By Andrew S. BoutrosJohn R. Schleppenbach, and Craig B. Simonsen

Seyfarth Synopsis:  Among the latest news reports in the cross-border public corruption space that has legally-minded sports fans talking is that a federal grand jury is investigating Major League Baseball’s international player development system for potential Foreign Corrupt Practices Act (FCPA) violations.  See for instance Report: A Federal Grand Jury is Investigating MLB’s International Player Development System, Major League Baseball Signings Focus of Grand Jury Probe, Reports Say, and OT MLB under investigation by US Federal Grand Jury.

The news reports claim that the FBI and federal prosecutors with the FCPA Unit out of the U.S. Department of Justice are investigating whether MLB clubs and those acting on their behalf are “bribing clerks or immigration officials to change dates of birth on identification documents, or to fabricate false identity documents,” when recruiting top baseball prospects coming out of international markets.  Specifically, the well-sourced FCPA Professor blog, in quoting a former baseball operations executive for an MLB club, explained that, “MLB scouting staff or other club employees may interact at various times with these [international] officials to obtain identification documents for prospects, such as birth certificates and passports. . . .  The reason why these points of contact create risk for clubs is that prospects, through their agents or handlers, commit rampant age and identity fraud in order to appear younger and thus increase their market value.”

Of course, those familiar with the FCPA know that the statute makes it illegal for certain persons and business entities (certainly anyone resident or acting in the United States) to corruptly offer or give anything of value (whether money, gifts, or other benefits) to foreign officials, foreign political parties, or public international organizations, with the intent to obtain or retain business.  And, of course, major league baseball and its prized recruiting systems are big business in the sports world, both in the United States and abroad.  If true, this criminal probe may well shine a spotlight on a foreseeable dark side of MLB recruiting practices in the same way that a different federal grand jury investigation brought attention to illegal steroid use by some of the league’s best and most popular players several years ago.

This latest reported FCPA investigation also demonstrates (once again) that U.S. government enforcers are applying the versatile statute to fact patterns outside traditional corporate paradigms such as improper payments for lucrative contracts.  Indeed, just a few years ago, we wrote about another “non-traditional” FCPA fact pattern, that one involving the DOJ and SEC scrutinizing whether a for-profit higher-education institution (and “issuer”) may have made an improper payment while operating its overseas campus in Turkey.  See “Higher Education Institutions are Beginning to Get an Education in the FCPA,” Management Alert, Seyfarth Shaw LLP (December 22, 2016).  As we noted then, “[l]ong gone are the days where the FCPA was viewed as practically applying only to large multinational companies with significant overseas business activity.”  We went on to observe that as “U.S. higher education institutions have opened foreign campuses (either directly or through affiliates) in places such as China, India, and the Middle East,” the foreign government approval process has required “colleges and universities to interface with foreign government officials, which in turn increases the risk that higher education institutions will fold to pressures of commission or kickback requests, or hidden payments for expediency.”

The lesson in all of these out-the-box investigations is that the FCPA really cannot be limited to a so-called “box” anymore.  Whenever U.S. entities, persons, or others interface with foreign government officials, then regardless of the industry—whether sports, film, music, education, art, or traditional business—the opportunity and temptation for improper payments will be present.  And, under such circumstances, criminal activity will necessarily abound, at least to some degree.  When that happens, we should not be all that surprised to see our enforcers step up and take a crack at the conduct with their rather mighty enforcement bats.

Seyfarth Shaw is a full-service firm with leading FCPA, white collar, international, and higher education practitioners.  Those with questions about any of these issues or topics are encouraged to reach out to the authors, your Seyfarth attorney, or any member of the Seyfarth Shaw’s White Collar, Internal Investigations, and False Claims Team or International Employment Law Team.

By Andrew S. Boutros and Craig B. Simonsen

Seyfarth Synopsis: Federal whistleblower laws collide with the in-house attorney-client privilege. The trial round goes to the whistleblower.  The expected appellate round still has not been fought.

In a February 7, 2017 jury verdict, the plaintiff, Sanford S. Wadler, the former General Counsel of Bio-Rad Laboratories, Inc., was awarded $7.29 million for compensatory and punitive damages in a case alleging Sarbanes-Oxley and Dodd-Frank Acts whistleblower retaliation – Foreign Corrupt Practices Act (FCPA) claims, in the United States District Court for the Northern District of California.  It is exceedingly rare for a general counsel of a public company to be a whistleblower, much less file a lawsuit, take it to trial, and be awarded anti-retaliation whistleblower fees.

