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Pharmaceutical Companies Resolve DOJ and SEC FCPA Charges
On August 7, the DOJ and the SEC announced the resolution of FCPA allegations against Pfizer Inc. (Pfizer) and two of its subsidiaries, Pfizer H.C.P. and Wyeth LLC. The DOJ announced that it filed a criminal information in the U.S. District Court for the District of Columbia, as well as a deferred prosecution agreement pursuant to which Pfizer H.C.P. admitted to making improper payments to public officials in Russia and other eastern European countries in attempts to influence decisions to approve and register certain pharmaceutical products. Pfizer H.C.P. must pay a $15 million penalty, but the agreement acknowledges Pfizer’s efforts to investigate and self-report the matter, as well as the company’s “significant cooperation” and extensive remedial efforts. Civil charges brought by the SEC through separate complaints against Pfizer and Wyeth involve similar allegations regarding the companies’ conduct in numerous countries. While Wyeth neither admitted nor denied the SEC allegations, the two parties resolved the cases by agreeing to pay a combined $45 million, committing to certain remedial actions, and reporting to the SEC. Like the DOJ, the SEC notes Pfizer’s voluntary disclosure and cooperation. The SEC complaints and the DOJ deferred prosecution agreements are available on BuckleySandler’s FCPA Score Card.
Senators Unveil Bill to Increase SEC Civil Penalties; House Members Propose Competing Bills to Enhance the SEC's Investment Adviser Oversight
On July 23, Senators Reed (D-RI) and Grassley (R-IA) unveiled legislation to increase statutory limits on SEC civil monetary penalties to $1 million per violation for individuals, and $10 million per violation for entities. The bill, S. 3416, would also allow for the size of penalties to be linked to the scope of harm and associated investor losses, and provide substantially higher penalties for repeat offenders. The legislation follows a letter SEC Chairman Shapiro sent to Senators Reed and Crapo (R-ID) in November 2011, seeking reforms to the SEC’s authority to impose civil penalties.
On July 24, Representatives Waters (D-CA), Frank (D-MA), and Capuano (D-MA) announced new legislation, H.R. 6204, that would provide the SEC with the authority to impose user fees on investment advisers for the purpose of funding an increase in the number and frequency of SEC examinations. This bill follows an earlier bill from Reps. Bachus (R-AL) and McCarthy (D-NY), H.R. 4624, which also seeks to improve oversight of investment advisers, but through the establishment of self-regulatory organizations overseen by the SEC that investment advisers with retail customers would be required to join.
SEC Announces Additional Senior Appointments
On July 5, the SEC announced Norm Champ as the new Director of the SEC’s Division of Investment Management. Mr. Champ has been serving as Deputy Director of the SEC’s Office of Compliance Inspections and Examinations. Prior to joining the SEC in 2010, Mr. Champ was general counsel and a partner at investment management firm Chilton Investment Company. On July 9, the SEC announced that beginning August 6, 2012, Paula Drake will serve as Associate Director, Chief Counsel and Chief Compliance and Ethics Officer. Ms. Drake joins the SEC from Oechsle International Advisors, LLC, where she served as General Counsel and Chief Operating Officer.
Medical Device Manufacturer Resolves FCPA Violations Related to Conduct in Mexico
On July 10, medical device manufacture Orthofix International N.V. became the latest in a string of companies in the medical device sector to resolve an FCPA matter with the U.S. government. The settlement adds Orthofix to the list of device manufacturers that have settled FCPA matters in 2012, along with Smith & Nephew and Biomet, who settled in February and March 2012, respectively. The Orthofix FCPA resolution calls for the company to pay a criminal fine to the DOJ of $2.22 million, and a civil monetary sanction (including disgorgement and interest) of $5.2 million to the SEC. The DOJ resolved the matter through a Deferred Prosecution Agreement, which was attached to the company’s 8-K of July 10, 2012, reporting the resolution. According to the allegations in the SEC’s Complaint, Promeca S.A. de C.V, a subsidiary based in Mexico, paid bribes to employees of the government-operated health care system, referring to the payments as “chocolates” and booking inaccurate reimbursement requests as meals, car tires or training expenses. The Mexico subsidiary made approximately $317,000 in improper payments over a 7-year period, according to the SEC. The FCPA resolution follows a June 7, 2012 guilty plea by the U.S. subsidiary, Orthofix Inc., on a False Claims Act-related matter, resulting in $7.8 million fine and payment of over $34 million to resolve a civil action.
CFTC, SEC Approve Final Rules To Define "Swap"; CFTC Exempts Small Banks From Clearing Requirements
This week the CFTC and the SEC approved jointly written rules and guidance to further define “swap”, “security-based swap,” and other related terms for use in regulating over-the-counter (OTC) derivatives. The Dodd-Frank Act defines these terms but also requires both the SEC and CFTC to jointly define the terms further and jointly establish regulations regarding “mixed swaps” as may be necessary to carry out the purposes of swap and security-based swap regulation under the Act. The SEC and CFTC final rules and guidance identify specific products and services that do and do not fall within the further-defined terms. The approved rules will take effect 60 days after being published in the Federal Register. The approval of the definitions also triggers the period for swap dealers to comply with other Dodd-Frank Act rules put in place to regulate the OTC derivatives markets. The CFTC also approved a final rule that implements an exemption to the clearing requirement for non-financial entities and financial institutions with total assets of $10 billion or less that hedge or mitigate business risk through swaps.
