The BLT: The Blog of Legal Times

In Split Vote, SEC Approves New Rules to Reward Whistleblowers

In a vote split along partisan lines, the U.S. Securities and Exchange Commission today approved final rules for rewarding whistleblowers who provide the agency with tips that lead to successful prosecutions.

The agency attempted to strike a balance on the most controversial issue - whether to require workers to report possible wrongdoing to their employers first before going to the government. The business community argued vigorously that without such a provision, internal compliance programs would be decimated.

Under the final rules, workers are not required to use internal programs, but the SEC will offer incentives to those that choose to do so.

If whistleblowers make use of internal programs, the SEC will give them credit when determining the size of their reward—tipsters get 10% to 30% of the penalty collected in excess of $1 million. Conversely, those who don't use or interfere with internal programs will get less money from the SEC.

Also, if an employee reports a minor or non-specific violation internally—information that by itself might not be eligible for a whistleblower bounty—and the company investigates, finds a wider problem, and then tells the SEC, the whistleblower gets credit for all the information.

“I believe that incentivizing—rather than requiring—internal reporting is more likely to encourage a strong internal compliance culture,” said SEC Chairman Mary Schapiro at today’s meeting. “Our rules create incentives for people to report misconduct to their employers, but only if those companies have created an environment where employees feel comfortable that management will take them seriously—and where they are free from possible retaliation.”

The new whistleblower program is mandated by Section 922 of the Dodd-Frank financial reform legislation. The SEC released draft rules in November, triggering strong public debate.

SEC Commissioner Kathleen Casey, a Republican, voted against the new rules, which she described as favoring “a pound of cure over an ounce of prevention.”

Casey said she was “deeply concerned” that the rules didn’t do enough to “preserve the value of internal programs,” and that potential tipsters would be too tempted by SEC money to report violations in-house.

“By diverting a large portion of the flow of information, it impairs a company’s ability to step in,” she said. Because SEC investigations tend to be “more ponderous and time consuming,” the result may be to “permit violations to last longer and be more serious.”

Commissioner Troy Paredes shared Casey's concerns in voting against the rules, arguing that the final rule “unduly erodes the value of internal compliance programs.”

Enforcement Division head Robert Khuzami defended the rules. “An absolute requirement to report internally would be detrimental to the enforcement program and seemingly inconsistent with the statute’s goals,” he said. “It would place an undue burden on the whistleblower.”

Commissioners Luis Aguilar and Elisse Walter joined Schapiro in voting in favor of the rules.

The SEC also extended the period of time a whistleblower can wait after making an internal complaint before notifying the agency from 90 to 120 days.

To Randall Fons, who is co-chair of Morrison & Foerster’s securities litigation, one real-world result of the rules will be to change how companies deal with whistleblowers who make use of compliance programs.

“Historically, most companies have not gone back to whistleblowers and said, ‘Here’s what we’ve done,” he said. But now, companies are on notice that if the person feels the issue hasn’t been addressed within 120 days, he or she could still go to the SEC. “Public companies need to go back and look at their processes and procedures,” he said.

T. Markus Funk, a white collar partner at Perkins Coie, said the new rules may also make companies more inclined to come forward to the SEC when confronted with internal wrongdoing.

“An increase in tips breeds an increase in self-reporting,” he said. “If a problem is widely known within a company, that’s an additional reason to come forward rather than wait for the ax to drop.”

Congress Considers Penalties for U.S. Contractors Abroad

The chairman of the Senate Judiciary Committee is making a new push to apply some U.S. criminal laws to federal employees and government contractors who are working abroad.

The move by Sen. Patrick Leahy (D-Vt.) is at least the third such attempt since a high-profile killing of Iraqi civilians by Blackwater security guards in September 2007. But this time, Leahy has at least the tentative support of some in the contracting industry and of the U.S. Justice Department.

Leahy said in prepared remarks for a hearing today that he was planning to introduce the latest version of legislation soon, and that he will move forward with it if he finds bipartisan support.

