Next up in our review of states requiring private employers to participate in E-Verify – North Carolina and South Carolina. 

North Carolina

In June 2011, North Carolina enacted a law (North Carolina HB 36) requiring all state agencies, counties and municipalities to use E-Verify by October 1, 2011.  All other North Carolina employers must implement E-Verify by the following deadlines:

• Employers with more than 500 employees: October 1, 2012
• Employers with 100-499 employees: January 1, 2013
• Employers with 25-99 employees: July 1, 2013

The North Carolina law exempts seasonal temporary employees who are employed for 90 or fewer days during a 12-month period.  However, employers need to be careful with these state mandated exemptions.  In order to participate in E-Verify, employers have to sign a Memorandum of Understanding with the Department of Homeland Security which requires the employer to use E-Verify for all new employees and prohibits the employer from verifying selectively. 

The North Carolina law imposes civil monetary penalties for violations.

South Carolina

In June 2011, South Carolina enacted a law (South Carolina Act 69) requiring all employers to participate in E-Verify by January 1, 2012.  The new law removed the option of only hiring employees who possess or qualify for a South Carolina driver’s license (or other state license with similarly strict requirements) in lieu of using E-Verify.  The South Carolina law includes a grace period of one year for employers, during which penalties are probationary.  After the one year grace period, employers can face suspension of their business license.

The South Carolina law also requires private employers to maintain contact information for all of its subcontractors and sub-subcontractors performing services for the private employer and to provide such information pursuant to an audit or investigation within seventy-two hours of the request.

Like many other states, certain provisions of the South Carolina immigration law have been blocked from taking effect by a challenge in federal court (see United States v. South Carolina, No. 2:11-cv-2958 (D.S.C. December 22, 2011)), including a provision that requires law enforcement officers to check the immigration status of people they pull over for traffic violations.  However, the provisions regarding participation in E-Verify remain in effect.

The Securities and Exchange Commission announced on Friday, January 6^th a significant new policy: companies that admit to criminal charges in securities fraud matters will no longer be able to settle SEC charges without admitting guilt in enforcement proceedings stemming from the same conduct.  The SEC’s Director of Enforcement, Rob Khuzami, reportedly explained:

The new policy does not require admissions or adjudications of fact beyond those already made in criminal cases, but eliminates language that may be construed as inconsistent with admissions or findings that have already been made in the criminal cases.

The Wall Street Journal’s Joe Palazzolo explains, “The policy change eliminates what had been a strange feature of parallel criminal and civil proceedings. Even when companies admitted to broad criminal violations in settlements with the Justice Department, which carry greater consequences than civil charges, they weren’t required to make an admission in their settlements with the SEC.”

As Law360 reports, Khuzami stressed that the policy change will apply only in a minority of cases where there are parallel criminal proceedings arising from the same misconduct.  And, importantly, SEC settlements will not require companies to admit to broader misconduct than admitted in the concurrent criminal proceedings. 

Many do not view the new directive as a significant shift in SEC policy.  John Carney of CNBC, for example, insists that “the change will have very little impact on most of the cases the SEC brings.”   Carney believes most companies seeking to settle SEC matters can still avail themselves of the “neither admit nor deny” language, because “[o]nly companies that admit or are convicted in a criminal court will actually be denied those familiar words of settlement blather.” 

Still, for companies faced with parallel enforcement proceedings, the shift in policy may in fact shape their litigation strategy.  Companies in such a situation should consider, first, the timing of any settlement with the Commission.  Settlement on a “neither admit nor deny” basis may be available until the company admits guilt in the parallel criminal matter.  Thus, settling with the SEC first may present an opportunity to secure settlement on favorable terms. 

Second, for companies forced to admit guilt in an SEC settlement under the new policy, it is essential to make sure the admission covers the same conduct or elements described in the criminal matter.  While the SEC insists it will not ask companies to admit to broader misconduct, it is ultimately up to the companies to ensure any admission is sufficiently narrowly tailored. 

The Commodity Futures Trading Commission announced last week that Vincente Martinez has been appointed as the first director of the Commission’s recently created Whistleblower Office.  According to CFTC Chairman Gary Gensler:

The CFTC’s Whistleblower Office, which the agency implemented under the Dodd-Frank Act, provides the public an avenue to help catch misconduct in the markets and improve the CFTC’s ability to be an effective cop on the beat.

