United States: Doing Battle On (At Least) Two Fronts: What Happens When Multiple Regulators Engage In Parallel Enforcement Efforts?

Businesses and individuals alike face difficult choices when considering the prospect of multiple federal-agency investigations of business practices happening in parallel. In that scenario, what are the relevant considerations to determine how to handle the situation? Multi-agency cooperation efforts can go a long way toward obtaining mitigated civil or criminal penalties. But companies, their executives and employees may find that there are significant collateral consequences to affirmatively engaging with all relevant regulators. Companies should consider these factors in making strategic decisions behind whether to cooperate, with whom and in what manner.

While navigating investigations by multiple regulators is always challenging, recent parallel and seriatim multi-agency enforcements provide valuable insight. These cases illustrate the considerations companies should assess when faced with multiple regulators or enforcement agencies knocking at the door. Ultimately, company executives must balance the benefits of a multi-agency resolution against alternative considerations like self-disclosing conduct to regulators that may not otherwise be aware of it. Regulators may also have membership rules that require testimony and disclosure of documents, or investigators may have limits on the ability to share collected information with other regulators.

Setting the Stage

Various Government Investigators

Whistleblower or victim complaints, formal referrals, traditional law enforcement activities and self-disclosure may prompt a regulator or government enforcement agency to launch an informal inquiry or a formal investigation and examine a company's practices. Traditional law enforcement agencies include, of course, the Department of Justice (DOJ), the Securities Exchange Commission (SEC), the U.S. Commodity and Futures Trading Commission (CFTC) and other criminal and civil federal law enforcement agencies.

Industry regulators and industry membership organizations are other potential players in investigative or enforcement efforts that may use applicable regulations and rules to collect information from industry participants and members, respectively. With these particular regulators, membership rules may require cooperation with an organization's investigation, including producing documents and providing testimony, in order to maintain membership in the organization.

When regulators engage, a business must determine the costs and benefits of cooperating with all relevant regulators contemporaneously, a task often easier said than done at the outset of a potential legal issue.

Government Investigative Tools

Government law enforcement agencies, industry regulators and industry membership organizations investigating wrongdoing can engage a company in a number of ways - informally or formally, and with a corresponding degree of process for redress (or enforcement).

A government law enforcement agency can use formal information-gathering tools, like grand jury subpoenas, civil subpoenas, depositions and the like to obtain information to further a criminal or civil enforcement investigation. In those cases, it is clear that a formal legal process has been initiated, and certain rights and processes apply to redress issues that arise in conjunction with their enforcement.

Separately, government agencies also may use other civil or informal tools to gather information pre-litigation.  Formal tools include civil investigative demands and administrative subpoenas. Informal tools include letter requests. The government may use these tools to acquire information from a company, or its individuals, without formalizing them as targets of a government investigation.

These tools implicate different levels of available legal process to oversee enforcement efforts, which generally correspond inversely to the evidentiary proof required to issue the request. By example, a civil investigative demand requires a showing that there is reason to believe that the recipient has information relevant to an investigation, while a letter request requires no showing of relevance at all. Correspondingly, the recipients of such requests may have different compliance requirements - from the availability of court redress to require compliance with formal requests for information, to no obligation to comply with a letter request (but with the understanding that a refusal to comply may be followed by a formal request).

Moreover, each of these means of collecting information has various implications for whether the information shared with the requesting body can be shared with others. Civil and criminal regulators may have formalized information-sharing agreements, including Memoranda of Understanding.¹ Documents provided in response to a civil investigative demand (commonly referred to as a CID) can be shared with a criminal enforcement agency. However, documents produced in response to a grand jury subpoena cannot be provided by the receiving law enforcement agency - DOJ, a U.S. Attorney's Office or an investigating agency like the FBI - to a civil regulator like the SEC or the CFTC without a formal judicial order. The same is true for witness interview memoranda.

Should a civil regulator engage first, perhaps through requests for information or civil proceedings, information unearthed in the investigation can later be used in criminal proceedings. Courts have limited the use of civil investigations as guises for criminal investigations.² But, typically, if a civil regulator acts in good faith, it can - and often will - share information that criminal regulators may use for their own inquiries.³

Considerations and Counter-Considerations in Parallel Investigations

Multifactor Decision of Whether to Disclose Misconduct to Multiple Regulators

Pursuant to many industry regulators' rules, failure to cooperate in an internal investigation, including testifying before an investigating agent(s) when requested, will result in losing membership privileges. For some industries, like securities, commodities or government contracting, loss of membership privileges with the industry regulator or regulations (like FINRA, the National Futures Association (NFA) or under the Federal Acquisition Regulations for many government contractors) means loss of licensing or potential suspension and debarment and a resulting loss of livelihood. So industry participants are essentially compelled to cooperate and provide witness testimony and/or documents, where sought by regulators.

