Preparing Your Company to Respond to Unannounced Government Visits (Part 3)

This three-part series, written by recent in-house counsel and former federal prosecutors, aims to help legal and compliance teams avoid missteps that can lead to aggressive government responses.  In part three, the authors explain the tools for understanding the enforcement process and conducting internal investigations.  Click here to read the full article

Preparing Your Company to Respond to Unannounced Government Visits (Part 2)

This series, written by recent in-house counsel and former federal prosecutors, aims to help in-house legal and compliance teams avoid the types of seemingly minor or inconsequential missteps that can lead to aggressive government responses, including parallel civil and criminal investigations.

In part two, the authors explain what to do when a search warrant is served and how to prepare for government interviews with employees. Click here to read the full article.

 

What Does the 2018 Farm Bill Mean for Hemp/CBD Businesses?

On December 20, 2018, President Trump signed the Agriculture Improvement Act of 2018 (popularly known as the 2018 Farm Bill) into law.

  • Among the broad-ranging provisions included in the law, it legalizes the cultivation and sale of hemp at the federal level, effective January 1, 2019.
  • Hemp and cannabidiol (CBD) businesses have thrived in numerous state jurisdictions in which such products are legal. Federal legalization means that hemp producers and businesses that deal in hemp and hemp-derived products, such as CBD, are now free to pursue their businesses more aggressively, and with less concern that a seismic shift in enforcement priorities could result in their investigation or prosecution by federal authorities.

In this update, we review the 2018 Farm Bill and the implications for those participating in the hemp and CBD industries.

Click here to read the full update.

Preparing Your Company to Respond to Unannounced Government Visits (Part 1)

This series, written by recent in-house counsel and former federal prosecutors, takes a practical approach to helping in-house legal and compliance teams operating in a world of complex regulatory schemes and increased whistleblower activity.  It specifically aims to address how to avoid the types of seemingly minor or inconsequential missteps that can lead to aggressive government responses, including parallel civil and criminal investigations.

In part one, the authors focus on the initial steps, including assuring the company has competent and experienced outside counsel at the ready to supplement the in-house team.  Click here to read the full article.

SEC May Limit “Game Changing” Whistleblower Bounties

On June 28, 2018, the U.S. Securities and Exchange Commission proposed three rule changes to the Commission’s Whistleblower Program, including one that would authorize the SEC to “downward adjust” monetary awards in large actions for which an award might “exceed an amount that is reasonably necessary to advance the program’s goals”—in the view of the Commission.  The proposed change prompted an immediate response from Commissioner Kara Stein who issued a separate Statement on Proposed Amendments to the Commission’s Whistleblower Program Rules (“Statement”) in which she highlights concerns that a move towards a more subjective standard in determining monetary awards could threaten a whistleblower’s incentive to come forward, given the added uncertainty in outcome.  Additionally, Stein questions whether the SEC has the statutory authority under the Dodd-Frank Act to alter the rules impacting awards in this way.     Continue Reading

SCOTUS Finds SEC ALJ Appointments Unconstitutional

On June 21, 2018, the Supreme Court issued its highly anticipated opinion in Lucia v. SEC, finding that the manner in which the U.S. Securities and Exchange Commission (SEC) selects its “in-house” administrative law judges (ALJs) violates the Appointments Clause of the Constitution.  In a 7-2 decision, the Court held that ALJs are “inferior officers” and must be appointed by the president or head of the agency, rather than hired by SEC staff through the civil service process.  The immediate practical impact of the decision requires that petitioner Raymond Lucia be afforded a new hearing before “a properly appointed official.”

In recent years, capitalizing on what some commentators considered a “home court advantage” for enforcement actions, the SEC began favoring administrative proceedings in which agency ALJs serve as adjudicators rather than judicial proceedings in federal court.  An ALJ assigned to hear an SEC enforcement action has the power to issue an initial decision containing factual findings, legal conclusions, and appropriate remedies.  The Commission is not required to review the ALJ’s decision, and if it declines to review, the ALJ’s “initial” decision is deemed a final action of the Commission.  In practice, most ALJ initial decisions become final without any Commission review; for example, 2016 data revealed that 90% of SEC ALJ initial decisions were not reviewed by the Commission.  Continue Reading

Courts Continue to Grapple with Border Searches of Electronic Devices: Fourth Circuit Rules Forensic Searches Require Individualized Suspicion

On May 9, 2018, the Fourth Circuit Court of Appeals issued an opinion in United States v. Kolsuz, holding that the Fourth Amendment requires individualized suspicion for forensic searches of cell phones seized at the border.