Mr. Martinez joins the CFTC from the Securities and Exchange Commission, where he served as an Assistant Director in the Division of Enforcement.  At the SEC, Martinez helped establish the Office of Market Intelligence, which drafted the SEC’s own whistleblower rules and currently oversees the SEC’s collection and analysis of whistleblower tips.  The CFTC consulted the SEC’s Office of Market Intelligence in crafting its whistleblower program, and the CFTC’s whistleblower rules are nearly identical to the SEC’s.  Thus, Martinez will be very familiar with the CFTC’s whistleblower program, and ready to step in as “an effective cop on the [CFTC] beat.” 

The CFTC whistleblower bounty program, which went into effect in October 2011, provides an award for whistleblowers who voluntarily come forward with original information that leads to a successful enforcement action in which the CFTC recovers monetary sanctions in excess of $1 million.  Qualified CFTC whistleblowers are entitled to an award of 10-30% of the amount recovered.  Like the SEC rules, the CFTC rules do not require a whistleblower to report a potential violation internally before reporting to the government. 

The CFTC rules, however, differ from the SEC rules in two significant respects: First, unlike the SEC rules, the CFTC rules do not exclude employees of public accounting firms from eligibility for a whistleblower award, meaning outside auditors of CFTC-regulated entities may blow the whistle on their clients.  Second, the CFTC rules do not contain a “double dip” provision, meaning the CFTC does not exclude from eligibility for an award whistleblowers who previously recovered a bounty from another regulator in a criminal or enforcement matter related to the same alleged misconduct.

As predicted in my May 2011 blog on the U.S. Supreme Court’s decision upholding Arizona’s E-Verify mandate, several states have followed suit and mandated E-Verify participation.  At the start of this year, E-Verify requirements became effective in Georgia, Louisiana, South Carolina and Tennessee, and all employers in Alabama must implement E-Verify by April 1, 2012.

The number of immigration-related bills introduced across the country in 2011 is astounding.  In 2011 alone, state lawmakers in all fifty states and Puerto Rico introduced over 1,600 immigration-related bills.  Of those bills, as of December 7, 2011, 42 states and Puerto Rico had enacted over 300 new immigration-related laws or resolutions.   

Of most importance to employers and businesses are the states that enacted laws in 2011 regarding E-Verify participation.  According to the National Conference of State Legislatures, 17 states now require E-Verify for public or private employers.   

While this list will not remain current for long, employers operating in at least the following states should pay attention to state E-Verify requirements:

• Alabama (passed in 2011) (effective April 2012)
• Arizona
• Colorado
• Florida (2011)
• Georgia (2011)
• Idaho
• Indiana (2011)
• Louisiana (2011)
• Mississippi
• Missouri
• Nebraska
• North Carolina (2011)
• Oklahoma
• South Carolina (2011)
• Tennessee (2011)
• Utah (2011)
• Virginia (2011)

While many states this year enacted laws requiring E-Verify use, a few states moved in the opposite direction.  In January 2011, Rhode Island repealed a 2008 executive order requiring use of E-Verify.  And, Minnesota’s 2008 executive order requiring some state agencies and contractors to use E-Verify expired in April 2011. 

E-Verify: Georgia

This blog is the first in a series to focus on individual states’ E-Verify requirements.  First up – Georgia. 

Effective January 1, 2012, E-Verify is mandatory for all employers with 500 or more employees in Georgia. (Georgia H.B. 87).  The Georgia law will eventually require all employers with more than 10 employees to use E-Verify.  The law kicks in for employers with 100-499 employees on July 1, 2012, and for those with 11-99 employees on July 1, 2013. 

Similar to those in the Arizona law (Arizona S.B. 1070), the penalties in Georgia include restrictions on the ability to get new or renew business licenses or other required business documents. 

