allegations, the company agreed to pay penalties of $2.8 million; the former CEO and controller agreed to pay a combined total of approximately $100,000 in disgorgement, interest and penalties; and the former sales executive agreed to be barred from serving as an officer or director of a public company for five years and pay a $50,000 penalty. In April, the SEC settled charges of accounting fraud against a Japanese electronics company.[24]  The SEC alleged that the company’s U.S. subsidiary prematurely recognized more than $82 million in revenue by backdating an agreement with an airline and providing misleading information to an auditor.  The matter involved FCPA allegations as well. Also in April, the SEC instituted settled proceedings against a California internet services and content provider.[25]  The SEC alleged that the company failed to timely disclose a major data breach in which hackers stole personal data relating to hundreds of millions of user accounts.  In addition, the SEC alleged that the company did not share its knowledge of the breach with its auditors or outside counsel, and failed to maintain adequate controls and procedures to assess its cyber-disclosure obligations.  Without admitting the allegations, the company agreed to pay a $35 million penalty to settle the charges. In May, the SEC filed a complaint against three former executives of a Houston-based health services company.[26]  The complaint alleged that the executives falsified financial information—including financial statements for three fictitious subsidiaries acquired by the company—to induce a private firm to acquire a majority of the company’s equity.  In a parallel action, DOJ brought criminal charges against the defendants. In June, the SEC filed a complaint against a California-based telecommunications equipment manufacturer and three of its executives.[27]  According to the SEC’s complaint, the executives inflated company revenues by prematurely recognizing revenue on sales and entering into undisclosed side agreements that relieved customers of payment obligations.  The SEC also alleged that the defendants inflated the prices of products to hit revenue targets with the agreement that the company would later repay the difference as marketing development fees.  Without admitting or denying the charges, the defendants agreed to pay penalties totaling $75,000.  In addition, two of the individual defendants consented to five-year officer and director bars; the other individual defendant consented to a bar from appearing or practicing before the SEC as an accountant for five years. B.  Auditor Cases In February, in a case the SEC said underscores its determination to pursue violations “regardless of the location of the violators,” a foreign auditor and his U.S.-based accounting firm, settled charges alleging they providing substantial assistance in a fraudulent shell company scheme by issuing misleading audit reports for numerous companies.[28]  The SEC suspended the auditor and his firm from appearing or practicing before the Commission. In March, the SEC announced settled charges against several foreign firms of the large international accounting networks based on allegations that the firms improperly relied on component auditors that were not registered with the PCAOB, even though the component auditors performed substantial work that should have triggered registration.[29] The SEC alleged violations of PCAOB standards that require sufficient analysis and inquiry when relying on another auditor.  Without admitting or denying the allegations, the four foreign firms agreed to pay roughly $400,000 combined in disgorgement and penalties. Additionally, an auditing firm, two of its partners and a registered financial advisory firm settled charges in May relating to violations of the Custody Rule.[30]  According to the SEC, the auditors failed to meet the independence requirements of the Custody Rule by both preparing and auditing financial statements of several funds and because they had a direct business relationship with the financial advisory firm through a fee-referral relationship.  The SEC also charged the respondents for failing to comply with the requirement of regular PCAOB inspections and cited multiple professional conduct violations, including for failing to design and implement appropriate oversight mechanisms, insufficient quality control and violation of professional due care, among others.  Without admitting or denying the allegations, the defendants were barred from appearing before the Commission and agreed to pay roughly $52,000 combined in disgorgement and penalties. The SEC is also ensuring that firms are not associating with barred auditors. In April, an accounting firm and its sole officer and founder settled charges with the SEC for allegedly violating the Sarbanes Oxley Act of 2012, which prohibits auditors barred by the PCAOB from association with a registered public accounting firm from associating with corporate issuers in an accountancy or financial management capacity.[31]  Without admitting or denying the findings, the company and its founding officer agreed to cease and desist from the association and agreed to pay a $22,500 civil penalty. C.  Private Company Cases While the number of cases against public companies remains low, the SEC has continued to step up its enforcement efforts against private companies. In March, the SEC instituted settled proceedings against a California-based financial technology company.[32]  The SEC alleged that the respondent offered unregistered stock options to its employees without providing the employees with timely financial statements and risk disclosures.  Without admitting the allegations, the company agreed to pay a $160,000 penalty to settle the charges. Also in March, the SEC filed a complaint against a California-based health care technology company, its former CEO, and a former president at the company.[33]  The complaint alleged that the defendants made numerous false statements in investor presentations, product demonstrations and media articles about their flagship product—including misrepresentations regarding expected revenue and the U.S. Department of Defense’s adoption of the product—which deceived investors into believing the product was revolutionary.  Without admitting the allegations, the company and former CEO agreed to settle the charges.  Under the settlement terms, the former CEO agreed to pay a $0.5 million penalty, be barred from serving as an officer or director of a public company for ten years, return 18.9 million shares of the company, and relinquish her voting control by converting her Class B Common shares to Class A Common shares.  The SEC will continue to litigate its claims against the former president in federal court. And in April, the SEC filed a fraud complaint against four parties:  a biotechnology startup formerly based in Massachusetts, its CEO, an employee, and the CEO’s close friend.[34]  According to the SEC, the CEO and the employee made false claims to investors about the company’s finances and the company’s progress in seeking FDA approval for one of its products.  The complaint also alleged that the defendants engaged in a fraudulent scheme to acquire and merge the company with a publicly traded company, manipulated the shares of the new entity, and diverted a portion of the sale proceeds.  The SEC is litigating the case in federal court and seeks to freeze the company’s and CEO’s assets, as well as prohibit the defendants from soliciting money from investors.  In addition, the SEC seeks a permanent injunction, the return of the ill-gotten gains with penalties, and industry and penny stock bars.  The DOJ brought parallel criminal charges against the individual defendants. III.  Investment Advisers and Funds A.  Fees and Expenses In June, a private equity firm settled allegations that it had charged accelerated monitoring fees on portfolio company exits without adequate disclosure.[35]  According to the SEC, the undisclosed receipt of accelerated fees from portfolio companies resulted in negligent violations of various provisions of the Advisers Act.  To settle the matter, the Respondents agreed to pay $4.8 million in disgorgement and prejudgment interest and $1.5 million in penalties. Shortly thereafter, the SEC filed a settled action against a New York-based venture capital fund adviser for allegedly failing to offset consulting fees against management fees in accordance with organizational documents for the funds it advised.[36]  The SEC alleged that the adviser received $1.2 million in consulting fees from portfolio companies in which the funds had invested, and that those fees were not properly offset against advisory or management fees paid by investors, resulting in an overpayment of over $750,000.  The adviser reimbursed its clients, plus interest, and agreed to pay a $200,000 penalty.  Significantly, the SEC’s press release cites to the adviser’s remediation and cooperation, indicating that this was taken into account in determining the appropriate resolution. B.  Conflicts of Interest In March, the SEC instituted settled proceedings against two investment adviser subsidiaries for undisclosed conflicts of interest with regard to the practice of recalling securities on loan.[37]  The SEC alleged that the advisers were affiliated with insurance companies, but also served as investment advisers to insurance-dedicated mutual funds.  The advisers would lend securities held by the mutual funds, and then recall those securities prior to their dividend record dates.  This meant that the insurance company affiliates, as record shareholders of such shares, would receive a tax benefit on the basis of the dividends received.  However, according to the SEC, this recall system resulted in the mutual funds (and their investors) losing income, while the insurance company affiliates reaped a tax benefit.  Without admitting or denying the allegations, the advisers agreed to pay approximately $3.6 million to settle the charges. In April, the SEC instituted proceedings against a New York-based investment adviser in connection with the receipt of revenue sharing compensation from a service provider without disclosing conflicts of interest to its private equity clients.[38]  According to the SEC, the investment adviser entered into an agreement with a company that provided services to portfolio companies.  Pursuant to that agreement, when portfolio companies made purchases, the service provider would receive revenue, and, in turn, the investment adviser would receive a portion of that revenue.  Without admitting or denying the allegations of Advisers Act violations, the investment adviser agreed to pay nearly $800,000 in disgorgement, prejudgment interest, and civil penalties. In early June, the SEC instituted settled proceedings against a New York-based investment adviser in connection with alleged failures to disclose conflicts of interest to clients and prospective clients relating to compensation paid to the firm’s individual advisers and an overseas affiliate.[39]  According to the SEC, this undisclosed compensation, which came from overseas third-party product and service providers recommended by the adviser, incentivized the adviser to recommend certain products and services and a pension transfer.  The SEC also found that the adviser made misleading statements regarding investment options and tax treatment of investments.  In settling the action without admitting or denying the allegations, the investment adviser agreed to pay an $8 million civil penalty and to engage an independent compliance consultant.  In a parallel action, the Commission filed a complaint in federal court in Manhattan against the adviser’s former CEO and a former manager. On the same day, the SEC filed another settled administrative proceeding relating to undisclosed conflicts of interest with a Delaware-based investment adviser.[40]  The settlement order alleges that the adviser negotiated side letters with outside asset managers resulting in arrangements under which the asset managers would make payments to the adviser based on the amount of client assets placed or maintained in funds advised by those asset managers.  This was not disclosed to clients, and contravened the adviser’s agreements with two specific advisory clients.  The SEC also alleged that the adviser failed to implement policies and procedures to prevent conflicts of interest and failed to maintain accurate records relating to the payments from the outside asset managers.  Without admitting or denying the Commission’s findings, the adviser agreed to pay a $500,000 penalty. C.  Fraud and Other Misconduct In January, the SEC filed settled charges against a California-based investment adviser and its CEO and President for failing to adequately disclose the risks associated with investing in their advisory business.[41]  According to the SEC, the firm decided to borrow cash from investors—including its own retail investor clients whose portfolio accounts were managed by the CEO—in the form of promissory notes, in order to fund its business expenses, which exceeded the amount of money received from advisory fees.  In their efforts to market the promissory notes, the CEO and President failed to disclose the true financial state of the firm or the significant risk of default.  In settling the action, the investment adviser agreed to various undertakings, including an in-depth review and enhancement of compliance policies and procedures, and the provision of detailed information regarding noteholders to the staff.  In addition, the firm paid a $50,000 penalty and each principal paid a $25,000 penalty. Also in January, the SEC filed charges in the District of Massachusetts against two Boston-based investment advisers, alleging they engaged in various schemes to defraud their clients, including stealing client funds, failing to disclose conflicts of interest, and secretly using client funds to secure financing for their own investments.[42]  The SEC also alleged that one of the individuals violated his fiduciary duties to clients by obtaining a loan from a client on unfavorable terms to that client and charging advisory fees over 50% higher than the promised rate.  According to the complaint, the pair in one instance misappropriated nearly $450,000 from an elderly client, using the funds to make investments in their own names and to pay personal expenses for one of the individual advisers.  The U.S. Attorney’s Office for the District of Massachusetts also filed criminal charges against the same advisers in a parallel action.  While the SEC action remains pending, the individuals have both pleaded guilty to criminal charges.[43] The SEC also initiated a number of enforcement actions for alleged cherry-picking by investment advisers.  In February, the SEC instituted a litigated action against a California-based investment adviser, its president and sole owner, and its former Chief Compliance Officer for allocating profitable trades to the investment adviser’s account at the expense of its clients.[44]  The SEC’s complaint also alleges that the adviser and president misrepresented trading and allocation practices in Forms ADV filed with the Commission.  The former CCO agreed to settle the charges against him—without admitting or denying allegations that he ignored red flags relating to the firm’s allocation practices—and pay a fine of $15,000; the litigation against the investment adviser and president remains ongoing.  And in March the SEC instituted settled proceedings against a Texas-based investment adviser and its sole principal for disproportionately allocating unprofitable trades to client accounts and profitable trades to their own accounts.[45]  The investment adviser agreed to pay a total of over $700,000 in disgorgement, prejudgment interest, and civil penalties, and the principal agreed to a permanent bar from the securities industry. In April, the SEC filed a settled administrative proceedings against an Illinois-based investment adviser and its president in connection with allegedly misleading advertisements about investment performance.[46]  According to the SEC, the adviser did not disclose that performance results included in advertisements—in the form of written communications and weekly radio broadcasts and video webcasts by its president—were often based on back-tested historical results generated by the adviser’s models, rather than actual results.  The adviser also allegedly failed to adopt written policies and procedures designed to prevent violations of the Advisers Act.  In reaching the agreed-upon resolution, the SEC took into account remediation efforts undertaken by the adviser during the course of the SEC’s investigation, including hiring a new CCO and engaging an outside compliance consultant who conducted an in-depth review of the compliance program and made recommendations which were then implemented by the adviser.  The investment adviser agreed to pay a $125,000 penalty, and the adviser’s president agreed to pay a $75,000 penalty. In May, the SEC charged a California-based individual investment adviser with lying to clients about investment performance and strategy, inflating asset values and unrealized profits in order to overpay himself in management fees and bonuses, and failing to have the private funds audited.[47]  The adviser settled the charges without admitting or denying the allegations, agreeing pay penalties and disgorgement in amounts to be determined by the court. Later that month, the SEC filed settled charges against a Delaware-based investment adviser and its managing member for allegedly making misrepresentations and omissions about the assets and performance of a hedge fund they managed.[48]  According to the SEC, the adviser misrepresented the performance and value of assets in the hedge fund after losing nearly all of its investments after the fund’s trading strategy led to substantial losses.  In addition to making false representations to the fund’s two investors, the adviser withdrew excessive advisory fees based on the inflated asset values.  Without admitting or denying the charges, the adviser and managing member agreed to a cease-and-desist order under which the individual also agreed to a broker-dealer and investment company bar, as well as a $160,000 penalty. In another pair of cases filed in May, the SEC charged a hedge fund and a private fund manager in separate cases involving inflated valuations.  In one case, the SEC alleged that the fund manager’s Chief Financial Officer failed to supervise portfolio managers who engaged in asset mismarking.[49]  The asset mismarking scheme resulted in the hedge fund reaping approximately $3.15 million in excess fees.  The SEC had previously charged the portfolio managers in connection with their misconduct in 2016.  The CFO agreed to pay a $100,000 penalty and to be suspended from the securities industry for twelve months, while the firm agreed to pay over $9 million in disgorgement and penalties.  In the other case, the SEC filed a litigated action in the U.S. District Court for the Southern District of New York against a New York-based investment adviser, the company’s CEO and chief investment officer, a former partner and portfolio manager at the company, and a former trader, in connection with allegations that the defendants inflated the value of private funds they advised.[50]  According to the complaint, the defendants fraudulently inflated the value of the company’s holdings in mortgage-backed securities in order to attract and retain investors, as well as to hide poor fund performance.  This litigation is ongoing. Finally, in late June the SEC announced a settlement with an investment adviser that allegedly failed to protect against advisory representatives misappropriating or misusing client funds.[51]  Without sufficient safeguards in place, one advisory representative was able to misappropriate or misuse $7 million from advisory clients’ accounts.  Without admitting or denying the SEC’s findings, the adviser agreed to pay a $3.6 million penalty, in addition to a cease-and-desist order and a censure.  The representative who allegedly misused the $7 million from client accounts faces criminal charges by the U.S. Attorney’s Office for the Southern District of New York. D.  Investment Company Share Price Selection The first half of 2018 saw the launch of the SEC’s Share Class Selection Disclosure Initiative (SCSD Initiative), as well as several cases involving share class selections.  Under the SCSD Initiative, announced in February, the SEC’s Division of Enforcement agreed not to recommend financial penalties against mutual fund managers which self-report violations of the federal securities laws relating to mutual fund share class selection and promptly return money to victimized investors.[52]  Where investment advisers fail to disclose conflicts of interest and do not self-report, the Division of Enforcement will recommend stronger sanctions in future actions. In late February, a Minnesota-based broker-dealer and investment adviser settled charges in connection with the recommendation and sale of higher-fee mutual fund shares when less expensive share classes were available.[53]  In turn, those recommendations resulted in greater revenue for the company and decreased customers’ returns.  The company, without admitting or denying the allegations, consented to a penalty of $230,000. In April, three investment advisers agreed to settle charges in connection with their failure to disclose conflicts of interest and violations of their fiduciary duties by recommending higher-fee mutual fund share classes despite the availability of less expensive share classes.[54]  Collectively, the companies agreed to pay nearly $15 million in disgorgement, prejudgment interest, and penalties.  The SEC used the announcement of the cases to reiterate its ongoing SCSDC Initiative. E.  Other Compliance Issues In January, the SEC announced settled charges against an Arizona-based investment adviser and its sole principal in connection with a number of Advisers Act violations, including misrepresentations in filed Forms ADV, misrepresentations and failure to produce documents to the Commission examination staff, and other compliance-related deficiencies.[55]  According to the SEC, the adviser’s Forms ADV for years misrepresented its principal’s interest in private funds in which its advisory clients invested.  While the clients were aware of the principal’s involvement with the funds, the adviser falsely stated in filings that the principal had no outside financial industry activities and no interests in client transactions.  Additionally, the SEC alleged that the adviser misstated its assets under management, failed to adopt written policies and procedures relating to advisory fees, and failed to conduct annual reviews of its policies and procedures.  Without admitting or denying the SEC’s allegations, the investment adviser agreed to pay a $100,000 penalty, and the principal agreed to a $50,000 penalty and to a prohibition from acting in a compliance capacity. In April, the SEC filed settled charges against a Connecticut-based investment adviser and its sole owner for improper registration with the Commission and violations of the Commission’s custody and recordkeeping rules.[56]  According to the settled order, the adviser misrepresented the amount of its assets under management in order to satisfy the minimum requirements for SEC registration.  The adviser also allegedly—while having custody over client assets—failed to provide quarterly statements to clients or to arrange for annual surprise verifications of assets by an independent accountant, as required by the Custody Rule, and also failed to make and keep certain books and records required by SEC rules.  Without admitting or denying the allegations, the adviser and its owner agreed to the entry of a cease-and-desist order, and the owner agreed to pay a $20,000 civil penalty and to a 12-month securities industry suspension. A few weeks later, a fund administrator settled cease-and-desist proceedings in connection with the company’s alleged noncompliance in maintaining an affiliated cash fund.[57]  According to the SEC, from mid-2008 to the end of 2012, the firm’s pricing methodology for its affiliated unregistered money market fund was flawed.  The SEC alleged that the deficiencies in the pricing methodology caused the affiliated cash fund to violate Investment Company Act.  To settle the charges, the trust agreed to pay a civil monetary penalty of $225,000. And in June, the SEC announced settlements with 13 private fund advisers in connection with their failures to file Form PF.[58]  Advisers who manage $150 million or more of assets are obligated to file annual reports on Form PF that indicate the amount of assets under management and other metrics about the private funds that they advise.  In turn, the SEC uses the data contained in Form PF in connection with quarterly reports, to monitor industry trends, and to evaluate systemic risks posed by private funds.  Each of the 13 advisers failed to timely file Form PF over a number of years.  Without admitting or denying the allegations, each of the 13 advisers agreed to pay a $75,000 civil penalty. IV.  Brokers and Financial Institutions A.  Supervisory Controls and Internal Systems Deficiencies The SEC brought several cases during the first half of 2018 relating to failures of supervisory controls and internal systems.  In March, the SEC filed a litigated administrative proceeding against a Los Angeles-based financial services firm for failing to supervise one of its employees who was involved in a long-running pump-and-dump scheme and who allegedly received undisclosed benefits for investing her customers in microcap stocks that were the subject of the scheme.[59]  The employee agreed to settle fraud charges stemming from the scheme.  The SEC alleged that the firm ignored multiple signs of the employee’s fraud, including a customer email outlining her involvement in the scheme and multiple FINRA arbitrations and inquiries regarding her penny stock trading activity.  The firm even conducted two investigations, deemed “flawed and insufficient” by the SEC, but failed to take action against the employee.  The SEC previously charged the orchestrator of the pump-and-dump scheme, as well as 15 other individuals and several entities. Also in March, the SEC announced settled charges against a New York-based broker-dealer for its failure to perform required gatekeeping functions in selling almost three million unregistered shares of stock on behalf of a China-based issuer and its affiliates.[60]  The SEC alleged that the firm ignored red flags indicating that the sales could be part of an unlawful unregistered distribution. At the end of June, the SEC charged a New York-based broker-dealer and two of its managers for failing to supervise three brokers, all three of whom were previously charged with fraud in September 2017.[61]  According to the SEC, the firm lacked reasonable supervisory policies and procedures, as well as systems to implement them, and if those systems had been in place, the firm likely would have prevented and detected the brokers’ wrongdoing.  In separate orders, the SEC found that two supervisors ignored red flags indicating excessive trading and failed to supervise brokers with a view toward preventing and detecting their securities-laws violations. B.  AML Cases During the first half of 2018, the SEC brought a number of cases in the anti-money laundering (“AML”) arena.  In March, the SEC brought settled charges against a New York-based brokerage firm for failure to file Suspicious Activity Reports (or “SARs”) reporting numerous suspicious transactions.[62]  The brokerage firm admitted to the charges, and agreed to retain a compliance expert and pay a $750,000 penalty.  The SEC also brought charges against the brokerage firm’s CEO for causing the violation, and its AML compliance officer for aiding and abetting the violation.  Without admitting or denying the charges, the CEO and AML compliance officer respectively agreed to pay penalties of $40,000 and $25,000. In May, the SEC instituted settled charges against two broker-dealers and an AML officer for failing to file SARs relating to the suspicious sales of billions of shares in penny stock.[63]  Without admitting or denying the SEC’s findings, the broker-dealers agreed to penalties; the AML officer agreed to a penalty and an industry and penny stock bar for a minimum of three years. C.  Regulatory Violations In January, the SEC instituted a settled administrative proceeding against an international financial institution for repeated violations of Rule 204 of Regulation SHO, which requires timely delivery of shares to cover short sales.[64]  The SEC’s order alleged that the firm improperly claimed credit on purchases and double counted purchases, resulting in numerous, prolonged fail to deliver positions for short sales.  Without admitting or denying the allegations, the firm agreed to pay a penalty of $1.25 million and entered into an undertaking to fully cooperate with the SEC in all proceedings relating to or arising from the matters in the order. In March, the SEC announced settled charges against a Los-Angeles broker dealer for violating the Customer Protection Rule, which requires that broker-dealers safeguard the cash and securities of customers, by illegally placing more than $25 million of customers’ securities at risk to fund its own operations.[65]  Specifically, the broker-dealer on multiple occasions moved customers’ securities to its own margin account without obtaining the customers’ consent.  The SEC’s Press Release noted that it had recently brought several cases charging violations of the Customer Protection Rule.  Without admitting or denying the allegations, the broker dealer agreed to pay a penalty of $80,000. Also in March, the SEC filed a settled action against a New York-based broker dealer and its CEO and founder for violating the net capital rule, which requires a broker-dealer to maintain sufficient liquid assets to meet all obligations to customers and counterparties and have adequate additional resources to wind down its business in an orderly manner if the firm fails financially.[66]  The SEC found that for ten months, the firm repeatedly failed to maintain sufficient net capital, failed to accrue certain liabilities on its books and records, and misclassified certain assets when performing its net capital calculations.  According to the SEC, the firm’s CEO was involved in discussions about the firm’s unaccrued legal liabilities and was aware of the misclassified assets, but he nevertheless prepared the firm’s erroneous net capital calculations.  As part of the settlement, he agreed to not serve as a financial and operations principal (FINOP) for three years and to pass the required licensing examination prior to resuming duties as a FINOP; the firm agreed to pay a $25,000 penalty. And in a novel enforcement action also arising in March, the SEC filed a settled action against the New York Stock Exchange and two affiliated exchanges in connection with multiple episodes, including several disruptive market events, such as erroneously implementing a market-wide regulatory halt, negligently misrepresenting stock prices as “automated” despite extensive system issues ahead of a total shutdown of two of the exchanges, and applying price collars during unusual market volatility on August 24, 2015, without a rule in effect to permit them.