Subject to Inquiry

Subject to Inquiry

The Latest on Government Inquiries and Enforcement Actions

Government, Regulatory & Criminal Investigations Group
Anti-Corruption, Charging, Compliance, Corporate Fraud, DOJ Policy, Enforcement Actions, FCPA, FCPA Investigations, Non-Prosecution Agreements, White Collar Crime

DOJ Criminal Division Chief Provides Guidance on Corporate Charging Decisions

Government-Regulatory-and-Criminal-Investigations.jpgOn April 17, 2015, Assistant Attorney General Leslie Caldwell provided helpful guidance regarding the Justice Department’s approach to corporate charging decisions in remarks that she delivered at New York University Law School’s Program on Corporate Compliance and Enforcement. Ms. Caldwell explained that her remarks furthered the Criminal Division’s efforts to increase transparency regarding corporate prosecutions, which she assured was one of her top priorities as head of the division. According to Ms. Caldwell, greater transparency “benefits everyone,” as a greater understanding of the potential benefits of self-reporting and cooperation likely will lead to more corporations self-disclosing potential wrongdoing to the government.

A comprehensive, credible but properly tailored investigation is crucial to receiving credit

Ms. Caldwell confirmed that if companies hope to receive cooperation credit, a comprehensive and credible internal investigation is essential: “Put simply, if a company wants cooperation credit, we expect that company to conduct a thorough internal investigation and to turn over evidence of wrongdoing to our prosecutors in a timely and complete way.” She proceeded to identify several key features of such an investigation:

  • Investigations must identify culpable individuals. “Perhaps most critically,” Justice expects cooperating companies to identify culpable individuals and to provide all facts related to their conduct. Individual prosecutions remain a top Justice priority.
  • Investigations must be independent and credible. Caldwell emphasized that investigations must be “designed to uncover the facts, not to spread company talking points or whitewash the truth.”
  • Investigations should be appropriately tailored. Seeking to respond to criticism that internal investigations may cost enormous sums of time and money, Ms. Caldwell explained that the company, and not Justice, can determine the extent of the investigation. Justice does “not expect companies to aimlessly boil the ocean.” By way of example, she noted that if a company identifies an FCPA investigation in one country but “has no basis to suspect that violations are occurring elsewhere, we would not necessarily expect it to extend its investigation beyond the conduct in that country.”

The internal investigation does not occur in a vacuum, but rather takes place in conjunction with the Criminal Division’s investigation. Ms. Caldwell confirmed that Justice will proceed with its own investigation and will “pressure test” the company’s internal investigation. On the flip side, she stressed that Justice should engage in an “open dialogue” with cooperating corporations and help them by sharing the areas of interest identified by Justice: “I tell my prosecutors that where possible, if it would not compromise our own investigation, we should share information about our investigation with a cooperating company to help focus the company’s internal inquiry.”

Choosing not to cooperate in a timely fashion or at all will have negative consequences

While acknowledging a company’s right not to cooperate, Ms. Caldwell stressed that the failure to cooperate – either in a timely fashion or at all – will have negative consequences when it comes to making a charging decision. For example, she advised that the lack of cooperation was a “tipping point” in recent investigations that led to significant charges and guilty pleas. She further cautioned that while the failure to cooperate may delay Justice’s investigation, it will not “thwart” their investigation.

The Filip Memo and other resources on charging decisions and corporate compliance

Although recognizing the desire for a matrix for charging decisions, Ms. Caldwell explained that a “rote formula” would be detrimental to the individualized determination of justice in a given case. That said, she reiterated that Justice has for years publicly disclosed the factors that prosecutors must evaluate during corporate charging considerations. These considerations are reflected in the nine Principles of Prosecution of Business Organizations, which are set forth in the Filip Memo (available here in PDF). These factors help determine whether the corporation will be charged or will receive a deferred prosecution agreement (DPA), non-prosecution agreement (NPA) or a declination of prosecution. These factors provide companies an opportunity to advocate. According to Ms. Caldwell, in “virtually every instance, we invite company counsel to make a presentation regarding the application of the Filip factors in the case at hand before making a charging decision.” Moreover, after making a charging decision, Justice will provide an explanation of the key factors that led to its decision. Ms. Caldwell advised that the department’s resolutions should be providing even more information in this regard in the future.

