Judge Leon The SEC IBM and the FCPA

Judge Richard Leon has waited twenty months for the Securities and Exchange Commission (SEC) to come to its enforcement senses.

And still, he waits.

Last month, in his federal courtroom in Washington, D.C., Judge Leon brought before him the SEC’s lawyer – Kyle Martin DeYoung – and IBM’s lawyers – Richard Barbur of Cravath, Swaine & Moore in New York and Noel John Francisco of Jones Day in Washington, D.C.

On May 8, 2011, the SEC charged IBM with making improper cash payments, gifts, and travel and entertainment to government officials in South Korea and China.

The SEC charged IBM with violating the Foreign Corrupt Practices Act (FCPA).

As is the SEC’s practice, the SEC entered into a consent decree with the defendant.

In the consent decree, IBM neither admitted nor denied violating the law.

But agreed not to violate it again.

And agreed to pay $10 million.

It’s the kind of sweetheart deal that the SEC cuts with corporate defendants in FCPA cases.

And it’s similar to the sweetheart deals the Justice Department cuts with corporate defendants in FCPA cases. At the Justice Department, they’re called deferred and non prosecution agreements.

The difference in the IBM case is that the SEC and IBM ran into Judge Leon.

Judge Leon, as part of his oversight responsibility in monitoring FCPA consent decrees, requires defendant companies to submit to him and to the SEC annual reports regarding their FCPA compliance efforts.

The SEC and IBM agreed to Judge Leon’s request on that issue.

But Judge Leon also wants IBM to report to him and to the SEC “immediately upon learning that it is reasonably likely” the company violated the FCPA.

To this IBM has not agreed.

IBM argues that this reporting requirement should be limited to violations of the FCPA “in connection with any improper payment to obtain or retain business.”

“That limitation strikes me as wholly inappropriate in a case like this where the company has a history of FCPA books and records violations,” Judge Leon said.

Judge Leon also wants IBM to report within 60 days of learning that it is the subject of “any investigation or enforcement proceeding by any federal government agency, a party to any major federal administrative proceeding, a party to any major civil litigation in the United States, or the subject of any criminal investigation by the Department of Justice.”

That would be – Judge Leon wants the company to compile a federal rap sheet.

Not a bad idea.

And one that has been proposed by public interest attorneys to apply to all major corporations.

“Once again, the defendant has indicated it will only agree to these requirements if they are limited to FCPA-related proceedings, litigation and investigations,” Judge Leon said. “Not surprisingly, I disagree.”

“I believe that such a limitation would severely limit this court’s ability to assess whether the law-abiding corporate culture the defendant has allegedly put in place company-wide and the internal controls to monitor it are actually succeeding,” Judge Leon said.

“IBM balks at these reporting requirements as too burdensome to comply with,” Judge Leon said.

“For reasons the Court the cannot fathom, the SEC appears to agree with the defendant,” Judge Leon said. “I, of course, continue to disagree.”

“The parties have not demonstrated that these requirements are, in fact, too burdensome,” Judge Leon said.

The SEC’s DeYoung said that he looks forward to “the opportunity to further explain why we think those limitations are appropriate here.”

“How would you like to do that?” Judge Leon asked. “What’s your game plan? You must have one. Because I know the SEC doesn’t want to try cases. So you want to resolve this short of a trial. What’s your game plan?”

“Do you have data at your disposal that would demonstrate how complying with these requirements would in some way be too onerous or burdensome for IBM?” Judge Leon asked.

“Do you have any data? Have they given you – let start with that. Have they provided you any data as to how it is – because they haven’t provided any to the Court. Have they provided you any data as to how it is this would be too great a burden to the general counsel’s office and the person in charge of monitoring and compliance at IBM, one of the largest corporations in the world – how this would be too burdensome to them? Have they given you any data to date?”

“No, your Honor,” DeYoung said. “They have not provided us with any data.”

“Do you, for example, have any idea how many items these requirements would require them to report if they had to comply with it?” Judge Leon asked.

“I don’t, your Honor,” DeYoung said.

“No. So it could be as few as a couple or it could be as many as 100 or 1,000 or 5,000,” Judge Leon said. “You just don’t have any idea. And yet the SEC’s position is, we are okay with it. We are fully in support of IBM? Is what you are telling me?”

DeYoung says that the SEC has filed a proposed consent decree with IBM, but Judge Leon cuts him off.

“This is not a rubber stamp court,” he says. “You know that. The SEC has had a lot of big cases in this court, and we can start with a certain one in Germany [Siemens]. I think you might be familiar with that one.”

“Okay, your Honor,” DeYoung says.