[67]  The SEC also, for the first time, alleged a violation of Regulation SCI, which was adopted by the Commission to strengthen the technology infrastructure and integrity of the U.S. securities markets.  The SEC charged two NYSE exchanges with violating Regulation SCI’s business continuity and disaster recovery requirement.  Without admitting or denying the allegations, the exchanges agreed to pay a $14 million penalty to settle the charges. D.  Other Broker-Dealer Enforcement Actions In June, the SEC settled with a Missouri-based broker-dealer, alleging that the firm generated large fees by improperly soliciting retail customers to actively trade financial products called market-linked investments, or MLIs, which are intended to be held to maturity.[68]  The SEC alleged that the trading strategy, whereby the MLIs were sold before maturity and the proceeds were invested in new MLIs, generated commissions for the firm, which reduced the customers’ investment returns.  The order also found that certain representatives of the firm did not reasonably investigate or understand the significant costs of the MLI exchanges.  The SEC also alleged that the firm’s supervisors routinely approved the MLI transactions despite internal policies prohibiting short-term trading or “flipping” of the products. Later in June, the SEC announced that it had settled with a New York-based broker-dealer for the firm’s violations of its record-keeping provisions by failing to remediate an improper commission-sharing scheme in which a former supervisor received off-book payments from traders he managed.[69]  The SEC also filed a litigated complaint in federal court against the former supervisor and former senior trader for their roles in the scheme.  As alleged by the SEC, the former supervisor and another trader used personal checks to pay a portion of their commissions to the firm’s former global co-head of equities and to another trader.  The practice violated the firm’s policies and procedures and resulted in conflicts of interest that were hidden from the firm’s compliance department, customers, and regulators. E.  Mortgage Backed Securities Cases The SEC appeared to be clearing out its docket of enforcement actions dating back to the mortgage crisis. In February, the SEC announced a settlement against a large financial institution and the former head of its commercial mortgage-backed securities (“CMBS”) trading desk, alleging that traders and salespeople at the firm made false and misleading statements while negotiating secondary market CMBS sales.[70]  According to the SEC’s order, customers of the financial institution overpaid for CMBS because they were misled about the prices at which the firm had originally purchased them, resulting in increased profits for the firm to the detriment of its customers.  The order also alleged that the firm did not have in place adequate compliance and surveillance procedures which were reasonably designed to prevent and detect the misconduct, and also found supervisory failures by the former head trader for failing to take appropriate corrective action.  The firm and trader, without admitting or denying the allegations, agreed to respective penalties of $750,000 and $165,000.  The firm also agreed to repay $3.7 million to customers, which included $1.48 million ordered as disgorgement, and the trader agreed to serve a one-year suspension from the securities industry. Similarly, in mid-June, a large New York-based wealth management firm paid $15 million to settle SEC charges that its traders and salespersons misled customers into overpaying for residential mortgage backed securities (RMBS) by deceiving them about the price that the firm paid to acquire the securities.[71]  The SEC also alleged that the firm’s RMBS traders and salespersons illegally profited from excessive, undisclosed commissions, which in some instances were more than twice the amount that customers should have paid.  According to the SEC, the firm failed to have compliance and surveillance procedures in place that were reasonably designed to prevent and detect the misconduct. V.  Insider Trading A.  Classical Insider Trading And Misappropriation Cases In January, a former corporate insider and a former professional in the brokerage industry agreed to settle allegations that they traded on the stock of a construction company prior to the public announcement of the company’s acquisition.[72]  The insider purportedly tipped his friend, who was then a registered broker-dealer, about the impending transaction in return for assistance in obtaining a new job with his friend’s employer following the merger.  According to the SEC, the broker-dealer traded on that information for a profit exceeding $48,000.  Without admitting or denying the SEC’s findings, both individuals consented to pay monetary penalties, and the trader agreed to disgorge his ill-gotten gains. The following month, the SEC sued a pharmaceutical company employee who allegedly traded in the stock of an acquisition target despite an explicit warning not to do so.[73]  According to the SEC, the defendant bought stock in the other company a mere 14 minutes after receiving an e-mail regarding the acquisition.  Without admitting or denying the SEC’s allegations, the employee agreed to disgorgement of $2,287 and a $6,681 penalty. In February, the SEC charged the former CEO and a former officer of a medical products company with trading on information regarding a merger involving one of their company’s largest customers.[74]  Without admitting or denying the allegations, the two executives agreed to disgorge a total of about $180,000 in trading proceeds and to pay matching penalties. In March, the SEC charged a former communications specialist at a supply chain services company with garnering more than $38,000 in illicit profits after purchasing shares in his company prior to the public announcement of its acquisition.[75]  Without admitting or denying the allegations, the defendant subsequently agreed to $38,242 in disgorgement and the payment of a penalty to be determined following a subsequent motion by the SEC.[76] That same month, the SEC filed suit against the former chief information officer of a company who sold shares of his employer prior to public revelations that that company had suffered a data breach.[77]  In addition, the U.S. Attorney’s Office for the Northern District of Georgia brought  parallel criminal charges.  Both cases are still pending.  Subsequently, at the end of June, the SEC charged another employee at that same company with trading on nonpublic information that he obtained while creating a website for customers affected by the data breach.[78]  The defendant agreed to a settlement requiring him to return ill-gotten gains of more than $75,000 plus interest, and a criminal case filed by the U.S. Attorney’s Office for the Northern District of Georgia remains ongoing. In April, the SEC charged a New York man with tipping his brother and father about the impending acquisition of a medical-supply company based on information that he learned from his friend, the CEO of the company being acquired.[79]  The SEC alleged that the father and brother garnered profits of about $145,000 based on their unlawful trading, and—without admitting or denying the SEC’s allegations—the tipper agreed to pay a $290,000 penalty.  The SEC’s investigation remains ongoing. Also in April, the SEC and the U.S. Attorney’s Office for the District of Massachusetts filed parallel civil and criminal charges against a man accused of trading on a company’s stock based on information gleaned from an unidentified insider.[80]  The man purportedly purchased shares using his retirement savings in advance of eight quarterly earnings announcements over a two-year period, reaping over $900,000 in illicit profits.  The SEC’s complaint also names the man’s wife as a relief defendant, and the matter remains ongoing. Finally, in May, the SEC charged two men with reaping small profits by trading on non-public information in advance of a merger of two snack food companies based on information gained from a close personal friend at one of the merging companies.[81]  Both defendants agreed to settle the lawsuit by disgorging ill-gotten gains and paying penalties. B.  Misappropriation by Investment Professionals and Other Advisors At the end of May, the SEC charged a vice president at an investment bank with repeatedly using confidential knowledge to trade in advance of deals on which his employer advised.[82]  The defendant allegedly used client information to trade in the securities of 12 different companies via a brokerage account held in the name of a friend living in South Korea, evading his employer’s rules that he pre-clear any trades and use an approved brokerage firm.  The trader purportedly garnered approximately $140,000 in illicit profits, and the U.S. Attorney’s Office for the Southern District of New York filed a parallel criminal case.  Both matters are still being litigated. In June, the SEC sued a Canadian accountant for trading on information misappropriated from his client, a member of an oil and gas company’s board of directors.[83]  Based on this relationship, the defendant gained knowledge of an impending merger involving the company.  Without admitting or denying the SEC’s allegations, he agreed to be barred from acting as an officer or director of a public company, and to pay disgorgement and civil penalties of $220,500 each.  The defendant also consented to an SEC order suspending him from appearing or practicing before the Commission as an accountant. Finally, that same month, the SEC charged a credit ratings agency employee and the two friends he tipped about a client’s nonpublic intention to acquire another company.[84]  According to the SEC, the tipper learned the confidential information when the client reached out to the agency to assess the impact of the merger on the company’s credit rating.  Based on the information they received, the friends allegedly netted profits of $192,000 and $107,000, respectively.  In addition, the U.S. Attorney’s Office for the Southern District of New York filed a parallel criminal case against all three individuals.. C.  Other Trading Cases And Developments In February, the Third Circuit Court of Appeals issued a decision in United States v. Metro reversing the district court’s sentencing calculation following the appellant’s conviction on insider trading charges.[85]  The appellant, Steven Metro, was a managing clerk at a New York City law firm, and over the course of five years, he disclosed material nonpublic information to a close friend, Frank Tamayo, concerning 13 different corporate transactions.  Tamayo then transmitted that information to a third-party broker, who placed trades on behalf of Tamayo, himself, and other clients, yielding illicit profits of approximately $5.5 million.  Metro pleaded guilty to one count of conspiracy and one count of securities fraud, and the district court attributed the entire $5.5 million sum to Metro in calculating the length of his sentence.  Metro objected, arguing that he was unaware of the broker’s existence until after he stopped tipping Tamayo. On appeal, the Third Circuit vacated Metro’s sentence after determining that the district court made insufficient factual findings to substantiate imputation of all illicit profits to Metro, holding: “When the scope of a defendant’s involvement in a conspiracy is contested, a district court cannot rely solely on a defendant’s guilty plea to the conspiracy charge, without additional fact-finding, to support attributing co-conspirators’ gains to a defendant.”  The court emphasized that “when attributing to an insider-trading defendant gains realized by other individuals . . . a sentencing court should first identify the scope of conduct for which the defendant can fairly be held accountable . . . .”  Such an inquiry “may lead the court to attribute to a defendant gains realized by downstream trading emanating from the defendant’s tips, but, depending on the facts established at sentencing, it may not,” and the court therefore found that the government erred in propounding a “strict liability” standard. Finally, the first half of this year also saw limited activity by the SEC to freeze assets used to effectuate alleged insider trades.  In January, the SEC obtained an emergency court order freezing the assets of unknown defendants in Swiss bank accounts.[86]  According to the SEC, those unknown defendants were in possession of material nonpublic information regarding the impending acquisition of a biopharmaceutical company, and some of the positions taken in those accounts represented almost 100 percent of the market for those particular options.  The illicit trades allegedly yielded about $5 million in profits.. VI.  Municipal Securities and Public Pensions Cases In the first half of 2018, the SEC’s Public Finance Abuse Unit continued the slower pace of enforcement that began in 2017, pursuing two separate cases against municipal advisors. In January, the SEC charged an Atlanta, Georgia-based municipal advisor and its principal with defrauding the city of Rolling Fork, Mississippi.[87]  The SEC alleged that the municipal advisor had fraudulently overcharged Rolling Fork for municipal advisory services in connection with an October 2015 municipal bond offering and had failed to disclose certain related-party payments.  The related-party payments consisted of an undisclosed $2500 payment made to the advisor by an employee of a municipal underwriter shortly before the advisor recommended that the city hire the underwriter’s firm.  The parties subsequently agreed to settle the case.[88]  Without admitting or denying the allegations against them, the advisor and principal consented to the entry of judgments permanently enjoining them from violating Sections 15B(a)(5) and 15B(c)(1) of the Securities Exchange Act of 1934 and MSRB Rule G-17.  The judgment also requires the defendants to pay a total of about $111,000 in disgorgement, interest, and penalties. In addition, the SEC settled its case against the municipal underwriter.  Without admitting the SEC’s findings, the underwriter agreed to a six-month suspension and to pay a $20,000 penalty. And in May, the SEC brought settled administrative proceedings against another municipal advisor and its owner.[89]  The SEC alleged that, by misrepresenting their municipal advisory experience and failing to disclose conflicts of interest, the advisor and owner had defrauded a South Texas school district and breached their fiduciary duties to that district.  Without admitting to the allegations, the advisor and owner agreed to pay a combined total of approximately $562,000 in disgorgement, interest, and penalties.. [1] Lucia v. SEC, 585 U.S. __ (2018).  For more on Lucia, see Gibson Dunn Client Alert, SEC Rules That SEC ALJs Were Unconstitutionally Appointed (June 21, 2018), available at www.gibsondunn.com/supreme-court-rules-that-sec-aljs-were-unconstitutionally-appointed. [2] See Gibson Dunn Client Alert, U.S. Supreme Court Limits SEC Power to Seek Disgorgement Based on Stale Conduct (June 5, 2017), available at www.gibsondunn.com/united-states-supreme-court-limits-sec-power-to-seek-disgorgement-based-on-stale-conduct. [3] SEC v Kokesh, No. 15-2087 (10th Cir. Mar. 5, 2018); see also Jonathan Stempel, SEC Can Recoup Ill-gotten Gains from New Mexico Businessman: U.S. Appeals Court, Reuters (Mar. 5, 2018), available at www.reuters.com/article/us-sec-kokesh/sec-can-recoup-ill-gotten-gains-from-new-mexico-businessman-u-s-appeals-court-idUSKBN1GH2YK. [4] Adam Dobrik, Unhelpful to Threaten SEC with Trial, Says Enforcement Director, Global Investigations Review (May 10, 2018), available at globalinvestigationsreview.com/article/jac/1169315/unhelpful-to-threaten-sec-with-trial-says-enforcement-director. [5] See SEC v. Cohen, No. 1:17-CV-00430 (E.D.N.Y. July 12, 2018) (holding claims for injunctive relief time-barred). [6] Dunstan Prial, High Court Agrees To Review Banker’s Copy-Paste Fraud, Law360 (Jun. 18, 2018), available at https://www.law360.com/securities/articles/1054568. [7] SEC Press Release, SEC Awards Whistleblower More Than $2.1 Million (Apr. 12, 2018), available at www.sec.gov/news/press-release/2018-64. [8] SEC Press Release, SEC Announces Its Largest-Ever Whistleblower Awards (Mar. 19, 2018), available at https://www.sec.gov/news/press-release/2018-44. [9] Ed Beeson, SEC Whistleblowers Net $83M In Largest Ever Bounties, Law360 (Mar. 19, 2018), available at www.law360.com/articles/1023646/sec-whistleblowers-net-83m-in-largest-ever-bounties. [10] In re Claims for Award in connection with [redacted], Admin. Proc. File No. 2018-6 (Mar. 19, 2018), available at https://www.sec.gov/rules/other/2018/34-82897.pdf. [11] SEC Press Release, SEC Awards More Than $2.2 Million to Whistleblower Who First Reported Information to Another Federal Agency Before SEC (Apr. 5, 2018), available at www.sec.gov/news/press-release/2018-58. [12] SEC Press Release, SEC Awards Whistleblower More Than $2.1 Million (Apr. 12, 2018), available at www.sec.gov/news/press-release/2018-64. [13] Digital Realty Trust, Inc. v. Somers, 583 U.S. __ (2018); see Dunstan Prial, Supreme Court Narrows Definition Of Whistleblower, Law360 (Feb. 21, 2018), available at www.law360.com/securities/articles/1003954. [14] Jennifer Williams Alvarez, SEC Proposes Changes to Whistle-Blower Program, Agenda: A Financial Times Services (Jun. 28, 2018), available at [insert]. [15] SEC Public Statement, Statement on Cybersecurity Interpretive Guidance (Feb. 21, 2018), available at www.sec.gov/news/public-statement/statement-clayton-2018-02-21. [16] SEC Public Statement, Statement on Potentially Unlawful Online Platforms for Trading Digital Assets (March 7, 2018), available at https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading. [17] SEC Press Release, SEC Charges Former Bitcoin-Denominated Exchange and Operator with Fraud (Feb. 21, 2018), available at https://www.sec.gov/news/press-release/2018-23. [18] SEC Press Release, SEC Halts Alleged Initial Coin Offering Scam (Jan. 30, 2018), available at www.sec.gov/news/press-release/2018-8. [19] SEC Press Release, SEC Halts Fraudulent Scheme Involving Unregistered ICO (April 2, 2018), available at www.sec.gov/news/press-release/2018-53. [20] SEC Press Release, SEC Charges Additional Defendant in Fraudulent ICO Scheme (April 20, 2018), available at www.sec.gov/news/press-release/2018-70. [21] SEC Press Release, SEC Obtains Emergency Order Halting Fraudulent Coin Offering Scheme (May 29, 2018), available at www.sec.gov/news/press-release/2018-94. [22] SEC Press Release, SEC Obtains Emergency Freeze of $27 Million in Stock Sales of Purported Cryptocurrency Company Longfin (April 6, 2018), available at www.sec.gov/news/press-release/2018-61. [23] SEC Press Release, SEC Charges Energy Storage Company, Former Executive in Fraudulent Scheme to Inflate Financial Results (Mar. 27, 2018), available at www.sec.gov/news/press-release/2018-48. [24] SEC Press Release, Panasonic Charged with FCPA and Accounting Fraud Violations (Apr. 30, 2018), available at www.sec.gov/news/press-release/2018-73. [25] SEC Press Release, Altaba, Formerly Known as Yahoo!, Charged With Failing to Disclose Massive Cybersecurity Breach; Agrees To Pay $35 Million (Apr. 24, 2018), available at www.sec.gov/news/press-release/2018-71. [26] SEC Press Release, SEC Charges Three Former Healthcare Executives With Fraud (May 16, 2018), available at www.sec.gov/news/press-release/2018-90. [27] SEC Litig. Rel. No. 24181, SEC Charges California Company and Three Executives with Accounting Fraud (July 2, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24181.htm. [28] SEC Press Release, SEC Obtains Bars and Suspensions Against Individuals and Accounting Firm in Shell Factory Scheme (Feb. 16, 2018), available at www.sec.gov/news/press-release/2018-21. [29] SEC Press Release, Foreign Affiliates of KPMG, Deloitte, BDO Charged in Improper Audits (Mar. 13, 2018), available at www.sec.gov/news/press-release/2018-39. [30] In the Matter of Winter, Kloman, Moter & Repp, S.C., Curtis W. Disrud, CPA, and Paul R. Sehmer, CPA, Admin. Proc. File No. 3-18466 (May 04, 2018), available at www.sec.gov/litigation/admin/2018/34-83168.pdf. [31] AP File No. 3-18442, SEC Charges New Jersey-Based Company and Founder for Impermissible Association with Barred Auditor (Apr. 19, 2018), available at www.sec.gov/enforce/34-83067-s. [32] SEC Admin. Proc. File No. 3-18398, Fintech Company Charged For Stock Option Offering Deficiencies, Failed To Provide Required Financial Information To Employee Shareholders (Mar. 12, 2018), available at www.sec.gov/litigation/admin/2017/34-82233-s.pdf. [33] SEC Press Release, Theranos, CEO Holmes, and Former President Balwani Charged With Massive Fraud (Mar. 14, 2018), available at www.sec.gov/news/press-release/2018-41. [34] SEC Litig. Rel. No. 24121, SEC Charges Biotech Start-up, CEO With Fraud (Apr. 24, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24121.htm. [35] In the Matter of THL Managers V, LLC, and THL Managers, VI, LLC, Admin. Proc. File No. 3-18565 (June 29, 2018), available at www.sec.gov/litigation/admin/2018/ia-4952.pdf. [36] SEC Admin. Proc. File No. 3-18564, SEC Charges New York-Based Venture Capital Fund Adviser for Failing to Offset Consulting Fees (June 29, 2018), available at www.sec.gov/enforce/ia-4951-s. [37] SEC Press Release, (Mar. 8, 2018), available at www.sec.gov/news/press-release/2018-35. [38] SEC Admin. Proc. File No. 3-18449, SEC Charges a New York-Based Investment Adviser for Breach of Fiduciary Duty (Apr. 24, 2018), available at www.sec.gov/enforce/ia-4896-s. [39] SEC Press Release, SEC Charges Investment Adviser and Two Former Managers for Misleading Retail Clients (June 4, 2018), available at www.sec.gov/news/press-release/2018-101. [40] In re Lyxor Asset Management, Inc., Admin Proc. File No. 3-18526 (June 4, 2018), available at www.sec.gov/litigation/admin/2018/ia-4932.pdf. [41] SEC Admin. Proc. File No. 3-18349, Investment Adviser and Its Principals Settle SEC Charges that They Failed to Disclose Risks of Investing in Their Advisory Business (Jan. 23, 2018), available at  www.sec.gov/enforce/33-10454-s. [42] SEC Litig. Rel. No. 24037, SEC Charges Two Boston-Based Investment Advisers with Fraud (Jan. 31, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24037.htm. [43] Nate Raymond, Ex-Morgan Stanley adviser sentenced to U.S. prison for fraud, Reuters (June 28, 2018), available at www.reuters.com/article/morgan-stanley-fraud/ex-morgan-stanley-adviser-sentenced-to-u-s-prison-for-fraud-idUSL1N1TU28Q. [44] SEC Litig. Rel. No. 24054, SEC Charges Orange County Investment Adviser and Senior Officers in Fraudulent “Cherry-Picking” Scheme (Feb. 21, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24054.htm. [45] SEC Press Release, Investment Adviser Settles Charges for Cheating Clients in Fraudulent Cherry-Picking Scheme (Mar. 8, 2018), available at www.sec.gov/news/press-release/2018-36. [46] In re Arlington Capital Management, Inc. and Joseph L. LoPresti, Admin. Proc. File No. 3-18437 (Apr. 16, 2018), available at www.sec.gov/litigation/admin/2018/ia-4885.pdf. [47] SEC Litig. Rel. No. 24142, SEC Charges California Investment Adviser in Multi-Million Dollar Fraud (May 15, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24142.htm. [48] In re Aberon Capital Management, LLC and Joseph Krigsfeld, Admin. Proc. File No. 3-18503 (May 24, 2018), available at www.sec.gov/litigation/admin/2018/ia-4914.pdf. [49] SEC Press Release, Hedge Fund Firm Charged for Asset Mismarking and Insider Trading (May 8, 2018), available at www.sec.gov/news/press-release/2018-81. [50] SEC Press Release, SEC Charges Hedge Fund Adviser With Deceiving Investors by Inflating Fund Performance (May 9, 2018), available at www.sec.gov/news/press-release/2018-83. [51] SEC Press Release, SEC Charges Morgan Stanley in Connection With Failure to Detect or Prevent Misappropriation of Client Funds (June 29, 2018), available at www.sec.gov/news/press-release/2018-124. [52] SEC Press Release, SEC Launches Share Class Selection Disclosure Initiative to Encourage Self-Reporting and the Prompt Return of Funds to Investors (Feb. 12, 2018), available at www.sec.gov/news/press-release/2018-15. [53] SEC Press Release, SEC Charges Ameriprise With Overcharging Retirement Account Customers for Mutual Fund Shares (Feb. 28, 2018), available at www.sec.gov/news/press-release/2018-26. [54] SEC Press Release, SEC Orders Three Investment Advisers to Pay $12 Million to Harmed Clients (Apr. 6, 2018), available at www.sec.gov/news/press-release/2018-62. [55] SEC Admin. Proc. File No. 3-18328, Formerly Registered Investment Adviser Settles SEC Charges Related to Filing False Forms ADV and Other Investment Advisers Act Violations (Jan. 3, 2018), available at www.sec.gov/litigation/admin/2018/ia-4836-s.pdf. [56] SEC Admin. Proc. File No. 3-18423, SEC Charges Investment Adviser for Improperly Registering with the Commission and Violating Several Rules (Apr. 5, 2018), available at www.sec.gov/enforce/ia-4875-s. [57] In re SEI Investments Global Funds Services, Admin. Proc. File No. 3-18457 (Apr. 26, 2018), available at www.sec.gov/litigation/admin/2018/ic-33087.pdf. [58] SEC Press Release, SEC Charges 13 Private Fund Advisers for Repeated Filing Failures (June 1, 2018), available at www.sec.gov/news/press-release/2018-100. [59] SEC Press Release, SEC Charges Recidivist Broker-Dealer in Employee’s Long-Running Pump-and-Dump Fraud (Mar. 27, 2018), available at www.sec.gov/news/press-release/2018-49. [60] SEC Press Release, Merrill Lynch Charged With Gatekeeping Failures in the Unregistered Sales of Securities (Mar. 8, 2018), available at www.sec.gov/news/press-release/2018-32. [61] SEC Press Release, SEC Charges New York-Based Firm and Supervisors for Failing to Supervise Brokers Who Defrauded Customers (June 29, 2018), available at www.sec.gov/news/press-release/2018-123. [62] SEC Press Release, Broker-Dealer Admits It Failed to File SARs (Mar. 28, 2018), available at www.sec.gov/news/press-release/2018-50. [63] SEC Charges Brokerage Firms and AML Officer with Anti-Money Laundering Violations (May 16, 2018), available at www.sec.gov/news/press-release/2018-87. [64] Administrative Proceeding File No. 3-18341, Industrial and Commercial Bank of China Financial Services LLC Agrees to Settle SEC Charges Relating to Numerous Regulation SHO Violations That Resulted in Prolonged Fails to Deliver (Jan. 18, 2018), available at www.sec.gov/litigation/admin/2018/34-82533-s.pdf. [65] SEC Press Release, Broker Charged with Repeatedly Putting Customer Assets at Risk (Mar. 19, 2018), available at www.sec.gov/news/press-release/2018-45. [66] Admin. Proc. File No. 3-18409, SEC Charges Broker-Dealer, CEO With Net Capital Rule Violations (Mar. 27, 2018), available at www.sec.gov/enforce/34-82951-s. [67] SEC Press Release, NYSE to Pay $14 Million Penalty for Multiple Violations (Mar. 6, 2018), available at www.sec.gov/news/press-release/2018-31. [68] SEC Press Release, Wells Fargo Advisors Settles SEC Chargers for Improper Sales of Complex Financial Products (June 25, 2018), available at www.sec.gov/news/press-release/2018-112. [69] Lit. Rel. No. 24179, SEC Charges Cantor Fitzgerald and Brokers in Commission-Splitting Scheme (June 29, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24179.htm. [70] SEC Press Release, Deutsche Bank to Repay Misled Customers (Feb. 12, 2018), available at www.sec.gov/news/press-release/2018-13. [71] SEC Press Release, SEC Charges Merrill Lynch for Failure to Supervise RMBS Traders (June 12, 2018), available at www.sec.gov/news/press-release/2018-105. [72] Admin. Proc. File No. 3-18335, Former Corporate Insider and Brokerage Industry Employee Settle Insider Trading Charges with SEC (Jan. 11, 2018), available at www.sec.gov/litigation/admin/2018/34-82485-s.pdf. [73] Lit. Rel. No. 24056,  SEC: Insider Bought Minutes After Warnings Not to Trade (Feb. 28., 2018), available at www.sec.gov/litigation/litreleases/2018/lr24056.htm. [74] Lit Rel. No. 24044, SEC Charges Former Medical Products Executives with Insider Trading (Feb. 12, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24044.htm. [75] Lit Rel. No. 24065, SEC Charges Corporate Communications Specialist with Insider Trading Ahead of Acquisition Announcement (Mar. 8, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24065.htm. [76] Lit Rel. No. 24163, Court Enters Consent Judgment against Robert M. Morano (June 11, 2018), available at https://www.sec.gov/litigation/litreleases/2018/lr24163.htm. [77] Press Release, Former Equifax Executive Charged With Insider Trading (Mar. 14, 2018), available at www.sec.gov/news/press-release/2018-40. [78] Press Release, Former Equifax Manager Charged With Insider Trading (June 28, 2018), available at www.sec.gov/news/press-release/2018-115. [79] Lit Rel. No. 24104, SEC Charges New York Man with Insider Trading (Apr. 5, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24104.htm. [80] Lit Rel. No. 24097, SEC Charges Massachusetts Man in Multi-Year Trading Scheme (Apr. 5, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24097.htm. [81] Lit Rel. No. 24134, SEC Charges Two Pennsylvania Residents with Insider Trading (May 4, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24134.htm. [82] Press Release, SEC Charges Investment Banker in Insider Trading Scheme (May 31, 2018), available at www.sec.gov/news/press-release/2018-97. [83] Lit Rel. No. 24165, SEC Charges Canadian Accountant with Insider Trading (June 12, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24164.htm. [84] Lit Rel. No. 24178, SEC Charges Credit Ratings Analyst and Two Friends with Insider Trading (June 29, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24178.htm. [85] 882 F.3d 431 (3d Cir. 2018); see also Tom Gorman, “SEC Disgorgement: A Path For Reform?,” SEC Actions Blog (Feb. 20, 2018), available at http://www.lexissecuritiesmosaic.com/net/Blogwatch/Blogwatch.aspx?ID=32139&identityprofileid=PJ576X25804. [86] Lit Rel. No. 24035, SEC Freezes Assets Behind Alleged Insider Trading (Jan. 26, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24035.htm. [87] SEC Press Release, SEC Charges Municipal Adviser and its Principal with Defrauding Mississippi City (January 5, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24025.htm. [88] SEC Press Release, SEC Obtains Judgments Against Municipal Adviser and Its Principal for Defrauding Mississippi City (July 2, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24182.htm. [89] SEC Press Release, SEC Levies Fraud Charges Against Texas-Based Municipal Advisor, Owner for Lying to School District (May 9, 2018), available at www.sec.gov/news/press-release/2018-82. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Marc Fagel, Mary Kay Dunning, Amruta Godbole, Amy Mayer, Jaclyn Neely, Joshua Rosario, Alon Sachar, Tina Samanta, Lindsey Young and Alex Zbrozek. 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July 30, 2018 |
