TEVA and the long arm of US securities law

Foreign Corrupt Practices Act allows the US to pay bounties to those who come forward and report fraud.

Teva 311 (photo credit: REUTERS/Ronen Zvulun)
Teva 311
(photo credit: REUTERS/Ronen Zvulun)
On Thursday, August 2, 2012, the United States Securities and Exchange Commission announced that it was investigating Israeli pharmaceutical giant TEVA for alleged violations of a US law known as the Foreign Corrupt Practices Act. While it might seem strange that TEVA, a company situated thousands of miles outside the United States’ borders, is being investigated by a US government regulatory agency; perhaps more interesting is that the investigation stems from alleged wrongful conduct in Latin America.
Non-US companies, including TEVA, that trade, or issue their stock on US exchanges, are subject to the full panoply of US securities laws including the Foreign Corrupt Practices Act, a law which precludes the bribery of foreign officials in order to facilitate business.
In some countries, bribery has become routine business. Yet it is illegal under US law, the long arm of which can reach as far as South America and the Middle East to impose sanctions on companies that engage in this conduct. Any company that issues its stock on US exchanges is subject to liability under the US Foreign Corrupt Practices Act.
One would think that those running companies the size of TEVA fully understand their obligations under US law and the potential for extra-territorial enforcement.
Yet large multi-nationals, including Siemens, IBM, Johnson & Johnson and a host of others, have either been investigated by the US SEC for bribery of foreign officials or paid hefty sanctions to settle potential agency actions. Even a company as big as Walmart is not immune from SEC scrutiny.
Earlier this year, revelations surfaced that Walmart allegedly bribed Mexican officials to secure business.
If there is a heightened awareness regarding the requirements of the Foreign Corrupt Practices Act and other obligations under US securities laws, it is only because recent legislation passed during President Barack Obama’s tenure in office now allows the US SEC to pay bounties to those who come forward and report fraud.
Where the SEC imposes a monetary sanction exceeding $1 million for violations of US securities laws, those who blow the whistle may be entitled to split bounties of up to 30 percent of the government’s recovery.
The bounty system, established by the US government’s Dodd-Frank Act, provides opportunities for both US and foreign whistleblowers. Even Israeli citizens who report wrongdoing to the SEC can secure a bounty.
The bounty system bolted into the Dodd- Frank Act actually finds its roots in a US law called the False Claims Act which was passed during the administration of Abraham Lincoln in 1864. That law allows private individuals, without regard to their citizenship, to initiate a lawsuit in the name of the government against individuals and corporations that have cheated the US government. Individuals, known as realtors, can initiate litigation when they base their lawsuit on information that is not derived from news reports or generally on information made available by the government itself. Those who initiate False Claims Act litigation are entitled to significant bounties.
In 2012 alone, bounties totaling several hundred million dollars were paid to whistleblowers that took action under the False Claims Act. Of particular significance is that this law can be utilized by even foreign citizens who work for contractors that provide goods and services that are paid for or financed with US government dollars, which includes even foreign military assistance monies.
Whether through Dodd-Frank or the False Claims Act, the opportunity for Israelis to participate in the enforcement of US laws, and the exposure faced by Israeli enterprises traded on US exchanges or operating with US government dollars, is not to be understated. First, while language barriers and the ability to collect evidence in many countries may make collection of evidence and enforcement of US laws complicated, the bilingual capabilities of Israelis and similarities in judicial process make Israel a ripe environment for whistleblowers to aid in enforcement of US laws. In addition, as Israeli technology expands, and entrepreneurs seek investors through US exchanges, there will continue to be more situations where Israeli enterprise will subject themselves to US compliance enforcement.
For those working in Jerusalem’s hi-tech corridor and in technology centers throughout Israel, the TEVA investigation is undoubtedly going to be an important point of focus and, at the end of the day, will provide additional guidance on extraterritorial compliance enforcement of US securities laws. Stay tuned.
The writer heads the whistleblower practice at US law firm Grant & Eisenhofer. He is an adjunct professor and Senior Fellow at the Emory University School of Law Center for Advocacy and Dispute Resolution. He founded the website