The Justice Department’s case against the Blackwater guards, one of many incidents involving contractors abroad in recent years, is moving slowly. Last month, a federal appeals court reinstated the case, but prosecutors still face evidence problems that Leahy said could have been avoided if U.S. law clearly applied.

“Had jurisdiction for these offenses been clear, FBI agents likely would have been on the scene immediately, which could well have prevented the problems that have plagued the case,” Leahy said.

DLA Piper partner Tara Lee, who co-chairs the firm’s transnational litigation practice, said at today’s hearing that many of the government contracting companies she represents would welcome some version of the proposal because existing law is unclear. For example, the law generally applies to contractors working for the Defense Department but it doesn’t always apply to those working for other agencies like the State Department.

“If there’s lack of clarity in a statute, I stay busy all day,” Lee said. “But from the perspective of the companies I represent, I think you do have an opportunity to clearly articulate your intent here.”

Michael Edney, of counsel to Gibson, Dunn & Crutcher, urged caution. He said senators should include a blanket exception for employees and contractors who work on authorized intelligence operations, or who believe they are working on authorized intelligence operations. Otherwise, he said federal prosecutors would gain a veto power over what intelligence agents do.

“It would be a kind of de facto reorganization of how we conduct our intelligence operations,” said Edney, who was a legal adviser to the National Security Council under President George W. Bush.

Such a “carve-out” for intelligence and national security officials might be needed to win the support of Sen. Charles Grassley (R-Iowa), the Judiciary Committee’s ranking Republican. “There is a lot of merit to extending our criminal law to civilian contractors and employees abroad,” Grassley said in prepared remarks. “However, we must make sure that this is done in a manner that is narrowly tailored to the specific problem and is not overly broad.”

Assistant Attorney General Lanny Breuer told senators that the Justice Department has brought about 50 cases under the Military Extraterritorial Jurisdiction Act. The 2000 law applied many criminal laws to Defense Department employees and contractors and to those “supporting the mission” of the Defense Department abroad.

The category of “supporting the mission” could apply to many non-defense federal workers, Breuer said, but prosecutors have a difficult time making that link. “We can spend literally thousands of hours on one case trying to establish that nexus,” he said.

Breuer said the department supports Leahy’s bill with an exception for intelligence workers.

At World Bank, Breuer Trumpets Kleptocracy Asset Recovery

The head of the Justice Department's Criminal Division today in a speech at the World Bank said the government will continue its effort to target and forfeit proceeds of corrupt foreign officials.

Assistant Attorney General Lanny Breuer said in remarks that the department’s Kleptocracy Asset Recovery Initiative, which the attorney general announced last summer, recently brought its first cases.

Breuer’s remarks follow President Barack Obama’s Middle East speech last week at the U.S. State Department in which he declared the United States “will help newly democratic governments recover assets that were stolen.”

The Justice Department's fight against corruption, Breuer said, will "send the message loud and clear that public officials who abuse their power for personal gain–whether they are in the United States or the emerging democracies of North Africa and the Middle East or anywhere else around the world–are on the wrong side."

The goal of the kleptocracy asset recovery initiative, Breuer said, is to seize and later return alleged illegal proceeds of foreign officials. Breuer said it is often “impractical or impossible to bring a criminal prosecution against a kleptocrat” because of jurisdiction issues. But prosecutors, he said, can pursue a civil forfeiture action to recover stolen money.

In March and April, Breuer noted today, prosecutors filed civil forfeiture actions in Maryland and in Massachusetts federal district courts targeting property and money allegedly associated with Diepreye Solomon Peter Alamieyeseigha, the former elected government of an oil-producing state in Nigeria.

In U.S. District Court for the District of Maryland, prosecutors are going after a house in Rockville that government lawyers said was purchased in 2001 and later held in the name of a shell company. Breuer said the property is worth more than $600,000. The Justice Department’s Asset Forfeiture and Money Laundering Section is pursuing more than $386,000 in a brokerage account in a civil action in Boston federal district court.