2018 Mid-Year Government Contracts Litigation Update

Click for PDF In this mid-year analysis of government contracts litigation, Gibson Dunn examines trends and summarizes key decisions of interest to government contractors from the first half of 2018.  This publication covers the waterfront of the opinions most important to this audience issued by the U.S. Court of Appeals for the Federal Circuit, U.S. Court of Federal Claims, Armed Services Board of Contract Appeals (“ASBCA”), and Civilian Board of Contract Appeals (“CBCA”). The first six months of 2018 yielded 4 government contracts-related opinions of note from the Federal Circuit, excluding decisions related to bid protests.  From January 1 through July 30, 2018, the U.S. Court of Federal Claims issued 7 notable non-bid protest government contracts-related decisions (and one bid-protest decision with wider-reaching implications we address here), and the ASBCA and CBCA published 54 and 64 substantive government contracts decisions, respectively.  As discussed herein, these cases address a wide range of issues with which government contractors should be familiar, including matters of cost allowability, jurisdictional requirements, terminations, contract interpretation, remedies, and the various topics of federal common law that have developed in the government contracts arena.  For background on the tribunals that adjudicate government contracts disputes, please see our 2017 Year-End Update. Of 1,502 cases pending before the Federal Circuit as of June 30, 2018, 12 were appeals from the boards of contract appeals and 132 were appeals from the Court of Federal Claims (“COFC”)—cumulatively comprising just under 10% of the appellate court’s docket. Only 4% of the appeals filed at the Federal Circuit in FY 2017 were governments contracts cases, which is consistent with previous years. On May 13, 2018, Judge Lis B. Young was appointed to the ASBCA after over 25 years of public service with the Federal Government, holding various positions with the former General Services Board of Contract Appeals and  the Department of the Navy, including most recently as Associate Counsel, Navy Acquisition Integrity Office, where she worked on suspension and debarment actions. On March 28, 2018, the CBCA proposed to amend its rules of procedure for cases arising under the CDA. The Board’s current rules were issued in 2008, and were last amended in 2011. The proposed revisions establish a preference for electronic filing, are designed to “increase[e] conformity” between the Board’s rules and the Federal Rules of Civil Procedure by cross-referencing and incorporating the FRCP standards, and streamlines and clarifies the Board’s current rules and practices. Notably, a proposed change to CBCA Rule 6, which governs pleadings, would require the opposing party’s consent to amend a pleading once without permission of the Board. Comments on the Proposed Rule were due on May 29, 2018. I.    COST ALLOWABILITY & COST ACCOUNTING STANDARDS The Court of Federal Claims issued one decision during the first half of 2018 addressing the merits of cost allowability issues under the Federal Acquisition Regulation (“FAR”).  Pursuant to FAR 31.201-2, a cost is allowable only if it (1) is reasonable; (2) is allocable; (3) complies with any applicable Cost Accounting Standards, or otherwise with generally accepted accounting principles appropriate in the circumstances; (4) complies with the terms of the contract; and (5) complies with any limitations in FAR subpart 31.2. Bechtel Nat’l, Inc. v. United States, No. 17-757C (Fed. Cl. Apr. 3, 2018) In Bechtel, the Court of Federal Claims considered whether the Department of Energy’s disallowance of litigation costs breached Bechtel’s contract. Two former employees of Bechtel sued Bechtel for sexual and racial harassment and discrimination. Bechtel ultimately settled both suits and sought reimbursement of litigation costs from the government for each suit, which the contracting officer denied in a final decision. In disallowing the costs, the contracting officer relied in part on the Federal Circuit’s decision in Geren v. Tecom, Inc., 566 F.3d 1037 (Fed. Cir. 2009), which held that costs incurred in the defense of an employment discrimination suit settled before trial are unallowable unless the contracting officer determines that the plaintiff had “very little likelihood of success on the merits.” Bechtel argued that Tecom had no bearing on the allowability of its litigation costs because, unlike in Tecom, the contract here included a Department of Energy Acquisition Regulation (“DEAR”) clause that “explicitly allocat[ed] the risk of third party claims to the Government.” The Court (Kaplan, J.) rejected this argument, finding that an exception in the DEAR clause prohibiting reimbursement of liabilities “otherwise unallowable by law or the visions of this contract” applied. Employing the principles in Tecom, the COFC found the “provisions of the contract,” including the contract’s anti-discrimination provision, rendered Bechtel’s costs of defending against and settling the discrimination complaints unallowable. However, the COFC stated that the holding in Tecom “was a limited one” that did not necessarily extend to breaches of contractual obligations other than anti-discrimination provisions. Bechtel’s appeal to the Federal Circuit is pending. ___________________ The COFC also considered two questions relating to the allocation of pension assets and liabilities for the purpose of a segment closing under Cost Accounting Standard (“CAS”) 413. United States Enrichment Corp. v. United States, No. 15-68C (Fed. Cl. Jan. 16, 2018) United States Enrichment Corporation (“USEC”) became a private entity in 1998 pursuant to the 1996 USEC Privatization Act.  Post-privatization, USEC continued to operate uranium enrichment facilities for the government at Portsmouth, Ohio and Paducah, Kentucky.  In 2010, DOE wound down all enrichment work at USEC’s Portsmouth facility, and on January 1, 2011, USEC divided what had been a single cost accounting segment for Paducah and Portsmouth into two separate segments. USEC announced it would close the Portsmouth segment on September 30, 2011, which triggered its obligation to perform a segment closing adjustment under CAS 413-50(c)(12). First, rejecting USEC’s argument that CAS 413-50(c)(5) requires the use of historical “data of the segment,” the COFC (Firestone, J.) determined that USEC had applied CAS 413 incorrectly when it failed to use data from the earliest date that USEC had data for employees associated with Portsmouth to allocate pension assets and liabilities to the new segment.   Instead, the Court agreed with the Government’s argument that the allocation must be based on historic data for the workers employed at the closed segment from the earliest period when that data is available and readily determinable – including the period before USEC became a private enterprise. Second, the COFC considered whether USEC could recover any deficit for under-funded post-retirement benefit obligations (“PRB”) from the Government in the CAS 413 segment closing adjustment, or whether the PRB obligations at issue should be excluded from the closing adjustment. Applying the holding from Raytheon Co. v. United States, 92 Fed. Cl. 549 (2012), the COFC found that while some of the PRBs at issue were not vested or integral because USEC’s Plan provided that USEC could terminate or modify its obligation to pay PRBs, others were protected by the Privatization Act such that they should be factored into the segment closing adjustment, and granted-in-part and denied-in-part both parties’ cross motions for summary judgment on the issue. II.  JURISDICTIONAL ISSUES As is frequently the case, jurisdictional issues dominated the landscape of key government contracts decisions during the first half of 2018. A.  Requirement for a Valid Contract In order for there to be Contract Disputes Act jurisdiction over a claim, there must be a contract from which that claim arises.  See FAR 33.201 (defining a “claim” as “a written demand or written assertion by one of the contracting parties seeking . . . relief arising under or relating to this contract“).  The CDA applies to contracts made by an executive agency for: (1) the procurement of property, other than real property in being; (2) the procurement of services; (3) the procurement of construction, alteration, repair, or maintenance of real property; and (4) the disposal of personal property.  41 U.S.C. § 7102(a)(1)-(4). Additionally, claims under the Contract Disputes Act must be brought by a contractor in privity of contract with the government. The Federal Circuit and the ASBCA addressed these issues in the first half of 2018. Agility Logistics Servs. Co. KSC v. Mattis, No. 2015-1555 (Fed. Cir. Apr. 16, 2018) In Agility, the Federal Circuit affirmed the Armed Services Board of Contract Appeals’ dismissal for lack of jurisdiction of Agility’s claim arising from a contract originally awarded by the Coalition Provisional Authority (“CPA”) in Iraq. The COFC (Prost, C.J.) found that the CPA did not constitute an “executive agency” so as to invoke jurisdiction under the Contracts Disputes Act. The court relied primarily on the plain language of the agreement, which made clear that the CPA, which was not an executive agency, awarded the contract.  The COFC also rejected Agility’s argument that the government became the contracting party after the CPA dissolved because the Iraqi Interim Government’s Minister of Finance had properly taken responsibility for the contract after the dissolution of the CPA.  The COFC also rejected Agility’s argument that each individual task order issued was a discrete contract, finding that “even if an executive agency issued the Task Orders, it did so as a contract administrator and not as a contracting party.”  The COFC additionally found that it had no jurisdiction to review the Board’s decision regarding jurisdiction under the Board’s charter. Cooper/Ports America, LLC, ASBCA No. 61461 (May 2, 2018) After Cooper/Ports America LLC (“CPA”) entered into a novation agreement with the government and the original contractor, Shippers, CPA filed a claim for unilateral mistake based, in part, on the fact that Shippers’ bid was 63% below that of the next lowest bidder and contained mistakes that should have been apparent to the government. The government moved to dismiss, claiming that CPA lacked the required privity of contract to qualify as a “contractor” with standing to pursue a claim that accrued when it was not a party to the contract (i.e., pre-novation). More specifically, the government asserted that there must have been an express assignment of that claim to which the government consented in order for the Board to find a valid government waiver of the statutory prohibition against assignment of claims. The ASBCA (O’Sullivan, A.J.) denied the government’s motion to dismiss because the government expressly recognized CPA as the “contractor” in the novation agreement. Moreover, the novation agreement recognized CPA as “entitled to all rights, titles and interests of the Transferor in and to the contracts as if the Transferee were the original party to the contracts,” and the Board found that a narrow interpretation of the novation would fly in the face of the plain language of the agreement. B.  Adequacy of the Claim Another common issue arising before the tribunals that hear government contracts disputes is whether the contractor appealed a valid CDA claim.  FAR 33.201 defines a “claim” as “a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to this contract.”  Under the CDA, a claim for more than $100,000 must be certified.  In the first half of 2018, the boards considered the elements of an adequate claim under the CDA. Meridian Eng’g Co. v. United States, 2017-1584 (Fed. Cir. Mar. 20, 2018) Meridian Engineering Company appealed the Court of Federal Claims’ dismissal of its claims arising from its 2007 contract to build flood control structures.  Meridian’s initial suit in the COFC alleged breach of contract, breach of the duty of good faith and fair dealing, and violation of the CDA as an independent claim. Meridian argued that the COFC erred when it “reasoned that only Meridian’s breach of contract and breach of good faith and fair dealing claims presented a viable cause of action” because its claims should have been “analyzed under the framework contemplated by the CDA, and not under the rubric of a ‘breach’ claim.” The Federal Circuit (Wallach, J.) affirmed the dismissal, finding that Meridian had not submitted a valid claim because the CDA did not itself provide a cause of action. Rather, “it is the claim asserted pursuant to the CDA that is the source of potential damages and review by the trier of fact.”  The court concluded that the COFC had not erred in finding jurisdiction under the CDA to evaluate the breach of contract claims, but found that the COFC had erred with respect to the substantive merits of certain claims. 1.  Claim Accrual Under the CDA, a claim must be submitted within six years after the claim accrues. FAR 33.201 defines accrual of a claim as the date when all events that fix alleged liability and permit assertion of the claim are known or should be known. Green Valley Co., ASBCA No. 61275 (Feb. 13, 2018) Green Valley held a blanket purchase agreement to supply life support services to the Army.  In 2006, Green Valley began invoicing the government for services it performed under the BPA, but it did not submit a certified claim for those unpaid invoices until 2017.  The contracting officer denied the claim, and Green Valley appealed.  The government sought to dismiss the claim because it had not been submitted within six years of accrual of the claim, as required by the CDA’s statute of limitations. The ASBCA (Melnick, A.J.) found that Green Valley’s claim accrued in 2006 after it submitted its invoices for payment, and that the ten-year delay in submitting the claim rendered it time-barred.  The Board explained that while an invoice is not necessarily a claim, it can be converted into one within a reasonable time if it is not acted upon or paid.  The Board considered Green Valley’s argument that the statute of limitations should be equitably tolled, noting that tolling might be appropriate if a litigant has been pursuing its rights diligently, and some extraordinary circumstance stood in its way and prevented the timely filing of the claim.  However, the Board found that Green Valley had not proven such circumstances, and dismissed the appeal as untimely. 2.  Sum Certain Fluor Fed. Sols., LLC, ASBCA No. 61353 (May 30, 2018) Fluor submitted a certified claim to the Navy for the estimated additional cost of performing work  under a unilateral modification to the contract.  The Navy argued that the claim was complex and, thus, refused to issue a final decision until it received an audit report from the Defense Contract Audit Agency (“DCAA”).  Fluor notified the Navy that it would treat the claim as a deemed denial and subsequently appealed to the ASBCA on this basis.  The Board asked the parties to respond whether the claimed amount qualified as a sum certain since it was based on estimated costs. Both parties agreed that Fluor’s claim satisfied the sum certain requirement.  The Navy argued, however, that the claim was complex and required a DCAA audit before the CO could issue a final decision. Without a final decision, the Navy argued, the claim was premature and the Board lacked jurisdiction. The Board (Clarke, A.J.) denied the Navy’s motion to dismiss for lack of jurisdiction, holding that the desired DCAA audit does not change the status of a contractor’s claim because it is not needed to assess entitlement, only quantum. The Board affirmed previous decisions that the use of estimated or approximate costs in determining the value of a claim is permissible so long as the total overall demand is for a sum certain. 3.  Claim Certification Horton Constr. Co., Inc., ASBCA No. 61085 (Feb. 14, 2018) Horton requested an equitable adjustment to its contract for the crushing of a concrete stockpile because the amount of concrete stockpile was smaller than originally anticipated. When Horton appealed from the contracting officer’s denial of its equitable adjustment claim, the government moved to dismiss for lack of jurisdiction, claiming Horton had not shown that it possessed the legal capacity to initiate or continue the appeal because the company’s status had been administratively terminated by the state of Louisiana, and that any attempt to ratify the appeal was too late. The ASBCA (Osterhout, A.J.) rejected the government’s first argument that Horton did not have the capacity to continue the appeal because Louisiana had subsequently reinstated the company.  The Board also rejected the government’s argument that the signatory to the claim was not authorized to certify the claim.  The CDA requires that a certified claim be executed by an individual authorized to bind the contractor with respect to the claim.  The test is one of authorization, and the signatory here was appointed as executrix to the estate of Mr. Horton Sr., who owned the company, and thus had power to bind the company. Moreover, the Board held, even if the executrix had not been authorized to bind the company, a defective certification under the CDA may be corrected prior to the entry of final judgment by the Board.  Accordingly, because the appeal was timely filed and the claim was properly certified and prosecuted, the Board denied the government’s motion to dismiss. Mayberry Enters., LLC v. Department of Energy, CBCA No. 5961 (Mar. 13, 2018) The Western Area Power Administration (“WAPA”), acting through the Department of Energy, filed a motion to dismiss Mayberry’s appeal from a contracting officer’s decision denying its monetary claims because Mayberry’s claim letter was uncertified. Under the CDA, while a defective certification can be corrected, a complete failure to certify may not and the Board must dismiss for lack of jurisdiction. In light of the Federal Circuit’s caution that tribunals should be wary of automatically applying claim certification to a single claim letter containing multiple claims that do not arise out of the same operative facts, Placeway Construction v. United States, 920 F.2d 903 (Fed. Cir. 1990), the CBCA reviewed the letter to determine whether the “claims” should be interpreted as a single claim or multiple claims. Because the Board (Lester, A.J.)found that each claim arose from different and unrelated problems during contract performance, each claim was analyzed for certification independently. The Board dismissed one of the three claims for lack of jurisdiction because it was in excess of $100,000 and had not been certified. Areyana Grp. of Constr. Co., ASBCA No. 60648 (May 11, 2018) Areyana Group of Construction Co. (“AGCC”) timely appealed a CO’s final decision denying a request for a time extension and the return of liquidated damages withheld by the government. The government filed a motion to dismiss, contending that AGCC failed to certify its request and that, accordingly, the ASBCA lacked jurisdiction to review its allegations. The Board (Paul, A.J.) agreed with the government and dismissed the AGCC’s claim, affirming prior holdings that absence of a certification bars the Board’s exercise of jurisdiction and is not considered a “defect.” Additionally, the Board noted that the CO’s purported issuance of a final decision does not remedy this problem. C.  Requirement for a Contracting Officer’s Final Decision A number of decisions from the tribunals that hear government contracts disputes dealt with the CDA’s requirement that a claim have been “the subject of a contracting officer’s final decision.” Hejran Hejrat Co., ASBCA No. 61234 (Apr. 23, 2018) After HHL’s contract was suspended pending a bid protest, HHL informed the contracting officer that it incurred additional costs due to the time necessary for the government’s corrective action and delay in the issuance of the notice to proceed. There was no evidence that the government considered HHL’s concerns regarding additional costs. Instead, the government issued a unilateral modification that lifted the prior award suspension; decreased the contract price; revised the performance work statement to reflect delays in government furnished equipment; and declared that an equitable adjustment due to the suspension was not required and the government was absolved of any claims due to that suspension. The ASBCA (Kinner, A.J.) dismissed HHL’s appeal for lack of jurisdiction because HHL’s purported claim was not certified and failed to request a final decision from the contracting officer.  The Board noted that the CO’s statements promising to send a final decision and, in fact, sending a document labeled final decision did not cure HHL’s failure to request a final decision.  The Board stated: “There can be no contracting officer’s final decision on a claim if the contractor has not requested that decision from the contracting officer.” H2Ll-CSC, JV, ASBCA No. 61404 (June 14, 2018) H2Ll-CSC, JV (“HCJ”) appealed a CO’s decision denying HCJ’s claim arising from an indefinite-delivery, indefinite-quantity type contract with firm-fixed-price task orders for design/build construction, and incidental service projects. The ASBCA sua sponte directed the parties to brief the issue of the Board’s jurisdiction. Specifically, the Board noted that HCJ had requested telephonically, but not in writing, that its request for an equitable adjustment be treated as a claim under the CDA. The Board (Paul, A.J.) dismissed the appeal for lack of jurisdiction, holding that a request for a final decision, like the totality of a claim submission, must be in writing and the CO cannot waive this requirement by issuing a final decision. OCCI, Inc., ASBCA No. 61279 (May 29, 2018) OCCI sought remission of liquidated damages that the government claimed for late completion of contract work, arguing that it was entitled to time extensions for government-caused and/or concurrent delay and that its failure to timely complete work under the contract was excusable. The ASBCA (Shackleford, A.J.) dismissed the appeal, holding that OCCI was precluded from raising the issue that its delay was excusable and that it was entitled to time extensions because OCCI never filed a proper CDA claim asserting entitlement to the time extensions as required by M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010), which held that “a contractor seeking an adjustment of contract terms [such as an extension of time] must meet the jurisdictional requirements and procedural prerequisites of the CDA, whether asserting the claim against the government as an affirmative claim or as a defense to a government action” (emphasis added). Walker Dev. & Trading Grp., Inc., CBCA No. 5907 (June 6, 2018) The Department of Veterans Affairs (“VA”) moved to strike certain counts of Walker Development & Trading Group Inc.’s complaint, asserting that the CBCA lacks jurisdiction to decide those portions of the complaint because they were not included in its claims submitted to the contracting officer. The Board (Beardsley, A.J.) observed that, while it may not consider new claims that a contractor failed to present to the contracting officer, a claim before the Board is not required to rigidly adhere to the exact language or structure of the original administrative CDA claim presented to the contracting officer.  The Board denied the motion to dismiss, finding that “the allegations in the complaint arise from the same operative facts and are not materially different.” D.  Filing Deadlines The boards of contract appeals heard cases concerning two different types of timing deadlines – the CDA’s six-year statute of limitations, and the requirement that a claim for equitable adjustment be filed before final payment is made on the contract. Khenj Logistics Grp., ASBCA No. 61178 (Feb. 15, 2018) In 2009, the government awarded KLG a contract to construct a facility in Afghanistan.  After commencing work on the contract, the government issued a stop-work order.  Shortly thereafter, the parties executed a bilateral contract modification which terminated the contract for convenience, and the government agreed to reimburse KLG for the cost of maintaining insurance, while KLG in turn released further claims against the government.  KLG finally submitted a termination claim in 2017. After KLG appealed, the government filed a motion for summary judgment based on KLG’s release and on the basis that KLG’s claim was untimely.  The ASBCA (Kinner, A.J.) held that KLG’s claim was time-barred due to the six-year CDA statute of limitations, concluding that KLG should have known that the government’s payment would not be forthcoming when the government failed to make a last payment in accordance with promises made by the contracting officer.  The Board also found there was no basis for equitable tolling because KLG had not diligently pursued its rights and there were no extraordinary circumstances that would have prevented the timely filing of the claim. Merrick Constr., LLC, ASBCA No. 60906 (Mar. 22, 2018) Merrick appealed a contracting officer’s decision denying its claim for rental costs on a bypass pumping system installed pursuant to a government change order.  The government moved for summary judgment, arguing that Merrick’s claim was precluded by the general release, and that there was an accord and satisfaction based upon a modification to the contract. The ASBCA (D’Alessandris, A.J.) explained that a release is a type of contract that grants the release of any claim or right that could be asserted against the other.  After interpreting the plain language of the release, the Board found that as a rule, a general release which is not qualified on its face bars any claims based upon events occurring before the execution of the release, and thus the government had met its burden of establishing that the general release applied.  The Board went on to note that there can be exceptions to a release, such as fraud, mutual mistake, economic duress, or consideration of a claim after release.  In this instance, the Board found that there was no mistake because Merrick’s argument was entirely speculative and no evidence was presented that would have shown that there was mistake.  The Board also held that Merrick’s claim was barred because it was submitted after final payment.  Pursuant to the Changes clause, FAR 52.243-4(f), no proposal by a contractor for an equitable adjustment can be allowed if asserted after final payment under the contract.  Because Merrick could not establish that the contracting officer knew or should have known of Merrick’s claim prior to the final payment, the Board held that Merrick’s claim was barred by final payment.  Accordingly, the Board granted the government summary judgment. Michaelson, Connor & Boul, CBCA 6021 (May 29, 2018) In February 2010, HUD awarded MCB a contract to serve as HUD’s mortgagee compliance manager to ensure lender compliance with the property conveyance requirements of HUD’s real-estate portfolio.  After the contract ended, MCB submitted a claim to the contracting officer requesting payment in the amount of $661,312.81, which MCB stated was incurred “in connection to” “extra-contractual work” allegedly requested by HUD.  The contracting officer denied MCB’s claim and MCB timely appealed to the CBCA.  HUD challenged the Board’s jurisdiction over the claim, alleging that because MCB’s claim arose after the contract ended, it did not arise out of the same operating facts as the contract and thus precluded the Board’s jurisdiction over the matter. The Board (Russell, A.J.) raised concerns about whether the claim presented to the contracting officer is the same claim that MCB presented on appeal, and ordered MCB to clarify whether it was seeking relief (1) under the contract identified in the notice of appeal, (2) under no contract, or (3) under a different contract. The Board held that it did have jurisdiction to hear MCB’s appeal because MCB’s appeal filings were “fundamentally the same” as those asserted in its claim to the contracting officer. Judge Chadwick dissented, noting that while the case presented the “closest ‘same claim/new claim’ issue” he had come across, the controlling question is whether MCB intends to litigate the operative facts of its certified claim, which according to Judge Chadwick MCB had abandoned because while the appeal sounded in contract, the certified claim was not based on any “provision, clause, or even a single word of the written contract.” E.  Amending the Complaint John C. Grimberg Co., Inc., ASBCA No. 60371 (Feb. 15, 2018) Grimberg held a contract to construct an advanced analytical chemistry wing for work with toxic agents.  After a dispute arose regarding contract terms, Grimberg filed a claim and an appeal of the contracting officer’s deemed denial when a year passed without a final decision on the claim.  Three weeks prior to the scheduled hearing date, Grimberg filed an amended complaint adding a new count based on the government’s failure to disclose superior knowledge of contract requirements.  The hearing was subsequently rescheduled by the Board to a date several months after the original hearing date.  Grimberg filed a motion for reconsideration after the Board rejected the amended complaint due to the absence of a motion for leave to amend. The ASBCA (Woodrow, A.J.) held that it had jurisdiction to hear the new count in the amended complaint because a new legal theory of recovery asserted in an amended complaint does not constitute a new claim if based upon the same operative facts as the original claim, and the new count would require review of the same evidence as the original counts.  Therefore, the Board concluded that it possessed jurisdiction to hear the new count.  The Board then determined that the proposed amendment to the complaint would be fair to both parties, as required by Board Rule 6, because the rescheduling of the hearing allowed the government additional time to address concerns raised by the new count.  Thus, the Board granted Grimberg leave to file its amended complaint. F.  Availability of Declaratory Relief The Federal Circuit and boards of contract appeals considered the availability of declaratory relief in an action brought pursuit to the CDA. Securiforce Int’l Am., LLC v. United States, Nos. 2016-2589, 2016-2633 (Fed. Cir. Jan. 17, 2018) Securiforce International America, LLC (“Securiforce”) supplied fuel to eight locations in Iraq under a contract with the Defense Logistics Agency (“DLA”). DLA partially terminated the contract for convenience with respect to two of the sites, but subsequently placed oral orders for small deliveries to those sites.  When Securiforce’s deliveries to the remaining sites were late, the government sent a show cause notice, in response to which Securiforce claimed the delays were due in part to the allegedly improper termination for convenience. The government terminated the remainder of the contract for default.  