The Intersection of FCPA Enforcement and Whistleblower Claims

In his Employment Issues column, Philip Berkowitz discusses a recent decision of the U.S. Court of Appeals for the Ninth Circuit, which provides a good illustration of the intersection between FCPA enforcement and whistleblower claims.

When considering compliance with the Foreign Corrupt Practices Act (FCPA), the activities of an employer’s human resources department are not normally the area of initial focus. Instead, the FCPA is usually associated with claims of kickbacks to shadowy government officials in far-off locales.

We have seen the collision between human resources and FCPA compliance in recent SEC and DOJ prosecutions and multi-million dollar settlements of claims alleging that major companies hired relatives and friends of foreign government officials in order to obtain or retain business or other benefits.

Another area of intersection lies in the activities of employees entrusted with assuring that their companies comply with the law. Plaintiffs in senior compliance positions, such as in-house counsel and chief risk officers, increasingly claim that they are victims of retaliation for reporting their suspicion of FCPA violations either internally or to the government.

After all, it is their job to monitor compliance—when they spot issues, they are supposed to say something and be part of the solution. And if these employees, after raising a red flag, become subjects of discipline or are not provided the resources to do what they believe is necessary, even for completely unrelated reasons, then they may wonder whether they are being penalized for doing their jobs.

And if the discipline decision is not well documented, or if the non-retaliatory reasons for the discipline do not seem clear, then the employee may follow through and file a retaliation claim. They know where the proverbial skeletons are buried, and they become whistleblowers.

A recent decision of the U.S. Court of Appeals for the Ninth Circuit provides a good illustration of the intersection between FCPA enforcement and whistleblower claims. In Wadler v. Bio-Rad Laboratories, 916 F.3d 1176 (9th Cir. 2019), the jury awarded the corporate defendant’s former general counsel $11 million for terminating him allegedly in retaliation for his internal report that he believed the company had engaged in violations of the Foreign Corrupt Practices Act in China. The jury decided that this conduct violated the Sarbanes-Oxley Act, the Dodd-Frank Act, and California public policy.

First, a brief review of the FCPA. At its core, the FCPA has two provisions: anti-bribery and accounting. The first prohibits any U.S. individual, business entity or employee of a U.S. business entity from offering or providing, directly or through a third party, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage. Intent and knowledge are usually inferred from that fact that bribery took place.

The accounting provisions of the FCPA prohibit a company that reports to the SEC from having false or inaccurate books or records or failing to maintain a system of internal accounting controls. The accounting provisions do not require the government to prove intent to establish a violation. Thus, failing to keep clear records of a decision to hire an individual in the circumstances described above could constitute a separate violation of the Act.

As noted above, FCPA and whistleblower retaliation claims naturally find each other. A senior executive who blows the whistle on what he or she believes are violations of the FCPA may do so in good faith, or may do so as a defensive maneuver to protect himself against discipline, but depending on how the investigation goes and whether there is a finding that the claim had merit, or not, the whistleblower may find their motives and good faith under scrutiny.

Such was allegedly the case in Wadler, which has worked its way through the California federal courts for several years, and resulted in numerous significant rulings, most of them bad for employers. Among them were findings by the district court that the Bio-Rad’s CEO could properly be a defendant in a SOX case, and rejecting efforts to strike the complaint on the grounds that the plaintiff could not properly rely on allegedly privileged attorney-client information that he gained while employed as general counsel.

In this most recent incarnation, Wadler (again, the company’s former general counsel) claimed that CEO fired him shortly after delivering a report to the company’s audit committee claiming that he believed Bio-Rad employees in China had violated the FCPA’s bribery and books-and- records provisions, and that senior management was likely complicit.

The story goes back to 1999, when at Wadler’s recommendation, Bio-Rad hired outside counsel to investigate findings of its internal audit team that salesmen in Vietnam and Thailand engaged in potential FCPA violations. Outside counsel concluded that Bio-Rad employees were indeed violating the FCPA’s bribery and books-and-records provisions in Vietnam, Thailand, and Russia. As for China, he reported several “red flags,” but concluded that he had found “no evidence of improper payments.”