Prosecutors allege Alamieyeseigha amassed more than $12.7 million in assets from 1999 until his impeachment in 2005. Breuer said Alamieyeseigha’s declared income for that period was $248,000.

“We were able to bring these cases, even though (Alamieyeseigha) long ago absconded to Nigeria, because the law permits us to bring a civil action against the corrupt proceeds themselves rather than against the person to whom they belong,” Breuer said today.

Breuer’s speech touched on a range of anti-corruption topics, including Foreign Corrupt Practices Act enforcement and the prosecution of public officials in federal district court.

On the FCPA front, he noted a jury this month in California found a company there and two of its senior executives guilty of paying bribes to a state-owned utility company in Mexico. The case marked the first-ever jury conviction of a corporation in an FCPA case, Breuer said.

“When U.S. businesspersons, foreign executives, and even foreign officials know that they risk liability under the FCPA and related statutes, behavior changes,” Breuer said. “In addition to motivating U.S. and foreign corporations to change the way they do business—something that I believe is already happening—the threat of liability can help corporations resist corrupt demands from foreign officials, which can lead the officials themselves to alter their practices.”

The Morning Wrap

Big Bill: State attorneys general told five of the nation's largest banks on Tuesday they face a potential liability of at least $17 billion in civil lawsuits if a settlement isn't reached to address improper foreclosure practices, according to The Wall Street Journal.

Internet Regulation: Leaders of the Group of 8 industrialized countries are set to issue a provocative call for stronger Internet regulation, a cause championed by the host of the meeting, President Nicolas Sarkozy of France, but fiercely opposed by some Internet companies and free-speech groups, according to The New York Times.

Paid Back: The U.S. Treasury made a small profit when it sold a portion of its shares in American International Group Inc on Tuesday, but it was unclear how its investment in the beleaguered insurer will ultimately fare, Reuters reports.

Blood Trail: Evidence that Dominique Strauss- Kahn’s encounter with a hotel maid may have involved force, including reports of blood at the scene, might damage any defense contention that she consented, former prosecutors said, Bloomberg reports.

Competency Hearing: A judge may decide today if Jared Lee Loughner is mentally competent to stand trial, CNN reports. The Arizona man faces multiple charges -- including murder and attempted murder -- related to the January 8 mass shooting in a grocery store parking lot in Tucson.

FTC Challenges Pay-to-Delay Drug Deal in Rare Amicus Filing

The Federal Trade Commission has filed an amicus brief in a class action that questions whether brand name drug companies can pay generic rivals to stay out of the market until a patent expires.

According to the FTC, which files only a handful of amicus briefs each year, such agreements cost consumers $3.5 billion per year by depriving them of generic alternatives to brand-name drugs.

The case, now before the U.S. Court of Appeals for the Third Circuit, involves a settlement between Schering-Plough Corp., which owned a key patent (now expired) for the high blood pressure medication K-Dur 20, and generic drug makers Upsher Smith and ESI (formerly a division of Wyeth).

In 1995, the two generic companies sought U.S. Food and Drug Administration approval to make generic K-Dur. Schering sued them for patent infringement. On the eve of trial, Schering agreed to pay Upsher – the alleged infringer - $60 million if it agreed to abandon efforts to make generic K-Dur until 2001. Schering separately agreed to pay ESI up to $15 million in exchange for ESI’s agreeing not to market its generic version of K-Dur until January 2004.

For the FTC, the brief is akin to a second bite at the apple. The agency itself challenged the K-Dur deal in 2001, arguing that it was anti-competitive and violated Section 5 of the FTC Act, only to lose before the Eleventh Circuit.

In the class action, the purchasers of K-Dur 20 allege that Schering’s settlement agreements with Upsher and ESI violated the Sherman Act.

The district court disagreed, and granted defendants’ motions for summary judgment. The court found that unless Schering’s patent infringement suit was “objectively baseless,” there could be no antitrust challenge unless the settlement restrained competition beyond “the scope of Schering’s patent.”