“It’s the largest FCPA case in history,” Judge Leon says. “This Court has had a lot of SEC enforcement cases, and I don’t just sign it and turn it over. I am part of a growing number of District judges in the country who have grown increasingly concerned about that kind of conduct, just simply signing off on consent decrees. I don’t do that. You should know that by now.”

“We understand, your Honor,” DeYoung says.

“You sure as heck should understand it,” Judge Leon says.

“You have no data. How are you planning on getting it? Do you have a plan?”

“Well, your Honor, I –“ DeYoung says.

“I think the answer is no,” Judge Leon says.

“Regarding data, we don’t have a plan,” DeYoung says. “I think that would be an argument primarily made by IBM on the data. We do have other reasons why we believe that –”

“Well, IBM’s objection is it’s too burdensome,” Judge Leon says. “I want to see data as to why, for one of the largest companies in the world, this is too burdensome. Because I have nothing to support that, and neither do you. And the SEC, notwithstanding the fact it has nothing to support it, is taking the position it’s taking, just simply agreeing with IBM. I guess you want that $10 million judgment on your list of achievements this year at the SEC. Well, it’s not going to happen this year.”

“You are going to need data because, if you don’t have data, how am I supposed to make a judgment as to whether it’s too big a burden?” Judge Leon asks.

“I know, as a practical matter, and so should you, that the general counsel of IBM has a record that’s kept on a continuing basis of all litigation that it is involved in. They keep that on a daily basis. It’s in a computer. They monitor that constantly.”

“They have a person who is in charge of internal compliance on FCPA alone,” Judge Leon says. “It’s her job – it is her single job to make sure they comply with the FCPA. And she is constantly monitoring their facilities all over the world. And she is supposed to be reported to if a violation is really likely to have occurred, whether it be books or records or any other kind. IBM wants to limit this to, well, if there is a bribe paid to corporate official. This is a case involving books and records or any other kind.”

“You are going to need to figure out the answer to the question why that is you agree to – why you agreed to that, why that’s too burdensome on them. Be prepared. Make sure the Commission gives you the authority you need to get the answers to those questions, or otherwise I will just send it back.”

“Do you have any idea how many minor, inadvertent books and records FCPA-type violations they had, say, last year?” Judge Leon asks. “Did they tell you?”

“I don’t know, your Honor,” DeYoung says.

“Did you ask?” Judge Leon asks.

“I didn’t ask that specific question,” DeYoung says.

“If IBM wants to come in here and say — and the SEC, too – in the last year we had 10,000 – this is a hypothetical for the benefit of those sitting in the audience – we had 10,000 inadvertent FCPA books and records type violations that weren’t related in any way to paying a bribe to a foreign government official, and to keep track of those 10,000 is just too big a job for us, even though we have a person whose only job it is to monitor that – well, maybe they can make a case for that,” Judge Leon says.

“But if they are going to come in here and just say it’s too burdensome – this is not a potted plant court. I don’t just sign consent decrees, and you know it. SEC knows it. They might not know it over at IBM. You are going to need data. Don’t come back without it. Don’t come back with just conclusory arguments because I will send it back.”

Judge Leon’s interaction with IBM attorney Barbur did not go well.

Barbur started to talk before Judge Leon finished asking a question.

“Mr. Barbur, when I start, you stop. That’s the rules in this courtroom. You get it?” Judge Leon asked.

“Yes your honor,” Barbur responded.

“Now your position is that it’s too burdensome, right?”

“That’s part of our position,” Barbur said.

Judge Leon then asks Barbur how many books and records violations were uncovered by IBM last year.

Barbur says he doesn’t know.

But then Judge Leon and Barbur get tangled up again.

“Mr. Barbur, when I start, you stop,” Judge Leon says. “If you don’t, you will be held in contempt. That might be a first for Cravath. You stop when I start. You get me? This is the second time I have had to tell you this.”

“I apologize, your honor,” Barbur says.

“There won’t be a third,” Judge Leon says. “I’m promising you that.”

“I am not going to just roll over like the SEC has – this is too burdensome for IBM,” Judge Leon says. “Forget about it. You are going to need data to satisfy me. So you better sit down with those folks at the SEC and figure out how you are going to get them the data and how long it’s going to take. Because you have decided to lawyer this case the way you are lawyering it. I have had plenty of other cases where the lawyers never did any of these things. This is the Cravath approach. Okay, fine. This is your judgment. This is the judgment you have made – the language is too tough for IBM. It’s not too tough for a lot of other corporations, but IBM is a special situation. So you know what? Get the data.”

And get it by February 4, 2013 at 11:30 am.

See you then.

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