In February 2016, GIR first published this Know-How on Securities and Related Investigations. In this update, we discuss developments in the law since the initial publication, and also suggest new considerations that have emerged since then.
Since the 2008 financial crisis, government agencies around the world have launched investigations and brought enforcement actions at a pace and scale, and with sanctions, never before seen. Whether this increased level of enforcement activity is a reaction to the financial crisis and public cries for those who caused it to be “brought to justice,” or the result of more serious and systemic misbehaviour by participants in the world’s financial markets, may be open to debate. But what cannot be denied is that the past few years have brought dramatic changes in how securities and related investigations are conducted and resolved.
Investigations since the financial crisis have examined topics ranging from modern investment products such as residential mortgage-backed securities and collateralised debt obligations to age-old fraud such as Bernie Madoff’s Ponzi scheme. A common theme of many of these high-profile investigations is their increasingly transnational character. In the summer of 2012, media outlets reported that traders manipulated the London Interbank Offered Rate (Libor) upon which trillions of dollars in derivatives trading rely. Investigations to date resulted in over US$9.1 billion in fines by US, UK, Dutch and Swiss authorities. The “London Whale” matter, in which a trader at JP Morgan Chase was accused of hiding US$6.2 billion in losses, resulted in JP Morgan Chase paying fines to US and UK regulators. In November 2014, US and UK regulators also made coordinated announcements of fines amounting to US$4.3 billion for six banks that had allegedly engaged in the manipulation of foreign currency exchange rates, and in May 2015, five banks also entered into settlement with the US Department of Justice (DOJ) to settle similar claims for a total of US$5.6 billion. In May 2014, Credit Suisse paid a fine of US$2.6 billion to US regulators for assisting US citizens in avoiding taxes. Authorities in the United States, the UK, France and elsewhere are investigating numerous other Swiss banks for similar conduct. Since 2014, authorities in Brazil, the US and elsewhere have been investigating potential corruption involving Petroleo Brasileiro SA, commonly known as Petrobras. Almost 200 people have so far been criminally charged in the Petrobas investigation, which has also spawned a number of securities lawsuits.
The past year has also seen the initiation of major international investigations not necessarily involving securities-related misconduct, including investigations into Volkswagen, Audi, and other major automobile manufacturers for potential violations of emissions regulations, and investigations into executives of Fifa for corruption-related misconduct. Government authorities around the world have been investigating allegations made in March 2016 that Unaoil, a Monaco-based company that acted as intermediary in the Middle East for oil companies, engaged in a global bribery and money laundering scheme. The Unaoil allegations were followed quickly in April 2016 by the “Panama Papers” scandal, a massive leak of a Panamanian law firm’s documents that has caused various government authorities to launch investigations to identify money laundering, tax evasion and sanctions violations.
Another important recent development was publication in September 2015 of the Yates Memorandum, a policy proclamation by the DOJ reflecting that Department’s resolve to more aggressively prosecute individuals responsible for corporate misconduct. The Yates Memorandum provides, among other things, that a company is not eligible to receive any cooperation credit unless it discloses “all relevant facts relating to the individuals responsible for the misconduct”.
The growing size and complexity, as well as the increasingly international nature, of regulatory and criminal investigations pose new challenges for practitioners in this field. In this introduction we discuss a few of these challenges, which are then addressed in detail in the remainder of this publication.
First, government agencies increasingly assert jurisdiction and investigate conduct previously considered too removed in location or substance from their country. In the United States in particular, the DOJ now routinely asserts jurisdiction where there is only minimal contact with the United States, such as a wire transfer that passed through a US correspondent bank account. The UK Serious Fraud Office similarly has theoretically expansive jurisdiction for any “act or omission” in the UK that forms a bribery offence. Brazil’s Administrative Council for Economic Defense has even broader theoretical jurisdiction for conduct that has an effect in Brazil. Practitioners defending clients in investigations in jurisdictions outside the client’s home country need to be at least familiar with the customs, procedures and attitudes of those other government authorities. Practitioners must also develop a working understanding of the laws of the local jurisdiction.
Another challenge is the collection of evidence. A global investigation can require a client to collect evidence in multiple jurisdictions. Each jurisdiction will have its own laws about how information is collected and reviewed and what information may be transferred out of the country. Practitioners working on matters related to Europe should be aware of the changing landscape with respect to the EU’s data protection laws, such as the revised EU–US Privacy Shield made operational in July 2016, Britain’s decision to leave the EU following the Brexit vote in June 2016 and the General Data Protection Regulation that becomes enforceable in 2018. Employee interviews, typically a source of key information, may be difficult to conduct in jurisdictions with robust employment protection laws where adverse action taken against an employee may expose the client to a lawsuit.
A third challenge lies in the potential for collateral consequences resulting from a resolution with a government authority. A resolution in one jurisdiction may prevent a client from pursuing a particular defence or making particular arguments in another jurisdiction. Even if there is no such limitation, practitioners need to consider the practical effects of a resolution with one government authority, where detailed facts and conclusions (if not admissions) are often released publicly. Such a resolution also could impact private civil actions and criminal actions brought in multiple jurisdictions. Finally, practitioners need to carefully consider potential implications for the client’s business around the world of such a resolution, such as a revocation of a licence or debarment from government contracts.
In light of these and other challenges, practitioners need to develop defence strategies that similarly take into account and respond to government authorities conducting investigations in multiple jurisdictions. Arguments, defences and strategic decisions made with respect to an investigation in one jurisdiction can have profound and at times adverse consequences in another jurisdiction. This is particularly true in light of the dramatic increase in the past few years of cooperation and coordination among government authorities from different countries. An example of this cooperation is the coordination by the UK Financial Conduct Authority and the US Commodity Futures Trading Commission in the announcement of resolutions to foreign exchange investigations. Practitioners must develop advocacy and make other important decisions with not only their home jurisdiction but also all of the other jurisdictions in mind.
We recognise that no single resource can provide all the information and guidance necessary to manage a complex cross-border investigation. But in Securities and Related Investigations Know-How, the global crisis management and white-collar defence groups at Cleary Gottlieb, in conjunction with other leading practitioners, have compiled in one convenient location an overview of the relevant government agencies, statutory and regulatory frameworks, and salient issues likely to arise in securities and related investigations. The goal of this publication is to equip the reader with the tools necessary to ask the right questions, to identify significant issues and to avoid harmful pitfalls.
In using the phrase “Securities and Related Investigations”, we intend to cover not only government inquires directly tied to investment products but also inquiries into other types of misbehaviour involving the financial markets, such as insider trading, accounting fraud, market manipulation, misrepresentations in disclosures, misappropriation of client funds and breach of conduct rules. This list is not exhaustive, and other related legal issues may be relevant. However, this publication does not address issues related to bribery or corruption, such as those arising under the US Foreign Corrupt Practices Act (which will be covered by another publication), although many of the broad considerations for the management of a global securities investigation may be relevant to global corruption and bribery investigations.
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