Whether unique in its own facts or a watershed case that will serve as a precursor for more to come, the case will surely be studied for both its impact and implications. And, given the high stakes, it is expected that the legal saga will continue on appeal.  If it does, until the Ninth Circuit Court of Appeals rules on whether federal whistleblower laws preempt state ethics and privilege rules, it is unclear whether Wadler’s victory will stand the test of time.

With that: Law360 notes that “the case’s turning point came in late December, when U.S. Magistrate Judge Joseph C. Spero ruled that the Sarbanes-Oxley Act’s whistleblower protections preempt attorney-client privilege, thus allowing Wadler to use otherwise privileged information as evidence in the case. ” (Emphasis in the original.)  The ruling bucked a Second Circuit decision from 2013 that found that the former General Counsel of Unilab, which was later acquired by Quest Diagnostics, could not bring a qui tam whistleblower suit against Quest under the False Claims Act because “the allegations relied on privileged information,” amounting to a finding that “privilege took precedent over whistleblower protections,” as noted by Law360. See United States ex rel. Fair Lab. Practices Assoc. v. Quest Diagnostics Inc., 734 F.3d 154 (2d Cir. 2013).

Wadler, who had worked at Bio-Rad for some 25 years, specifically alleged that “after learning of his employer Bio-Rad Laboratories, Inc.’s involvement in extensive bribery occurring in Russia, Thailand, and Vietnam, [he] investigated evidence of similar violations of the FCPA in China, where corruption is notoriously endemic.” According to Wadler’s Complaint, key Bio-Rad officers and directors wanted him to “turn a blind eye to this misconduct or sweep it under the rug, but he refused. Instead, and following his mandatory duties under federal securities laws as the Company’s chief legal officer, Wadler investigated this potential criminal activity and reported it up the ladder.” Wadler v. Bio-Rad Laboratories, Inc., et al., No. 15-cv-02356-JCS, Complaint, p. 1.

Wadler’s above-the-fold Complaint allegations went even further: “When Wadler began to believe that the conspiracy to violate the FCPA went all the way to the top of the corporate hierarchy, he reported his concerns to the Company’s audit committee. Then, just shortly before Bio-Rad was scheduled to present to the SEC and DOJ regarding the Company’s investigation into potential FCPA violations, the Company fired Wadler precisely because he refused to be complicit in its wrongdoing.” Complaint, p. 1.

Law360 observed that the unique role of the general counsel came up prominently during the nearly three-week trial, as Bio-Rad defended its termination of Wadler. “The company argued that his incompetence had led him to misconstrue normal business practices as FCPA violations. One board member testified that when Wadler had raised FCPA concerns with the board, his initial reaction that Wadler had made a courageous move gave way to a belief that Wadler’s suspicions actually stemmed from a misunderstanding of the FCPA. Others testified that Wadler wasn’t a team player.” Even Bio-Rad’s outside counsel testified as a defense witness against Wadler.  But that strand of argument was met by another, this one raised by Wadler, as noted by Law360:  That the role of the general counsel is “that of a generalist who is trained to spot issues and call in specialized experts when necessary” and that an attorney’s duty is to “bring attention to legal risks even when management doesn’t want to hear about them.”

Although a plaintiff’s victory at trial is a critical statement to legal observers and practitioners on both sides of the “v” in a whistleblower claim, the legal battle over Wadler’s allegations and treatment is far from over. With competing precedent out of the Second Circuit, Bio-Rad is surely expected to appeal the jury’s verdict and ask the Ninth Circuit to toss out the verdict and either dismiss the case entirely or return the case to the district court for a retrial.  How the Ninth Circuit will rule remains to be seen, but the legal saga is sure to continue until then and the state of the law on whistleblower preemption can hardly be viewed as settled.

Those with questions about any of these issues or topics are encouraged to reach out to the authors, your Seyfarth attorney, or any member of the Seyfarth Shaw’s White Collar, Internal Investigations, and False Claims Team, Securities Litigation Team, or Whistleblower Team.