Patching the Holes in Sox: Fcpa Disgorgement After Liu and the Ndaa

• Citation: Vol. 71 No. 4
• Publication year: 2022

Patching the Holes in SOX: FCPA Disgorgement after Liu and the NDAA

Jason R. Chohonis

PATCHING THE HOLES IN SOX: FCPA DISGORGEMENT AFTER LIU AND THE NDAA

Abstract

The Foreign Corrupt Practices Act (FCPA) forbids companies and persons from bribing foreign officials to secure business and creates an affirmative duty for companies to maintain valid accounting records. Since 2004, following the passage of the Sarbanes-Oxley Act (SOX), the Securities and Exchange Commission (SEC) has pursued "equitable remedies" under 15 U.S.C. § 78u(d) to disgorge profits from those who have violated the FCPA. Despite apparent legislative acceptance of disgorgement, the Supreme Court put disgorgement's legality into doubt in two recent decisions. The first, Kokesh v. SEC in 2017, established that disgorgement had to happen within a five-year statute of limitations period. The second, Liu v. SEC in 2020, held that disgorgement might not be allowed as an equitable remedy if, as in FCPA cases, the money disgorged was sent to the Treasury rather than wronged investors.

At the close of 2020, Congress responded to these decisions. To preserve the powers of the SEC to protect U.S. financial markets, Congress passed legislation that expressly granted the SEC disgorgement powers and raised the statute of limitations to ten years for select securities law violations. Despite this new legislation, questions still exist as to whether the SEC must abide by the limitations on its disgorgement powers set out by the Liu decision and which statute of limitations applies to FCPA disgorgement. This Comment argues that disgorgement under the newly revised Section 78u(d) should be allowed for FCPA actions that send money to the Treasury, regardless of whether the limitations imposed by the Liu decision still apply. Further, this Comment asserts that, in light of the uncertainty likely to arise from the new changes to Section 78u(d), Congress should revise the statute to expressly allow the SEC to disgorge profits to the Treasury in FCPA actions with a ten-year statute of limitations. Finally, this Comment argues that the best solution for concerns about the slow pace of SEC enforcement would be new legislation that allows for SEC self-funding derived from FCPA disgorgement remedies.

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Table of Contents

Introduction.............................................................................................843

I. FCPA Background.........................................................................845

A. The FCPA Anti-Bribery Provisions.......................................... 847
B. The FCPA Accounting Provisions............................................ 847
C. Consequences for FCPA Violations ......................................... 849

II. Recent Challenges: Kokesh and Liu..........................................852

A. Grupo-Mexicano's "Historic" Approach................................. 853
B. Kokesh's Footnote Three Threatened the Existence of SEC Disgorgement Writ Large......................................................... 854
C. Liu Lays Out Limitations.......................................................... 856

III. Disgorgement for FCPA Violations Is Appropriate, Necessary, and Equitable...........................................................859

A. Disgorgement Is Appropriate and Necessary for the Benefit of Investors ............................................................................... 860

1. Disgorgement Is a Necessary Deterrent............................. 861
2. Disgorgement Is Appropriate and Benefits Investors ......... 865

B. Disgorgement to the Treasury Aligns with Equitable Principles .................................................................................. 866

IV. Congress's Grant of Express Authority to Disgorge Creates New Questions................................................................ 876

A. How the NDAA Alters Section 78u(d) ...................................... 877

1. Section 78u(d) Now Allows the SEC to Disgorge Funds Which May Free It of Liu's Restrictions ............................ 878
2. Section 78u(d)'s Statute of Limitations Guidelines Will Create Confusion for FCPA Enforcement .......................... 882

B. Future Revisions to the FCPA Should Specify a Ten-Year Statute of Limitations for FCPA Actions and Route Disgorgement Money to Fund the SEC .................................... 886

1. Congress Should Add the FCPA Anti-Bribery and Accounting Provisions to Section 78u(8)(A)(ii) ................. 886
2. Congress Should Provide that Disgorgement Funds Go to Self-Funding the SEC ..................................................... 888

Conclusion.................................................................................................890