Ms. Caldwell closed by offering suggestions about where companies and their counsel should look for guidance on charging decisions and on compliance programs. First, she assured that DPAs and NPAs in actual cases provide excellent guidance, noting that “[c]ompanies seeking to measure their own compliance programs need look no further than many of the resolutions we have made publicly available.” Second, she referred the audience to the Foreign Corrupt Practices Act (FCPA) Resource Guide published by the Justice Department and the Securities and Exchange Commission (which is available here in PDF). In particular, she noted the FCPA Resource Guide’s section on declinations. Finally, she pointed to Justice’s own FCPA website, which posts relevant enforcement actions as well as opinion letters.


As readers of Subject to Inquiry are well aware, even the suggestion of corporate prosecution can be devastating. That is why transparency and guidance such as that provided by Ms. Caldwell and the FCPA Resource Guide are crucial to helping corporations understand the risks faced by companies who have identified potential wrongdoing as well as the potential and significant benefits of active cooperation. Of course, even more importantly, companies should draw upon this guidance to make sure they have implemented robust compliance programs to help ensure they do everything possible to minimize the potential for wrongdoing in the first instance.

CFPB, Financial Regulation

Agency Cooperation in Fair Lending Enforcement

iStock_000010667691MediumJoint investigations, cross-agency partnership, cooperation … terms all too familiar to regulatory and defense practitioners accustomed to collaboration among the alphabet soup of federal regulators. These terms may now be regularly used to describe the emergent relationship between the Department of Justice (DOJ) and the Consumer Financial Protection Bureau (CFPB). Indeed, the Attorney General’s 2014 Annual Report to Congress Pursuant to the Equal Credit Opportunity Act Amendments of 1976, published this month, touts the increased cooperation between these agencies to vigorously enforce federal fair lending laws. One such law, the Equal Credit Opportunity Act (ECOA), prohibits lenders from discriminating against credit applicants on the basis of race, color, religion, age, sex and national origin, among other factors.

The Annual Report provides a lens into fair lending enforcement activity over the past year, while foreshadowing things to come. One obvious trend is that the CFPB and the DOJ are talking − a lot. This budding partnership, however, should come as no surprise. Overlapping federal jurisdiction makes these agencies natural allies in fair lending enforcement. The DOJ – through the Housing and Civil Enforcement Section in the Civil Rights Division – is authorized to enforce fair lending laws and civil rights statutes, including the ECOA, the Fair Housing Act (FHA) and the Servicemembers Civil Relief Act (SCRA). The CFPB, through jurisdiction granted to it by Title X of the Dodd-Frank Act, shares enforcement jurisdiction over certain fair lending laws, including the ECOA. Indeed, the coordination between the DOJ and the CFPB is prescribed in a 2012 Memorandum of Understanding (MOU) between the agencies.

Notably, the ECOA requires financial regulators to refer matters to the DOJ when the regulator suspects a lender of engaging in a pattern or practice of discrimination. The numbers provided in the Annual Report speak for themselves. Of the 18 referrals the DOJ received in 2014, 15 came from the CFPB. Ten of those referrals resulted in DOJ investigations, including four joint investigations with the CFPB. And one joint investigation resulted in a landmark $169 million settlement with a leading credit card issuer for discriminating against Hispanic borrowers by excluding them from certain debt-repayment programs. An additional seven joint investigations initiated before 2014 are still under way. These figures mark a significant uptick in DOJ-CFPB cooperation, a trend which will only continue upward.

Lenders and their counsel should be cognizant of this cooperation when dealing with the CFPB in any matters, particularly those relating to fair lending. And know that a possible DOJ investigation is only a referral away.

