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Pharmaceutical company settles FCPA-related bribery charges with SEC
On July 2, a Boston-based global pharmaceutical company agreed to pay over $21 million to settle claims by the SEC that the company violated the books and records and internal accounting controls provisions of the FCPA. According to the SEC, Turkish and Russian subsidiaries of the pharmaceutical company made payments to foreign government officials in those countries to obtain various types of favorable treatment for the pharmaceutical company’s primary drug, including prescription approvals. Specifically, the SEC alleged that from 2010 to 2015, the Turkish subsidiary made payments to a consultant who passed a portion of the funds on to government officials; the Turkish subsidiary also allegedly made payments to “improperly influence” health care providers (HCPs) to make decisions in favor of the pharmaceutical company. Additionally, the SEC claimed that from 2011 to 2015, Russian government health officials received improper payments from the Russian subsidiary in order to influence regional healthcare budget allocations for the primary drug and to increase the number of approved prescriptions. The SEC asserted that the two subsidiaries maintained false books and records of these improper payments, which the pharmaceutical company’s internal accounting controls failed to detect or prevent. As a result, according to the SEC, due to the pharmaceutical company’s lack of an effective anti-corruption compliance program and inadequate internal accounting controls, it was “unjustly enriched by over $14 million.” The SEC also claimed that two additional subsidiaries in Brazil and Colombia failed to maintain accurate books and records regarding third-party payments.
In entering into the administrative order, the SEC considered the pharmaceutical company’s cooperation and remedial efforts, including efforts to (i) strengthen and expand its global compliance organization; (ii) enhance third-party payment related policies and procedures; (iii) revamp engagement and oversight of HCPs; (iv) improve internal audit functions; (iv) conduct “proactive compliance market reviews”; and (v) improve employee anti-corruption training.
Without admitting or denying wrongdoing, the pharmaceutical company consented to a cease and desist order, and agreed to pay a $3.5 million civil money penalty and approximately $17.9 million in disgorgement and pre-judgment interest.
SEC issues $18.5 million civil penalty for unregistered digital token offering
On June 26, the SEC announced a settlement with two offshore entities, resolving allegations that the entities violated federal securities laws by raising more than $1.7 billion in unregistered digital token offerings. As previously covered by InfoBytes, in October 2019, the SEC obtained a temporary restraining order, halting the offerings. According to the SEC, the entities violated Sections 5(a) and 5(c) of the Securities Act by failing to register its offers and sales of securities with the SEC. Prior to the restraining order, the entities had sold approximately 2.9 million digital tokens worldwide, including more than 1 billion tokens to 39 U.S. purchasers. The settlement requires the entities to return more than $1.2 billion to investors in “ill-gotten gains” from the token offerings. Additionally, the parent company is required to pay an $18.5 million civil penalty and give proactive notice to the SEC before participating in any digital asset issuances for the next three years. The entities entered into the settlement without admitting or denying the allegations in the SEC’s complaint.
FINRA updates guidance on fingerprinting requirements
FINRA has updated its frequently asked questions guidance regarding relief from certain fingerprinting requirements (previously covered here). The guidance notes that, on June 27, the SEC extended its order providing temporary relief from fingerprinting requirements of the Securities Exchange Act Rule 17f-2 for FINRA members until a date to be specified in a public notice from SEC staff. Because FINRA already provided notification to the SEC in March on behalf of its members, their employees, and associated persons, such individuals may continue to rely on the commissioner’s order and FINRA’s notification. However, for an individual seeking registration pursuant to the submission of a Form U4, a FINRA member firm seeking to rely on temporary exemptive relief for registered persons must comply with FINRA’s guidance with respect to FINRA Rule 1010.
Global pharmaceutical company’s current and former subsidiaries settle alleged FCPA violations with DOJ
On June 25, the DOJ announced it had entered into a deferred prosecution agreement with a subsidiary of a Switzerland-based global pharmaceutical company to pay $225 million in criminal penalties related to alleged violations of the FCPA’s anti-bribery and books and records provisions. The DOJ also entered into a separate deferred prosecution agreement with a former subsidiary of the pharmaceutical company (current subsidiary of a multinational eye care company) for approximately $8.9 million in criminal penalties related to alleged violations of the FCPA’s books and records provisions.
