The International Law Firm of Fulbright & Jaworski - Corporate Governance
April 6, 2011
- Supreme Court Rules Oral Complaints May Invoke FLSA's Provision Prohibiting Retaliation
- FINRA Issues Regulatory Notice Regarding FCPA Compliance Under Rule 2010
- Japan Crisis Triggers Corporate Disclosures
- IBM Enters Into $10 Million FCPA Settlement with the SEC
- Independent Consultant Presents Study on SEC to Congress
On March 22, 2011, the U.S. Supreme Court issued a 6-2 decision holding that an oral complaint may invoke the Fair Labor Standards Act's antiretaliation provision, which prohibits employers from discharging or discriminating against "any employee because such employee has filed any complaint or instituted or caused to be instituted any proceeding under or related to the [Act]…." 29 U.S.C. § 215(a)(3) (emphasis added).
In Kasten v. Saint-Gobain Performance Plastics Corp., 563 U.S. __ (2011) (slip op.), an employee sued his employer for allegedly discharging him in retaliation for an oral complaint to supervisors about the location of time clocks, which the employee claimed were unlawfully placed in a manner that prevented employees from receiving credit for time spent changing into and out of protective gear. The district court entered summary judgment in favor of the employer on the retaliation claim on the basis that the employee's alleged oral complaint could not be "filed" within the meaning of the Act. The Seventh Circuit affirmed.
Resolving a split among the circuits, the Supreme Court reversed, concluding that an interpretation of the Act that excludes oral complaints would undermine its objectives. The Court made clear, however, that not just any oral complaint would suffice. "To fall within the scope of the antiretaliation provision," the Court stated, "a complaint must be sufficiently clear and detailed for a reasonable employer to understand it, in light of both the content and context, as an assertion of rights protected by the statute and a call for their protection."
The Supreme Court in Kasten expressly declined to decide whether an employee's complaint made to a private employer, rather than to the government, invokes the Act's antiretaliation provision. Given the differing views of lower courts on this question, the Supreme Court's decision means that employers should be cognizant of the increased risk that all oral complaints alleging FLSA violations pose under its antiretaliation provision.
On March 18, 2011, the Financial Industry Regulatory Authority (FINRA) issued a regulatory notice advising its members that it will consider failure to comply with the U.S. Foreign Corrupt Practices Act (FCPA) a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).
Rule 2010 provides that a FINRA "member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade," though the rule does not further define these standards and principles. Members and those associated with them may be subject to a wide range of sanctions for violating FINRA's rules. On March 18, FINRA issued a regulatory notice, reminding its members of the extent to which the FCPA's recordkeeping, internal controls, and antibribery provisions govern them. Importantly, that same notice states that a "member firm's failure to comply with its FCPA obligations will be considered conduct inconsistent with high standards of commercial honor and just equitable principles of trade in violation of FINRA Rule 2010."
FINRA's express inclusion of FCPA violations in the conduct proscribed by Rule 2010 opens another FCPA enforcement front against FINRA members and those associated with them, and provides one more reason to be vigilant regarding compliance.
The recent events in Japan have prompted an ongoing array of corporate disclosures filed with the U.S. Securities and Exchange Commission by dozens of securities issuers, serving as a reminder for companies of the need to evaluate and potentially disclose the effects or risks that these events present.
A Fulbright survey of these disclosures confirms that numerous issuers adversely affected by the events in Japan have moved quickly to disclose the nature and extent of the damage to their property and businesses in Japan, as well as the remedial steps they are taking to contend with those challenges. Others have warned shareholders that they are not yet able to assess the impact of unfolding events.
Even issuers that do not have affected operations or assets in Japan have identified, analyzed, and disclosed indirect effects on their businesses, such as potential disruptions in their supply chains from limitations on their ability to obtain manufacturing inputs from Japanese suppliers. Other issuers outside of Japan have taken the opportunity to evaluate the risk and potential effects of a similar disaster where they operate.
Issuers would be prudent to evaluate the accuracy and adequacy of their disclosures in light of these events and the insights into risk that they provide.
On March 18, 2011, the Securities and Exchange Commission (SEC) announced a settlement with IBM in the amount of $10 million for alleged violations of the books and records and internal control provisions of the FCPA. The alleged violations related to the provision of improper cash payments, gifts and payments of travel and entertainment expenses to foreign officials in South Korea and China by IBM's subsidiaries and affiliates.
The SEC's Complaint alleges that from 1998 to 2003, IBM's subsidiary, IBM Korea, Inc., and a joint venture in which IBM held a majority interest, LG IBM PC Co., Ltd., paid multiple cash bribes totaling approximately $207,000 and provided improper entertainment expenses to Korean foreign officials in order to secure contracts with various Korean government entities for the sale of mainframe computers, personal computers, and related IBM goods and services.
The SEC asserted that IBM affiliates utilized cash bribes in paper bags, made payments through business partners and provided free computers and computer equipment to key decision makers to secure contracts and obtain nonpublic information regarding the contracts.
The Complaint also contains allegations that from at least 2004 to early 2009, IBM subsidiaries IBM (China) Investment Company Limited and IBM Global Services (China) Co., Ltd. "engaged in a widespread practice" of supplying overseas trips, improper entertainment and gifts to Chinese foreign officials through slush funds at travel agencies and business partners.
The enforcement action is based on IBM's lack of sufficient internal controls designed to prevent and detect the FCPA violations in South Korea and China, as well as its failure to make and keep records that accurately reflected the improper payments.
As part of the settlement, IBM consented to the entry of a final judgment permanently enjoining it from future books and records and internal controls violations and ordering it to pay $2.0 million in civil penalties, $5.3 million in disgorgement and $2.7 million in prejudgment interest. This settlement again emphasizes the size of the risks associated with FCPA claims.
As mandated by Section 967 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), on March 10, 2011, an independent consultant engaged by the SEC presented Congress with a report on the SEC's "organizational structure, personnel and resources, technology and resources, and relationships with self-regulatory organizations (SROs)." The consultant, The Boston Consulting Group, Inc., recommended the SEC implement "optimization initiatives" falling into four broad categories, as follows:
Reprioritize regulatory activities. Take a structured approach to assessing the SEC's highest priority needs and reallocating resources accordingly.
Reshape the organization. Reshape the SEC's organizational structure, roles and reporting chains, including seeking flexibility from Congress on certain Dodd-Frank-mandated offices and activities to avoid duplication of efforts.
Invest in enabling infrastructure. Focus on utilizing resources such as technology, human resources and risk management in light of developing market trends.
Enhance SRO engagement model. Strengthen oversight of SROs through enhanced disclosures and rule proposal processes, and create a coordinated approach for interacting with SROs.
The consultant further recommended establishing an office within the SEC dedicated to reviewing and implementing these recommendations. Finally, it noted that if Congress should determine the recommended optimization initiatives are insufficient to meet Congress's expectations with respect to the SEC's efficiency and effectiveness, it should consider providing additional funding or revising the SEC's role.
In response to the study, SEC Chairman Mary Schapiro issued a statement noting the following: "Importantly, the report of the independent consultant confirms the concerns I have been expressing that the SEC does not have the resources to perform all the activities expected of us." In response to specific recommendations in the study, as first steps she undertook to (i) ask for authority to move all functions currently reporting to the SEC's Office of the Executive Director to its Chief Operating Officer (COO); and (ii) direct the COO to lead a series of working groups to address each of the study's recommendations.