In 2012, Securiforce filed a complaint in the COFC claiming that the termination for default was improper, and then requested a final decision from the contracting officer (“CO”) that the termination for convenience had been improper. After the CO denied the request for final decision, Securiforce amended its COFC complaint to include a request for declaratory judgment that the government’s termination for convenience had been improper.  The COFC found jurisdiction over both claims and held that the partial termination for convenience of the contract had been an abuse of discretion and thus a breach of the contract, but found the termination for default proper and rejected Securiforce’s claim that its nonperformance was excused by the improper termination for convenience. On appeal, the Federal Circuit (Dyk, J.) found that the COFC lacked jurisdiction to adjudicate the declaratory relief claim regarding the validity of the government’s termination for convenience.  While contractors may seek declaratory relief in some cases, the Federal Circuit stated they may not “circumvent the general rule requiring a sum certain by reframing monetary claims as nonmonetary.”  The Federal Circuit characterized Securiforce’s declaratory relief claim as a claim for monetary relief because the default remedy for a breach of contract would be damages, and that Securiforce had failed to state a sum certain as required by the CDA.  The court further held that there would have been no jurisdictional impediment to Securiforce invoking the improper termination for convenience as an affirmative defense for its default without presenting the defense to the CO because Securiforce was neither seeking the payment of money nor attempting to change the terms of the contract.  However, under the facts at hand, the Federal Circuit concluded that the termination for convenience did not, in fact, amount to an abuse of discretion or breach of the contract.  Duke University, CBCA No. 5992 (Apr. 6, 2018) Duke University appealed a contracting officer’s final decision on what Duke referred to as a “non-monetary claim” that it had submitted to the National Institute of Allergy and Infectious Diseases (“NIAID”).  Duke did not specify a sum of monetary payment in its claim, instead seeking a declaratory judgment regarding the parties’ rights and obligations under the contract.  Applying the Federal Circuit’s recent decision in Securiforce, and upon a joint motion by the parties to dismiss the appeal without prejudice, the CBCA (Lester, A.J.) dismissed the appeal for lack of jurisdiction on the ground that Duke’s claim was one contemplated by Securiforce, requiring Duke to state a sum certain. Mare Solutions, Inc., CBCA Nos. 5540, 5541, 6037 (May 16, 2018) Mare Solutions, Inc. (“Mare”) was awarded a contract from the Department of Veterans Affairs (“VA”) for the construction of a two-story parking garage at the VA Medical Center in Erie, Pennsylvania.  When the project was nearly complete, two disputes arose – one involving bucked metal conduit on the first floor ceiling of the garage and the other regarding which party was responsible for purchasing “head-end” equipment for the video surveillance system.  Mare appealed the contracting officer’s final decisions and sought declaratory relief absolving it of liability for the buckled conduit and for the purchase of head-end equipment. At the time the appeals were filed, the ASBCA found its jurisdiction was proper because both appeals involved live performance disputes that could be resolved by declaration of the Board. At the hearing, however, the Board learned that, in addition to seeking declaratory relief, Mare had procured and installed the head-end equipment and was seeking reimbursement for those costs. Accordingly, Mare submitted a related monetary claim to the CO, which was also denied and which Mare appealed.  While there were no jurisdictional issues with the first appeal for declaratory relief relating to the metal conduit, the ASBCA (O’Rourke, A.J.) found that it no longer had jurisdiction over the head-end equipment claim for declaratory relief because the issues had been subsumed within the monetary claim.  Thus, the Board’s jurisdiction to issue declaratory relief can be obviated by the filing of a related monetary claim. Based on its interpretation of the contract, the Board ruled that Mare was not liable for the buckled conduit, but denied Mare’s monetary claim. G.  Election Doctrine A decision from the COFC highlights the issues that can arise from bringing proceedings before more than one tribunal that hear government contracts disputes. ACI-SCC JV et al v. United States, No. 17-1749C (Fed. Cl. Mar. 12, 2018) In what it described as a “conundrum of a case,” the COFC dismissed a suit against the Army Corps of Engineers brought by Plaintiff Arwand Road and Construction Company (“Arwand”), acting as Trustee for Plaintiff-Intervenors ACI-SCC JV, ACI-SCC JV LLC (together, “the JV”), and Plaintiff Advance Constructors International LLC (“ACI”). Arwand was a subcontractor to the JV, which held a number of construction contracts in Afghanistan. However, the JV did not pay Arwand on time for its work, claiming it had not yet been paid by the government. The contracting officer terminated the government’s contracts with the JV, and the JV and ACI appealed the terminations separately to the ASBCA. Both parties settled their claims and the ASBCA dismissed their appeals with prejudice. Arwand sued both the JV and ACI in the United States District Court for the District of Delaware for damages due under its subcontract with the JV, and the court awarded judgment in Arwand’s favor later that year. Arwand then filed a “petition” before the ASBCA asserting breach of contract claims against the government, which Arwand later voluntarily dismissed without prejudice. After the Delaware Court of Chancery appointed Arwand as trustee for the JV and ACI, Arwand filed suit against the Corps before the COFC in its capacity as trustee to recover unpaid fees on the JV’s contracts. The JV intervened and filed a motion to dismiss. The COFC (Wheeler, J.) dismissed the case as moot as a result of the settled ASBCA cases that had been dismissed with prejudice, at which time Arwand was merely a subcontractor with no rights, privity, or standing to sue the Government over the prime contract. Second, the COFC also held that by first filing suit at the ASBCA, Arwand lost its right to file in the COFC because courts have interpreted the CDA to impose an “either-or choice” of forum, meaning that a contractor is barred from filing in one forum if it chooses to file in the other forum first. Even though Arwand may not have had standing to file a “petition” before the ASBCA and  voluntarily dismissed the suit, he was precluded from litigating the same claim in the COFC under the CDA. III.  TERMINATIONS In two noteworthy decisions during the first half of 2018 arising from contract terminations, the ASBCA strictly construed the one-year time limit to submit a termination settlement proposal in accordance with the FAR’s termination for convenience clause. Am. Boys Constr. Co., ASBCA No. 61163 (Jan. 9, 2018) In 2013, the government awarded a contract for the construction of a prime power overhead cover to American Boys Construction Company (“American Boys”).  More than three and a half years after receiving notice of the government’s termination of the contract for convenience, American Boys submitted a termination settlement agreement proposal as a certified claim to the contracting officer.  The contracting officer denied the claim because American Boys did not file a settlement proposal within one year of the termination.  American Boys timely appealed the CO’s final decision and the government filed a motion for summary judgment requesting that the Board deny the appeal. The Board (Osterhout, A.J.) granted the government’s motion and denied the appeal because American Boys did not file its termination settlement claim until 2017 – nearly four years after the contract termination – in violation of FAR 52.249-2. Abdul Khabir Constr. Co., ASBCA No. 61155 (Apr. 6, 2018) Abdul Khabir Construction Co. appealed a contracting officer’s denial of a claim seeking settlement costs resulting from the government’s termination for convenience of its construction contract.  The government filed a motion for summary judgment, arguing that Abdul failed to submit its termination settlement proposal within a year of the effective date of termination, and did not submit its certified claim until more than seven years after termination. Abdul countered that the government never asked for a settlement proposal, and never told it where to file a claim. The Board (Osterhout, A.J.) found no evidence that the contracting officer extended the FAR’s one-year time period to file a termination claim.  Because no extension was granted and the parties did not dispute that Abdul Khabir did not submit a proposal or contact the government until over 18 months after the due date, the Board found the claim untimely and denied the appeal. IV.  CONTRACT INTERPRETATION A number of noteworthy decisions from the first half of 2018 articulate broadly applicable contract interpretation principles that should be considered by government contractors. CB&I AREVA MOX Servs., LLC v. United States, No. 16-950C, 17-2017C, 18-80C, 18-522C, 18-677C, 18-691C, 18-701C (Fed. Cl. June 11, 2018) In 1999, the Department of Energy awarded a cost reimbursement contract to the predecessor in interest of CB&I AREVA MOX Services, LLC (“MOX Services”) to construct a Mixed Oxide Fuel Fabrication Facility (“MFFF”) at a site in South Carolina. The original target completion date was in 2016, but was extended until 2029 and the estimated cost more than doubled. Under the contract, MOX Services was eligible to receive quarterly incentive fees pursuant to a vesting schedule for making progress towards completion of the construction of the MFFF beginning in 2008. Although the entire fee was provisional for at least the first year after it was invoiced, the incentive fee became 50% vested if MOX Services’ performance remained within the schedule and cost parameters for the subsequent four quarters. The government paid MOX incentive fees, of which a portion was provisional. The government suspended further incentive fee payments in 2011 when it determined that MOX Services was no longer performing within the applicable cost and schedule parameters. In 2016, MOX Services submitted a certified claim to the government for the suspended incentive fees that the company did not receive from 2011 through 2015. In response, the contracting officer not only denied the certified claim suspended payments, but also demanded that MOX Services refund the provisional incentive fee payments already made. The government argued that MOX Services has no hope of meeting the project’s parameters on cost and schedule and thus will not be entitled to retain any incentive fees at project completion. The Court of Federal Claims (Wheeler, J.) rejected this position, noting that “the contract provisions taken together unambiguously provide that the incentive fee [paid] to MOX Services is to remain in the custody of MOX Services until the MFFF construction is completed.” The court also criticized the CO’s demand for a refund of $21.6 million “as a way to gain leverage over MOX Services through baseless retaliation.” The court granted plaintiff’s partial motion for summary judgment, effectively requiring the government to return the provisional incentive fees to MOX Services until the project is completed. ABB Enter. Software, Inc., f/k/a/ Ventyx, ASBCA No. 60314 (Jan. 9, 2018) Tech-Assist, the corporate predecessor to ABB Enterprise Software, Inc., provided software and licenses to support naval maintenance requirements.  Pursuant to a master license agreement, the Navy was only allowed to install one copy of ABB’s software on ships and Navy bases, but ABB alleged that the Navy breached its licensing agreement by allowing two copies of the software to be installed on certain aircraft carriers.  After the Board granted the Navy’s motion to amend its answer to include an affirmative defense for equitable estoppel, ABB moved for summary judgment on its claim for entitlement based on its contention that the licensing agreement’s plain language only allowed for one copy of the software to be installed. The ASBCA (Kinner, A.J.) determined that the plain language of the licensing agreement controlled, and was explicitly clear that only one installation of software for each location would be allowed.  The Board also found that the Navy had not shouldered its burden to establish equitable estoppel by demonstrating that (1) the party to be stopped knew the facts; (2) the government intended that the conduct alleged to have induced continued performance will be acted on, or the contract must have a right to believe the conduct in question was intended to induce continued performance; (3) the contract must not be aware of the true facts; and (4) the contractor must rely on the government’s conduct to its detriment.  Thus, the Board granted ABB’s motion for summary judgment. Name Redacted, ASBCA No. 60783 (Feb. 8, 2018) In 2016, the government awarded a firm-fixed-price contract to Appellant for enhanced force protection and facility upgrades in Afghanistan.  The contract provided for a certain exchange rate between Afghani currency and U.S. dollars.  Following the contract’s termination for default, the contractor submitted a certified claim for additional costs, which the CO denied and the contractor appealed. In a subsequent modification converting the termination to one for convenience, the government agreed to pay over $93,000 to settle the pending appeal at the agreed upon exchange rate.  After some delay, the government paid Appellant, but Appellant countered that due to the delay there had been a change in the exchange rate, and that it was entitled to an additional $4,300.  The government moved to dismiss on the ground that the claim had been settled and Appellant had agreed to its dismissal. The Board (Melnick, A.J.) found that Appellant was not entitled to any additional costs because nothing in the modification allowed for additional compensation if the exchange rate fluctuated, and Appellant had released its claim when it agreed to the modification. Accordingly, the Board dismissed the appeal. UNIT Co., ASBCA No. 60581 (Feb. 12, 2018) The government awarded a contract for the construction of a battle command training center to UNIT.  During the course of the contract, UNIT subcontracted with other companies to perform certain mechanical work.  Due to various interpretations of design requirements, one of the subcontractors, Klebs Mechanical (“Klebs”) submitted “request for information” (“RFI”) forms to UNIT to pose questions to the government.  After some disagreement, UNIT submitted a claim for damages and costs for defective specifications, which the contracting officer denied.  The CO found that UNIT did not provide contractually required notice of the defective specifications and that its recovery was therefore barred. UNIT appealed the CO’s final decision and the government moved for summary judgment. The ASBCA (Newsom, A.J.) relied on FAR 52.236-21(a), Specifications and Drawings for Construction (Feb 1997) to find that UNIT had provided sufficient notice to the government in its RFI forms, or at the very least, that UNIT had created a disputed issue of material fact on whether or not sufficient notice was provided, and the Board accordingly denied summary judgment. MW Builders, Inc. v. United States, No. 13-1023C (Fed. Cl. Mar. 5, 2018) In our 2017 Year-End Update, we covered the Court of Federal Claims’ grant of partial judgment in favor of MW Builders, Inc. (“MW Builders”) on its claims that the Army Corps of Engineers breached its contract for electrical utility services and violated the duty of good faith and fair dealing. In a portion of the decision not covered in our Year-End Update, the COFC (Braden, C.J.) also determined that the claims of MW Builders’ subcontractor, Bergelectric, were waived as the result of a lien waiver in its subcontract providing that Bergelectric waived “any other claim whatsoever in connection with this Contract…” MW Builders moved for reconsideration of Bergelectric’s pass-through claims, arguing  that the precedent relied upon in the initial decision was inapplicable because that case was about a settlement dispute, whereas Bergelectric and MW agree that the contract does not evidence their intent. In the alternative, MW Builders claimed that the court should reform the release language. The court rejected both arguments. First, it held that the terms of the contractual release were unambiguous and that the court was therefore precluded from considering the extrinsic evidence regarding the parties’ intent even though the scope of the release included in the contract was unintentionally broad. Second, the COFC held that it does not have jurisdiction to reform an agreement between a contractor and its subcontractor, citing the Severin doctrine. Accordingly, the court denied the motion for reconsideration. V.  DAMAGES John Shaw LLC d/b/a/ Shaw Bldg. Maint., ASBCA No. 61379 (Mar. 8, 2018) In 2010, John Shaw LLC was awarded a contract to provide janitorial services at an Air Force base.  After the contract expired, Shaw presented a claim for “punitive damages” to the contracting officer, which was denied. Shaw appealed, and requested punitive damages and “missed opportunities” damages stemming from contracts allegedly not obtained due to the government’s handling of its contract.  The government moved to dismiss the claims for punitive and “missed opportunities” damages. The ASBCA (McIlmail, A.J.) dismissed Shaw’s damages claims, finding the connection between the government’s administration of the contract and the allegedly lost contracts with third parties was a claim for consequential damages, which were too remote and speculative to be recovered.  The Board further noted that it has no authority to award punitive damages, and dismissed both claims. Green Bay Logistic Servs. Co.,  ASBCA No. 61063 (Apr. 12, 2018) Green Bay appealed the Defense Contract Management Agency (“DCMA”)’s termination for convenience of its lease of two stakebed or flatbed trucks. Green Bay argued that it was owed twice the value of the contract because it attempted to deliver the vehicles twice. The ASBCA (Osterhout, A.J.) denied Green Bay’s appeal, finding that Green Bay failed to prove that it was entitled to any amount it presented to the government in its termination settlement proposal. Upon a termination for convenience of a commercial item contract, FAR 52.212-4(1) directs the government to pay the contractor: (1) a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination; and (2) reasonable charges the contractor can demonstrate to the satisfaction of the government using its standard record keeping system, have resulted from the termination. The Board concluded that because Green Bay delivered non-compliant vehicles, it did not complete any percentage of the contract, and that Green Bay did not present any reasonable charges that imposed upon the government a requirement to pay. Entergy Nuclear Generation Co. v. United States, No. 14-1248C (Fed. Cl. June 19, 2018) Entergy Nuclear Generation Company (“Entergy”) operates a nuclear power station. In 1983, Entergy’s predecessor, Boston Edison Company entered into a contract authorized by the Nuclear Waste Policy Act of 1982 for the disposal of spent nuclear fuel generated at the station to begin by January 31, 1998, but the Department of Energy (“DOE”) breached the contract and did not dispose of the spent fuel. In 2012, Entergy was awarded damages for the additional costs incurred in operating the plant due to the breach through December 31, 2008. In this second lawsuit, Entergy sought to recover damages allegedly incurred between December 31, 2008 and June 30, 2015 because Entergy could not recover future damages in the first suit. Because the government did not contest two-thirds of the damages sought by Entergy, Entergy sought partial summary judgment on liability and entry of partial final judgment on the uncontested amount. The court granted Entergy’s motion for partial summary judgment on liability for the uncontested amount, but found that the entry of partial final judgment as to the uncontested amount was improper under COFC Rule 54(b), which allows the court to direct final judgment “as to one or more, but fewer than all, claims” in an action. Here, where the COFC determined that Entergy is only alleging one “claim”—partial breach of contract—granting partial final judgment on some but not all of the harms arising out of a single claim “would be to enter judgment on less than one claim, violating Rule 54(b).” The government cross-moved for summary judgment as to Entergy’s claim for storage fees paid to the Nuclear Regulatory Commission (“NRC”). The court rejected the government’s argument that Entergy was foreclosed from proving causation between the breach and the increased fees because it had already presented such evidence, and the government’s argument had been rejected in a prior Federal Circuit case. The COFC denied the Government’s motion, finding that Entergy’s intent to present substantially different evidence from that considered in the prior Federal Circuit case created genuine dispute as to causation. Although not briefed by the parties, the court also found that because the COFC determined in a prior suit for damages brought by the Boston Edison Company that DOE’s breach was a but-for cause of the NRC fee change at the Pilgrim Nuclear Power Station, and the causation issue was not raised on appeal, issue preclusion may have provided an alternate basis to deny the Government’s motion. But the COFC had an opportunity to prohibit re-litigation of this same issue based on collateral estoppel in another case, discussed infra in Section VI(C). VI.  COMMON LAW PRINCIPLES The boards of contract appeals and COFC addressed a number of issues during the first half of 2018 arising out of the body of federal common law that has developed in the context of government contracts. A.  Application of Common Law in Government Contracts Cases Assessment and Training Solutions Consulting Corp., ASBCA No. 61047 (Mar. 6, 2018) ATSCC sought reconsideration of the ASBCA’s earlier decision sustaining ATSCC’s appeal, arguing that the Board erroneously applied a common law of bailment presumption of negligence and that the written contract should be enforced over the common law.  The Board (Clarke, A.J.) explained that the common law of bailment imposes upon the bailee the duty to protect property by exercising ordinary care and to return said property in substantially the same condition.  Thus, when the government receives property in good condition and returns it in damaged condition, there is a presumption that the cause of the damage was due to the government’s failure to exercise ordinary care.  The government argued that the presumption did not apply, and that where there was a written bailment contract, the contract should apply, not common law.  However, the Board noted that this was only true if the written contract and the common law differed.  Because the written contract and common law were the same in this instance, the Board concluded that the common law bailment presumption would apply.  Accordingly, the Board held, the prior decision’s reliance on the common law presumption was not legal error. B.  Fraud We have been following in our recent publications developments in the law of whether and to what extent the boards of contract appeals may exercise jurisdiction over claims and defenses sounding in fraud when the alleged fraud affects the administration of government contracts.  For example, in our 2016 Year-End Government Contracts Litigation Update, we covered the Federal Circuit’s decision in Laguna Construction Company, Inc. v. Carter, 828 F.3d 1364 (Fed. Cir. 2016), which held that as long as the ASBCA can rely upon prior factual determinations from other tribunals (such as through a guilty plea), the Board has jurisdiction to adjudicate legal defenses based upon those prior determinations of fraud.  In the first half of 2018, the ASBCA considered one case addressing the impact of Laguna on its jurisdiction, and another that evaluated the validity of a contracting officer’s final decision based partially on a decision of fraud. Int’l Oil Trading Co., ASBCA Nos. 57491, 57492, 57493 (Jan. 12, 2018) IOTC sought partial judgment on the pleadings or, alternatively, renewed its motion to strike the Government’s affirmative defense that IOTC obtained its contracts for fuel delivery to the government in Iraq through fraud or bribery, claiming that the Federal Circuit’s decision in Laguna abrogated the Board’s previous ruling denying IOTC’s initial motion to strike by preventing the Board from hearing the fraud-based affirmative defense. Citing ABS Development Corp., which we discussed in our 2017 Year-End Government Contracts Litigation Update, the ASBCA (Melnick, A.J.) held that Laguna did not impact its prior ruling that it was not precluded from considering fraud related claims based because the CDA’s statutory bar did not apply to an affirmative defense that a contract is void under the common law for fraud or bribery in its formation. The Board noted that the Federal Circuit’s decision did not restrict the Board’s power to determine the validity of a contract when the government has lodged an affirmative defense that the contract is void  ab initio due to fraud or bribery, as opposed to when the government is asserting a fraud claim (such as a claim under the False Claims Act) that the Board does not have jurisdiction to entertain. Accordingly, the Board denied IOTC’s motion. PROTEC GmbH, ASBCA Nos. 61161, 61162, 61185 (Mar. 20, 2018) The government moved to dismiss for lack of jurisdiction PROTEC’s appeals from the Army’s denials of its claims for unpaid invoices, arguing that the contracting officers’ final decisions were invalid because denials were based on  suspicion of fraud. None of the final decisions mentioned any suspicion of fraud; however, the U.S. Army Criminal Investigation Command was conducting an investigation into allegations of fraud at the time the final decisions were issued and at the time of the appeal. Under the FAR, a contracting officer’s authority to decide or resolve claims does not extend to settlement, compromise, payment, or adjustment of any claim involving fraud.  The COFC and CBCA have held that a final decision is therefore invalid if it is based upon a suspicion of fraud.  However, the Federal Circuit has clarified that a final decision is invalid only if the decision rests solely upon a suspicion of fraud.  Because the decisions issued to PROTEC were not based upon a suspicion of fraud and the decisions also relied upon other rationales,  it did not matter for jurisdictional purposes  that there was an ongoing criminal investigation into fraud allegations.  The Board (Sweet, A.J.) therefore denied the motion to dismiss. C.  Good Faith & Fair Dealing Ala. Power Co. v. United States, No. 17-1480, Ga. Power Co. v. United States, Nos.  17-1492C, 17-1481C (Fed. Cl. Mar. 26, 2018) In a pair of cases arising from ongoing litigation regarding the government’s failure to collect spent nuclear fuel (“SNF”) from the plaintiffs’ facilities pursuant to its contracts, the Government  sought to dismiss two claims—the first relating to the recovery of certain fees levied by the Nuclear Regulatory Commission (“NRC”), and the second to plaintiffs’ claim for breach of the covenant of good faith and fair dealing. In 2004, the COFC granted summary judgment in plaintiffs’ favor on their initial breach of contract suit. The plaintiffs sued again in 2010 to recover the damages accrued from the government’s continued breach by failing to remove the material between 2005 and 2010, including fees collected by the NRC. During that second phase of litigation, the COFC held that although the plaintiffs were entitled to recovery, they could not recover the additional NRC fees because they did not sufficiently prove the breach of contract caused the increase in the fees. The plaintiffs sued a third time to recover all costs incurred after 2011, at which point the COFC granted partial summary judgment for the government on the issue of the NRC fees as barred by the doctrine of collateral estoppel. This fourth case, based upon nearly identical facts, is framed as both a breach of contract claim and a breach of the implied covenant of good faith and fair dealing. The Government moved dismiss the breach claims related to the recovery of the NRC fees based on collateral estoppel and to dismiss the good faith and fair dealing claim as duplicative of the breach of contract claim for which liability had been established in the 1998 case. The COFC (Campbell-Smith, J.) granted the motion to dismiss the NRC fees because the allegations in the complaint were virtually identical to those in the previous complaint and there had been no change in the law between the two suits. The COFC also found that the good faith and fair dealing claim was duplicative of the breach of contract claim. To state a separate claim for breach of the implied covenant of good faith and fair dealing,  a plaintiff must allege some kind of subterfuge—evasion that goes against the spirit of the bargain, lack of diligence, willful rendering of imperfect performance, abuse of power, or interference with performance—founded upon different allegations than the breach of contract claim. The COFC found no alleged facts that even arguably support plaintiff’s conclusion that defendant was attempting to avoid its obligations, and therefore granted the motion to dismiss. Raytheon Co., ASBCA Nos. 60448, 60785 (Apr. 9, 2018) Raytheon appealed from the CO’s denial of two claims relating to additional services rendered under its “Lot 27” contract with the Air Force. About two months before the hearing, the government moved to amend its answer to add an additional “unclean hands” affirmative defense based on the latest round of government depositions of Raytheon personnel, which the government claimed revealed that Raytheon had an undisclosed pre-award plan to complete the Lot 27 contract work with future appropriated funds siphoned away from future missile production contracts that Raytheon hoped to obtain on an annual basis. Raytheon moved to dismiss the additional defense, arguing the ASBCA did not have jurisdiction to entertain the defense because it had not been submitted as  claim to the CO, and that the government did not justify the defense or the delay in raising it. The ASBCA (Scott, A.J.) granted the government’s motion to amend its answer. Although the Board recognized that the government’s amendment was filed only shortly before the hearing, there was insufficient information for the Board to conclude that the government delayed unduly in raising the defense. The Board also concluded that there was insufficient evidence to establish bad faith on the part of the government or for the Board to decide the futility of the amendment. The ASBCA did, however, allow Raytheon additional discovery and/or submissions both before and after the scheduled hearing. VII.  