Compliance, Corporate Compliance

HHS OIG Issues Guidance to Healthcare Boards Regarding Oversight

skd284437sdc-thumb-225x225-203.jpgOn April 20, 2015, the United States Department of Health and Human Services Office of the Inspector General (OIG) issued guidance aimed at the governing boards of healthcare entities. The guidance—issued in conjunction with associations of healthcare auditors, attorneys, and compliance professionals—aims to inform healthcare boards regarding their oversight duties. Although the guidance is written at a relatively high level, it contains numerous statements and recommendations that will be of interest to any board concerned with healthcare compliance.

In the guidance, OIG states that boards have a duty to act reasonably in ensuring that a corporate information and reporting system exists and that the reporting system is adequate to provide the board with appropriate information relating to compliance. OIG recommends that boards consult OIG’s own compliance guidance and also the Federal Sentencing Guidelines and Corporate Integrity Agreements (CIAs) as benchmarks for the board’s compliance efforts. CIAs are imposed on organizations that have been investigated by the OIG because of fraud allegations and contain structural and reporting requirements, while the Sentencing Guidelines consider compliance activity in mitigation of criminal fines and sentences.

In its recommendations, OIG takes into account the size of organizations to some extent. OIG requires that even smaller organizations “show the same degree of commitment to ethical conduct and compliance as larger organizations.” It recognizes, however, that smaller organizations may be able to do so “with less formality and fewer resources” than a larger organization. The guidance states that in smaller organizations it may be possible to use existing employees for compliance instead of hiring separate staff and suggests that boards may be more personally involved.

Despite this recognition of the potential burden on smaller entities, OIG states that a company’s legal, compliance, and internal audit functions should be separate and independent, which clearly requires the involvement or hiring of a number of employees. OIG also recommends that boards consider entering into executive sessions (without management present) with those employees responsible for compliance and suggests that such sessions should be regular so that management is not lead to believe that any executive session relates to a particular problem.

OIG recommends that boards have a formal plan to stay up to date regarding changing regulations including through updates from employees and management as well as formal education. The guidance also suggests that it may be desirable for a board to include one or more members who are professionals with healthcare compliance expertise. OIG states that the board and management should stay up to date regarding new potential compliance risks and industry trends that may create new risks. Among other emerging risks, OIG cites increased transparency due to the reporting of Medicare payments and the Sunshine Act.

The guidance recommends that boards consider employee incentive programs that are focused on compliance and tied to bonuses or other incentives. OIG notes that boards and their organizations can benefit in several ways from compliance programs, noting in particular that repayment of Medicare and Medicaid overpayments within 60 days after they are identified (as required by statute) will be aided by effective compliance and reporting programs.

From the guidance, boards and board members should understand that OIG is expecting them to play integral and active roles in their organization’s compliance. Boards must be prepared to ensure that their organizations have sufficient compliance structures in place and, in the case of smaller entities, to take personal roles in compliance. Under the guidance, and to take full advantage of the possible mitigation of fines under the Sentencing Guidelines in the event of a criminal conviction, boards cannot rely on upper management for compliance, but must be prepared to create structures in which the individuals responsible for compliance and related areas have direct and open contact with their respective boards.

CFPB, Compliance, Enforcement Actions, Financial Regulation, Regulation

CFPB Targets PayPal’s Consumer Lending Service

Government-Regulatory-and-Criminal-Investigations.jpgIn a recent filing with the Securities and Exchange Commission, eBay’s PayPal division disclosed that it could be hit with an enforcement lawsuit by the Consumer Financial Protection Bureau (CFPB) as early as the second quarter of 2015. The potential suit arises from CFPB inquiries into PayPal Credit, the company’s consumer lending service formerly known as Bill Me Later. According to PayPal’s filing, the CFPB served Civil Investigative Demands on the company in August 2013 and January 2014 seeking information related to PayPal Credit products, “including online credit products and services, advertising, loan origination, customer acquisition, servicing, debt collection, and complaints handling practices.”