It’s an issue of first impression before the Third Circuit. Other courts of appeal have split, with the Second and Federal Circuits tolerating such exclusion payments, while the Sixth and D.C. Circuits suggest that these settlements could violate antitrust laws.

“Agreements made by patent holders are subject to antitrust scrutiny, particularly where, as here, they eliminate potential competition by splitting monopoly rents with would-be competitors,” asserted the FTC in its brief.

“If the challenger is offering a commitment to stay out of the market for a specified time, it follows that the payment is to secure exclusion of a potential competitor.” That’s an unlawful market allocation arrangement, the FTC asserts.

The FTC noted that the Hatch-Waxman Act specifically encourages generic drug makers to challenge weak or narrow patents. “The court’s rule would negate such challenges by allowing a branded company simply to pay generic filers to stay out of the market until the patent expires. Economic realities make such deals irresistible as long as they are condoned by the courts,” according to the FTC.

The brief was penned by FTC General Counsel Willard Tom, Deputy General Counsel for Litigation John Daly, and Lawrence DeMille-Wagman, assistant general counsel for litigation.

Schering is represented by Covington & Burling’s John Nields, Jr, Alan Wiseman and Thomas A. Isaacson; Charles Loughlin of Baker Botts; and William O’Shaughnessy of McCarter & English.

Upsher-Smith has retained William Goydan of Wolff & Samson and Christopher Curran of White & Case. Wyeth hired Robert Michels of Winston & Strawn and Brian McMahon of Gibbons.

The plaintiffs lawyers include Berger & Montague; Cohn Lifland Pearlman Hermann & Knopf; Garwin Gerstein & Fisher; Odom & Des Roches; Heim Payne & Chorush and Percy Smith & Foote.

Former AG Gonzales 'Disappointed' in His Own Conduct in DOJ Hiring

Former Attorney General Alberto Gonzales has said for the first time that "I am disappointed that I didn't do things differently" to stop the politicization of the system of hiring career Justice Department attorneys through its honors program during his time in office.

"Obviously everyone is smarter in hindsight. In hindsight you wish you would do some things differently and ... I feel disappointment in myself," Gonzales said, according to filings this week in a pending suit filed on behalf of applicants who were rejected for the program for political or ideological reasons. “I, the attorney general, am ultimately responsible," Gonzales also said.

Gonzales' statements came during a deposition he gave last September in the case of Gerlich v. Department of Justice, now pending before Judge John Bates in the U.S. District Court for the District of Columbia. Eight applicants were plaintiffs in the suit filed in 2008, but only three remain. Bates has scheduled a hearing for October on motions by both sides for summary judgment.

“I think everyone in the room realized that, in his own limited way, he was at last being apologetic for what had or had not taken place in this regard," said plaintiffs' lawyer Daniel Metcalfe, who conducted the deposition in Lubbock, Texas. Gonzales is teaching at Texas Tech University in Lubbock. Metcalfe is a former Justice Department official now teaching at American University Washington College of Law.

Gonzales served as the nation's top law enforcement official from 2005 to 2007. Internal investigations of the honors and summer intern programs that were made public in 2008 found that Department officials did Internet searches to investigate the applicants' political and ideological affiliations, added that information to applicants' files, and used it to "deselect" some of those who would otherwise have been interviewed and hired. One candidate was nixed because he had run for office as a Green Party candidate.

The suit as it now stands is based mainly on the Privacy Act, which bars the government from maintaining records about individuals' exercise of First Amendment rights unless authorized by law. In September 2009, Bates dismissed other claims of constitutional violations directed at the Justice Department officials personally.The plaintiffs are seeking monetary damages for the Privacy Act violations totalling around $250,000, based on the lower salaries they are now earning because they were not hired at Justice.

With Glut of Vacant Jobs, SEC Turns to Headhunter for Help

Legal jobs with the federal government these days are few and far between, but the U.S. Securities and Exchange Commission has multiple attorney openings.