CASES TO WATCH While the Government Contracts Litigation Update does not typically analyze bid protest cases from the GAO or the Court of Federal Claims, two recent cases—a decision from the Court of Federal Claims, and a case still pending before the Federal Circuit— have wide-reaching implications of which government contractors should be aware. A.  Trade Agreements Act Acetris Health, LLC v. United States, No. 18-433C (Fed. Cl. May 8, 2018) The Court of Federal Claims considered Acetris Health, LLC’s challenge to the Department of Veterans Affairs’ reliance on a determination by Customs and Border Patrol that the pharmaceuticals Acetris provided under contract to the VA and the Department of Defense were considered a product of India because the active ingredient in the drug was not “substantially transformed” in the United States. The VA determined that Acetris was required to supply “only U.S.-made or designated country end products” under the contract because it was subject to the Trade Agreements Act of 1979 (“TAA”). Acetris claimed that the pharmaceuticals it provide were TAA compliant because the foreign ingredients were processed into the final product in the U.S. Acetris challenged CBP’s country of origin determination at the Court of International Trade (“CIT”) in March 2018. Before the COFC, Acetris lodged a pre-award bid protest challenge to the VA’s reliance on CBP’s determination in interpreting its solicitation. After receiving the CBP determination, the VA notified Acetris that it could no longer fulfill the relevant contract using the existing pharmaceutical supply, and solicited new proposals to supply a TAA-compliant version of the product. Acetris submitted a proposal that was rejected by the VA. The VA expressed its intention to “rely entirely” on the findings of CBP for the purpose of country of origin determinations for TAA compliance. Acetris challenged both the VA’s substantive interpretation of the TAA and its reliance on CBP to make the country of origin determination. The COFC (Sweeney, J.) denied the government’s motion to dismiss, finding that  “all of plaintiff’s claims are aimed at the actions (or inaction) of the VA” and thus are “properly the subject of a preaward bid protest.” The COFC also determined that 28 U.S.C. §1500 does not divest the COFC of jurisdiction because the court determined that the challenge to CBP’s country-of-origin determination pending before the CIT was not based on substantially the same operative facts, and that Acetris’ claims were ripe for review and stated claims upon which relief could be granted. After oral argument earlier this month, the COFC granted declaratory judgment in favor of Acetris. The COFC found that the VA misconstrued the Trade Agreements clause included in the solicitation as preventing the purchase of products that qualify as domestic end products under relevant FAR provisions. The COFC also held that the VA’s reliance on CBP’s country of origin determination, rather than independently assessing TAA compliance, was arbitrary and capricious. B.  Commercial Item Contracting Palantir USG Inc. v. United States, No. 17-1465 (Fed. Cir. Feb. 8, 2018) In February, Gibson Dunn argued before the Federal Circuit on behalf of its client Palantir Technologies to uphold a 2016 Court of Federal Claims ruling (Horn, J.) that the Army violated the Federal Acquisition Streamlining Act (“FASA”) when it decided to develop a new data-management platform from scratch without undertaking market research to determine whether its needs could be met by a commercially available product. The COFC found that Palantir was wrongly excluded from a $206 million intelligence software procurement when the Army refused to consider procuring its platform on a firm fixed price, commercial item basis, and instead issued a solicitation calling for developmental solutions on a cost-plus basis. On appeal, the Government argued that the COFC erroneously added a requirement to FASA that government market research must “fully investigate” whether commercial items could meet all or part of the agency’s requirements, and that the COFC wrongly substituted its judgment in determining that the Army’s market research was inadequate. Palantir argued that reversal of the COFC decision would “flout” the FASA procedures requiring that agencies acquire commercial items “to the maximum extent possible,” which were designed to prevent federal agencies from “wasting taxpayer funds by developing products that are already available in the commercial marketplace.” The Federal Circuit’s impending decision in this case will have wide reaching impacts on the procurement community and the deference afforded the Government’s market research in developing its solicitation requirements. VIII.  CONCLUSION We will continue to keep you informed on these and other related issues as they develop. The following Gibson Dunn lawyers assisted in preparing this client update: Karen L. Manos, Lindsay M. Paulin, Melinda Biancuzzo, Jessica Altman, Sydney Sherman, and Casper J. Yen. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following: Washington, D.C. Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) David P. Burns (+1 202-887-3786, dburns@gibsondunn.com) Michael Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) Michael K. Murphy(+1 202-995-8238, mmurphy@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Melinda R. Biancuzzo (+1 202-887-3724, mbiancuzzo@gibsondunn.com) Ella Alves Capone (+1 202-887-3511, ecapone@gibsondunn.com) Michael R. Dziuban (+1 202-887-8252, mdziuban@gibsondunn.com) Melissa L. Farrar (+1 202-887-3579, mfarrar@gibsondunn.com) Lindsay M. Paulin (+1 202-887-3701, lpaulin@gibsondunn.com) Laura J. Plack (+1 202-887-3678, lplack@gibsondunn.com) Erin N. Rankin (+1 202-955-8246, erankin@gibsondunn.com) Jeffrey S. Rosenberg (+1 202-955-8297, jrosenberg@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Jeremy S. Ochsenbein (+1 303-298-5773, jochsenbein@gibsondunn.com) Los Angeles Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Maurice M. Suh (+1 213-229-7260, msuh@gibsondunn.com) James L. Zelenay, Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Dhananjay S. Manthripragada (+1 213-229-7366, dmanthripragada@gibsondunn.com) Sean S. Twomey (+1 213-229-7284, stwomey@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 12, 2018 |
Shareholder Proposal Developments During the 2018 Proxy Season

Click for PDF This client alert provides an overview of shareholder proposals submitted to public companies during the 2018 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests. Top Shareholder Proposal Takeaways From the 2018 Proxy Season As discussed in further detail below, based on the results of the 2018 proxy season, there are several key takeaways to consider for the coming year: Shareholder proposals continue to be used by certain shareholders and to demand significant time and attention.  Although the overall number of shareholder proposals submitted decreased 5% to 788, the average support for proposals voted on increased by almost 4 percentage points to 32.7%, suggesting increased traction among institutional investors.  In addition, the percentage of proposals that were withdrawn increased by 6 percentage points to 15%, and the number of proponents submitting proposals increased by 20%.  However, there are also some interesting ongoing developments with respect to the potential reform of the shareholder proposal rules (including the possibility of increased resubmission thresholds). It is generally becoming more challenging to exclude proposals, but the Staff has applied a more nuanced analysis in certain areas.  Success rates on no-action requests decreased by 12 percentage points to 64%, the lowest level since 2015.  This is one reason (among several) why companies may want to consider potential engagement and negotiation opportunities with proponents as a key strategic option for dealing with certain proposals and proponents.  However, it does not have to be one or the other—20% of no-action requests submitted during the 2018 proxy season were withdrawn (up from 14% in 2017), suggesting that the dialogue with proponents can (and should) continue after filing a no-action request.  In addition, companies are continuing to experience high levels of success across several exclusion grounds, including substantial implementation arguments and micromanagement-focused ordinary business arguments.  Initial attempts at applying the Staff’s board analysis guidance from last November generally were unsuccessful, but they laid a foundation that may help develop successful arguments going forward.  The Staff’s announcement that it will consider, in some cases, a board’s analysis in ordinary business and economic relevance exclusion requests provided companies with a new opportunity to exclude proposals on these bases.  Among other things, under the new guidance, the Staff will consider a board’s analysis that a policy issue is not sufficiently significant to the company’s business operations and therefore the proposal is appropriately excludable as ordinary business.  In practice, none of the ordinary business no‑action requests that included a board analysis were successful in persuading the Staff that the proposal was not significant to the company (although one request based on economic relevance was successful).  Nevertheless, the additional guidance the Staff provided through its no-action request decisions should help provide a roadmap for successful requests next year, and, therefore, we believe that companies should not give up on trying to apply this guidance.  It will be important for companies to make a determination early on as to whether they will seek to include the board’s analysis in a particular no-action request so that they have the necessary time to create a robust process to allow the board to produce a thoughtful and well-reasoned analysis. Social and environmental proposals continue to be significant focus areas for proponents, representing 43% of all proposals submitted.  Climate change, the largest category of these proposals, continued to do well with average support of 32.8% and a few proposals garnering majority support.  We expect these proposals will continue to be popular going into next year.  Board diversity is another proposal topic with continuing momentum, with many companies strengthening their board diversity commitments and policies to negotiate the withdrawal of these proposals.  In addition, large asset managers are increasingly articulating their support for greater board diversity. Don’t forget to monitor your EDGAR page for shareholder-submitted PX14A6G filings.  Over the past two years, there has been a significant increase in the number of exempt solicitation filings, with filings for 2018 up 43% versus 2016.  With John Chevedden recently starting to submit these filings, we expect this trend to continue into next year.  At the same time, these filings are prone to abuse because they have, to date, escaped regulatory scrutiny. Click here to READ MORE. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance practice group: Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) Maia Gez – New York (+1 212-351-2612, mgez@gibsondunn.com) Aaron Briggs – San Francisco (415-393-8297, abriggs@gibsondunn.com) Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com) Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 9, 2018 |
Who’s Who Legal Recognizes 24 Gibson Dunn Attorneys

24 Gibson Dunn attorneys were recognized by Who’s Who Legal in their respective fields. In Who’s Who Legal Competition 2018, 20 attorneys were recognized for their work. The list includes Brussels attorneys Peter Alexiadis, Attila Borsos, Jens-Olrik Murach, Elsa Sependa and David Wood; Dallas partners Sean Royall and Robert Walters; Hong Kong partner Sébastien J Evrard; London partner Ali Nikpay; Los Angeles partner Daniel Swanson; New York partner Eric Stock; San Francisco partners Rachel Brass, Trey Nicoud and Gary Spratling; and Washington, D.C. partners Jarrett Arp, Adam Di Vincenzo, Scott Hammond, Joseph Kattan, Richard Parker and Cynthia Richman. In the 2018 Who’s Who Legal M&A and Governance guide, four partners were recognized: Century City partner Jonathan Layne, New York partner Dennis Friedman and Washington, D.C. partners Howard Adler and John Olson. The guides were published on July 9, 2018 and June 8, 2018.

July 9, 2018 |
2018 Mid-Year FCPA Update

Click for PDF The steady clip of Foreign Corrupt Practices Act (“FCPA”) prosecutions set in 2017 has continued apace into the first half of 2018, largely quieting any questions of enforcement of this important statute under the current Administration.  Although this update captures developments through June 30, the enforcers did not have a reprieve for the July 4th holiday, because they announced two corporate enforcement actions in the first week of the month.  From our perspective, all signs point to business as usual at the U.S. Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”), the two regulators charged with enforcing the FCPA. This client update provides an overview of the FCPA as well as domestic and international anti-corruption enforcement, litigation, and policy developments from the first half of 2018. FCPA OVERVIEW The FCPA’s anti-bribery provisions make it illegal to corruptly offer or provide money or anything else of value to officials of foreign governments, foreign political parties, or public international organizations with the intent to obtain or retain business.  These provisions apply to “issuers,” “domestic concerns,” and those acting on behalf of issuers and domestic concerns, as well as to “any person” who acts while in the territory of the United States.  The term “issuer” covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d).  In this context, foreign issuers whose American Depository Receipts (“ADRs”) are listed on a U.S. exchange are “issuers” for purposes of the FCPA.  The term “domestic concern” is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has its principal place of business in the United States. In addition to the anti-bribery provisions, the FCPA also has “accounting provisions” that apply to issuers and those acting on their behalf.  First, there is the books-and-records provision, which requires issuers to make and keep accurate books, records, and accounts that, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets.  Second, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.  Prosecutors and regulators frequently invoke these latter two sections when they cannot establish the elements for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations.  Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency. FCPA ENFORCEMENT STATISTICS The following table and graph detail the number of FCPA enforcement actions initiated by DOJ and the SEC during each of the past 10 years. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (as of 7/06) DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC 26 14 48 26 23 25 11 12 19 8 17 9 10 10 21 32 29 10 11 6 2018 MID-YEAR FCPA ENFORCEMENT ACTIONS The first half of 2018 saw a diverse mix of FCPA enforcement activity, from relatively modest to very large financial penalties, the first-ever coordinated U.S.-French bribery resolution, and numerous criminal prosecutions of individual defendants, particularly for non-FCPA charges arising out of foreign corruption investigations. Corporate FCPA Enforcement Actions There have been 11 corporate FCPA enforcement actions in 2018 to date. Elbit Imaging Ltd. The year’s first corporate FCPA enforcement action involved an aggressive interpretation of the FCPA’s accounting provisions resulting in a relatively modest financial penalty.  On March 9, 2018, Israeli-based holding company and issuer Elbit Imaging settled an SEC-only cease-and-desist proceeding for alleged FCPA books-and-records and internal controls violations.  According to the SEC’s order, between 2007 and 2012 Elbit and an indirect subsidiary paid $27 million to two consultants and one sales agent in connection with real estate projects in Romania and the United States.  Without making direct allegations, the SEC intimated corruption in the Romanian projects by asserting that the two consultants were engaged without any due diligence to facilitate government approvals and were paid significant sums of money without any evidence of work performed.  In connection with the U.S. project, the SEC again asserted that the sales agent was retained without due diligence and paid significant sums of money without evidence of work performed, but in this case concluded that the majority of those funds were embezzled by Elbit’s then-CEO. Without admitting or denying the allegations, Elbit consented to the cease-and-desist proceeding and agreed to pay a $500,000 civil penalty.  The SEC acknowledged Elbit’s self-reporting to U.S. and Romanian authorities, as well as the fact that Elbit is in the process of winding down its operations as factors in setting the modest penalty and lack of any post-resolution monitoring or reporting obligations.  This resolution marks the lowest monetary assessment in a corporate FCPA enforcement action since June 2016 (Nortek, Inc., covered in our 2016 Mid-Year FCPA Update, in which the company paid just more than $320,000 in disgorgement and prejudgment interest). Transport Logistics International, Inc. The first criminal corporate FCPA resolution of 2018 stems from an investigation that we have been following for several years.  On March 12, 2018, Maryland transportation company Transport Logistics International (“TLI”) reached a deferred prosecution agreement with DOJ arising from an alleged scheme to make more than $1.7 million in corrupt payments to an official of JSC Techsnabexport (“TENEX”)—a Russian state-owned supplier of uranium and uranium enrichment services—in return for directing sole-source uranium transportation contracts to the company.  We first reported on this in our 2015 Year-End FCPA Update in connection with guilty pleas by former TLI Co-President Daren Condrey, wife Carol Condrey, TENEX official Vadim Mikerin, and businessman Boris Rubizhevsky.  Rounding out the charges, on January 10, 2018 the other former TLI Co-President Mark Lambert was indicted on 11 counts of FCPA, wire fraud, and money laundering charges. To resolve the charges of conspiracy to violate the FCPA’s anti-bribery provisions, TLI entered into a deferred prosecution agreement and agreed to pay a $2 million criminal penalty, as well as self-report to DOJ on the state of its compliance program over the three-year term of the agreement.  Notably, the $2 million penalty represents a significant departure from the DOJ-calculated fine of $21.4 million, based upon an inability-to-pay analysis by an independent accounting firm hired by DOJ that confirmed TLI’s representation that a penalty greater than $2 million would jeopardize the continued viability of the company.  After a significant colloquy with government and company counsel concerning whether DOJ was being unduly lenient in deferring prosecution, the Honorable Theodore Chuang of the U.S. District Court for the District of Maryland approved of the resolution.  Trial in the case against remaining defendant Lambert is currently set for April 2019. Kinross Gold Corporation On March 26, 2018, the SEC announced a settled cease-and-desist order against Canadian gold mining company Kinross Gold for alleged violations of the FCPA’s accounting provisions.  According to the charging document, in 2010, Kinross acquired two subsidiaries that operated mines in Mauritania and Ghana but, despite due diligence identifying a lack of anti-corruption compliance controls, was slow to implement such controls.  Kinross further allegedly failed to respond to multiple internal audits flagging the inadequate controls, and payments continued to be made to vendors and consultants, often in connection with government interactions, without appropriate efforts to ensure that the funds were not used for improper payments.  Notably, however, the SEC did not allege any specific corrupt payments made by or on behalf of Kinross. Without admitting or denying the allegations, Kinross agreed to pay a $950,000 penalty to resolve the charges.  The SEC’s order does not allege that the company realized profits tied to the misconduct and therefore did not order disgorgement.  The SEC acknowledged Kinross’s remedial efforts, which the company will continue to self-report to the SEC on for one year.  Kinross has stated that DOJ has closed its investigation without taking any enforcement action. The Dun & Bradstreet Corporation On April 23, 2018, the business intelligence company Dun & Bradstreet agreed to settle FCPA accounting charges arising from allegations of improper payments to acquire confidential data in China.  According to the SEC, between 2006 and 2012 two Chinese subsidiaries made payments to Chinese officials and third parties to obtain non-public information that was not subject to lawful disclosure under Chinese law.  One of the subsidiaries and several of its officers were prosecuted and convicted in China for the unlawful procurement of this data. Without admitting or denying the allegations, Dun & Bradstreet consented to the entry of a cease-and-desist order and agreed to disgorge $6.08 million of profits, plus $1.14 million in prejudgment interest, and pay a $2 million civil penalty.  The SEC’s order did not impose ongoing reporting requirements on Dun & Bradstreet and credited the company’s self-disclosure, which occurred after local police conducted a raid at one of the subsidiaries.  Among other remedial actions, Dun & Bradstreet shuttered one of the subsidiaries.  Citing the FCPA Corporate Enforcement Policy, DOJ issued a public letter declining to prosecute Dun & Bradstreet in light of the SEC resolution and other factors. Panasonic Corporation On April 30, 2018, the SEC and DOJ announced the first joint FCPA resolution of 2018, with Japanese electronics company Panasonic and its California-based subsidiary Panasonic Avionics Corporation (“PAC”), respectively.  PAC designs and distributes in-flight entertainment systems and communications services to airlines worldwide.  According to the charging documents, PAC agreed to provide a post-retirement consultancy position to an official at a state-owned airline as PAC was negotiating agreements with the state-owned airline worth more than $700 million.  PAC allegedly paid the official $875,000 for little to no work.  Separately, PAC also allegedly failed to follow its own third-party due diligence protocols in Asia, including by concealing the retention of agents who did not pass screening by employing them as sub-agents to a single qualified agent. To resolve a one-count criminal information charging PAC with causing the falsification of Panasonic’s books and records, PAC entered into a deferred prosecution agreement with DOJ and agreed to pay a $137.4 million criminal fine, a 20% discount from the bottom of the applicable Guidelines range based on the company’s cooperation but failure to voluntarily disclose.  To resolve civil FCPA anti-bribery and accounting violations, as well as allegations that it fraudulently overstated its income in a separate revenue recognition scheme, Panasonic consented to an SEC cease-and-desist order and agreed to pay $143.2 million in disgorgement and prejudgment interest.  Together, the parent and subsidiary agreed to pay combined criminal and regulatory penalties of more than $280 million. In addition to the monetary penalties, PAC agreed to engage an independent compliance monitor for a period of two years to be followed by one year of self-reporting.  In addition to traditional monitor requirements, such as demonstrated FCPA expertise, the deferred prosecution agreement includes an additional proviso to the list of qualifications for monitor selection—diversity—stating that “[m]onitor selections shall be made in keeping with the Department’s commitment to diversity and inclusion.” Société Générale S.A. /Legg Mason, Inc. Closing out the first half of 2018 corporate enforcement in a big way, on June 4, 2018 DOJ announced two separate but related FCPA enforcement actions with French financial services company Société Générale (“SocGen”) and Maryland-based investment management firm Legg Mason, Inc.  Both resolutions stem from SocGen’s payment of more than $90 million to a Libyan intermediary, while allegedly knowing that the intermediary was using a portion of those payments to bribe Libyan government officials in connection with $3.66 billion in investments placed by Libyan state-owned banks with SocGen.  A number of those investments were managed by a subsidiary of Legg Mason. To settle the criminal FCPA bribery and conspiracy charges, SocGen entered into a deferred prosecution agreement and had a subsidiary plead guilty.  SocGen also simultaneously resolved unrelated criminal fraud charges of rigging LIBOR rates.  Further, in the first U.S.-French coordinated resolution in a foreign bribery case, SocGen also reached a parallel resolution with the Parquet National Financier (“PNF”) in Paris.  After netting out offsets between the bribery resolutions, SocGen agreed to pay $292.78 million to DOJ and $292.78 million to French authorities, in addition to $275 million to resolve DOJ’s LIBOR-related allegations.  Adding $475 million paid to the U.S. Commodity Futures Trading Commission in the LIBOR case, the total price tag well exceeds $1.3 billion. Legg Mason had a somewhat lesser role in the alleged corruption scheme, reflected in the fact that it was permitted to enter into a non-prosecution agreement with DOJ with a $64.2 million price tag.  Nearly half of the DOJ resolution amount is subject to a potential credit “against disgorgement paid to other law enforcement authorities within the first year of the [non-prosecution] agreement,” a seeming anticipatory nod to a forthcoming FCPA resolution with the SEC. Both companies will self-report to DOJ over the course of the three-year term of their respective agreements.  Neither was required to retain a compliance monitor, although the principal reasoning for lack of monitor in the SocGen case appears to be that the bank will be subject to ongoing monitoring by France’s L’Agence Française Anticorruption. Beam Suntory Inc. Trailing into the second half of 2018, on July 2, 2018 the SEC announced an FCPA resolution with Chicago-based spirits producer Beam Suntory relating to allegations of improper payments to government officials in India.  According to the SEC, from 2006 through 2012 senior executives at Beam India directed efforts by third parties to make improper payments to increase sales, process license and label registrations, obtain better positioning on store shelves, and facilitate distribution.  The allegations include an interesting cameo by the SEC’s 2011 FCPA resolution with Beam competitor Diageo plc (covered in our 2011 Year-End FCPA Update).  The SEC alleged that after the Diageo enforcement action was announced, Beam sent an in-house lawyer to India to investigate whether similar conduct was occurring at Beam India and to implement additional FCPA training.  This review led to a series of investigations culminating in a voluntary disclosure to the SEC. Without admitting or denying the allegations, Beam consented to the entry of a cease-and-desist order to resolve FCPA accounting provision charges and agreed to disgorge $5.26 million of profits, plus $917,498 in prejudgment interest, and pay a $2 million civil penalty.  The SEC’s order did not impose ongoing reporting requirements on Beam and acknowledged the company’s voluntary self-disclosure, cooperation with the SEC’s investigation, and the remedial actions taken by the company, including ceasing operations at Beam India until Beam was satisfied it could operate in a compliant manner.  Beam has announced that it is continuing to cooperate in a DOJ investigation. Credit Suisse Group AG Further trailing into the second half of 2018, on July 5 DOJ and the SEC announced the second joint FCPA resolution of 2018 with Swiss-based financial services provider and issuer Credit Suisse.  According to the charging documents, between 2007 and 2013 Credit Suisse’s Hong Kong subsidiary hired more than 100 employees at the request of Chinese government officials.  These so-called “relationship hires” were allegedly made to encourage the referring officials to direct business to Credit Suisse and despite the fact that, in many cases, these applicants did not possess the technical skills and qualifications of those not referred by foreign officials. To resolve the criminal investigation, Credit Suisse’s Hong Kong subsidiary entered into a non-prosecution agreement and agreed to pay a criminal penalty of just over $47 million.  Notably, Credit Suisse received only a 15% discount from the bottom of the Guidelines range (rather than the maximum 25% available under the FCPA Corporate Enforcement Policy for non-voluntary disclosures) because its cooperation was, allegedly, “reactive and not proactive” and “because it failed to sufficiently discipline employees who were involved in the misconduct.”  Credit Suisse will self-report on the status of its compliance program over the three-year term of the agreement. To resolve the SEC investigation, the parent company consented to a cease-and-desist proceeding alleging violations of the FCPA’s anti-bribery and internal controls provisions and agreed to pay nearly $25 million in disgorgement plus more than $4.8 million in prejudgment interest.  This brings the total monetary resolution to nearly $77 million. Prior examples of so-called “princeling” FCPA resolutions include JPMorgan Chase & Co. (covered in our 2016 Year-End FCPA Update), Qualcomm, Inc. (covered in our 2016 Mid-Year FCPA Update), and Bank of New York Mellon Corp. (covered in our 2015 Year-End FCPA Update). Individual FCPA and FCPA-Related Enforcement Actions The number of FCPA prosecutions of individual defendants during the first half of 2018 was a relatively modest half dozen, including the indictment of former TLI Co-President Mark Lambert discussed above.  But that number masks the true extent of FCPA-related enforcement as DOJ brought twice that many prosecutions in money laundering and wire fraud actions arising out of FCPA investigations.  In large part, these non-FCPA charges are a result of DOJ pursuing the foreign official recipients of bribe payments, who cannot be charged under the FCPA but can be charged with criminal offenses (including money laundering) associated with the receipt of those bribes. FCPA-Related Charges in Och-Ziff Case In our 2017 Mid-Year FCPA Update, we covered civil FCPA charges filed by the SEC against former Och-Ziff Capital Management Group LLC executive Michael L. Cohen.  On January 3, 2018, a criminal indictment was unsealed charging Cohen with 10 counts of investment adviser fraud, wire fraud, obstruction of justice, false statements, and conspiracy.  