On November 28, 2011, SEC Chairman Mary Schapiro sent a letter to Senator Jack Reed, Chairman of the Senate Subcommittee on Securities, Insurance and Investment, requesting “statutory changes [that] would further enhance the effectiveness of the Commission’s enforcement program by expanding the Commission’s authority to seek monetary penalties for the most serious securities law violations.”  Despite “impressive” enforcement results in 2011, Schapiro says, legislative changes are needed to further deter securities laws violations.  To that end, she proposes increasing limits on civil monetary penalties and “substantially rais[ing] the financial stakes for securities law recidivists.”   

In order to deter – and in appropriate circumstances penalize – violators of the federal securities laws, Schapiro seeks to exponentially increase existing caps on civil penalties the SEC may recover in an enforcement action: from $150,000 per violation to $1 million per violation for individuals; and from $725,000 per violation to $10 million per violations for “entities.”  And in certain cases, Schapiro would like authorization to seek a penalty equal to the amount of investor losses caused by a securities law violation.   

Central to Schapiro’s request – and perhaps of more practical importance – is a proposal that would allow the SEC to prosecute more enforcement matters in administrative proceedings.  As Peter Henning of the NY Times reports:

There are a number of advantages for the S.E.C. to pursuing a case administratively, including limited discovery rights for the respondent in the action and a quicker hearing.  There is a perception among securities lawyers that the S.E.C. has something of a “home court” advantage in cases heard by an administrative law judge because the decision will be reviewed first by the full commission, which authorized filing the action, before it ever goes before a federal judge.

If approved, Henning says, the changes would allow the SEC to pursue enforcement matters outside of the federal courts, thereby “skirting the kind of scrutiny Judge Rakoff applied” in rejecting the SEC’s proposed settlement with Citigroup.  (Journalists for Bloomberg and Reuters, too, draw connections between Schapiro’s letter requests to Senator Reed and the rejected Citi settlement.)  

The requested changes, Schapiro argues, “would substantially enhance the effectiveness of the Commission’s enforcement program by addressing existing limitations that have resulted in criticism regarding the adequacy of Commission actions.”  If nothing else, the increased penalties contemplated would drastically change the stakes for regulated individuals and entities.  

Schapiro plans to prepare and submit to the Senate Subcommittee proposed language affecting the propose changes.  The fate of the draft legislation is yet to be determined, but companies should follow this space closely. 

In November, the SEC’s Office of the Whistleblower released its Annual Report on the Dodd-Frank Whistleblower Program, detailing the quantity, quality and nature of the complaints it received during its first several weeks of operation, and describing the Commission’s responses to those tips.  The Report draws on only seven weeks of data and, therefore, provides limited insight into the goings on at the whistleblower office. 

According to the Report, the whistleblower office received 334 whistleblower tips from August 12, 2011 through September 30, 2011 (roughly seven per day).   The complaints received cover the waterfront in terms of the federal securities violations alleged.  As Emily Chasan of the Wall Street Journal’s CFO Report explains, however, “most of the complaints were related to market manipulation, offering fraud, insider trading, trading and pricing, unregistered offerings and market events.”  The following comprise the most frequently reported types of whistleblower allegations:

• 16.2% of the complaints alleged market manipulation;
• 15.6% of the complaints alleged offering fraud; and
• 15.3% of the complaints alleged problems with corporate disclosures and financial statements.

Many who read the Report were surprised to find that alleged FCPA violations made up only 3.9% of the tips received. 

At a December “SEC and DOJ Hot Topics” seminar in Washington, D.C., Sean McKessy, Chief of the SEC’s Office of the Whistleblower, emphasized that the available whistleblower data is a “small sample size,” and insisted that it is too early to identify overarching reporting trends.  Nevertheless, McKessy made several “observations” about the data:

• As compared with whistleblower complaints received in the past, the whistleblower office is experiencing a marked increase in the quality of tips received;
• Contrary to popular expectations, the whistleblower office has not been inundated with “an avalanche” of whistleblower complaints;
• The alleged violations cover “the full gamut” of securities laws violations, and the “most frequently litigated areas” are well represented;
• The whistleblower office is receiving “very detailed, very specific” tips, complaints, and referrals from whistleblowers;
• The whistleblower office is working with whistleblowers and their counsel to move complaints swiftly through “the triage process;” and
• The whistleblower office is actively reviewing tips and making referrals to the SEC Division of Enforcement. 