According to the DOJ, between 2012 and 2015, the current pharmaceutical subsidiary violated the FCPA by engaging in a scheme to bribe employees of state-owned and state-controlled hospitals and clinics in Greece to increase the sales of its products. Moreover, between 2009 and 2010, the pharmaceutical subsidiary made improper payments, in connection with an epidemiological study, to providers in order to increase sales of certain prescription drugs. The DOJ alleged that the pharmaceutical subsidiary “knowingly and willfully conspired with others to cause [the pharmaceutical parent company] to mischaracterize and falsely record improper payments…in [the parent company]’s books, records, and accounts.” Under the terms of the agreement with the pharmaceutical subsidiary, the subsidiary agreed to cooperate with ongoing investigations, and both the subsidiary and its parent agreed to enhance their compliance programs and report to the DOJ on those improvements.
In the DPA with the former eye care subsidiary, the DOJ alleged that between 2011 and 2014, while still a subsidiary of the pharmaceutical parent company, the former subsidiary “knowingly and willfully conspired with others to cause [the pharmaceutical parent company] to maintain false books, records and accounts, as a result of a scheme to bribe employees of state-owned and state-controlled hospitals and clinics in Vietnam.” The agreement notes that the former eye care subsidiary and its current parent company have since implemented and will continue to implement enhanced FCPA compliance controls and will report to the government on the implementation.
The DOJ recognized that both subsidiaries engaged in remedial measures, including (i) terminating and disciplining individuals involved in the misconduct; (ii) adopting heightened controls and anti-corruption protocols; and (iii) increasing the resources devoted to compliance.
The SEC simultaneously announced a resolution with the pharmaceutical parent company to pay over $112 million in a related matter.
Agencies finalize covered funds changes to Volcker Rule
On June 25, the Federal Reserve Board, CFTC, FDIC, OCC, and SEC (agencies) finalized the rule, which will amend the Volcker Rule to modify and clarify the regulations implementing Section 13 of the Bank Holding Company Act with respect to covered funds. As covered by InfoBytes in February, the agencies issued the proposed rule, and, after the notice and comment period, finalized the proposal with certain modifications based on the public comments. Among other things, the final rule (i) exempts qualifying foreign excluded funds from certain restrictions, but modifies the anti-evasion provision and compliance program requirements from the proposal; (ii) revises the exclusions from the covered fund provisions for foreign public funds, loan securitizations, and small business investment companies; (iii) adopts several new exclusions from the covered fund provisions, including an exclusion for venture capital funds, family wealth management, and customer facilitation vehicles; (iv) permits established, codified categories of limited low-risk transactions between a banking entity and a related fund; (v) provides an express safe harbor for senior loans and senior debt, and redefines “ownership interest”; and (vi) provides clarity regarding permissible investments in the same investments as a covered fund organized or offered by the same banking entity. The final rule is effective October 1.
The FDIC also released a Fact Sheet on the final rule.
SEC issues two separate whistleblower awards totaling over $800,000
On June 23, the SEC announced a $125,000 award to a whistleblower in an enforcement action. According to the press release, the whistleblower’s “information and assistance helped both the SEC and another agency bring successful actions against the perpetrator of a fraudulent securities offering.” The formal order notes that the whistleblower’s information helped the SEC and another agency discover “a fraudulent scheme that preyed on a vulnerable investor community” and that the whistleblower provided assistance to the SEC and the other agency throughout the investigation.
Additionally, on June 19, the SEC announced a nearly $700,000 award to a whistleblower in an enforcement action. According to the press release, the whistleblower’s “significant information helped the agency bring a successful enforcement action that resulted in the return of money to harmed investors.” The formal order notes that the whistleblower reported the concerns internally “in an effort to remedy the conduct,” and provided ongoing assistance to the agency throughout the investigation.
These press releases also noted that as of June 23, the SEC has awarded 85 individuals a total of approximately $501 million in whistleblower awards since its first award in 2012.
