On August 27, 2018, the Securities and Exchange Commission (“SEC”) announced a $34.5 million settlement with investment management firm Legg Mason, Inc. (“Legg Mason” or the “Company”) for violating the internal controls provision of the Foreign Corrupt Practices Act (“FCPA”) in connection with a scheme to bribe Libyan government officials to secure investments from Libyan state-owned financial institutions.[1]  The SEC settlement follows a June 2018 non-prosecution agreement between Legg Mason and the U.S. Department of Justice (“DOJ”) regarding the same conduct.[2]  Under the non-prosecution agreement, Legg Mason agreed to pay $64.2 million.  The Legg Mason settlements reflect the increased focus of U.S. authorities on coordinating with other authorities in imposing penalties on a company, including not “piling on,” and the continued enforcement of the FCPA, while highlighting the potential risks under the FCPA of not having proper controls in place for assessing use of third party intermediaries.

According to the SEC, a former Legg Mason asset management subsidiary, Permal Group Ltd. (“Permal”), worked with Société Générale S.A. (Société Générale)[3] to sell to Libyan state-owned financial institutions structured notes issued by Société Générale that were linked to funds managed by Permal.  Permal earned approximately $31.6 million in net revenues from those investments.  For each investment, Société Générale paid a Panamanian company controlled by a Libyan middleman a commission based on the nominal value of the investments.  The Libyan middleman used those funds to pay Libyan government officials to secure the investments.  Two Permal employees were aware that the Libyan middleman was paying bribes to Libyan government officials to secure investments for Société Générale.

Based on these facts, the SEC determined that Legg Mason lacked adequate internal accounting controls.  Specifically, the SEC found that Legg Mason’s internal accounting controls were deficient with respect to its use of and payments to intermediaries—Legg Mason did not establish, on a timely basis, appropriate risk-based due diligence and compliance requirements for retention and oversight of intermediaries.[4]

The SEC’s and DOJ’s resolutions with Legg Mason reflect the U.S. government’s increased focus on coordination among authorities.[5]  The SEC ordered disgorgement of $27.6 million, but it did not impose a civil penalty on Legg Mason based on the DOJ’s imposition of a $32.6 million criminal penalty against the Company.  Similarly, the DOJ’s non-prosecution agreement with Legg Mason provides that the Department will credit any disgorgement the Company pays to another law enforcement authority to the DOJ’s $31.6 million disgorgement amount.  This is consistent with DOJ’s recently announced “anti-piling-on” policy, which instructs the DOJ to coordinate with other enforcement agencies in imposing penalties relating to the same misconduct on a company.[6]

The DOJ resolution also follows the DOJ FCPA Corporate Enforcement Policy announced in November 2017, which seeks to encourage voluntary disclosure of misconduct and provides guidance on how the Department may resolve FCPA investigations.[7]  In announcing its resolution with the Company, the DOJ highlighted that Legg Mason did not voluntarily and timely disclose the conduct, but it fully cooperated in the Department’s investigation and remediated.[8]  Based on the Company’s cooperation and remediation, the DOJ’s criminal penalty reflects a 25% reduction off the low end of the U.S. Sentencing Guidelines fine range.  The SEC also acknowledged the Company’s cooperation in its investigation and the remedial steps taken by the Company.[9]

Additionally, the resolutions serve as a reminder of the importance of conducting due diligence regarding third parties, such as “introducing brokers,” and implementing related compliance.  Indeed, five of the six SEC FCPA resolutions thus far in 2018 involved improper payments to third parties or failure to conduct appropriate third party due diligence.[10]  In the largest of these resolutions, Panasonic agreed to pay $143 million to the SEC.[11] Panasonic also agreed to pay a criminal penalty of more than $137 million as part of a deferred prosecution agreement with DOJ.[12]  These and other recent settlements demonstrate that the SEC and DOJ remain focused on FCPA enforcement.  A recent speech by Deputy Assistant Attorney General Matthew Miner highlighting the importance of due diligence and assessing FCPA risks in the M&A context reiterates that fighting corruption “remains a significant priority.”[13]  By performing risk-based due diligence and ongoing oversight of third parties, as well as implementing robust compliance programs, companies can take steps to prevent FCPA violations, identify potential red flags and position themselves to make voluntary disclosures to the authorities.