According to the indictment, Cohen violated his fiduciary duties to a charitable foundation client by failing to disclose his personal interest in investments he promoted relating to an African mining operation and then engaged in obstructive acts to cover up the transaction after the SEC began investigating. Cohen has pleaded not guilty to all charges.  No trial date has been set. Additional FCPA and FCPA-Related Charges in PDVSA Case We have been reporting on DOJ’s investigation of a corrupt pay-to-play scheme involving Venezuela’s state-owned energy company, Petróleos de Venezuela S.A. (“PDVSA”), since our 2015 Year-End FCPA Update.  On February 12, 2018, DOJ unsealed and announced charges against five new defendants for their alleged participation in the scheme:  Luis Carolos De Leon Perez, Nervis Gerardo Villalobos Cardenas, Cesar David Rincon Godoy, Rafael Ernesto Reiter Munoz, and Alejandro Isturiz Chiesa.  All five defendants are charged with money laundering; De Leon and Villalobos are additionally charged with FCPA conspiracy. According to the indictment, in 2011 PDVSA found itself in significant financial distress relating to the sharp reduction in global oil prices.  Knowing that the agency would be unable to pay all of its vendors, the five defendants (the three non-FCPA defendants with PDVSA and the two FCPA defendants as brokers) concocted a scheme to solicit PDVSA vendors to obtain preferential treatment in payment only if they agreed to kickback 10% of the payments to the defendants. Four of the five defendants were arrested in Spain in October 2017, whereas Isturiz remains at large.  Cesar Rincon was extradited from Spain in early February and, on April 19, 2018, pleaded guilty to one count of money laundering conspiracy and was ordered to forfeit $7 million, pending a summer sentencing date.  De Leon, a U.S. citizen, has been extradited to the United States and has pleaded not guilty, although pre-trial filings suggest that a plea agreement may be in the works.  Villalobos and Reiter remain in Spanish custody pending extradition proceedings. These charges bring to 15 the number of defendants charged (publicly) in the wide-ranging PDVSA corruption investigation.  With Cesar Rincon, 11 of the 15 have now pleaded guilty. Additional FCPA Charges in U.N. Bribery Case We have been reporting on FCPA and non-FCPA charges associated with a scheme to bribe U.N. ambassadors to influence, among other things, the development of a U.N.-sponsored conference center in Macau, since our 2015 Year-End FCPA Update.  On April 4, 2018, Julia Vivi Wang, a former media executive who promoted U.N. development goals, pleaded guilty to three counts of FCPA bribery, conspiracy, and tax evasion in connection with her role in the scheme.  Wang was originally charged in March 2016, but a superseding charging document was filed in 2018.  Wang’s sentencing has been set for September 5, 2018. Additional FCPA and FCPA-Related Charges in Petroecuador Case In our 2017 Year-End FCPA Update, we reported on the money laundering indictment of Marcelo Reyes Lopez, a former executive of Ecuadorian state-owned oil company Petroecuador.  Lopez pleaded guilty on April 11, 2018 to money laundering conspiracy in connection with his alleged receipt of bribes. On March 28, 2018, another former Petroecuador executive, Arturo Escobar Dominguez, likewise pleaded guilty to one count of conspiracy to commit money laundering.  Then, on April 19, 2018, a grand jury in the Southern District of Florida returned an indictment charging two additional defendants:  Frank Roberto Chatburn Ripalda and Jose Larrea.  Chatburn is charged with FCPA bribery, money laundering, and conspiracy in connection with his alleged payment of $3.27 million in bribes to Petroecuador officials to obtain $27.8 million in contracts for his company.  Larrea is charged with conspiracy to commit money laundering in connection with the scheme.  Chatburn has yet to be arraigned, and Larrea has pleaded not guilty with a current trial date of August 2018. New FCPA and FCPA-Related Charges in Setar Case In April 2018, charges against a former Florida telecommunications company executive, Lawrence W. Parker, Jr., and a former official of the Aruban state-owned telecommunications company Servicio di Telecomunicacion di Aruba N.V. (“Setar”), Egbert Yvan Ferdinand Koolman, were unsealed in the U.S. District Court for the Southern District of Florida.  According to the charging documents, Koolman accepted $1.3 million in bribes from Parker and others, for several years, in exchange for providing confidential information concerning Setar business opportunities.  Parker was charged with one count of FCPA conspiracy and Koolman with one count of money laundering conspiracy. Both Parker and Koolman have pleaded guilty and have been sentenced to 35 and 36 months in prison, in addition to $700,000 and $1.3 million in restitution, respectively. New FCPA-Related Charge in HISS Case In our 2015 Mid-Year FCPA Update, we covered DOJ’s civil action to forfeit nine New Orleans properties—worth approximately $1.5 million—filed in the U.S. District Court for the Eastern District of Louisiana.  On April 27, 2018, a grand jury sitting in the same district returned an indictment criminally charging Carlos Alberto Zelaya Rojas, the nominal owner of those properties, with 12 counts of money laundering and other offenses associated with the impediment of the civil forfeiture proceedings.  According to the indictment, Zelaya is the brother of the former Executive Director of the Honduran Institute of Social Security (“HISS”).  The brother, who according to press reports was criminally charged in Honduras, allegedly received millions of dollars in bribes from two Honduran businessmen.  Zelaya then assisted with the laundering of at least $1.3 million of those bribe payments, including through the purchase of the nine properties. On June 27, 2018, Zelaya pleaded guilty to a single count of money laundering conspiracy and has been detained pending an October sentencing date.  As part of this plea, Zelaya consented to the forfeiture of the nine properties. Additional FCPA-Related Charges in Rolls-Royce Case In our 2017 Mid-Year FCPA Update, we covered the multi-jurisdictional resolution of criminal bribery charges against UK engineering company Rolls-Royce.  The corporate charges were then supplemented by FCPA and FCPA-related charges against five individual defendants as reported in our 2017 Year-End FCPA Update.  On May 24, 2018, DOJ announced a superseding indictment that charged two new defendants—Vitaly Leshkov and Azat Martirossian—with money laundering charges associated with the Rolls-Royce bribery scheme. According to the indictment, Leshkov and Martirossian were employees of a technical advisor to a state-owned joint venture between the governments of China and Kazakhstan, formed to transport natural gas between the two nations.  In this capacity, they allegedly “had the ability to exert influence over decisions” by the state-owned joint venture and accordingly qualified as foreign officials even though they had no official government positions.  They then participated in a scheme to solicit bribes on behalf of employees of the state-owned joint venture from employees of Rolls-Royce. Neither Martirossian nor Leshkov have made a physical appearance in U.S. court to answer the charges.  Nevertheless, Martirossian already has moved to dismiss the indictment as described immediately below. 2018 MID-YEAR CHECK-IN ON FCPA ENFORCEMENT LITIGATION Martirossian Motion to Dismiss As just described, Azat Martirossian was indicted on May 24, 2018 on money laundering charges associated with the alleged Rolls-Royce bribery scheme in China and Kazakhstan.  Although Martirossian reportedly remains in China and has yet to make a physical appearance in U.S. court, he very quickly filed a motion to dismiss the indictment on the grounds that it insufficiently alleges a U.S. nexus.  The motion also contests the “aggressive theory” that Martirossian qualifies as a “foreign official” under the FCPA based on his work as a technical advisor to a state-owned entity. DOJ’s initial response briefly contests Martirossian’s arguments on the merits, but focuses more on DOJ’s contention that the motion should be held in abeyance until Martirossian submits himself to the jurisdiction of the Court pursuant to the fugitive disentitlement doctrine.  The motion remains pending before Chief Judge Edmund A. Sargus of the U.S. District Court for the Southern District of Ohio. Ho Motion to Dismiss We reported in our 2017 Year-End FCPA Update on the December 2017 indictment of Chi Ping Patrick Ho, the head of a Chinese non-governmental organization that holds “special consultative status” at the United Nations, on FCPA and money laundering charges associated with his alleged role in corruption schemes involving Chad and Uganda.  After pleading not guilty earlier this year, on April 16 Ho filed a motion to dismiss certain of the counts.  Ho argues, among other things, that the indictment inconsistently charges him with violating both 15 U.S.C. § 78dd-2, which applies to “domestic concerns,” and § 78dd-3, which applies to persons who act within U.S. territory in furtherance of a bribe.  Ho additionally contends that the money laundering charges fail because they cannot be based on wires sent from one foreign jurisdiction to another foreign jurisdiction—here Hong Kong to Dubai and Uganda—with no U.S. nexus other than the fact that they passed through a New York bank account.  DOJ, as one would expect, opposed the motion, which remains pending before the Honorable Loretta A. Preska of the U.S. District Court for the Southern District of New York.  Denial of Ng Seng’s Motion for New Trial / Sentencing We covered in our 2017 Year-End FCPA Update the conviction after trial of Macau billionaire Ng Lap Seng on FCPA, federal programs bribery, and money laundering charges associated with his role in a scheme to pay more than $1 million in bribes to two U.N. officials in connection with, among other things, a plan to build a U.N.-sponsored conference center in Macau.  Seng subsequently filed a Rule 33 motion for a new trial, arguing that DOJ introduced a new theory of liability at trial, constituting an amendment of or prejudicial variance from the indictment, as well as that the Government’s key witness, cooperating defendant Francis Lorenzo, committed perjury at trial, which DOJ failed adequately to investigate and correct. On May 9, 2018, the Honorable Vernon S. Broderick of the U.S. District Court for the Southern District of New York denied the motion.  In a lengthy opinion, steeped in the facts of the four-week trial, the Court found that there was no constructive amendment of or prejudicial variance from the superseding indictment based on the evidence adduced at trial, and further that Seng failed to meet his burden of establishing perjury by Lorenzo, and that even if there had been perjury it was not material to the jury’s verdict. Judge Broderick subsequently sentenced Seng to 48 months in prison and ordered approximately $1.8 million in forfeiture and restitution.  Seng has appealed to the Second Circuit, which in an early ruling denied Seng’s motion for bail pending appeal but ordered his appeal to be expedited. In the same case, on February 28, 2018, Judge Broderick sentenced Seng’s co-defendant and former assistant, Jeff Yin, to 7 months in prison and nearly $62,000 in restitution for his tax evasion conviction. Motion to Intervene in Och-Ziff Sentencing Proceedings As reported in our 2016 Year-End FCPA Update, New York-based hedge fund Och-Ziff Capital Management Group LLC, together with its investment advisor subsidiary, reached a coordinated FCPA resolution with DOJ and the SEC in September 2016, pursuant to which the entities agreed to pay just over $412 million in total.  After several adjournments of the sentencing hearing, on February 20, 2018 a self-styled victim of Och-Ziff’s alleged corruption, Africo Resources Limited, filed a letter with the Court asserting that it is entitled to a share of the proceeds collected by DOJ pursuant to the Mandatory Victim Restitution Act.  Och-Ziff, represented by Gibson Dunn, has filed a submission disputing Africo Resources’ claims.  The Honorable Nicholas G. Garaufis of the U.S. District Court for the Eastern District of New York has yet to rule. SEC Proceedings Against Och-Ziff Defendants Stayed As reported in our 2017 Year-End FCPA Update, former Och-Ziff executive Michael Cohen and analyst Vanja Baros filed motions to dismiss the civil FCPA proceedings brought against them by the SEC.  After those motions were fully briefed and argued, but pending ruling, DOJ unsealed an indictment that charged Cohen criminally as discussed above. On February 9, 2018, DOJ filed a motion to intervene and stay the SEC civil suit on the grounds that the facts of the civil cases overlap substantially with the criminal case, even though the indictment does not allege FCPA violations.  Cohen and Baros did not object to a stay of the SEC case, but requested that the Court rule on their pending motions to dismiss first.  On May 11, 2018, the Honorable Nicholas G. Garaufis granted DOJ’s motion to stay discovery in the SEC’s case, but denied the request to stay ruling on the motions to dismiss.  A decision on those motions remains pending. Khoury’s Motion to Unseal Indictment We reported in our 2017 Year-End FCPA Update on the unorthodox motion filed by Samir Khoury to unseal an indictment against him that may or may not exist.  Khoury, a former consultant named in prior FCPA corporate resolutions as “LNG Consultant,” contends that it is likely that there is an indictment pending against him under seal since approximately 2009, waiting for him to travel to the United States or another country with an extradition treaty.  Khoury asserts that the indictment should be unsealed and then dismissed given the prejudicial effect of the passage of time. Oral argument on the motion was heard before the Honorable Keith P. Ellison of the U.S. District Court for the Southern District of Texas on March 22, 2018.  At the hearing, Khoury’s counsel presented argument that 12 potential defense witnesses have died since 2009, and that Khoury has been unable to open bank accounts in his native Lebanon and has lost business opportunities because of his perceived affiliation with the Bonny Island scheme.  In response, attorneys for DOJ refused to acknowledge whether Khoury had or had not been indicted, but indicated that if an indictment did exist it could hold the indictment under seal indefinitely. On June 11, 2018, Judge Ellison issued a Memorandum Opinion and Order.  He first pushed aside DOJ’s “issue preclusion” arguments that decisions from several years prior resolve this matter, holding that the three years that has passed since that litigation represent a changed circumstance warranting another look.  Similarly, the Court rejected DOJ’s “fugitive disentitlement” argument, holding that Khoury is not a fugitive because he did not abscond from the United States but rather has at all relevant times been living in his native Lebanon.  Judge Ellison gave DOJ 20 days to submit to the Court, in camera, any evidence it “wishes to adduce in opposition to Mr. Khoury’s Motion to Unseal.” DOJ filed a sealed pleading on July 2, 2018.  The next day, Khoury filed a motion to unseal any portion of that pleading that was beyond the contours of what the Court permitted.  This motion, as well as the underlying motion to unseal and dismiss, remain pending. Guilty Plea in Vietnamese Skyscraper Case In our 2017 Mid-Year FCPA Update, we reported on the indictment of New Jersey real estate broker Joo Hyun Bahn in connection with a feigned plot to bribe an official of the sovereign wealth fund of a Middle Eastern country (subsequently identified as Qatar) to induce the official to cause the fund to purchase a skyscraper in Hanoi.  The alleged agent of the sovereign wealth fund subsequently admitted that the bribery plot was a sham and that he pocketed the bribe payment. On January 5, 2018, Bahn pleaded guilty to one count of FCPA conspiracy and one count of violating the FCPA in the U.S. District Court for the Southern District of New York.  His sentencing is scheduled for September 6, 2018 before the Honorable Edgardo Ramos. Guilty Plea in Siemens Case As reported in our 2017 Year-End FCPA Update, former Siemens executive Eberhard Reichert was extradited to the United States, following his arrest in Croatia, to face a December 2011 indictment charging him and seven others in relation to their alleged roles in a scheme to bribe Argentine officials in connection with a $1 billion contract to create national identity cards. On March 15, 2018, Reichert pleaded guilty in the U.S. District Court for the Southern District of New York to one count of conspiring to violate the anti-bribery, internal controls, and books-and-records provisions of the FCPA and to commit wire fraud.  Reichert awaits a sentencing date before the Honorable Denise L. Cote. 2018 MID-YEAR FCPA-RELATED DEVELOPMENTS In addition to the enforcement activity covered above, the first six months of 2018 saw DOJ issue important guidance on how it will administer criminal enforcement, as well as a Supreme Court decision with significant ramifications for FCPA whistleblowers. DOJ Announces “Piling On” Policy On May 9, 2018, Deputy Attorney General Rod J. Rosenstein introduced a new DOJ “Policy on Coordination of Corporate Resolution Penalties.”  Announcing the policy at a New York City Bar event, Rosenstein said that it attempts to discourage “piling on” by different enforcement authorities punishing the same company for the same conduct. Incorporated in Sections 1-12.100 and 9-28.1200 of the U.S. Attorneys’ Manual, the new policy directs federal prosecutors to “consider the totality of fines, penalties, and/or forfeiture imposed by all Department components as well as other law enforcement agencies and regulators in an effort to achieve an equitable result.”  The policy has four key components: First, prosecutors may not use the specter of criminal prosecution as leverage in negotiating a civil settlement; Second, if multiple DOJ components are investigating the same company for the same conduct, they should coordinate to avoid duplicative penalties; Third, DOJ should coordinate with and consider fines, penalties, and/or forfeiture paid to other federal, state, local, or foreign enforcement authorities investigating the same company for the same conduct; and Fourth, the policy sets forth factors DOJ should consider in determining whether multiple penalties are appropriate, including the egregiousness of wrongdoing, statutory requirements, the risk of delay in achieving resolution, and the adequacy and timeliness of a company’s disclosures to and cooperation with DOJ. In our view, the policy largely reflects pre-existing DOJ practice in the FCPA arena, where DOJ routinely coordinates resolutions with the SEC and, increasingly, participates in cross-border resolutions by, among other things, crediting a company’s payments to foreign enforcement authorities in calculating the U.S. criminal fine.  We covered this latter phenomenon in our 2017 Year-End FCPA Update. Supreme Court Decision Resolves Dispute Over Who is a “Whistleblower” On February 21, 2018, the U.S. Supreme Court unanimously held in Digital Realty Trust, Inc. v. Somers that the anti-retaliation provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act covers only those who report an alleged violation of the federal securities laws to the SEC.  The Court’s decision reversed a Ninth Circuit ruling that Dodd-Frank’s anti-retaliation provision also covers employees who report such issues internally without reporting them to the SEC.  Although the statutory definition of a “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the [SEC], in a manner established . . . by the [SEC],” appeared to be clear to all nine justices, this issue had sharply divided the lower courts in recent years. The holding in Digital Realty has been interpreted by some as a harbinger of future potential whistleblowers bypassing internal reporting channels and going directly to the SEC to ensure they are protected.  Although we agree that the Court’s decision could affect the decision-making calculus of a would-be whistleblower, studies routinely show that the vast majority of employees report their concerns internally first, and that they report externally only after they feel their concerns have not been adequately addressed.  We are not certain that this phenomenon will change, at least dramatically, and we thus advise our clients and friends that it is more important now than ever for companies to scrutinize their internal policies and procedures to ensure that they encourage internal reporting, protect those who do, and robustly investigate the concerns expressed.  For more on the Supreme Court’s decision, please see our Client Alert, “Supreme Court Says Whistleblowers Must Report to the SEC Before Suing for Retaliation Under Dodd-Frank.” 2018 MID-YEAR KLEPTOCRACY FORFEITURE ACTIONS We continue to follow DOJ’s Kleptocracy Asset Recovery Initiative, spearheaded by DOJ’s Money Laundering and Asset Recovery Section.  The initiative uses civil forfeiture actions to freeze, recover, and, in some cases, repatriate the proceeds of foreign corruption.  The first half of 2018 saw continued coordination between attorneys from MLARs and DOJ’s FCPA Unit, as they have been frequently appearing in one another’s enforcement actions, working hand-in-glove across section lines.  As stated by then-Acting Deputy Assistant Attorney General (now Gibson Dunn partner) M. Kendall Day in his February 6, 2018 testimony before the Senate Committee on the Judiciary, “One of the most effective ways to deter criminals . . . is to follow the criminals’ money, expose their activity and prevent their networks from benefitting from the enormous power of [the U.S.] economy and financial system.” In our 2016 and 2017 Year-End FCPA Updates, we reported on DOJ’s massive civil forfeiture action seeking to recover more than $1 billion in assets associated with Malaysian sovereign wealth fund 1Malaysia Development Berhad (“1MDB”).  In February 2018, a 300-foot superyacht allegedly bought with money stolen from 1MDB was impounded on behalf of U.S. authorities off the coast of Bali.  DOJ seeks to bring the yacht to the United States where it can be taken into U.S. government custody and sold.  In March, Hollywood production company Red Granite Pictures (the company that produced The Wolf of Wall Street) agreed to pay $60 million to resolve a civil lawsuit stemming from the DOJ’s investigation.  Red Granite was co-founded by the stepson of the Malaysian prime minister, and DOJ alleged that three of Red Granite’s productions were funded with money stolen from 1MDB. 2018 MID-YEAR FCPA-RELATED PRIVATE CIVIL LITIGATION We continue to observe that although the FCPA does not provide for a private right of action, various causes of action are employed by civil litigants in connection with losses allegedly associated with FCPA-related conduct.  A selection of matters with developments in the first half of 2018 follows. Shareholder Lawsuits Centrais Electricas Brasileiras S.A. (“Eletrobras”):  On May 2, 2018, Eletrobras entered into a $14.75 million settlement agreement with shareholders to resolve claims that the government-controlled utility made misrepresentations in its public filings regarding the company’s financials and internal controls in connection with a bid-rigging scheme for service and engineering contracts.  In a press release, Eletrobras stated that it made no admission of wrongdoing or misconduct, but entered into the agreement for the best interests of its shareholders.  A hearing on the proposed settlement is scheduled before the Honorable John G. Koeltl of the U.S. District Court for the Southern District of New York on July 17, 2018. Cobalt International Energy, Inc.:  On April 5, 2018, the U.S. Bankruptcy Court for the Southern District of Texas approved a Chapter 11 plan by Cobalt on the heels of a consolidated class action against the exploration and production company for material misrepresentations regarding an alleged bribery scheme involving Angolan officials and the true potential of the company’s Angolan wells.  In June 2017, the Honorable Nancy F. Atlas certified a class of investors who purchased the company’s securities between March 2011 and November 2014.  In February 2018, the plaintiffs voluntarily dismissed the class action without prejudice because of the bankruptcy proceedings. Embraer S.A.:  On March 30, 2018, the U.S. District Court for the Southern District of New York dismissed a class action lawsuit against Brazilian-based aircraft manufacturer Embraer, which had contended that Embraer made false statements in its securities filings pertinent to its 2016 FCPA resolution.  In dismissing the suit, the Honorable Richard M. Berman explained that a company’s filings need not constitute a wholesale “confession” and that companies “do not have a duty to disclose uncharged, unadjudicated wrongdoing.”  The Court found that Embraer properly disclosed that it might have to pay fines or incur sanctions as a result of the investigation, that the company’s financial statements were accurate, and that because Embraer’s code of ethics was “inherently aspirational,” an undisclosed breach of the code was not actionable under the securities laws. Petróleo Brasileiro S.A. – Petrobras:  On June 4, 2018, the U.S. District Court for the Southern District of New York held a final settlement hearing for a securities class action brought against Brazil’s state oil company Petrobras.  As previously reported in our 2017 Mid-Year FCPA Update, the class action plaintiffs—purchasers of Petrobras securities in the United States—alleged that Petrobras made materially false and misleading statements about its earnings and assets as part of a far-reaching money laundering and bribery scheme in Brazil.  The settlement, which does not involve any admission of wrongdoing or misconduct by Petrobras and, in fact, includes an express denial of liability, resolves these claims for a total of $2.95 billion paid by Petrobras plus an additional $50 million paid by its external auditor, PricewaterhouseCoopers Auditores Independentes (“PwC Brazil”).  In a series of opinions and orders from June 25 to July 2, 2018, the Honorable Jed S. Rakoff approved of the settlement, but reduced counsel fees for the plaintiffs by nearly $100 million, to just over $200 million total. Civil Fraud / RICO Actions Bermuda As reported in our 2017 Mid-Year FCPA Update, the Government of Bermuda filed a Racketeer Influenced and Corrupt Organizations Act (“RICO”) lawsuit in U.S. District Court for the District of Massachusetts against Lahey Clinic, Inc., alleging that, for nearly two decades, the defendants conspired with Dr. Ewart Brown—the former Premier of Bermuda, a member of Bermuda’s Parliament, and the owner of two private health clinics in Bermuda—to receive preferential treatment.  On March 8, 2018, the Honorable Indira Talwani granted Lahey’s motion to dismiss, finding the Government of Bermuda had failed to demonstrate that it had suffered an injury to its U.S.-held business or property as a result of the alleged schemes. EIG Global Energy Partners Litigation In our 2017 Mid-Year FCPA Update we covered the civil fraud lawsuit against Petrobras filed by various investment funds, including EIG Global Energy Partners, alleging the funds lost their investment in an offshore drilling project known as “Sete” as a result of the Operation Car Wash scandal.  On March 30, 2017, the U.S. District Court for the District of Columbia largely denied Petrobras’s motion to dismiss, finding in relevant part that Petrobras was not immune from civil lawsuit under the Foreign Sovereign Immunities Act (“FSIA”) because the suit concerned Petrobras’s commercial activities having a “direct effect” in the United States.  Petrobras took an interlocutory appeal of the FSIA ruling. On July 3, 2018, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the judgment of the district court in a 2-1 decision authored by the Honorable Karen L. Henderson.  “Although a foreign state is presumptively immune from the jurisdiction of United States courts,” the Court held that the “direct-effect” exception to the FSIA applied on the facts as alleged by EIG in its complaint, while at the same time acknowledging that other “third-party lenders might have also injured EIG” and that the “locus” of the tort was foreign.  The Honorable David B. Sentelle filed a dissenting opinion in which he concluded that the requisite “direct effect” on U.S. commerce had not been established sufficiently to divest Petrobras of its presumptive right to immunity from suit in the U.S. courts. This is not the only RICO litigation initiated by EIG arising out of its failed Brazilian investment.  As summarized in our 2017 Year-End FCPA Update, in December 2017 Keppel Offshore & Marine Ltd. paid more than $422 million in penalties for its alleged bribery scheme with Brazilian government officials, including officials at Petrobras.  On February 6, 2018, EIG funds that had invested with Keppel filed suit in the U.S. District Court for the Southern District of New York seeking more than $660 million in damages for alleged RICO violations.  Plaintiffs allege that Keppel did not disclose its scheme to bribe Brazilian officials to secure contracts for the Sete project, and, after being discovered, the bribery scheme effectively wiped out EIG’s $221 million investment.  EIG has since amended its complaint to add additional predicate acts, and a briefing schedule for the motion to dismiss has been issued by the Honorable Paul G. Gardephe. Harvest Natural Resources On February 16, 2018, a recently-defunct Texas-based energy company, Harvest Natural Resources, Inc., filed suit in the U.S. District Court for the Southern District of Texas against various individuals and entities affiliated with the Venezuelan government and Venezuela’s state oil company, PDVSA.  The complaint alleges that, because Harvest refused to pay four separate bribes to Venezuelan officials in the pay-to-play scheme resulting in criminal prosecutions as described above, the Venezuelan government wrongfully refused to approve the sale of Harvest’s energy assets, forcing Harvest to sell the assets to a different buyer at a loss of approximately $470 million.  The complaint further alleges that by requiring bribes to approve sales, Venezuela tainted the market and made it impossible for law-abiding companies to conduct business within the country.  The complaint claims that the defendants violated both the RICO and antitrust laws. On April 30, 2018, the defendants moved to dismiss the suit for failure to state a claim.  