PayPal Credit offers instant financing to consumers who make purchases at certain EBay marketplace locations. Consumers are able to obtain loans without incurring interest as long as they repay the borrowed amounts within a certain period of time. If borrowers fail to repay the loans in full by the end of the promotional period, they are subject to fees and annualized interest rates as high as 19.99 percent, which can be applied retroactively to the origination date of the loan. Given the CFPB’s ongoing interest in cracking down on “payday lenders” and similar institutions, it should come as no surprise that the bureau is taking a hard look at the advertising, customer-acquisition and lending practices of services like PayPal Credit.

PayPal stated that it was in receipt of a Notice and Opportunity to Respond and Advise – an early warning to a company under investigation that the CFPB believes it has amassed sufficient evidence to proceed with an action for violations of the consumer protection laws. A company receiving such a notice typically has 14 days to respond to the CFPB’s concerns, at which point the CFPB will determine whether to proceed with the enforcement action. PayPal stated that the company is cooperating with the investigation and is engaged in settlement negotiations, but provided no additional details related to the particulars of the CFPB’s case against it.

CFPB, Legislation, News, Regulation

Rogue Agency or Champion of Consumers? House Votes for CFPB Transparency

top secretA common complaint against the CFPB is that the agency wields too much power without enough accountability. House Financial Services Committee Chairman Jeb Hensarling recently described the CFPB as “the single most powerful and least accountable Federal agency in all of Washington.” And as U.S. Senator David Perdue has complained, “the CFPB is a rogue agency that dishes out malicious financial policy and creates new rules and regulations without any oversight from Congress.”

This perception may soon change. The U.S. House of Representatives voted Tuesday to pass H.R. 1265, the Bureau Advisory Commission Transparency Act (“BACTA”) by a bipartisan, overwhelming margin of 401 to 2. The bill seeks to make the CFPB subject to the Federal Advisory Committee Act (“FACA”), which, among other items, requires an agency to hold committee and subcommittee meetings in public. Only three agencies are statutorily exempted from FACA – the Central Intelligence Agency, the Officer of the Director of National Intelligence, and the Federal Reserve.

Yet despite the fact that the CFPB is not involved in intelligence gathering or the setting of monetary policy, Director Richard Cordray has taken the position that it is not subject to FACA. When one Congressman recently requested to attend the CFPB’s Consumer Advisory Committee meeting, his staff was told via email, “We cannot accommodate the Congressman’s request.”

However, the writing may be on the wall that signals the end of this secrecy by the CFPB. In addition to BACTA, which is now in the Senate, a budget amendment has been proposed by Senator Perdue to subject the CFPB to the Congressional appropriations process, rather than allowing its continued operation under the Federal Reserve with no accountability to Congress. The amendment seeks to allow Congressional oversight of the CFPB’s functions in light of its roughly $600 million budget.

The CFPB does not appear to have commented publicly on these legislative measures. Yet the agency devotes a full page of its website to open government. There, it states that “Transparency is at the core of our agenda, and it is a key part of how we operate.”

The days of the CFPB’s clandestine policymaking and unbridled activities may be coming to a close. Don’t expect it to happen without a fight.

DOJ Policy, Financial Crimes, News, Schemes, Sentencing, White Collar Crime

Will Judge Rakoff Get His Wish? – Changes to Federal Sentencing Guidelines May Alter the Plea Bargaining Process


In an article last fall, U.S. District Judge Jed Rakoff lamented the prevalence and process of plea bargaining in today’s criminal justice system.  While plea bargains currently resolve an estimated 97 percent of federal criminal cases, recent changes to the sentencing guidelines may encourage some white-collar defendants to take their chances at trial. Last week, the U.S. Sentencing Commission announced a number of amendments to the sentencing guidelines for economic crimes.