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Introduction

From 2004 to 2007, banker Garth Peterson crossed ethical and legal lines.¹ Peterson, a fluent speaker of Mandarin² and head of the Shanghai branch of Morgan Stanley's global real estate office, "secretly bribed a [Chinese] government official to illegally win business for his employer."³ Peterson insisted that his colleagues owed this official a favor because the official had "really gone out of his way" to help them get a deal over a competitor.⁴ This act of bribery ultimately enriched Peterson to the tune of more than $1.8 million.⁵ A large portion of these ill-gotten gains were in the form of a property interest in a luxury high-rise apartment building in Shanghai, which he jointly invested in with his corrupt foreign counterpart.⁶ After his deception was discovered by the Securities and Exchange Commission (SEC), Peterson agreed to disgorge profits of over $250,000, as well as his interest in the property, worth over $3.4 million (referenced in this Comment as the Peterson case).⁷

Peterson faced civil, criminal, and—importantly for this Comment—equitable penalties because he violated the Foreign Corrupt Practices Act (FCPA).⁸ Yet, had he committed those same actions today, he may have gained materially from his crimes at the cost of his competitors, his employer, and the rule of law as a result of the Supreme Court's recent holding in Liu v. SEC.⁹ This 8-1 decision, which only partially upheld the SEC's ability to seek disgorgement,¹⁰ threatened the ability of the SEC to bring disgorgement at all in

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civil actions involving FCPA violations.¹¹ Post-Liu changes to the law that expressly allow the SEC to seek disgorgement and raise the statute of limitations for some securities law violations,¹² while a laudable first step by Congress, have not completely addressed the problems created by Liu and Kokesh v. SEC, a 2017 case in which the Supreme Court first questioned the equitable nature of SEC disgorgement.¹³

Part I of this Comment discusses the FCPA, which was passed in the aftermath of the Watergate scandal when congressional hearings revealed a pattern of questionable foreign payments by U.S. corporations.¹⁴ This legislation allows the SEC to pursue civil actions against issuers¹⁵ and their officers, like Peterson, when they bribe foreign officials to secure business.¹⁶ The FCPA also creates an affirmative duty on these issuers to maintain books, records,¹⁷ and internal control systems to prevent such actions.¹⁸ Part II explores how the SEC has used legislation to enforce FCPA actions before and after the introduction of a provision within the Sarbanes-Oxley Act (SOX) in 2002. This provision enabled the SEC to seek "any equitable relief that may be appropriate or necessary for the benefit of investors" under any provision of the securities laws, providing a statutory basis for the use of disgorgement in judicial enforcement actions.¹⁹ However, due in part to alleged SEC overreach,²⁰ the Supreme Court has threatened the viability of disgorgement as an SEC enforcement action in the recent decisions of Kokesh and Liu. Part III argues that, despite the absence of specific identifiable victims in FCPA enforcement, disgorgement is both an "appropriate" and "necessary" relief, and that courts should allow it as an equitable remedy subject to certain limits.²¹ Part IV analyzes recent changes to the statute that expressly authorized disgorgement and raised the statute of limitations for certain security violations. This Part argues that the murky nature

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of this new legislation creates open questions about FCPA disgorgement that Congress should rectify with additional legislation. In doing so, Congress should take the opportunity to provide the SEC with the type of funding that is commensurate with its considerable responsibilities.

I. FCPA Background

Passed in 1977, the Foreign Corrupt Practices Act (FCPA) was an audacious piece of legislation. This "pioneering statute" was the first in the world to govern "domestic business conduct with foreign government officials in a foreign market."²² Investigations in the 1970s by the Office of the Watergate Special Prosecutor, the SEC, and a congressional subcommittee revealed that U.S. corporations had made inappropriate contributions to the President of the Republic of Korea, "a Saudi Arabian general," Italian political parties, the President of Honduras, and others.²³

Congress believed that legislation prohibiting acts of bribery was warranted for many policy reasons. Among them were concerns about foreign policy, the protection of investors,²⁴ morality, foreign support, and the protection of the entire free market economy. Congressional rhetoric showed concerns for U.S. investors and about the damage to the reputation of American business abroad.²⁵ Advocates for passing the FCPA stressed that the vast bulk of ethical law-abiding American businesses should not suffer because of the actions of a few bad apples.²⁶ Congressional debate revealed worries that if those tempted to bribe foreign officials were not deterred from continued acts of bribery, the resulting bad publicity might lead to further communist appropriation of...