[1] In re Legg Mason Inc., Exchange Act Release No. 83948 at 2 (August 27, 2018), available at https://www.sec.gov/litigation/admin/2018/34-83948.pdf.

[2] See Legg Mason Inc. Agrees to Pay $64 Million in Criminal Penalties and Disgorgement to Resolve FCPA Charges Related to Bribery of Gaddafi-Era Libyan Officials (June 4, 2018), available at  https://www.justice.gov/opa/pr/legg-mason-inc-agrees-pay-64-million-criminal-penalties-and-disgorgement-resolve-fcpa-charges [hereinafter Legg Mason DOJ Press Release].

[3] Société Générale also reached a global settlement with DOJ and the Parquet National Financier, France’s financial crimes authority, agreeing to pay a penalty of $585 million to be split between the two authorities.  See Joon H. Kim, Elizabeth Vicens, Abena Mainoo, Guillaume de Rancourt & Pekham Pal, Société Générale Enters Into First Coordinated Resolution of Foreign Bribery Case by U.S. and French Authorities (June 7, 2018), available at  https://www.clearyenforcementwatch.com/wp-content/uploads/sites/487/2018/06/2018_06_06-Société-Générale-Enters-into-First-Coordinated-Resolution-of-pdf.   

[4] In re Legg Mason Inc., Exchange Act Release No. 83948 at 6-7.

[5] For further discussion of recent FCPA developments see Breon S. Peace, Jennifer Kennedy Park & Alex Janghorbani, Recent Settlement Highlights Cooperation Parameters Under the Department of Justice’s FCPA Corporate Enforcement Policy (July 6, 2008), available at https://www.clearyenforcementwatch.com/2018/07/recent-settlement-highlights-cooperation-parameters-department-justices-fcpa-corporate-enforcement-policy/.

[6] See Deputy Attorney General Rod Rosenstein Delivers Remarks to the New York City Bar White Collar Crime Institute (May 9, 2018), available at https://www.justice.gov/opa/speech/deputy-attorney-general-rod-rosenstein-delivers-remarks-new-york-city-bar-white-collar.

[7] See Deputy Attorney General Rosenstein Delivers Remarks at the 34th International Conference on the Foreign Corrupt Practices Act (November 29, 2017), available at https://www.justice.gov/opa/speech/deputy-attorney-general-rosenstein-delivers-remarks-34th-international-conference-foreign.  For additional discussion of DOJ’s FCPA Corporate Enforcement Policy, see Elizabeth Vicens & Jonathan S. Kolodner, The New DOJ FCPA Corporate Enforcement Policy Highlights the Continued Importance of Anti-Corruption Compliance (Jan. 9, 2018), available at https://www.clearyenforcementwatch.com/2018/01/new-doj-fcpa-corporate-enforcement-policy-highlights-continued-importance-anti-corruption-compliance/.

[8] See Legg Mason DOJ Press Release, available at https://www.justice.gov/opa/pr/legg-mason-inc-agrees-pay-64-million-criminal-penalties-and-disgorgement-resolve-fcpa-charge.

[9] In re Legg Mason Inc., Exchange Act Release No. 83948 at 7.

[10] For a summary of recent SEC FCPA matters see SEC Enforcement Actions: FCPA Cases, available at https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml.

[11] See Panasonic Charged With FCPA and Accounting Fraud Violations (April 30, 2018), available at https://www.sec.gov/news/press-release/2018-73.

[12] See Panasonic Avionics Corporation Agrees to Pay $137 Million to Resolve Foreign Corrupt Practices Act Charges (April 30, 2017), available at https://www.justice.gov/opa/pr/panasonic-avionics-corporation-agrees-pay-137-million-resolve-foreign-corrupt-practices-act.

[13] See Jennifer Kennedy Park, Jonathan S. Kolodner & Martine B. Forneret, DOJ Remarks Provide Guidance on Addressing FCPA Risk in M&A Transactions (July 30, 2018), available at https://www.clearyenforcementwatch.com/2018/07/doj-remarks-provide-guidance-addressing-fcpa-risk-ma-transactions/.