On May 11, 2018 Chief Judge Lee H. Rosenthal granted Harvest’s motion for jurisdictional discovery to test defendants’ jurisdictional ties and contacts. Setar On March 3, 2017, Setar, N.V., filed a civil suit in the U.S. District Court for the Southern District of Florida against several individuals and entities, including Lawrence W. Parker, Jr. and former Setar official Egbert Yvan Ferdinand Koolman, who as discussed above pleaded guilty to one count of FCPA conspiracy and one count of money laundering conspiracy, respectively.  In relevant part, an amended complaint filed in February 2018 alleges that Koolman orchestrated a years-long scheme to steal more than $15 million from Setar through kickbacks and other improper means.  According to Setar’s amended complaint, when the Panama Papers (covered in our 2016 Mid-Year FCPA Update) became public and linked Koolman to a British Virgin Islands company, this led to an internal investigation that resulted in Koolman’s termination and the identification of the scheme.  Various motions to dismiss have been filed, and the proceedings are ongoing. FCPA-Related FOIA Litigation 100Reporters LLC We have been covering for several years the Freedom of Information Act (“FOIA”) lawsuit filed by media organization 100Reporters against DOJ in the U.S. District Court for the District of Columbia.  100Reporters sought records relating to DOJ’s 2008 FCPA resolution with Siemens AG and the monitorship reports prepared by Dr. Theo Waigel and his U.S. counsel, F. Joseph Warin of Gibson Dunn. As discussed in our 2017 Mid-Year FCPA Update, on March 31, 2017, the Honorable Rudolph Contreras granted defendants’ motions for summary judgment, in part, and denied in its entirety 100Reporters’ cross-motion for summary judgment.  The Court accepted Gibson Dunn’s position on behalf of Dr. Waigel that the “consultant corollary” to the deliberative process privilege may extend to communications between a government agency and an independent monitor and thereby shield information from disclosure under FOIA Exemption 5—the first time a court has applied the consultant corollary to a compliance monitor.  Judge Contreras denied summary judgment on these grounds because DOJ did not specifically identify the deliberative process at issue with respect to each type of documents withheld by DOJ, and left the door open for defendants to submit further affidavits to support this argument.  The Court also ordered DOJ to submit a copy of one monitorship work plan and one monitorship report for in camera review to assess whether any of the withheld materials could be segregated from non-exempt material. In response to the Court’s order, DOJ submitted two new declarations from DOJ personnel involved in the monitorship, an amended chronology of events supporting the deliberative process privilege, and the materials required for in camera review.  DOJ and 100Reporters filed renewed cross-motions for summary judgment. On June 18, 2018, the Court granted in part and denied in part both sets of cross-motions for summary judgment.  Judge Contreras scrutinized the materials submitted by DOJ and held that DOJ’s Exemption 4 withholdings were overbroad and although DOJ had justified withholding certain information under Exemption 5, those withholdings also were overbroad.  Ultimately, the Court determined that certain materials should be produced to 100Reporters; however, the Court determined that DOJ properly withheld the monitorship reports themselves (aside from a single, brief “best practices” subsection of each report), as well as draft work plans, presentations by the Monitor to DOJ, and correspondence among the Monitor, monitorship team, and DOJ.  Thus, the core monitorship materials, including the monitorship reports, will be withheld.  Judge Contreras ordered DOJ to reexamine its withholdings and redactions in light of the Court’s guidance and disclose the newly identified non-exempt information to 100Reporters. Monitor Candidates As covered in our 2016 Year-End and 2017 Mid-Year FCPA Updates, GIR Just Anti-Corruption journalist Dylan Tokar filed a December 2016 FOIA lawsuit in the U.S. District Court for the District of Columbia seeking disclosure of the names of corporate compliance monitor candidates submitted by 15 companies that settled FCPA charges through agreements that contained a monitorship requirement, as well as information regarding the DOJ committee tasked with evaluating and selecting such candidates.  In 2017, DOJ provided the identity of some of the firms associated with the monitorship candidates and certain information about the DOJ committee—but withheld the names of the candidates who were not selected, citing privacy concerns reflected in FOIA Exemptions 6 and 7(C).  When DOJ refused to answer a second request for the candidate names, the parties cross-moved for summary judgment. On March 29, 2018, the Honorable Rudolph Contreras granted GIR Just Anti-Corruption‘s motion for summary judgment.  The Court rejected DOJ’s contention that the FOIA request would not lead to enhanced public understanding of the monitor selection process, instead concluding that GIR Just Anti-Corruption “sufficiently demonstrated that the public interest will be significantly served by the release of these names.”  The Court also rejected DOJ’s argument that its refusal to disclose the names of monitorship candidates fell under FOIA exemption 7(C), which traditionally shields individuals from the stigma of being associated with an ongoing investigation.  The Court denied the majority of DOJ’s cross-motion for summary judgment with the exception of granting DOJ’s argument regarding redaction of information relating to efforts by one of the companies to enhance its compliance program on trade secrets grounds.  DOJ released the names to GIR Just Anti-Corruption in June 2018. 2018 MID-YEAR INTERNATIONAL ANTI-CORRUPTION DEVELOPMENTS World Bank Integrity Vice Presidency Expands Consideration of Monitor Candidates In March 2018, the World Bank—through Integrity Vice Presidency (“INT”) head Pascale Hélène Dubois—changed course regarding those it will allow to serve as a compliance monitor for companies sanctioned by the World Bank.  Ms. Dubois explained in a written response to GIR Just Anti-Corruption that the World Bank now will consider representatives of law firms with concurrent cases before INT, so long as the individuals proposed as monitors are not currently advising on those cases.  By revising the prior approach of informally disqualifying candidates from firms that had faced INT as adversaries in sanctions proceedings, the World Bank has broadened the pool of potential candidates. Also in March, the World Bank Office of Suspension and Debarment (“OSD”) released a 10-year update of metrics regarding OSD’s role in World Bank enforcement.  The report illustrates the depth and breadth of efforts by the World Bank to ensure that those who participate in projects financed with World Bank funds play by World Bank rules, but also shows the difficulty of successfully challenging INT allegations of misconduct:  historically, OSD has agreed with the preliminary determinations of INT—agreeing in 96% of cases that INT had presented sufficient evidence for at least one claim set forth, and in 62% of cases that INT had presented sufficient evidence for all claims set forth. Europe United Kingdom As we reported in our 2017 Year-End United Kingdom White Collar Crime Update, last year six individuals were charged by the UK Serious Fraud Office (“SFO”) in connection with investigations of Unaoil.  The first half of 2018 brought additional developments in this investigation.  On May 22, 2018, the SFO announced charges against Basil Al Jarah (Unaoil’s Iraq partner) and Ziad Akle (Unaoil’s territory manager for Iraq) for conspiracy to pay alleged bribes to secure a $733 million contract to build two oil pipelines in Iraq.  And on June 26, 2018, the SFO announced charges against Unaoil Monaco SAM and Unaoil Ltd.  Unaoil Ltd was charged in connection with the same oil pipeline project, while Unaoil Monaco SAM was charged with conspiracy to make corrupt payments to secure the award of contracts for SBM Offshore.  Unaoil has been summoned to appear at the Westminster magistrates court in London on July 18, 2018. In other enforcement developments, following a three-day trial in the High Court in London, in March 2018 the SFO secured recovery of £4.4 million from two senior Chad diplomats to the United States who received bribes from Canadian oil and gas company Griffiths Energy International in exchange for securing oil development rights.  This is the first time that money was returned overseas in a civil recovery case.  As reported in our 2013 Year-End FCPA Update, on January 22, 2013 Griffiths entered a guilty plea in Canada and paid a CAD $10.35 million fine in connection with the alleged bribery. Look for much more on UK white collar developments in our forthcoming 2018 Mid-Year United Kingdom White Collar Crime Update, to be released on July 16, 2018. France As discussed above, in June 2018 SocGen entered into a deferred prosecution agreement with DOJ and reached a parallel settlement with the French PNF in the first coordinated enforcement action by DOJ and French authorities in an overseas anti-corruption case.  SocGen will also be subject to ongoing monitoring by the L’Agence Française Anticorruption. In two decisions this year, France’s Supreme Court—the Cour de Cassation—limited the use of “international double jeopardy” as a viable defense to criminal prosecution.  French law provides that a criminal conviction in another country will preclude prosecution in France if no act related to the conduct took place in France.  But in March 2018, the French Court ruled that the Swiss company Vitol could be prosecuted for charges related to its involvement in the U.N. Oil-for-Food Program, despite having entered a guilty plea for grand larceny in New York based on the same facts.  The case spent more than five years in French courts before the Supreme Court ruled that the International Covenant on Civil and Political Rights, to which France is a signatory, prevents double jeopardy on similar charges for “unique facts” and applies “only in cases where both proceedings were initiated in the territory of the same State.”  The decision thus appears to end the protection against prosecution in France for the same conduct that had given rise to proceedings in the United States. The 2018 Vitol decision resembled another recent ruling in which the French Supreme Court overturned a lower court’s refusal to hear the case against British-Israeli lawyer Jeffrey Tesler, who pleaded guilty in the United States to charges of bribing Nigerian officials.  As we reported in our 2017 Mid-Year FCPA Update, the Paris Court of Appeals had previously held that the prosecution of Tesler was precluded by his 2011 plea agreement entered in U.S. court, suggesting that the U.S. plea was essentially involuntary and precluded him from fairly defending himself in France.  On January 17, 2018, the French Supreme Court reversed that ruling, noting that Tesler had not been deprived of his right to a fair trial because his appearance in French courts was not dictated by the terms of the U.S. plea agreement.  Furthermore, because some of the corrupt acts had been committed in France, the U.S. plea deal did not preclude French prosecution. Germany In February 2018, the German unit of French aerospace multinational Airbus SE agreed to pay $99 million to resolve a six-year bribery investigation by German prosecutors into a 2003 deal to sell fighter jets to Austria.  Although prosecutors conceded that they had identified no evidence that bribes were used to secure the 2003 contract, they accused Airbus management of supervisory negligence in allowing employees to make large payments linked to the deal for “unclear purposes.”  Airbus continues to face ongoing litigation in Austria, where the Austrian government is seeking more than $1 billion in damages from Airbus in connection with the 2003 deal. Russia One of Russia’s semiautonomous republics, Dagestan, has become embroiled in a major corruption scandal, with the arrest of numerous high-ranking local government officials, including the acting prime minister, his two deputies, and the mayor of Makhachkala (Dagestan’s capital).  In Moscow, Alexander Drymanov, a high-level official within Russia’s Investigative Committee (“IC”) known to be very close to Alexander Bastrykin, the head of the IC, resigned from his position in early June.  His resignation has been widely linked to allegations that Drymanov and other IC officers accepted bribes from the ringleader of a prominent criminal syndicate to ensure the release of a member of this syndicate.  Additionally, in March 2018, Drymanov’s former deputy told federal investigators of payments he had made in exchange for favorable treatment from Drymanov.  Drymanov has characterized his departure as retirement; however, news reports suggest his removal is part of a coordinated attack against Bastrykin by other law enforcement agencies, such as the General Prosecutor’s Office and the FSB (the KGB’s successor). Ukraine Ukraine’s parliament passed a bill to establish an anti-corruption court on June 7, 2018, which President Petro Poroshenko signed into law four days later.  This court will become the fourth anti-corruption institution launched in Ukraine since 2014, following the establishment of the National Anti-Corruption Bureau of Ukraine (“NABU”), the Specialized Anti-Corruption Prosecutor’s Office (“SAPO”), and the National Agency on Corruption Prevention (“NAZK”).  There is hope that the new court will address one of the NABU’s key complaints:  that, despite investigations into and arrests of corrupt officials, these efforts are being wasted due to corrupt judges who help the officials escape justice.  The newly passed law creates certain mechanisms intended to ensure that the anti-corruption court’s judges remain impartial and do not become beholden to political or financial influence.  Most notably, candidates for appointment to this court are subject to vetting by and interviews with a panel of six international experts.  If three of the six raise concerns about a nominee’s integrity or background, they may vote to block the candidacy, which result can be reversed only following further deliberations and a repeat vote. Despite the generally positive reaction to this piece of legislation, commentators have voiced concerns over one provision added to the bill at the last moment, whereby regular courts will retain jurisdiction over ongoing corruption cases, and any resulting appeals also will be heard in courts of general jurisdiction, rather than the appellate branch of the anti-corruption court.  Anti-corruption activists have expressed outrage at the furtive way in which this provision became part of the law—it was absent from the version of the law read to members of parliament prior to their vote—and have suggested its purpose is to enable the acquittal of certain indicted individuals, already on (or awaiting) trial, by courts of general jurisdiction. The Americas Argentina A federal magistrate in Argentina has charged former President Cristina Fernández de Kirchner and her children with money laundering and ordered millions in assets seized.  In another enforcement proceeding, the Anticorruption Office is seeking a prison sentence of five-and-a-half years, along with permanent disqualification from public office, against ex-Vice President and former Minister of Finance Amado Boudou after his conviction for “passive bribery” and “transactions incompatible with the exercise of public functions.”  The sentencing follows a trial concerning Boudou’s purchase of 70% of a then-bankrupt government contractor and his subsequent actions to have the bankruptcy lifted so that the contractor could again participate in federal government contracts. As covered in our Key 2017 Developments in Latin American Anti-Corruption Enforcement client alert, Argentina has passed sweeping new anti-corruption legislation under which legal entities are strictly liable for crimes such as bribery, extortion, or illicit enrichment of public officials that are committed, directly or indirectly, in their name, interest, or benefit.  Punishment for violating the law may result in one or a combination of criminal fines, suspension of state benefits, debarment, and dissolution.  To be exempt from penalties and administrative responsibility under the new law, legal entities must be able to demonstrate that they reported the wrongdoing as a result of a proper internal investigation; implemented a compliance program prior to commission of the act in question; and returned the benefit that was wrongfully obtained.  Companies facing possible sanctions may mitigate their punishment by cooperating in an active investigation.  Such cooperation includes disclosing accurate, actionable information that sheds further light on potential wrongdoing, recovery of assets, or identification of individual offenders. Articles 22 and 23 of the new law outline requirements for compliance or “integrity” programs.  The programs should be designed to prevent, detect, and correct irregularities and illicit acts taken by the corporation, its representatives, or third parties that confer a benefit to the company.  To receive exemption from any penalties under the law, companies must create internal compliance reporting methods and develop procedures to investigate reports.  The law requires that the compliance or integrity program contain at least (1) a code of conduct; (2) rules and procedures to prevent illicit acts in the course of bidding for administrative contracts, or in any other interaction with the public sector; and (3) periodic training programs for directors, administrators, and staff. Brazil Despite facing economic and political uncertainty, Brazil remains a driving force in global anti-corruption efforts.  Brazilian law enforcement entities across the country increasingly are cooperating with each other, as well as with dozens of foreign enforcement authorities.  Operation Lava Jato (Car Wash), now in its fifth year, continues to accumulate convictions related to a vast corruption scheme that exploited contracts with Brazil’s state-owned oil company, Petrobras.  So far, prosecutors have charged approximately 400 individuals and obtained more than 200 convictions on charges including corruption, money laundering, and abuse of the international financial system.  Building on its previous efforts, the Car Wash Task Force has initiated four new phases of Car Wash in 2018, many of which dig deeper into allegations that came to light in previous phases. We discussed in our 2017 Year-End FCPA Update the conviction of President Luiz Inácio Lula da Silva on corruption and money laundering charges.  Despite his conviction, Lula remained the front-runner for Brazil’s October 2018 presidential election.  In April 2018, however, Lula was ordered to turn himself in and begin serving his 12-year prison sentence.  Now in prison and with little hope of successfully appealing his conviction, it is unlikely Lula will be eligible to run for the presidency. Brazilian authorities also have expanded Operation Carne Fraca (“Weak Flesh”), which covers allegations of bribery in the Brazilian meatpacking industry to evade food safety inspections.  After launching the investigation in 2017, authorities carried out a third investigative phase in March 2018.  The new phase focused on Brazilian food processing giant BRF, with police arresting former BRF CEO Pedro de Andrade Faria, former BRF Vice President of Global Operations Helio dos Santos, and other executives.  Meanwhile, authorities have continued to investigate Brazilian meatpacking company JBS and its parent company, J & F Investimentos.  Its former executives and part owners Joesley and Wesley Batista—who were targets of earlier phases of Weak Flesh, as reported in our 2017 Year-End FCPA Update, and had been in prison since 2017—were released from prison after their prison sentences were commuted to house arrest in February 2018.  In May 2018, Brazilian authorities again arrested Joesley Batista, charging him with corruption, money laundering, and obstruction of justice.  Additional charges are expected, particularly as additional Brazilian law enforcement entities join the investigations. Canada In February 2018, Public Services and Procurement Canada (“PSPC”), the division of the Canadian government responsible for internal administration, announced that it would introduce legislation to adopt the use of deferred prosecution agreements as a new tool to penalize corporate wrongdoing.  The proposed program, known as the Remediation Agreement Regime, is intended to encourage companies to voluntarily disclose potential misconduct by offering a potential alternative to criminal conviction and debarment.  Legislation to adopt the Regime was introduced in March 2018.  Under the proposed bill, “remediation agreements” would be subject to prosecutorial discretion and, as in the United Kingdom, would require judicial approval and oversight.  Notably, only certain economic crimes—bribery, fraud, insider trading, and books-and-records violations, among others—would be eligible for deferred prosecution under the current draft of the bill. In addition to proposing the adoption of deferred prosecution agreements, PSPC in March further announced it would work to enhance the government-wide “Integrity Regime” debarment program.  Under the current program, companies convicted of certain white collar offenses are banned from bidding on government contracts for a period of 10 years, which can be reduced to a five-year ban in certain circumstances.  According to a March 2018 press release, enhancements to the program will include increasing the number of triggers that can lead to debarment, as well as introducing greater flexibility in debarment decisions.  A detailed description of the Integrity Regime’s new provisions will be included in a revised Ineligibility and Suspension Policy to be published on November 15, 2018.  The enhanced program will come into effect on January 1, 2019. Colombia As reported in our 2017 Mid-Year FCPA Update, former National Director of Anti-Corruption for Colombia’s Office of the Attorney General Luis Gustavo Moreno Rivera was charged in U.S. federal court with conspiracy to commit money laundering and related charges in June 2017.  On May 18, 2018, Moreno was extradited from Bogotá to Miami on charges stemming from an alleged bribery scheme.  Moreno and his purported middleman, Colombian attorney Leonardo Luis Pinilla Gomez, are accused of receiving a $10,000 bribe in a Miami mall bathroom in exchange for confidential information, including witness statements, from Moreno’s corruption investigation of former Córdoba governor Alejandro Lyons Muskus.  The exchange allegedly was a down payment for a $132,000 deal, in which Moreno agreed to discredit a witness in a case against Lyons before the IRS.  Recorded conversations purportedly capture Moreno and Pinilla discussing Moreno’s ability to control and obstruct the investigation.  Moreno and Pinilla were arraigned in Miami in late May and face wire fraud and money laundering-related charges. In August 2018, Colombia will hold a public referendum allowing citizens to vote on seven proposals aimed at combating graft and corruption.  The referendum will include provisions amending prison sentences and imposing lifelong bans on government employment for individuals found guilty of corruption, lower salaries for legislators and senior government officials, terms limits for holding office in public companies, and greater transparency in the bidding processes for government contracts. Guatemala Corruption investigations in Guatemala continued to face obstacles in early 2018.  As noted in our 2017 Year-End FCPA Update, President Jimmy Morales attempted to expel from Guatemala Iván Velásquez, a Colombian prosecutor and head of the International Commission Against Impunity (known by its Spanish acronym “CICIG”), on August 27, 2017.  CICIG is a U.N. commission created in 2006 to investigate corruption in the Guatemalan government.  The attempted expulsion came after Velásquez and Guatemalan Attorney General Thelma Aldana announced an investigation into Morales for illegal campaign financing.  Though the Guatemalan Supreme Court blocked the expulsion and other attempts to prevent investigations into Morales, CICIG remains embattled. In March 2018, the Guatemalan government removed 11 national police investigators from CICIG, disrupting the investigation into Morales and other high-ranking government officials.  Additionally, U.S. Senator Marco Rubio has placed $6 million in U.S. aid to CICIG, which represents a third of its annual budget, on hold, citing suspected manipulation of CICIG by Russian bank VTB to politically persecute a Russian family.  Rubio’s concerns stem from CICIG’s involvement in the criminal conviction of the Bitkov family, Russian nationals found guilty of purchasing false Guatemalan passports and entering Guatemala illegally after the state-owned Russian bank targeted their paper business. Despite these challenges, CICIG has moved forward with other investigations.  In February, former President Álvaro Colom and nine members of his cabinet were arrested.  Among them is Juan Alberto Fuentes Knight, a former finance minister and current chairman of Oxfam International.  The investigation concerns a $35 million deal for a public bus system in Guatemala City.  Prosecutors allege that nearly a third of the funding was spent on equipment that went unused. Honduras The Organization of American States Mission to Support the Fight Against Corruption and Impunity in Honduras (known by its Spanish-language acronym, “MACCIH”) has faced a number of setbacks over the past six months.  In December 2017, MACCIH and the Public Ministry (national prosecutors) indicted five outgoing members of the Honduran Congress for misappropriating public funds in a case known as Red de Diputados.  Around the time of the announcement, then-Spokesman and Head of MACCIH Juan Jiménez Mayor said that between 60 and 140 additional legislators were under investigation as part of the corruption probe.  Shortly thereafter, Congress passed a law blocking MACCIH from assisting the Public Ministry, and ordering the Tribunal Superior de Cuentas (“TSC”)—a government body dominated by ruling party stalwarts—to engage in an audit of the funds that Congress members have received since 2006.  The new measure shields members of Congress from legal action until the TSC concludes its investigation, which may take several years.  Citing the new law, the judge overseeing the Red de Diputados case released the five indicted congresspersons and postponed their trial.  On February 15, 2018, MACCIH’s director, Jiménez Mayor, announced in an open letter that he was resigning from the organization as a result of the challenges of working with the Honduran government and a lack of support from OAS Secretary General Luis Almagro Lemes. In late May 2018, the Honduran Supreme Court partially invalidated an agreement that created the Fiscal Unit Against Impunity and Corruption (“UFECIC”), the entity within the Public Ministry that worked with MACCIH.  The controversial ruling came in response to a legal challenge to MACCIH brought by three individuals accused by prosecutors and MACCIH of embezzling money in connection with the Red de Diputados case.  The plaintiffs argued that MACCIH should be declared unconstitutional because it violated Honduras’ sovereignty and the independence of its governmental organizations.  Though the court rejected that argument, it determined that the UFECIC, by serving as MACCIH’s investigative arm, impermissibly delegated constitutional functions to MACCIH and thus should be invalidated.  The Supreme Court’s decision followed lobbying by members of Honduras’s Congress—many of whom were being investigated by MACCIH—to invalidate the entire anti-corruption mission.  The opinion has been criticized by anti-corruption advocates. Mexico On May 18, 2018, the Mexican government published new requirements for companies wishing to contract with Petróleos Mexicanos (“PEMEX”), the Mexican state-owned oil company and a subject of numerous FCPA enforcement actions.  The new rules require parties contracting with PEMEX to have compliance programs designed to prevent and detect any instances of corruption.  The compliance program must remain in force for the duration of the contract with PEMEX and PEMEX has the power to verify the program.  The newly published regulations do not specify requirements for the compliance program, though one guidepost may be the Mexican Ministry of Public Administration’s Model Program for Company Integrity in the recently passed General Law of Administrative Responsibility (“GLAR”).  As discussed in our Key 2017 Developments in Latin American Corruption Enforcement client alert, the Model Program calls for clearly written anti-corruption policies and procedures, training, and avenues for reporting potential misconduct. In October 2017, Santiago Nieto was fired from his post as Special Prosecutor for Electoral Crimes.  Nieto claimed that his firing was politically motivated to halt his investigation into whether funds solicited by Emilio Lozoya Austin—CEO of PEMEX—were used to finance President Enrique Peña Nieto’s 2012 campaign.  This May, the Mexican government initiated an investigation against Lozoya, which remains ongoing.  Lozoya is alleged to have requested and received millions of dollars of improper payments from the Brazilian construction firm Odebrecht.  Nevertheless, the Mexican government has thus far not pursued further investigations into whether government officials accepted bribes from Odebrecht.  In April, Mexico issued administrative sanctions against Odebrecht, barring the company from doing business in the country for at least two years and three months.  The Mexican government also has fined Odebrecht $30 million. Peru Peruvian President Pedro Pablo Kuczynski resigned on March 21, 2018, the day before a scheduled congressional impeachment vote.  As reported in our 2017 Year-End FCPA Update, Kuczynski has been the subject of an investigation involving former Odebrecht CEO Marcelo Odebrecht‘s alleged payment of $29 million in bribes to Peruvian officials, including Kuczynski and former presidents Ollanta Humala and Alejandro Toledo.  Kuczsynski’s resignation followed quickly after surreptitiously recorded videos purported to show his colleagues, including Peruvian congressman Kenji Fujimori, bribing opponents with public contracts in exchange for voting against his impeachment in the 2018 vote.  Martín Vizcarra, the Vice-President, assumed the Peruvian presidency in Kuczynski’s place and will serve out his term through 2021. On June 10, 2018, Peruvian prosecutors formally opened an investigation into Kuczynski, Toledo, and former president Alan García for allegedly accepting bribes from Odebrecht.  The three former Peruvian Presidents are suspected of promising construction contracts in exchange for undeclared campaign contributions.  Humala already was under investigation for similar allegations; he and his wife were arrested in July 2017 but were released in May 2018 because no formal charges had yet been filed against them.  