On May 25, the Securities and Exchange Commission adopted new rules concerning the whistleblower program implemented under Section 922 of the Dodd-Frank Act.  In a party-line divided vote of 3-2, the SEC took a “middle of the road” approach to the controversial aspect of the rule of whether to require a whistleblower to first inform his or her company of the alleged conduct.  While the SEC did not require whistleblowers to take this step, it provided additional monetary incentives for those who do and guaranteed whistleblower status to those who report internally where the company subsequently discloses the conduct to the SEC.  The new rules, which become effective 60 days after publication in the Federal Register, require a whistleblower provide the SEC with original information that results in the successful enforcement by the agency in a federal court or administrative proceeding where the SEC obtains more than $1 million in sanctions. 

The requirement for internal reporting of alleged conduct has been hotly debated.  Senior Vice President and General Counsel of the Association of Corporate Counsel Susan Hackett characterized the SEC’s new rules as a “Pandora’s box.”  Likewise, public companies have criticized the SEC’s new rules and foreshadowed the potential damage to internal compliance and reporting systems. 

In contrast, SEC Chairman Mary Schapiro commented that the rules “are intended to the break the silence of those who see a wrong” and that the SEC found the proper balance between encouraging whistleblowers to report internally, but also gave them the option to contact the SEC directly.

Read the SEC Press Release in its entirety here.


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FCPA and National Security

Posted on July 6, 2010 07:39 by Jonathan Rosen

Two recent FCPA enforcement developments exemplify the government’s view that foreign corruption is a national security risk warranting increased scrutiny.

First, the newly established FCPA unit at the Securities and Exchange Commission is investigating companies in the pharmaceutical and energy industries that do business in nations designated as state sponsors of terrorism. The purpose of the investigation is to determine whether any of the companies’ operations were used to support terrorist activities in Cuba, Iran, Sudan and Syria.

Second, the Criminal Division’s Fraud Section has sent letters in recent weeks to a number of pharmaceutical companies asking about payments made to foreign officials in several nations, beyond those designated as state sponsors of terrorism. This development follows the justice department’s announcement of its own general probe into the pharmaceutical and medical device industry in November 2009.

These two investigations reflect a policy judgment that corruption is a national security issue. The government is now looking at international corporations, including those in the pharmaceutical and medical device industry, as the gatekeepers for business activity that can be used to finance terrorist activities. Moreover, the Department’s anticorruption efforts reflect an acceptance that poor governance, including corruption, has pernicious effects on development and stabilization.

These two developments are the latest manifestation of the trend in intensified FCPA enforcement targeting the pharmaceutical industry. In a speech on November 12, 2009, to the Tenth Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum, Lanny A. Breuer, Assistant Attorney General of DOJ’s Criminal Division, warned that “[o]ur focus and resolve in the FCPA will not abate, and we will be intensely focused on rooting out foreign bribery in your industry. That will mean investigation and, if warranted, prosecution of corporations to be sure, but also investigation and prosecution of senior executives.”

Breuer highlighted some of the key factors that increase FCPA liability risks for the pharmaceutical industry. First, he noted that “close to $100 billion, or roughly one-third, of total sales for [U.S. pharmaceutical companies] were generated outside the United States, where health systems are regulated, operated and financed by government entities to a significantly greater degree than in the United States” – thereby resulting in substantial interaction with foreign government officials to manufacture and market pharmaceutical products. Second, he highlighted the problem presented by interacting with foreign health care systems: “under certain circumstances and in certain countries, nearly every aspect of the approval, manufacture, import, export, pricing, sales and marketing of a drug product in a foreign country will involve a ‘foreign official’ within the meaning of the FCPA.” Third, he cited “fierce industry competition and the closed nature of many public formularies.”

Based on these factors, pharmaceutical companies must establish and implement internal controls that govern “routine” interactions with foreign officials throughout the entire product life cycle. Aggressive FCPA enforcement creates not only back-end, e.g., distribution, but also front-end, e.g., preclinical and R&D, compliance challenges for pharmaceutical management teams that may not be accustomed to focus on anything other the scientific process. The government will closely scrutinize contacts with foreign officials throughout the entire regulatory process, including: research and development, filing patents, manufacturing, registration, price fixing, licensing of professionals and establishments, selection of essential medicines, procurement, distribution, inspection of establishments, prescription, dispensing, pharmacovigilance and marketing and sales.

Some core activities implicating FCPA concerns include:

  • Engaging the services of health care professionals
  • Post-marketing studies and other clinical studies
  • Sponsoring health care professionals to attend meetings and events
  • Gifts and entertainment
  • Visits to company facilities and other travel
  • Sponsorship and grants
  • Political contributions
  • Facilitating payments
  • Actions by and payments to agents, consultants, joint-venture partners, distributors and other third party representatives
  • “hospitality” payments

FCPA enforcement is no longer only about “leveling the playing field” of corporate opportunities. Given the government’s treatment of corruption as a national security issue, business leaders must ensure that company proceeds do not finance illicit payments which can be used to sponsor terrorism or otherwise be seen as degrading the national security interests of the United States. With the dramatic increase in FCPA penalties against senior corporate executives, corporate executives must protect themselves and their companies by conducting the appropriate due diligence and implementing the necessary internal controls to identify and remediate the danger of FCPA violations.

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SEC cooperation guidelines for individuals

Posted on January 19, 2010 04:18 by Jonathan Rosen

The SEC recently announced the standards for it's new initiative to encourage and reward cooperation by individuals. The link to the SEC explanation of the standards is:


These guidelines confirm the SEC's previously stated intention to encourage cooperation in SEC investigations through a variety of methods, including cooperation agreements, which for the first time will provide for the prospect of reduced sanctions based on the nature of an individual's cooperation. The guidelines include the following criterion: "whether the individual provided non-privileged information, which information was not requested by the staff or otherwise might have been discovered."

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