U.S. Supreme Court upholds SEC’s disgorgement authority with limits
On June 22, in an 8-1 ruling, the U.S. Supreme Court vacated the U.S. Court of Appeals for the Ninth Circuit’s judgment in Liu v. SEC, holding that the SEC may continue to collect disgorgement in civil proceedings in federal court as long as the award does not exceed a wrongdoer’s net profits, and that such awards for victims of the wrongdoing are equitable relief permissible under §78u(d)(5). The ruling impacts petitioners who were ordered by a California federal court to disgorge $26.7 million in money collected from investors for a cancer treatment center that was never built, with the related SEC investigation finding that more than $20 million was spent on ostensible marketing expenses and salaries, far in excess of what the offering memorandum permitted. As previously covered by InfoBytes, the Court examined whether the SEC’s statutory authority to seek “equitable relief” permits it to seek and obtain disgorgement orders in federal court. The petitioners asked the Court to bar the SEC from seeking court-ordered disgorgement (covered by InfoBytes here), arguing that Congress never authorized the SEC to seek disgorgement in civil suits for federal securities fraud as a form of equitable relief or otherwise. The petitioners pointed to the Court’s 2017 decision in Kokesh v. SEC, in which the Court reversed the ruling of the U.S. Court of Appeals for the Tenth Circuit when it unanimously held that disgorgement operates as a penalty under 28 U. S. C. §2462, which establishes a 5-year limitations period for “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.”
The Court rejected the petitioners’ argument, noting that equity practice has “long authorized courts to strip wrongdoers of their ill-gotten gains,” although “to avoid transforming an equitable remedy into a punitive sanction, courts restricted the remedy to an individual wrongdoer’s net profits to be awarded for victims.” As such, the Court determined that the SEC’s disgorgement remedy must be limited in various ways. The Court discussed three limits: (i) the “profits remedy” must return the defendant’s wrongful gains to those harmed by the defendant’s actions, as opposed to depositing them in the Treasury; (ii) disgorgement under the statute requires a factual determination of whether petitioners can, consistent with equitable principles, be found liable for profits as partners in wrongdoing or whether individual liability is required; and (iii) disgorgement must be limited to “net profits” and therefore “courts must deduct legitimate expenses before ordering disgorgement” under the statute. The Court vacated the judgment against the petitioners and remanded to the lower court to examine the disgorgement amount in light of its opinion.
Justice Clarence Thomas dissented, however, stating that he would have barred the SEC from seeking disgorgement in federal court under the statute rather than limiting the remedy, because while 15 U. S. C. §78u(d)(5) allows the SEC to seek equitable relief that may be appropriate or necessary for the benefit of investors, “disgorgement is not a traditional equitable remedy.”
SEC extends permission for virtual fund board meetings
On June 19, the Securities and Exchange Commission extended conditional relief from its requirements for in-person voting boards of directors of registered management investment companies and business development companies (previously covered here). Instead, votes may be cast using any communication that permits all participating directors to hear each other simultaneously during the meeting. The commission extended the relief through December 31, 2020.
SEC temporarily allows municipalities to sell securities to banks
On June 16, the SEC released a temporary exemptive order, which provides a temporary conditional exemption for registered municipal advisors to sell municipal securities to banks, their wholly-owned subsidiaries engaged in commercial lending and financing activities, and credit unions. Specifically, the order, which is intended to “address disruption in the municipal securities market” due to Covid-19, provides municipal advisors a temporary exemption from broker registration under Section 15 of the Securities Exchange Act of 1934. The order notes that most municipal issuers facing “significant budget shortfalls” do not meet the eligibility criteria for the Federal Reserve Board’s Municipal Liquidity Facility, and therefore, the temporary exemption will help to “facilitate more timely and efficient access to bank financing alternatives by municipal issuers.” The order details the permitted activities allowed under the temporary exemption, along with written representations the municipal advisor must obtain. Additionally, the order restricts the aggregate principal amount of a municipal security to $20 million. The temporary exemption expires on December 31.
FINRA extends temporary changes to its procedural rules
On June 10, FINRA filed a proposed rule change with the SEC to extend the effective date of previous temporary changes to its procedure rules, previously covered here. The previous rule change modified certain timing, method of service, and other procedural requirements contained in FINRA rules. The amendments extend the rule changes through July 31, 2020.