Several changes, in particular, stress the subjective culpability of individual participants over the nature of the scheme itself. According to the commission’s chief judge, Patti Saris, the amendments “emphasize substantial financial harms to victims rather than simply the mere number of victims and recognize concerns regarding double-counting and over-emphasis on loss.”  Despite objections raised by the Department of Justice (DOJ), the amendments will take effect on November 1, 2015, barring objections from Congress.

Perhaps the most significant change is the commission’s clarification of the term “intended loss.” The current guidelines define “intended loss” as the “pecuniary harm that was intended to result from the offense.” Under this definition, a number of courts have taken an objective approach to this calculation, computing the loss amount based on the foreseeable financial risk created by the scheme. This amendment reorients the inquiry toward the defendant’s subjective culpability. Courts now must calculate intended loss based on “the pecuniary harm the defendant purposely sought to inflict.” While the commission reiterated its commitment to the “underlying principle that the amount of loss involved in the offense should form a major basis of the sentence,” this amendment shifts the focus from the foreseeable results of the scheme to the individual defendant’s actual goal.

A second change reinforces this effort. In their present form, the guidelines allow courts to apply an increased sentence if the scheme involved “sophisticated means.” Courts had applied this sentencing enhancement regardless of whether the individual defendant actually used “sophisticated means.” The commission added another element to this enhancement: Not only must the offense involve sophisticated means, but it also must entail that “the defendant intentionally engaged in or caused the conduct constituting sophisticated means.” In addition to these two changes, the amendments also encourage courts to consider a mitigating role adjustment for lower-level participants, particularly those who received little personal benefit from the scheme. Significantly, the commission has adjusted the calculation of loss amounts for inflation – a step that could reduce some sentences by nearly 25 percent. The amendments also allow courts more flexibility in calculating the losses on stocks and bonds.

Not all the changes are likely to help defendants. The commission also stiffened penalties for fraud schemes that inflict substantial harm on victims. Sentencing enhancements for defendants charged with defrauding large numbers of victims may be applied now when a defendant inflicts severe harm on a smaller number of victims. Nonetheless, these changes are likely to reduce prosecutors’ leverage in plea bargaining with lower-level participants in fraud schemes. The cooperation of these lower-level participants is often necessary for the DOJ to secure convictions of the scheme’s leaders. Prosecutors’ ability to tie defendants to sizeable loss amounts has been one of their most effective tools in securing guilty pleas from defendants who played minor roles in the fraud. With loss amounts now hewing more closely to the defendant’s role – combined with an inflationary adjustment – lower-level defendants may find the risks of going to trial less catastrophic going forward. If this happens, expect to see more generous plea offers for the least culpable offenders come 2016.


CFPB, Financial Regulation

CFPB Continues Focus on Mortgage Lender Advertising

Government-Regulatory-and-Criminal-Investigations.jpgLast week, the CFPB announced an enforcement action against RMK Financial Corporation d/b/a Majestic Home Loans (RMK) related to deceptive mortgage advertising practices. This enforcement action is the most recent in a series of enforcement actions and administrative proceedings concerning the 2011 Mortgage Acts and Practices Rule (Regulation N), 12 C.F.R. § 1014, governing misrepresentations in mortgage advertising.

Regulation N, effective as of December 30, 2011, generally forbids “any person to make any material misrepresentation, expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product.” The non-exhaustive list of potential terms that must be clearly identified include: (i) government affiliation (or lack thereof), (ii) interest rates, (iii) fees to be charged, (iv) payments associated with the loan, and (v) the amount of credit available to consumers.

On April 8, 2015, the CFPB and RMK entered into a consent order resolving the bureau’s enforcement action. According to the CFPB, RMK’s advertisements were misleading in a number of ways, including: (i) the advertisements gave the impression that the mortgage products were endorsed or sponsored by the Veteran’s Administration or the Federal Housing Administration; and (ii) the advertisements failed to clearly identify that the advertised rates were variable, and fine print was insufficient. RMK has agreed to pay a fine of $250,000. In addition, RMK is subject to heightened reporting and recordkeeping requirements for the next five years.