SEC and FDIC Announce Senior Appointments
On July 3, the SEC announced that Ken C. Joseph will lead the Investment Adviser/Investment Company Examination Program for the New York Regional Office. Mr. Joseph previously served for 16 years as a Staff Attorney, Branch Chief, and Assistant Director in the SEC’s Division of Enforcement in Washington, DC and New York.
On July 2, the FDIC announced that Doreen R. Eberley will oversee all examination activities of the FDIC’s regional and field supervisory operations as Senior Deputy Director for Supervisory Examinations in the Division of Risk Management Supervision. Ms. Eberley currently serves as New York Regional Director and has been with the FDIC for 25 years. The FDIC also announced that Andrew Gray will serve as Deputy to the Chairman for Communications and Eric Spitler will serve as Director of the Office of Legislative Affairs.
Federal Reserve Establishes Securities Holding Companies Registration Procedures
On May 30, the Federal Reserve Board issued a final rule that establishes procedures for nonbank companies that own at least one registered securities broker or dealer to register for supervision by the Federal Reserve Board as a securities holding company (SHC). The Dodd-Frank Act eliminated supervision of SHCs by the SEC and provided SHCs with the ability to seek supervision by the Federal Reserve Board to satisfy the requirements of foreign regulators or foreign law that companies be subject to consolidated supervision in the United States. The final rule includes capital and financial condition requirements and specifies other information necessary for registration. Once registered, an SHC would be supervised and regulated as if it were a bank holding company. However, the restrictions on nonbanking activities in section four of the Bank Holding Company Act would not apply to the supervised SHC.
SEC Announces $28 Million RMBS Settlement
On April 24, the U.S. Securities and Exchange Commission announced that it filed and simultaneously settled a suit alleging that an H&R Block subsidiary engaged in the fraudulent sale of subprime residential mortgage-backed securities (RMBS). The complaint alleges that during a short period at the beginning of 2007, Option One Mortgage, now known as Sand Canyon Corporation, sponsored over $4 billion of RMBS and represented to investors that it would repurchase or replace any pooled mortgage for which there was a breach of a representation or warranty. The SEC alleges that at the time it sponsored the RMBS at issue, Option One was experiencing financial difficulties related to the broader decline of the subprime mortgage market and faced substantial margin calls from its creditors. As such, Option Ones condition would have prevented the company from meeting its obligations to repurchase faulty loans. Further, according to the SEC, (i) Option One failed to disclosure that it was reliant on a line of credit from its parent, (ii) H&R Block was under no obligation to provide that funding, and (iii) Option Ones losses threatened H&R Blocks credit rating at a time when the parent was negotiating the sale of Option One. The SEC did not immediately make the settlement available, but it announced that without admitting or denying the allegations Option One agreed to (i) disgorge over $14 million, (ii) pay prejudgment interest of nearly $4 million, and (iii) pay a $10 million penalty. The SEC touts this latest action as part of financial crisis-related enforcement efforts that collectively have obtained more than $1.98 billion in penalties, disgorgement, and other monetary relief. Though the investigation likely precedes the state-federal Residential Mortgage-Backed Securities Working Group and appears to have been conducted by the SEC alone, the SEC notes its role as co-chair of that group, which seeks to leverage resources to pursue alleged misconduct in the RMBS market. This settlement, comments from the SEC, and the still developing efforts of the RMBS Working Group indicate that institutions should expect continued aggressive pursuit of alleged wrongdoing in the RMBS market. This was made clear by comments from Kenneth Lench, Chief of the SEC Division of Enforcements Structured and New Products Unit that the SEC intends to "take action against those who fail to disclose or downplay important facts that make an investment riskier, even if those risks do not materialize. We remain committed to uncovering misconduct involving complex financial instruments including RMBS. Also of note, the SEC has shown a continued willingness to employ so-called "no-admit" settlements, notwithstanding a challenge to that long-standing practice issued last year by Judge Rakoff of the Southern District of New York. Last month, the U.S. Court of Appeals for the Second Circuit issued an interim decision staying Judge Rakoff's order that denied a significant no-admit settlement and required the SEC to pursue its claims at trial. In doing so, the circuit court stated that it had a significant problem with the district court's decision to dictate policy to an executive administrative agency. Instead, the Second Circuit stated, courts should defer to the agency's judgment on discretionary policy. A final decision on the district court's ruling is still pending with the Second Circuit.
SEC moves to files amended complaint in FCPA enforcement action
On March 14, Fannie Mae followed its March 6 promise to update lender-placed insurance (LPI) requirements, by issuing Servicing Guide Announcement SVC-2012-4. The announcement details policy amendments and clarifications regarding the (i) use of LPI, (ii) coverage requirements, (iii) deductibles, (iv) carrier eligibility requirements, and (v) allowable reimbursable expenses. The Announcement also provides additional guidance to servicers for submitting property insurance claims and remitting outstanding insurance funds to Fannie Mae. The LPI updates will be published as a new section in Part II, Chapter 6 of the Servicing Guide, and servicers are required to implement the amended requirements by June 1, 2012. Additionally, on March 14, Fannie Mae announced the release of its 2012 Servicing Guide. According to SVC-2012-3, the new Guide incorporates all announcements issued through September 2, 2011. The new Guide does not include policies related to the servicing of reverse mortgages, which now form a new Servicing Manual. In addition, the new Guide includes certain policy clarifications regarding lender relationships and other miscellaneous issues.