The whistleblower office has not yet made public – in its Report or elsewhere – the details of any bounty payment made to an SEC whistleblower, but Mr. McKessy noted that the Commission has received a number of applications for whistleblower awards.  He suggested that the whistleblower office is likely to publicize the amount of any awards paid (without identifying the whistleblowers), along with details of the related enforcement matter.  Until the Office of the Whistleblower releases another Annual Report next fall, its reports of awards may provide the best source of information regarding the nature of the complaints it receives, the tips the Enforcement staff are taking up, and the overall success of the program.

While it may be too early to spot themes in the whistleblower data, Mr. McKessy’s observations present one clear takeaway: Whistleblowers are coming forward to the Office of the Whistleblower with information about potential securities laws violations, and companies who have not yet made preparations for handling whistleblower complaints internally should act now. 

The final 2011 installment of A Question of Ethics looks back at the year's big stories in government ethics.

Click here to continue reading.

In a rebuke to the SEC, on Monday, November 29, 2011, U.S. District Court Judge Jed Rakoff (SDNY) refused to sign a consent judgment approving a $285 million settlement between the Agency and Citigroup.  At issue is a lawsuit filed in October 2011 by the SEC alleging that Citigroup created and sold mortgage bond investments without disclosing to investors that the people assembling the deal were betting against the performance of the securities.  As a result, Citigroup allegedly reaped a $160 million profit from the sale while investors lost more than $700 billion.  On the same day the Agency filed suit, the SEC filed a consent agreement whereby Citigroup agreed to disgorge the $160 million plus $30 million in interest, pay a civil penalty of $95 million, and undertake internal measures designed to prevent recurrences of the securities fraud alleged.  Under the agreement, Citigroup neither admits nor denies the SEC’s allegations, a longstanding practice by the SEC. 

Judge Rakoff’s opinion is significant because the SEC has routinely sought settlements similar to this one, whereby the defendant neither admits nor denies the SEC’s allegations of wrongdoing in exchange for a fine and/or injunctive relief.  Judges have generally signed off on such agreements as a matter of course.  However, it is precisely this practice that Judge Rakoff now finds offensive.  His 15-page opinion calls the entering into such an agreement, whereby a defendant neither admits nor denies allegations, “hallowed by history, but not by reason,” and ruled that he could not sign off on such an agreement because a judge must have some facts upon which to exercise “even a modest degree of independent judgment.”  Without such independent judgment, he refused to sign the consent agreement.

Traditionally, the SEC has arranged settlements such as the agreement with Citigroup because doing so allows the Agency to declare victory without having to devote the considerable time and money it would take to take the same matter to trial.  Requiring an admission of wrongdoing, which Defendants are reluctant to do, would decrease settlements and increase the number of trials.  Thus, if Judge Rakoff’s opinion gains traction, the SEC will have to dramatically shift how it uses its resources, with broad implications for the Agency and Defendants alike. 

In the meantime, as Kevin LaCroix at the D&O Diary notes, the SEC and Citigroup will likely have to work out a deal omitting the “admits or denies” language, and Citigroup will probably have to make a greater monetary contribution before a proposed settlement passes Judge Rakoff’s scrutiny.  Meanwhile, the clock is ticking; trial is scheduled for July 16, 2012. 

In advance of the run up to an historic hearing held by the House Administration Committee , the Political Law Group at McGuireWoods recently sent this letter  (click on Berke letter) to the Committee on House Administration.  As we stated in our letter,   we believe that more guidance is needed by the FEC to assist campaigns in complying with federal election laws.  We also stated:               

During a hearing held by the FEC in 2009, a discussion occurred regarding the need for the Commission to make public its internal enforcement manual and guidelines.  The lack of transparency that binds FEC Office of General Counsel attorneys in their negotiations and dealings does a disservice to both the FEC and respondents to enforcement proceedings.  If the Department of Justice can recognize the public interest in making available its U.S. Attorneys’ Manual, the FEC can most certainly do the same with respect to its enforcement guidelines.  We encourage you to make this request to the Commissioners appearing before your Committee on November 3.    

We're happy that all of the FEC Commissioners appearing at the hearing appeared to agree with our position.  We thank the House Administration Committee for holding this important hearing, and the FEC Commissioners for appearing as witnesses.