In so holding, the Fourth Circuit provides important clarification about how the Fourth Amendment applies to border searches of electronic devices. But, both in the Fourth Circuit and in jurisdictions across the country, critical questions remain unanswered about the scope of the Fourth Amendment in this context.

Source: ACLU.org

The Decision

In United States v. Kolsuz, federal customs agents found firearm parts in the checked luggage of an airport traveler and then detained him as he was attempting to board an international flight. Subsequently, and without a warrant, agents seized his cell phone and “subjected it to a month-long, off-site forensic analysis, yielding a nearly 900-page report cataloging the phone’s data.” Based in part on this information, the traveler was eventually convicted of, among other things, attempting to smuggle firearms out of the country.

On appeal of his conviction, the traveler challenged the denial of his motion to suppress the forensic analysis of his cell phone as a violation of his Fourth Amendment rights.

In addressing the issue, the Fourth Circuit acknowledged that government agents may perform “routine” searches at international borders, or their functional equivalents, without a warrant or individualized suspicion consistent with the Fourth Amendment. But, the Court recognized that even at the border certain “non-routine,” “highly intrusive” searches require individualized suspicion.

Ultimately, the court held that forensic searches of digital devices, like the one at issue in that case, qualify as such “non-routine” searches and are thus prohibited absent some level of individualized suspicion.

The Court’s holding was based, in part, upon its determination that forensic analysis of a digital device can “reveal an unparalleled breadth” of “private,” “sensitive” information. It was also based on the Supreme Court’s 2014 decision in Riley v. California, which recognized the strong privacy interests associated with electronic devices. There, the Supreme Court held that a warrant is required to search a cell phone seized incident to arrest because of the private, extensive information contained on such devices.

Notably, however, the Fourth Circuit did not decide whether the requisite level of suspicion for such forensic searches is reasonable suspicion, or something more (like a warrant supported by probable cause). It also had no occasion to decide the requisite level of suspicion for officers to conduct “manual” searches, where agents review the content of electronic devices without the help of forensic technology.

Other Case Law, Open Questions Continue Reading

Monitoring the Monitors: DOJ Ordered to Disclose Info on Monitor Selections

Last month, a D.C. federal judge ordered the Department of Justice to turn over the names of prospective monitors nominated to oversee the corporate compliance programs of fifteen companies found to be in violation of the Foreign Corrupt Practices Act (FCPA).  While recognizing that these individuals have “more than a de minimis privacy interest in their anonymity,” the court found that any such privacy interest was outweighed by the public’s interest in learning their identities.

In April 2015, journalist Dylan Tokar filed a FOIA request seeking records related to the review and selection of corporate compliance monitors in FCPA settlement agreements between DOJ and fifteen corporate defendants.  Tokar, a reporter for the trade publication Just Anti-Corruption, hoped these records would shed light on the monitor selection process, including whether DOJ had been abiding by the guidelines for monitor selection set forth in its 2008 Morford Memorandum.  The Memorandum, which establishes several principles to avoid potential and actual conflicts of interest and address concerns of cronyism, prescribes the consideration of “at least three qualified monitor candidates” whenever practicable.  Accordingly, Tokar requested the names of the three monitor candidates and their associated firms for fifteen cases.

More than eighteen months later, DOJ provided Tokar with a table purportedly responding to his request, but redacted the names of the monitor candidates who were nominated but not selected, as well as their affiliated firms in some cases.  DOJ asserted that these redactions were necessary and justified under FOIA Exemptions 6 and 7(C), which exempt from disclosure certain information that would constitute an “unwarranted invasion of personal privacy.”