Job applicants can forget the dreaded knowledge-skills-abilities statement - the SEC is using a headhunter, Futurestep, "to provide strategic talent acquisition solutions to help the agency address its continuing talent needs." While retaining a headhunter may be standard operating procedure in the private sector, for federal agencies, it’s far more unusual.

Open SEC jobs include a trial attorney in the Enforcement Division and a senior advisor in the Clearance and Settlement unit within the Division of Trading and Markets, which both pay between $126,661 and $198,333. The SEC is also hiring an associate director for Clearance and Settlement and chief counsel of the Division of Trading and Markets, with salaries of up to $226,160.

The SEC is even using Futurestep to fill what amounts to entry-level attorney advisor positions - there are at least two vacancies, with pay starting at $81,225.

Futurestep is part of Korn/Ferry, which bills itself as the world’s largest executive recruiting firm. It was awarded a government contract in 2009 and began working with the SEC in February 2010, according a company press release, assisting with “the implementation of best-practice talent acquisition processes and expert support related to workforce planning, employment branding and talent technology strategy.”

The SEC job vacancies are listed on the Office of Personnel Management’s USAJobs.com website, but employment seekers are directed to Futurestep’s website to actually apply.

The SEC and Futurestep did not respond to requests for comment.

It’s imperative that the SEC fill the jobs before the end of the fiscal year in September, Enforcement Division head Robert Khuzami told a securities law conference earlier this month. The agency got a $70 million bump in funding which will go toward new hires, “but we only have five months to do it,” he said. “All of a sudden we have to push through a lot of hires, because if we don’t spend the money by the end of the fiscal year, it’s gone.”

The SEC’s workload has risen dramatically after the passage of the Dodd-Frank Act, which overhauled financial regulations. The Commodity Futures Trading Commission also found itself short-staffed, and is currently looking to fill at least eight lawyer vacancies – but it’s doing so on its own, without a headhunter.

Judge Rules Swedish Law Firm Can Be Named In Local Malpractice Suit

Updated at 4:58 p.m.

In a 120-page opinion (PDF) released yesterday afternoon, a Washington federal judge affirmed that a foreign-based law firm with few physical ties to Washington and limited involvement in an underlying case could still be the target of a legal malpractice suit in Washington based on its communications and visits over the years.

U.S. District Judge Reggie Walton upheld the majority of claims brought by Swedish scientist Hakan Lans, who is suing his former attorneys in Sweden and Washington over their handling of patent infringement suits he unsuccessfully pursued starting in the late 1990s. The two defendant firms – Sweden-based Advokatfirman Delphi & Co. and Washington-based Adduci, Mastriani & Schaumberg – had filed motions for dismissal.

According to his complaint (PDF), Lans developed color graphics technology for computers starting in the 1970s. He patented this technology in several countries, including the United States, where his patent was registered in 1981 and expired in 1999.

In the late 1990s, Lans was advised by Delphi to hire Adduci, Mastriani & Schaumberg, or AMS, to help him pursue patent infringers. In 1997, Lans unsuccessfully filed suit against a group of computer manufacturing companies in U.S. District Court for the District of Columbia for infringement.

AMS continued to represent Lans when he appealed the dismissals and also pursued additional infringement suits against the same computer companies. He was again unsuccessful on both fronts.

The computer companies then sued Lans and AMS for fees. The judge ruled Lans was liable, but AMS was not. In 2001, AMS and Lans parted ways. Lans sued AMS, later adding Delphi as a defendant, accusing his former counsel of mishandling his cases and knowingly making the errors that he believes cost him the litigation. Lans also challenged the judge’s previous ruling that AMS would not be liable for fees owed to the computer companies.

In DOJ Speech, Katyal Addresses Japanese Internment Cases

The mistakes the Justice Department made in defending Japanese internment during World War II did more than harm the reputation of the government, Acting Solicitor General Neal Katyal said in a speech today at the department.

"Ultimately it harmed our commitment to those magnificent words carved on the front of the Supreme Court, at the top: Equal Justice Under Law," said Katyal, speaking in the department's Great Hall to mark Asian American and Pacific Islander Heritage Month.