Lenders should be cognizant of these regulations as the CFPB appears to be placing a renewed emphasis on actively preventing deceptive mortgage advertising. In fact, the consent order with RMK is the third consent order related to Regulation N this year alone. According to the CFPB’s director:

Deceptive advertising has no place in the mortgage marketplace, and the Consumer Bureau will continue to take action against companies that mislead consumers with false claims of government affiliation. … Today’s action sends a clear message that misleading consumers is illegal, unacceptable, and will not be tolerated.

CFPB, Compliance, Legislation

Mortgage Shopping Toolkit Available for Compliance Guidance

Mortgage Loan Agreement

The Consumer Financial Protection Bureau (CFPB) recently released a step-by-step guide titled Your Home Loan Toolkit as part of their Know Before You Owe mortgage initiative designed to improve compliance and help consumers understand mortgage loans. This toolkit will guide potential homeowners in securing mortgages, understanding closing costs and offering helpful hints for consumers to become successful homeowners. With the effective date for the Know Before You Owe mortgage disclosure rules fast approaching (August 1), the CFPB has provided the mortgage industry with time to implement the toolkit to ensure compliance with mortgage origination policies and procedures. As CFPB Director Richard Cordray stated:

The new mortgage disclosure forms coming in August will help consumers comparison shop for mortgages and avoid surprises at the closing table. We are releasing this toolkit well in advance of the effective date to help the mortgage industry come into compliance with the new rules.

The toolkit replaces a booklet developed by the Department of Housing and Urban Development that lenders now provide to mortgage applicants. The new toolkit provides consumers with information regarding the nature and cost of real estate settlement services, defines what “affordable” might mean to a consumer, and helps to identify the best type of mortgage for a particular consumer’s situation. Included in the toolkit are checklists, worksheets, conversation starters between consumers and lenders, and helpful resources. Lenders will need to provide this toolkit to mortgage applicants during the application process, and other mortgage industry participants, such as real estate professionals, are encouraged to provide the toolkit to consumers as well.

The mortgage industry’s response to the latest CFPB requirements has generally been positive. Mortgage Bankers Association President and CEO David Stevens recently noted:

We fully support efforts by the CFPB to help inform and educate consumers who are working through the complexities of the mortgage process. … It is critical that all stakeholders work together to ensure that we continue to uphold the highest standards of consumer protection and an efficient marketplace.

As noted above, the toolkit will be used in conjunction with the new Loan Estimate and Closing Disclosure forms as part of the Know Before You Owe rules issued by the CFPB in November of 2013. The new rules consolidate four disclosures that lenders previously provided to consumers under the Truth in Lending Act and the Real Estate Settlement Practices Act, into two new forms. The CFPB believes that the consolidation of these forms will help consumers avoid information overload during the closing process, allowing the consumer to better understand the costs and risks associated with their mortgages.

Mortgage lenders now have one more task to address before the final rules become effective. Lenders would be wise to adjust their loan origination processes and policies now to overcome any potential technological glitches that could occur within their system to ensure compliance with the August 1, 2015, effective date.


SEC Charges Group of Unregistered Broker-Dealers Trading in Corporate Bond Market

Government-Regulatory-and-Criminal-Investigations.jpgLast week, the Securities and Exchange Commission (SEC) charged more than 20 individuals and companies with violations of the Securities Exchange Act of 1934 (the Exchange Act) related to the buying and selling of investment-grade corporate bonds. The SEC charged the respondents with trading in corporate bonds without first registering as broker-dealers. Two respondents, Global Fixed Income and its owner Charles Perlitz Kempf, were charged with aiding and abetting these violations.