After both parties cross-moved for summary judgment, the court concluded that the redactions were improper and ordered DOJ to release the candidates’ names.  It found that while DOJ had demonstrated sufficient privacy interests to warrant coverage under Exemptions 6 and 7(C)—as it was “plausible that these individuals would prefer to have their consideration and ultimate[] non-selection withheld from the public’s view”—these interests were outweighed by the public’s interest in disclosure.  The court agreed with Tokar that without disclosure of the candidates’ names, it would be “difficult (if not impossible) to know whether either the government or the corporate entity under investigation is taking advantage of the selection process in a manner that undermines the objectives of the DPA” and the principles delineated in the Morford Memorandum. Continue Reading

SCOTUS Speaks:  Guilty Pleas Don’t Waive All Appellate Claims

On February 21, 2018, in Class v. United States, the U.S. Supreme Court reaffirmed that a defendant who pleads guilty can still raise on appeal any constitutional claim that does not depend on challenging his or her “factual guilt.”  The Court’s holding preserves a federal criminal defendant’s ability to challenge the constitutionality of the statute underlying his or her conviction, even in the event of a guilty plea.  In other words, where the appellate claim implicates “the very power of the State” to prosecute the defendant, a guilty plea alone cannot bar it.  Continue Reading

Supreme Court Ruling Narrows Dodd-Frank Whistleblower Protections

Perhaps no part of the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) has garnered as much attention as its whistleblower provisions, which pay corporate whistleblowers bounties under some circumstances, and prevent employers from retaliating against whistleblowing employees. Often times, the bounties paid to whistleblowers under Dodd-Frank warrant the most attention-grabbing headlines.  But Dodd-Frank’s anti-retaliation provisions—which protect employees who blow the whistle from retaliation from their employer—are just as important.  After all, the chance of receiving a bounty serves as little comfort if employees fear for their jobs when reporting potential corporate wrongdoing.

But exactly which whistleblowers qualify for protection under Dodd-Frank’s anti-retaliation provisions has been a subject of much debate. By its terms, Dodd-Frank provides that an employer may not take any negative employment action against “a whistleblower.”  Dodd-Frank further defines “whistleblower” as an individual who provides information relating to a violation of the securities laws to the “Commission,” i.e., directly to the SEC.  By its language, then, Dodd-Frank’s anti-retaliation terms do not extend to employees who only report their concerns internally.

Nonetheless, the SEC had historically distinguished between whistleblowers eligible for a bounty and whistleblowers eligible for protection from retaliation: according to SEC’s interpretation, to be eligible for a bounty the employee must report to the SEC itself, while to be eligible for anti-retaliation protection the employee need only report internally. 17 CFR § 240.21F-2.

Whether the SEC’s interpretation comported with Dodd-Frank had split the circuit courts. The Fifth Circuit disagreed with the SEC rule, holding that to be eligible for anti-retaliation protection, the employee must report to the SEC.  The Second Circuit and Ninth Circuit reached the opposite result, concluding that the SEC had it right: to be protected from retaliation, the whistleblower need not report to the SEC directly.

In Digital Realty Trust Inc. v. Paul Somers, the Supreme Court has now resolved the split, holding that, in order for an employee to gain Dodd-Frank’s whistleblower protection, they must report wrongdoing to the SEC itself.  In a unanimous ruling, the Court said that it need look no further than the language of Dodd-Frank itself: the anti-retaliation term applied to “whistleblowers,” which the statute itself defined as individuals who report information to the SEC. The Court further observed that this result is consistent with the objective of Dodd-Frank’s whistleblower program: to encourage the reporting of securities law violations to the SEC itself.

At first blush, the limits put on Dodd-Frank’s anti-retaliation provisions by the Court would seem to benefit businesses, curbing the potential retaliation claims they face from employees. But the side-effects of the decision could be costly for corporations if employees are now incentivized to bring complaints directly to the SEC, rather than first reporting them internally.  Even corporations with robust compliance programs could lose the opportunity to first investigate claims of potential wrongdoing before the SEC launches its own inquiry—which is often followed by costly and time-consuming shareholder litigation

Whether by corporate policy, or statutory provisions such as those implemented by the Sarbanes-Oxley Act, there are numerous other means of anti-retaliation protections for whistleblowing employees. Thus, while the Digital Realty decision may not result in a sea change for the structure of corporate compliance programs, it may well lead to an increase in whistleblowers reporting directly to the SEC.  While companies wait to see whether Digital Realty has a significant impact on how employees report whistleblower concerns, they can redouble efforts to effectively implement and broadly publicize their own internal reporting programs.

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