Invoking the Fifth Amendment may prevent disclosure of potentially incriminating material that can be used against an individual, and by extension, the company. But an individual can only invoke the privilege when there exists what courts call a "reasonable fear" of the use of incriminating information in a criminal proceeding.⁴  Thus, the Fifth Amendment privilege against testifying or providing testimonial evidence may not be available where there is no criminal investigation pending or clearly likely.

Likewise, an individual's determination to invoke the Fifth Amendment against an administrative subpoena for testimony or the testimonial production of documents may result in the subpoenaing regulator coming to the conclusion that the individual is not cooperating with the investigation and terminating the individual or his/her business's membership or licensing. Thus, this choice may put the business itself at risk.

In addition, a determination to agree to a settlement, regulatory injunction, civil findings and administrative decision can have implications for a potential subsequent additional regulatory, civil or criminal investigation. Admissions in a settlement of a regulatory action can be used in a subsequent civil case. Admissions in the context of a regulatory or civil case certainly cannot be used as a legal determination of an issue in a criminal case because of the differences in standards of proof (e.g., a criminal case requires a higher standard of proof than a regulatory or civil action, so an admission in a regulatory or civil case does not decide a factual or legal issue definitively with respect to a criminal case).

However, practically speaking, civil admissions can be used to limit the ability of the target of a criminal investigation to deny a factual statement or legal conclusion that was reached in the earlier proceeding. Indeed, courts across the country, in a broad range of legal matters, have denied requests in formalized criminal proceedings to suppress prior admissions made to civil regulators.

For instance, in a case from the Northern District of Georgia, the defendant was charged with criminal securities fraud and moved to suppress deposition testimony gathered in SEC civil proceedings from use in the criminal action. The federal court denied the request, rejecting the defendant's contention that the DOJ colluded with the SEC and used the civil investigation to conduct a criminal one. The court noted that while the SEC has to, in good faith, pursue evidence for its own interests, "the SEC does not have an affirmative duty to advise a witness during civil . proceedings that he may be subject to criminal proceedings."⁵

In a waste-dumping case in the Southern District of Alabama, the district court permitted the introduction of statements made to U.S. Coast Guard agents during an initial administrative inspection of a vessel. The district court determined the regulator had broad powers to conduct administrative investigations alongside criminal ones, and silence as to any possible future criminal investigation did not justify suppression of prior incriminating statements.⁶

In the Southern District of New York, the district court denied a motion in limine seeking to preclude interview statements made during a civil tax-fraud investigation in a criminal trial on related charges. The court permitted the statements because there was no proof of the use of the civil investigation as an improper ruse solely to develop a criminal case.⁷

Thus, prior civil admissions essentially hamstring the subject of a related criminal case from contesting the admission. In addition to the potential Fifth Amendment issues here, the subject also risks violating the terms of a settlement in the regulatory or civil action if the subject subsequently denies or tries to explain away the previous admission. Typically, a settlement will include a representation that the settling party is and has been truthful and fulsome in its statements in connection therewith. Efforts to deny or explain admissions may result in the prior settling agency considering the agreement breached. The agency may seek to reinstitute proceedings or commence a follow-on action based on the theory that the subject gave false statements to the agency in connection with the initial settlement.

Costs of the Strategic Decision Not to Cooperate

The decision not to engage in parallel cooperation can lead to multiple separate cases - and multiple separate resolutions - potentially with accumulating financial costs. First, resolution with one agency may not prevent another regulator from investigating the same or similar business conduct at a later date, and with an independent resolution.

Second, a federal agency conducting a subsequent investigation of the same conduct may (and is likely to) refuse to credit a prior forfeiture with another regulator. Recent enforcement actions show the costs of the initial decision of whether to cooperate with authorities, including whether to notify them of potentially enforceable misconduct, can be significant.

For example, in 2020, Beam Suntory, Inc. agreed to pay almost $20 million in fines to resolve the DOJ Fraud Section's investigation into alleged bribery. Notably, the DOJ refused to credit an SEC settlement entered two years prior that arose from enforcement action for the same misconduct. In fact, the DOJ highlighted Beam's failure to coordinate a parallel resolution with the Fraud Section as its refusal to credit the prior settlement.

Cooperation Can Result in Maximum Resolution Benefits

By contrast, companies that engage in parallel cooperation with civil and criminal regulators can better manage the timing and scope of the investigations and resolutions than when handled one after the other.  Further, these businesses typically receive some form of financial credit for parallel cooperation.  DOJ has routinely offered fine reductions to cooperating companies.  In settlements with Teva Pharmaceutical and Panasonic Avionics Corporation, the DOJ offered 20 percent discounts off the low end of the United States Sentencing Guidelines fine range. In offering the fine reductions, the DOJ cited the companies' remediation efforts, like terminating responsible personnel and timely cooperation following the SEC's commencement of its own investigation of each company.

In 2019, Merrill Lynch received cooperation credit when it entered contemporaneous settlements with the DOJ and the CFTC, with the CFTC agreeing to credit any payments made to the DOJ. The DOJ and CFTC reached the resolution on the basis of the company's agreement to implement internal training and monitoring programs. The company also promised to continue its cooperation in related agency investigations.