In 2012 and 2013, Wadler and the CEO received information that caused Wadler to believe that the Company was in fact engaging in bribery in China. In February 2013, Wadler delivered a report to the Company’s Audit Committee in which he claimed that “these practices [we]re endemic and that high levels of management within the company had to know they were happening,” which, he continued, was why he had not yet discussed his concerns with senior management (including the CEO). He recommended that the Company carry out an investigation, and report his suspicions to the U.S. government.

In response, the Audit Committee authorized Wadler to hire outside counsel to investigate, and the Chairman of the Audit Committee informed the CEO about the report. Two days later, the CEO informed the head of Bio-Rad’s human resources department that Wadler had “been acting a little bizarre lately” and that he might “want to put him on an administrative leave.”

Several months later, in June 2013, outside counsel found that there was “no evidence to date of any violation— or attempted violation—of the FCPA” in China.

Three days later, the CEO fired Wadler.

At trial, Wadler claimed that the CEO fired him in retaliation for reporting alleged FCPA violations to the Audit Committee, while Bio-Rad argued that Wadler was fired due to his poor performance and dysfunctional relationship with management. Bio-Rad also argued that Wadler wrote the report only because he was concerned about his job security, and that it would have been unreasonable for a general counsel in Wadler’s position to believe that the Company had violated the FCPA in China.

At the close of trial, the judge gave several jury instructions concerning when an employee engages in “protected activity” for purposes of SOX, Dodd-Frank, and California state law. The judge instructed that to prove he engaged in protected activity under SOX, Wadler had to show that he disclosed conduct that he reasonably believed violated a “rule or regulation of the” SEC.

Further, the judge instructed that the recordkeeping provisions of the FCPA—prohibiting bribery of a foreign official, failing to keep accurate and reasonably detailed books and records, knowingly falsifying books and records, knowingly circumventing a system of internal accounting controls—constitute SEC rules and regulations, and therefore can give rise to a SOX whistleblower claim.

Bio-Rad filed a motion for judgment as a matter of law and for a new trial, arguing that these instructions were erroneous, because the FCPA, a statute, does not constitute SEC rules or regulations for purposes of SOX § 806. The district court denied Bio-Rad’s motions, holding that the FCPA is a “rule or regulation of the SEC” for purposes of SOX because “the FCPA is an amendment to the Securities … Exchange Act of 1934 and is codified within it.”

Following a verdict in favor of the plaintiff and an appeal, the Ninth Circuit reversed, holding that the district court’s instructions were erroneous.

And, the court held, Wadler could not maintain his Dodd-Frank claim in light of the Supreme Court’s 2018 opinion in Digital Realty Trust v. Somers, 138 S. Ct. 767, 778 (2018), which held that Dodd-Frank does not apply to purely internal reports. Wadler had only complained internally; he never went to the SEC.

But the news was not all good for Bio-Rad. The panel held that a properly instructed jury could nevertheless return a verdict in favor of Wadler on his state law retaliation claim and confirmed the jury’s award of compensatory and punitive damages. Therefore, the court remanded to the district court to determine whether a new trial on the SOX cause of action was warranted. The court noted that in a new trial, Wadler would not have to prove that he reported an actual violation, but only that he “reasonably believed that there might have been a violation, and that he was fired for even suggesting further inquiry.

Wadler demonstrates the continued risks associated with claims brought by compliance personnel. Human resources professionals and employment lawyers can mitigate these risks by assuring, at a minimum, that performance problems of individuals in these key positions are properly documented. Further, companies should not carry out discipline of these individuals without being absolutely certain they are free of bias and even the appearance of bias.

Read full article here:

Philip M. Berkowitz is a shareholder of Littler Mendelson and co-chair of the firm’s U.S. international employment law and financial services practices. 

Reprinted with permission from the May 08, 2019 edition of the New York Law Journal©

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