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When Should the SEC or the DOJ Investigate an Allegation of Bribery?

Everyone likes to monitor company disclosures for the newest FCPA investigation.  Once disclosed, the FCPA paparazzi lights up with the latest “Kim Kardashian News,” warning everyone who will listen about the dangers of government investigations.

 Before the disclosure even occurs, how much “evidence” does it take for the SEC or the Justice Department to open an investigation?  From my experience in representing companies and individuals under investigation, it does not take too much.  Prosecutorial discretion is a very valuable concept and it needs to be protected.  If it is not exercised carefully, standards can slip, resources can be wasted, and the Justice Department and the SEC will have uneven results in its civil and criminal prosecutions.

The FCPA paparazzi launched unwarranted criticisms against the SEC and DOJ over the last year.  The SEC and the DOJ are listening to these criticisms and I am sure they will respond in the usual way – by doing their job and succeeding.

The SEC and DOJ rely on voluntary disclosures, agency and international referrals, cooperating witnesses, confidential informants, whistleblowers, newspaper reports, industry inquiries, and other sources of information. 

By far, voluntary disclosures are the lifeblood of the SEC and DOJ enforcement programs.  My mentor and friend, former Judge Stanley Sporkin, reminds me often that it was the SEC in the late 1970s which first instituted a voluntary disclosure program, and did so very successfully.

 Aside from voluntary disclosures, international law enforcement and global financial organizations (e.g. World Bank) are another source of information leading to investigations.

 The other potential sources of information – whistleblowers, cooperating witnesses, confidential informants, newspaper reports, industry inquiries and other sources – are much more problematic.

As a civil enforcement agency, the SEC has a lower threshold to open an investigation.  A civil investigatigation does not require the same threshold of information as a grand jury investigation.  Even under this lower standard, does a single whistleblower complaint satisfy the SEC’s standard?  The answer depends on the quality of the information. 

Before launching such an investigation, there is a duty to review and assess, with a critical eye, the veracity of such a complaint.  Everyone has an axe to grind – that does mean they are misrepresenting the facts but the key concept is always corroboration.  A credibility assessment begins with determining if there is independent information or evidence to support the claim made by a whistleblower, confidential informant or the cooperating witness.  Prosecutors have a responsibility to interview the whistleblower, review the information and see if it is corroborated.  In some cases, I have seen investigations which have been launched by a single whistleblower’s allegation with very little corroboration, if any.  That does not seem right.  The company has to expend hundreds of thousands of dollars to defend itself against the allegations, and the government eventually is forced to fold its tent once the company demonstrates that the whistleblower’s allegations were unfounded.

The standard for opening a criminal or grand jury investigation is higher – and rightfully so.  The US Attorney’s Manual makes it clear that a criminal investigation requires the government to obtain evidence suggesting that a criminal violation may have occurred.  This is not a very high standard and may be difficult to meet based on uncorroborated information from a cooperating witness, confidential informant or whistleblower. 

Among the three sources, there are varying degrees of reliability.  An allegation made by a cooperating witness, who has proven reliable in the past by cooperating in another criminal case, is more persuasive than an allegation made by a confidential informant or whistleblower who may be motivated by money or some other personal interest.  Prosecutors have a responsibility to weigh all of these factors before launching criminal investigations.

In the end, the more investigations started with weak or shaky evidence, the more likely the government is to waste resources.  If the Justice Department wants to quiet the FCPA paparazzi, one way would be to ensure that its case selection is done carefully.

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