Toledo, who has been living in the United States, continues to fight extradition to Peru. Asia Bangladesh Bangladesh’s former two-term Prime Minister, Khaleda Zia, was sentenced to a five-year prison term in February 2018.  Zia had been convicted of embezzling donations meant for an orphanage trust established during her term as Prime Minister.  In March 2018, a Bangladeshi court granted bail to Zia, prompting hopes that she could participate in a December general election.  Despite a decision by the  Bangladeshi Supreme Court upholding a lower court’s decision to grant Zia bail, Zia remains imprisoned as her bail related to other charges has been denied.  Zia faces more than 30 separate inquiries into allegations of violence and corruption. China China’s anti-corruption campaign continues to be a priority as Xi Jinping moves into his second term.  Following the nationwide pilot scheme of the National Supervisory System rolled out in November 2017, in March 2018 the National People’s Congress (“NPC”) passed the Supervision Law of the People’s Republic of China (“PRC Supervision Law”) and at the same time amended the Chinese Constitution.  This provided legal and constitutional foundation for the National Supervisory System.  Supervisory Commissions at national and local levels are a new organ of the state and have jurisdiction to investigate corruption by all public servants in China, including those who are not party members.  Supervisory commissions have broad investigative powers to conduct interviews and interrogations, carry out inquiries and searches, freeze assets, obtain, seal/block and seize properties, records and evidence, conduct inquests, inspections and forensic examinations, and to detain individuals under a new mechanism known as “Liu Zhi.”  The 2018 NPC also approved a wide ranging reorganization of the Ministries under the State Council.  This means that enforcement of commercial bribery offenses under the Anti-Unfair Competition Law will now be carried out by the new State Administration for Market Regulation and its local counterparts. The first half of 2018 has also seen prosecution and sentencing of a number of high-profile individuals for corruption offenses.  Most notably in May 2018, Sun Zhengcai, a former member of the Politburo, was sentenced to life for bribery.  Sun had served as party chief of Chongqing, succeeding Bo Xilai who was sentenced to life imprisonment for corruption offenses in 2013.  He is the first serving member of the Politburo to be targeted by the campaign.  Xiang Junbo, the former Chairman of China’s now-defunct insurance regulator and the highest-ranking finance official snared in China’s anti-corruption campaign, has pleaded guilty to taking bribes and is awaiting sentencing. India In February 2018, the Central Bureau of Investigation (“CBI”) registered a case against executives of the Indian subsidiary of U.S.-based engineering and construction firm CDM Smith, as well as officials of the National Highways Authority of India (“NHAI”).  According to the CBI, CDM Smith paid bribes through its Indian subsidiary to various officials of the NHAI to secure infrastructure contracts between 2011 and 2016. The CDM Smith executives that stand accused allegedly disguised their bribes as “allowable business expenses” on their income tax returns.  The CBI enforcement action follows the 2016 Pilot Program declination with CDM Smith (covered in our 2017 Mid-Year FCPA Update) in which CDM Smith agreed to disgorge just over $4 million in profits in connection with the alleged improper payments to the NHAI. On April 4, 2018, the Indian government sought to pass the Prevention of Corruption (Amendment) Bill, 2013 (discussed in our 2016 Year-End FCPA Update) at a parliamentary session held at the Rajya Sabha (otherwise known as the Council of States, the upper house of the Indian Parliament).  The proposed law would introduce specific offenses and fines for commercial organizations engaging in bribery in India, create a specific offense for offering a bribe, and provide for criminal liability for company management of companies engaging in corrupt practices.  However, the Bill failed to be passed.  The Bill’s prospects of passage remain unclear. Korea The first half of 2018 saw a number of high-profile charges and convictions for corruption-related offenses.  As reported in our 2017 Year-End FCPA Update, then-President Park Geun-Hye was impeached in December 2016 amid allegations of influence peddling and corruption.  In April 2018, Park was convicted of 16 corruption-related offenses, including abuse of power, bribery, and coercion.  She was sentenced to 24 years’ imprisonment and a fine of KRW 18 billion (approximately $16 million).  Park decided not to appeal her sentence and is currently serving her jail term.  Choi Soon-Sil, Park’s friend and advisor who was accused of coercing Korean conglomerates into donating millions of dollars to charitable organizations connected to the former President, was sentenced in February 2018 to 20 years’ imprisonment for influence peddling, abuse of power, and corruption. In March 2018, another former Korean President, Lee Myung-Bak, was arrested on multiple charges of corruption, including bribery, embezzlement, tax evasion, and abuse of power.  Lee allegedly received more than KRW 11 billion (approximately $10 million) in bribes before and during his presidency.  Lee’s trial began at the end of May 2018 and is ongoing. As reported in our 2017 Year-End FCPA Update, Samsung Electronics Vice Chairman Lee Jae Yong was convicted of bribery and related charges and sentenced to five years’ imprisonment in August 2017.  In an unexpected turn of events, Lee was released from prison in February 2018, after the Seoul High Court halved his jail term to 2.5 years and suspended his sentence on appeal.  In contrast, Lotte Group’s Chairman Shin Dong Bin was convicted of bribery and sentenced to 30 months’ imprisonment and a fine of KRW 7 billion (approximately $6.5 million) in February 2018.  The court found that he paid KRW 7 billion (approximately $6.5 million) to Choi Soon-Sil’s K Sports Foundation in return for Park’s support of reissuing Lotte’s business permit to operate its duty-free stores.  Shin remains imprisoned while his appeal of the sentence continues. Middle East and Africa Israel In January 2018, the Office of Israel’s Tax and Economic Prosecutor announced that it reached a Conditional Agreement with Teva Pharmaceuticals Industries Ltd, the world’s largest manufacturer of generic pharmaceutical products.  The agreement arose from alleged corrupt payments made between 2002 and 2012 to high-ranking ministry of health officials in Russia and Ukraine to influence the approval of drug registrations, as well as to state-employed physicians in Mexico to influence the prescription of products.  As part of the agreement with Israeli authorities, Teva agreed to pay a fine of approximately $22 million, on top of the $519 million it paid to resolve FCPA charges arising from the same conduct, as covered in our 2016 Year-End FCPA Update.  This was the second enforcement action brought under Israel’s foreign bribery statute and the first involving a Conditional Agreement.  Israeli prosecutors stated that the decision to enter into a Conditional Agreement with Teva was based on various factors, including the large penalty already paid to U.S. authorities, Teva’s cooperation and remediation, and recent financial hardships incurred by Teva. Saudi Arabia Earlier this year, Saudi officials began taking steps to conclude a large anti-corruption probe initiated in November 2017 by Saudi Arabian Crown Prince Mohammed bin Salman that involved the detainment and questioning of hundreds of influential Saudis (covered in our 2017 Year-End FCPA Update).  According to one prosecutor, the government reached settlements worth $106 billion as a result of the probe.  Although most detainees have been released, some remain in custody pending trial.  Some analysts have viewed the corruption campaign as a power grab by Prince Mohammed, but the Saudi government insists its focus is combating endemic corruption.  In March 2018, Saudi officials announced that new anti-corruption departments were added to the Attorney General’s office in furtherance of King Salman and Crown Prince Mohammed’s goal to eradicate corruption. South Africa In April 2018, South African officials announced the reopening of a corruption investigation involving alleged abuse of public funds for a dairy farm in Vrede.  The investigation initially focused on Ace Magashule, secretary general of the African National Congress, and Mosebenzi Joseph Zwane, the former minister of mineral resources.  According to prosecutors, the dairy farm project was intended to help black farmers but instead funneled $21 million to business allies of the African National Congress.  As part of the investigation, prosecutors seized $21 million from three brothers known to be family friends and political allies of South Africa’s former President Jacob Zuma, who was ousted in February 2018 in connection with corruption allegations. CONCLUSION As is our semiannual tradition, over the following weeks Gibson Dunn will be publishing a series of enforcement updates for the benefit of our clients and friends as follows: Tuesday, July 10 – 2018 Mid-Year Update on Corporate NPAs and DPAs; Wednesday, July 11 – 2018 Mid-Year False Claims Act Update; Thursday, July 12 – Developments in the Defense of Financial Institutions; Friday, July 13 – 2018 Mid-Year Class Actions Update; Monday, July 16 – 2018 Mid-Year UK White Collar Crime Update; Tuesday, July 17 – 2018 Mid-Year Media and Entertainment Update; Wednesday, July 18 – 2018 Mid-Year Securities Litigation Update; Thursday, July 19 – 2018 Mid-Year Government Contracts Litigation Update; Monday, July 23 – 2018 Mid-Year UK Labor & Employment Update; Tuesday, July 24 – 2018 Mid-Year Shareholder Activism Update; Thursday, July 26 – 2018 Mid-Year Healthcare Compliance and Enforcement Update – Providers; Friday, July 27 – 2018 Mid-Year Securities Enforcement Update; and Wednesday, August 1 – 2018 Mid-Year FDA and Health Care Compliance and Enforcement Update – Drugs and Devices. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, John Chesley, Richard Grime, Christopher Sullivan, Jacob Arber, Elissa Baur, Josh Burk, Ella Alves Capone, Claire Chapla, Grace Chow, Stephanie Connor, Daniel Harris, William Hart, Patricia Herold, Korina Holmes, Derek Kraft, Miranda Lievsay, Zachariah Lloyd, Lora MacDonald, Andrei Malikov, Michael Marron, Jesse Melman, Steve Melrose, Jaclyn Neely, Jonathan Newmark, Nick Parker, Jeffrey Rosenberg, Rebecca Sambrook, Emily Seo, Jason Smith, Pedro Soto, Laura Sturges, Karthik Ashwin Thiagarajan, Caitlin Walgamuth, Alina Wattenberg, Oliver Welch, Oleh Vretsona, and Carissa Yuk. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues.  We have more than 110 attorneys with FCPA experience, including a number of former federal prosecutors and SEC officials, spread throughout the firm’s domestic and international offices.  Please contact the Gibson Dunn attorney with whom you work, or any of the following leaders and members of the FCPA group: Washington, D.C. F. Joseph Warin – Co-Chair (+1 202-887-3609, fwarin@gibsondunn.com) Richard W. Grime (+1 202-955-8219, rgrime@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) Judith A. Lee (+1 202-887-3591, jalee@gibsondunn.com) David P. Burns (+1 202-887-3786, dburns@gibsondunn.com) David Debold (+1 202-955-8551, ddebold@gibsondunn.com) Michael S. Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) Daniel P. 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Welch (+852 2214 3716, owelch@gibsondunn.com) São Paulo Lisa A. Alfaro – Co-Chair (+55 (11) 3521-7160, lalfaro@gibsondunn.com) Fernando Almeida (+55 (11) 3521-7095, falmeida@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 6, 2018 |
Update on California Immigrant Worker Protection Act (AB 450)

Click for PDF On July 5, 2018, Judge John A. Mendez of the Eastern District of California issued an important ruling involving California employers’ legal obligations during federal immigration enforcement actions at the workplace.  In the lawsuit at issue, the federal government seeks to invalidate a series of recent California “sanctuary” statutes, including AB 450, which imposes various restrictions and requirements on California employers, including that employers are not permitted to voluntarily consent to a federal agent’s request to access the worksite and employee records without a warrant.  In his 60-page order yesterday, Judge Mendez granted in part and denied in part the federal government’s motion for preliminary injunction and forbade California and its officials from enforcing several portions of AB 450 during the pendency of the litigation. While private California employers will not be subject to many of AB 450’s requirements for the time being, the fight over AB 450 is likely to proceed, including at the appellate level.  In the meantime, employers should make sure that they are knowledgeable about their obligations (and potential future obligations) under federal immigration law and AB 450 and seek counsel regarding how best to prepare for and ensure compliance with those obligations. Background California Governor Jerry Brown signed the Immigrant Worker Protection Act (also known as “Assembly Bill 450” or AB 450) into law on October 5, 2017.  AB 450 became effective on January 1, 2018, and applies to both public and private employers.  The statute prohibits employers from consenting to immigration enforcement agents’ access to the workplace or to employee records (unless permitted by judicial warrant) and also requires that employers provide prompt notice to employees of any impending inspection.  Violations of these requirements may result in penalties of between $2,000 and $5,000 for the first offense, and up to $10,000 for subsequent offenses.  The law does not provide for a private right of action; rather it is enforced exclusively through civil action by California’s Labor Commissioner or Attorney General, who recovers the penalties. AB 450 Requirements, The Specifics AB 450 sets forth several obligations (each of which is limited by the phrase, “except as otherwise required by federal law”) on employers that can be grouped into three main categories detailed below.  The California Labor Commissioner and Attorney General also provided joint guidance that sheds additional light on the application of AB 450 available here:  https://www.dir.ca.gov/dlse/AB_450_QA.pdf. Deny Access To Premises/Employee Records.  Under the new law, employers are prohibited from “provid[ing] voluntary consent to an immigration enforcement agent’s [attempt] to enter any nonpublic areas of a place of labor.”  Employers may only permit access when the agent provides a judicial warrant.[1]  A judicial warrant must be issued by a court and signed by a judge.[2]Similarly, employers may not “provide voluntary consent to an immigration enforcement agent to access, review, or obtain the employer’s employee records.”  Again, the employer may permit access when the agent provides a judicial warrant or subpoena or when the employer is providing access to I-9 Employment Eligibility Verification forms or other documents for which a Notice of Inspection (“NOI”) has been provided to the employer.[3]The state-provided guidance makes clear that “whether or not voluntary consent was given by the employer is a factual, case-by-case determination that will be made based on the totality of the circumstances in each specific situation,” but, at minimum, the new law “does not require physically blocking or physically interfering with an immigration enforcement agent in order to show that voluntary consent was not provided.” Provide Employees Notice.  AB 450 requires employers to provide each current employee notice of any upcoming inspections of I-9 records or other employment records within 72 hours of receiving an NOI.[4]  Notice must be posted in the language the employer normally communicates with its employees and contain (at minimum): (i) the name of the immigration agency conducting the inspection; (ii) the date the employer received the NOI; (iii) the nature of the inspection; and (iv) a copy of the NOI.After an inspection has been completed, employers must provide any affected employees (employees identified by the agency as potentially lacking work authorization or having deficiencies in their authorization documents) with notice of that information.[5]  Specifically, the affected employee (and his/her authorized representative) must receive a copy of the agency’s notice providing the results of the inspection and written notice of the employer’s and employee’s obligations resulting from the inspection within 72 hours of its receipt.  Employers must provide this notice by hand at work, if possible, or otherwise via both mail and email. Limit Reverification Of Current Employees.  Finally, the law penalizes employers for the reverification of the employment eligibility of a current employee “at a time or in a manner not required by [federal law.]”[6] Federal Government Response Within weeks of AB 450 becoming law, ICE’s Acting Director Thomas Homan responded by announcing that the agency planned to increase significantly the number of worksite-related investigations it initiated nationwide during 2018.  Homan later called AB 450 and Senate Bill 54, a related statute enacted at the same time as AB 450 that seeks to limits permissible cooperation between California agencies and federal immigration authorities, “terrible.”  And he stated that Californians “better hold on tight.” On March 6, 2018, the U.S. Department of Justice filed legal action against the state of California, Governor Jerry Brown, and Attorney General of California Xavier Becerra in federal court, requesting that the Court invalidate AB 450 and other so-called sanctuary laws on the ground, in part, that they are preempted by federal immigration law and are therefore unconstitutional.[7] The federal government also moved for a preliminary injunction forbidding enforcement of AB  450 during the pendency of the lawsuit.[8]  In short, the federal government contends that the laws intentionally obstruct federal law and impermissibly interfere with federal immigration authorities’ ability to carry out their lawful duties and, thereby violate the Supremacy Clause of the United States Constitution. The lawsuit generated significant interest, including no fewer than sixteen amici curiae briefs in support of both sides and multiple (unsuccessful) motions to intervene.  The California defendants’ motion to dismiss the case, filed on May 4, 2018, is pending before the Court. The district court heard argument on the federal government’s preliminary injunction motion on June 20, 2018, in Sacramento, California.  Yesterday, the Court found in the federal government’s favor (in part), enjoining California and its officials from enforcing all provisions of AB 450 except for the provisions relating to employee notice.[9] The Court noted that the lawsuit involves several “unique and novel constitutional issues,” including “whether state sovereignty includes the power to forbid state agents and private citizens from voluntarily complying with a federal program.”  In a detailed legal analysis, noting that it “expresse[d] no views on the soundness of the policies or statutes involved,” the Court found: That the federal government is likely to prevail in its arguments against the provisions of AB 450 that impose penalties on private employers who “voluntarily consent to federal immigration enforcement’s entry into nonpublic areas of their place of business or access to their employment records” because they “impermissibly discriminate[] against those who choose to deal with the Federal Government;” That the federal government is likely to prevail in its arguments against AB 450’s prohibition on reverification of employee eligibility, albeit “with the caveat that a more complete evidentiary record could impact the Court’s analysis at a later stage of th[e] litigation;” and That the federal government is not likely to prevail in its arguments against AB 450’s notice requirements adopted in Cal. Labor Code section 90.2.  The Court explained that “notice provides employees with an opportunity to cure any deficiency in their paperwork or employment eligibility” and does not impermissibly impede the federal government’s interests. As a result, the Court enjoined California from enforcing all provisions of AB 450 as applied to private employers except those regarding employee notice.  Private employers therefore only need to ensure compliance with those notice requirements for the time being.  As the Court itself noted, however, its ruling was only as to the likelihood of success at this early stage of the litigation and is subject to further review and a final determination on the merits after additional evidence is presented, as well as to further potential review by the Ninth Circuit Court of Appeals. Practical Considerations & Best Practices While yesterday’s ruling enjoins enforcement of most of the obligations imposed by AB 450, the ruling is only temporary and employers should seek counsel from immigration and/or employment counsel and should determine in advance how they will comply with these obligations, should AB 450 go into full effect.  Among other measures, employers should consider: Preparing facility managers and other employees most likely to encounter an immigration enforcement agent seeking access to the worksite or records on the proper procedures for handling an inspection, including how to determine whether the agent has a valid judicial warrant (as opposed, for example, to an administrative subpoena) and to consult immediately with counsel; Implementing procedures for handling notice to employees on an expedited basis, including a template to ensure all necessary information is provided (the state Labor Commissioner has provided a form template available here: https://www.dir.ca.gov/DLSE/LC_90.2_EE_Notice.pdf); and Ensuring any reverification of employment eligibility complies with federal legal obligations and conducting training on the verification and reverification process.    [1]   Cal. Gov. Code § 7285.1(a), (e).    [2]   Guidance No. 11, available at https://www.dir.ca.gov/dlse/AB_450_QA.pdf.    [3]   Cal. Gov. Code § 7285.2(a)(1), (a)(2).    [4]   Cal. Labor Code § 90.2(a).    [5]   Cal. Labor Code § 90.2(b).    [6]   Cal. Labor Code § 1019.2(a).    [7]   U.S. v. State of California, Case No. 1:18-cv-00490-JAM-KJN, Dkt. No. 1 (E.D. Cal. Mar. 6, 2018), available at https://www.justice.gov/opa/press-release/file/1041431/download.    [8]   Id. at Dkt. No. 2, available at https://www.justice.gov/opa/press-release/file/1041436/download.    [9]   Id. at Dkt. No. 193 (E.D.Cal. July 5, 2018). The following Gibson Dunn lawyers assisted in preparing this client update: Jesse Cripps and Ryan Stewart. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following in the firm’s Labor and Employment practice group: Catherine A. Conway – Co-Chair, Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com) Jesse A. Cripps – Los Angeles (+1 213-229-7792, jcripps@gibsondunn.com) Michele L. Maryott – Orange County (+1 949-451-3945, mmaryott@gibsondunn.com) Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)

June 27, 2018 |
Webcast: Developments in Virtual Currency Law and Regulation

The past year has seen an explosion in virtual currency offerings, as well as significant legal and regulatory developments as U.S. regulators have tried to keep pace with the industry. It is therefore timely for an analysis of these developments under a multi-disciplinary approach. Our team of experienced virtual currency practitioners analyze relevant issues from the perspective of U.S. securities regulation and enforcement, U.S. commodities regulation and enforcement, U.S. banking and licensed financial services law, and the U.S. anti-money laundering statutes and regulations. View Slides (PDF) PANELISTS: J. Alan Bannister is a partner in Gibson Dunn’s New York office and a member of the Firm’s Capital Markets, Global Finance and Securities Regulation and Corporate Governance Practice Groups. Mr. Bannister concentrates his practice on securities and other corporate transactions, acting for underwriters and issuers (including foreign private issuers), as well as strategic or other investors, in high yield, equity (including ADRs and GDRs), and other securities offerings, including U.S. public offerings, Rule 144A offerings, other private placements and Regulation S offerings, as well as re-capitalizations, NYSE and NASDAQ listings, shareholder rights offerings, spin-offs, PIPEs, exchange offers, other general corporate transactions and other advice regarding compliance with U.S. securities laws, as well as general corporate advice. Mr. Bannister also advises issuers and underwriters on dual listings in the U.S. and on various exchanges across Europe, Latin America and Asia. He has closely followed developments on Initial Coin Offerings (ICOs). Michael D. Bopp is a partner in Gibson Dunn’s Washington, D.C. office and Chair of the firm’s Public Policy group and its Financial Services Crisis Team, a multi-disciplinary group formed to address client concerns stemming from the credit and capital markets crisis.  Mr. Bopp engages in high-level, strategic policy and related regulatory work on a variety of issues but focuses on financial regulatory issues. He works with Congress and the Executive Branch on regulatory reform legislation and helping to shape new regulatory requirements promulgated as a result of the Dodd-Frank Act.  Mr. Bopp also has counseled numerous companies in complying with Dodd-Frank Act requirements.  From 2006-2008, Mr. Bopp served as Associate Director of the Office of Management and Budget in the White House, and was responsible for overseeing budgets and coordinating regulatory, legislative, and other policy for approximately $150 billion worth of spending for various government agencies, including the Departments of Treasury, Homeland Security, Transportation, Justice, Housing and Urban Development, and Commerce, the General Services Administration, the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission.  As a result of his work on financial regulatory and policy issues, Mr. Bopp has been named one of the 100 most influential people in finance by Treasury and Risk magazine. M. Kendall Day is a partner in Gibson Dunn’s Washington, D.C. office and a member of the White Collar Defense and Investigations and the Financial Institutions Practice Groups. His practice focuses on internal investigations, regulatory enforcement defense, white-collar criminal defense, and compliance counseling for financial institutions, multi-national companies, and individuals. Prior to joining Gibson Dunn, Mr. Day spent 15 years as a white-collar prosecutor, serving most recently as an Acting Deputy Assistant Attorney General of the U.S. Department of Justice’s Criminal Division. In that role, Mr. Day supervised more than 200 Criminal Division prosecutors and professionals tasked with investigating and prosecuting many of the country’s most significant and high-profile cases involving corporate and financial misconduct. He also had supervisory authority over every Bank Secrecy Act and money-laundering charge, deferred prosecution agreement and non-prosecution agreement involving every type of financial institution. Arthur S. Long is a partner in Gibson Dunn’s New York office, Co-Chair of Gibson Dunn’s Financial Institutions Practice Group and a member of the Securities Regulation Practice Group. Mr. Long focuses his practice on financial institutions regulation, advising on the regulatory aspects of M&A transactions; bank regulatory compliance issues; Dodd-Frank issues, including the regulation of systemically significant financial institutions (SIFIs) and related heightened capital and liquidity requirements; resolution planning; and Volcker Rule issues with respect to bank proprietary trading and private equity and hedge fund operations. Mr. Long has concentrated on the issues raised under U.S. state and federal banking law and state money transmission law by virtual currencies. Carl E. Kennedy is Of Counsel in Gibson Dunn’s New York office and a member of the firm’s Financial Institutions, Energy, Regulation and Litigation, and Public Policy Practice Groups. Mr. Kennedy applies his prior financial services and government experience to assisting clients with myriad regulatory, legislative, compliance, investigative and litigation issues relating to the commodities and derivatives markets. Mr. Kennedy served as Special Counsel and Policy Advisor to Commissioner Scott O’Malia at the U.S. Commodity Futures Trading Commission (CFTC) where he advised the commissioner on a full range of legal, regulatory and policy matters before the CFTC. While also at the CFTC, Mr. Kennedy was Legal Counsel in the Office of the General Counsel where he played a key role in the commission’s adoption of several rulemakings and guidance implementing the Dodd-Frank Act. Jeffrey L. Steiner is Counsel in Gibson Dunn’s Washington, D.C. office and is a member of the firm’s Financial Institutions, Energy, Regulation and Litigation, Investment Funds and Public Policy Practice Groups. Mr. Steiner co-leads the firm’s Derivatives team, as well as the firm’s Digital Currencies and Blockchain Technology team. Prior to joining Gibson Dunn, Mr. Steiner was special counsel in the Division of Market Oversight at the Commodity Futures Trading Commission (CFTC) where he drafted rules that became the current regulatory framework for over-the-counter derivatives. He advises commercial end-users, financial institutions, dealers, hedge funds, private equity funds, clearinghouses, industry groups and trade associations on regulatory, legislative and transactional matters related to OTC and listed derivatives, commodities and securities, including those relating to the Dodd-Frank Act, the rules of the CFTC, the Securities and Exchange Commission (SEC), the National Futures Association and the prudential banking regulators. Mr. Steiner also advises a range of clients on issues related to digital currencies and distributed ledger technology, including analyzing regulatory and enforcement matters relating to their implementation and use. 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 1.50 credit hours, of which 1.50 credit hours 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 Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@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 1.50 hours. 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.

June 25, 2018 |
Legal Risks and ESG Disclosures: What Corporate Secretaries Should Know

Washington, D.C. partners Beth Ising and Avi Garbow, of counsels Jason Meltzer and Gillian McPhee, associate Christopher White; and Orange County associate Lauren Assaf are the co-authors of “Legal Risks and ESG Disclosures: What Corporate Secretaries Should Know,” [PDF] published in June 2018 in conjunction with the Society for Corporate Governance.