In 2020, Goldman Sachs Group entered multi-agency settlements with both U.S. and foreign regulators. In the U.S., Goldman settled with the SEC, DOJ and the Federal Reserve Board. The company agreed to pay a global settlement of $2.9 billion, and the Fraud Section credited over $1.6 billion in payments made to other regulators, including the SEC and the Federal Reserve. In doing so, the DOJ reasoned only partial credit was appropriate. While Goldman cooperated by collecting and producing voluminous records, providing regular investigative updates and voluntarily making employees available for interviews, the company failed to promptly produce relevant evidence.

Vitol, Inc., a Texas-based commodities trading firm, also entered parallel settlements with DOJ's Fraud Section and the CFTC. Vitol entered into a deferred prosecution agreement with the DOJ for $135 million. The DOJ credited $45 million for a related settlement agreement with Brazil, citing Vitol's agreement to continue cooperating with the DOJ on any future investigations and prosecutions, enhance compliance efforts and report to the DOJ on the implementation of such programs. With the CFTC, Vitol settled for more than $95 million. The CFTC credited part of Vitol's settlement with the DOJ, recognizing the company's voluntary provision of material information identified by an internal investigation.

Novartis AG and its subsidiaries paid $345 million in criminal and regulatory penalties to resolve FCPA allegations related to foreign bribes in Greece and Vietnam. The penalties reflect a 25 percent reduction off the bottom of the U.S. Sentencing Guidelines fine range, in part because target companies agreed to continue cooperating in criminal investigations involving their employees. They also agreed to report to the DOJ on their promised compliance enhancements.

U.S. Government Policies Prioritize and Encourage Multi-Agency Cooperation

As these cases demonstrate, cooperation with multiple regulators can impact the scope and type of the resolutions, as well as the extent of financial penalties imposed on a company. Although each federal agency has its own cooperation policy, law enforcement agencies increasingly reward cooperation in the form of credit off the total available fines.

For instance, the DOJ corporate prosecution policies encourage fulsome and prompt cooperation, including in parallel with other agencies, and reward that behavior with less significant resolutions and lower fines and penalties than might otherwise be imposed.⁸ Similarly, through DOJ's Anti-Piling On Policy, released in May 2018, the Department strives to coordinate with U.S. and foreign counterparts when entering resolutions to avoid cumulative penalties.⁹ In considering how much to credit a resolution with another law enforcement authority, federal prosecutors assess, among other factors, "the adequacy and timeliness of a company's disclosures and its cooperation with the [DOJ.]"

In the case of the DOJ, a resolution with another law enforcement authority may significantly offset the resolution with the Department. For example, the DOJ's FCPA Corporate Enforcement Policy notes: "[t]he requirement that a company pay all disgorgement, forfeiture and/or restitution resulting from the misconduct at issue may be satisfied by a parallel resolution with a relevant regulator[.]"¹⁰

Conclusion

Businesses and their employees face complex challenges when navigating regulatory and/or government investigations, which may be compounded when multiple investigating bodies or agencies are involved.  Significantly, a company's various interests do not always point toward the same handling of the matter.

The key to determining the path forward is balancing the company's interests in potentially not engaging with multiple regulators or law enforcement agencies at the same time (agencies that might not otherwise be aware of the conduct at issue) against the potential benefits of a single multi-regulator or multi-agency resolution, which can be considerable. Although the decision of whether to engage with multiple regulators to address legal violations always is a difficult one, particularly where it involves informing an agency of the conduct, the lodestar for company decision-makers should be to minimize the consequential damages and promote the best interests of the business.

Footnotes

1 See, e.g., SEC Press Release, Securities and Exchange Commission and Justice Department's Antitrust Division Sign Historic Memorandum of Understanding (June 2020).

2 See, e.g., U.S. v. Scrushy, 366 F. Supp. 2d 1134, 1138 (N.D. Ala. 2005).

3 U.S.  v. Stringer, 535 F.3d 929, 949-40 (9th Cir. 2008).

4 U.S. v. Reiner, 532 U.S. 17, 21 (2001).

5 U.S. v. Harris, No. 09-406, 2010 WL 4967821, at *5 (N.D. Ga. Dec. 1, 2010).

6 U.S. v. La Forgia, No. 12-57, 2012 WL 1869035, at *2 (S.D. Ala. May 22, 2012).

7 U.S. v. Boykoff, 186 F. Supp. 2d 347, 349-53 (S.D.N.Y. 2002)

8 See  DOJ Justice Manual, § 9-28.700 (Principles of Federal Prosecution of Business Organizations).

9 See also  A Resource Guide to the U.S. Foreign Corrupt Practices Act, Second Edition (July 2020).  

10 See  DOJ Justice Manual, § 9-47-120, FCPA Corporate Enforcement Policy (Nov. 2019).

Originally Published by Corporate Compliance Insights

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