Katyal was the keynote speaker today, and his public commentary on the role of the solicitor general in advocating for internment comes several days after he wrote, on the Justice Department’s blog, about two internment cases—Korematsu v. United States and Hirabayashi v. United States. The high court upheld the internment program in the cases.

In his 18-minute speech, Katyal examined what one DOJ lawyer called the suppression of evidence from the high court. At the time, Solicitor General Charles Fahy did not disclose a report from the Office of Naval Intelligence that undermined the legal rationale behind internment. “What does Fahy do? Nothing,” Katyal said. “He decides not to alert the Court.”

Katyal said last summer he was looking into an immigration case—he did not disclose which case—when he came across a couple of briefs that “caused me some concern.” The two former Solicitor General briefs, he said, which examined Chinese exclusion and Indian immigration, got him thinking about the role the office played in defending the Japanese internment program.

“Every solicitor general has advanced the cause of civil rights in various ways,” Katyal said today, addressing more than 100 spectators in the Great Hall. “There have been dark times in our office.”

Toward the end of his remarks, Katyal quoted from Justice Stephen Breyer’s book “Making Our Democracy Work: A Judge’s View,” published last year. The Korematsu case, Breyer wrote, “suggested that the Court was unable or unwilling to make an unpopular decision that would protect an unpopular minority.” Breyer said Korematsu “harmed” the high court.

“I think it did harm the court,” Katyal said. “But it obviously harmed others as well. It harmed approximately 120,000 Japanese Americans. It harmed the department, which led the court, in part, to the results that it reached. It harmed out reputation as lawyers.”

In remarks today at the same event, Attorney General Eric Holder Jr. did not mention the Korematsu case. Holder spoke about diversity at the department. He called Katyal a "key ally" in ensuring that "diversity and equal justice are not merely noble aspirations, but permanent realities for all Americans."

Judge, Reporters And Youth Advocates Debate Access to Juvenile Records

Speaking at a panel last night hosted by the Council for Court Excellence, attorneys who work with youth offenders questioned the wisdom of a new statute expanding public access to juvenile court records.

The law, which went into effect March 8, allows limited access to court information on juveniles found guilty of violent crimes - and other felonies, under certain circumstances - after the case is closed. The text of the “Expanding Access to Juvenile Records Amendment Act of 2010” can be found here (PDF).

Panelist Hannah McElhinny, deputy trial chief in the Public Defender Service’s juvenile section, said she believed little good could come from the new law. Releasing identifying information about juveniles risks their rehabilitation, she said, since it opens the door to prejudice at school and in finding work.

“Lots and lots of people can be swept up in this,” she said.

The law will also offer police and local social service agencies greater access to juvenile offender records.

McElhinny was joined in her dissent by fellow panelists Robert Hildum, former director of the D.C. Department of Youth Rehabilitation Services and now a deputy D.C. Attorney General, and Daniel Okonkwo, executive director of D.C. Lawyers for Youth.

Washington Post editor Henri Cauvin led the discussion, which was held at the District of Columbia Court of Appeals. The panel also included D.C. Superior Court Judge Zoe Bush; former Washington City Paper reporter Jason Cherkis, now with the Huffington Post; and Dr. Jennifer Woolard, an expert in adolescent development at Georgetown University.

Cherkis, who covered city social services at the City Paper, came to the law’s defense, arguing that more transparency was needed to shed light on deficiencies within the city’s social service agencies.

Reporters covering juvenile proceedings are bound by a confidentiality agreement to not reveal any identifying information about youths or their families, but can otherwise reveal a wide range of often sensitive information that comes out in court. McElhinny noted that that law poses a new dilemma for media outlets if they cover proceedings – without naming the youth – and then the name becomes publicly available after.

Bush, the presiding Family Court judge, declined to take a side, but expressed her support for press coverage of juvenile proceedings.

“It personalizes it and it makes it more meaningful” beyond reporting hard statistics, she said.