Section 15(a) of the Exchange Act prohibits any individual or corporation from purchasing securities on behalf of another without first registering as a broker-dealer with the SEC. According to the SEC, the respondents purchased corporate bonds on behalf of Kempf and Global Fixed Income, who then resold the bonds at a profit. The respondents conducted these transactions without registering with the SEC. Under the SEC’s order, the respondents are subject to roughly $5 million in disgorgement of profits plus $1 million in penalties.

This action, as well as other, similar SEC enforcement actions in the corporate bond market, may be part of the SEC’s broader focus of increasing transparency in the corporate bond markets in 2016 and beyond. Last month, SEC Commissioner Daniel Gallagher spoke publicly on the need for increased transparency and liquidity in the corporate bond market. And, just two days before the SEC issued its press release on the GFI enforcement action, SEC Chair Mary Jo White gave testimony in front of the House Committee on Financial Services regarding the SEC’s budget and agenda for 2016. In discussing the SEC’s continued efforts toward improving the “market structure” for municipal and corporate bonds, Ms. White noted that the total principal amount of corporate bond issues totaled approximately $11.6 trillion, more than three times the amount of municipal bonds. Ms. White also discussed the difficulties created by the “rapid expansion of the size and complexity of the securities market” and cited the agency’s need for additional resources to monitor registered investment advisers. Taken together, these comments may foreshadow an increase in compliance efforts by the SEC in the corporate bond market to foster transparency and consumer confidence.

Corporate Compliance, Corporate Fraud, SEC, SEC Enforcement, Securities Litigation

Inadequate Internal Controls Cost Tech Firm $750,000

CashWithout admitting or denying the U.S. Securities and Exchange Commission’s findings, Polycom Inc. settled with the agency on Tuesday, March 31, 2015, over alleged insufficient internal controls and disclosure violations for personal perk expenses. Andrew Miller, Polycom’s former CEO, traveled to Indonesia and South Africa with his girlfriend, took limousine rides, and purchased dress shirts, spa treatments, and tickets to musicals and sporting events − all on the company’s dime. His expenditures are detailed in the settlement order and in the SEC’s complaint against Miller, filed in U.S. District Court on the same day as the SEC issued its order. The agency found that Miller’s improper reimbursement for personal expenses caused Polycom to report false information on its proxy statements and annual filings. Polycom has agreed to pay a civil penalty of $750,000 for its violations of securities laws. The SEC will pursue its case against Miller individually in federal court.

Ironically, Miller imposed stricter controls on travel and expenditures during his tenure as CEO. In 2013, Miller resigned after accepting responsibility for irregularities in expense submissions. In its complaint, the SEC alleges that Miller’s concealment of perks resulted in personal violations of several provisions of the federal securities laws, including anti-fraud, proxy solicitation, periodic reporting, false certification, false books, and records and internal controls provisions. The SEC is seeking to enjoin Miller from committing future violations, bar Miller from serving as an officer or director of a public company, and require him to disgorge ill-gotten gains as well as pay civil monetary penalties.

The SEC found that Polycom lacked the internal controls to prevent Miller from concealing perks. Miller submitted false business descriptions, approved his own expenses by submitting them through his administrative assistants and charged airline flights to the company with no description of purpose. As a result, Polycom’s filings incorrectly reflected that $190,000 of Miller’s charges were business expenses rather than compensation.

The Exchange Act’s recordkeeping provisions require reporting companies to make and keep books that accurately reflect transactions and the disposition of assets, and to maintain sufficient accounting controls to provide reasonable assurances that transactions are executed with management’s authorization. Item 402 of Regulation S-K also requires the disclosure of perquisites provided to executive officers by type, if the perquisites amount to $10,000 in a given year. Perquisites greater than $25,000, or 10 percent of total perquisites, must be specifically identified.

In the SEC’s press release, the San Francisco Regional Office Director, Jina L. Choi, put public companies on notice of the requirement to “implement and maintain effective controls over executive compensation and expenses.” The cases against Polycom and Miller serve as a reminder to carefully craft and implement internal controls, particularly with respect to the reimbursement of expenses.