Subject to Inquiry

Subject to Inquiry


Government Investigations and White Collar Litigation Group
Anti-Bribery and Corruption

Expansion of FCPA “Pilot Program” is Good for Companies, but Heed the Fine Print

Deputy Attorney General Rod Rosenstein’s Nov. 29 announcement that the Department of Justice FCPA “Pilot Program” will be permanently expanded is good news for companies that repeatedly faced the dilemma of whether or not to investigate and disclose FCPA issues discovered internally. However, companies should be careful to read the fine print of the policy before rushing into disclosure.

The disclosure dilemma

First, a brief look at the disclosure dilemma. A company that suspects FCPA issues, especially a public company with independent board members, has a strong legal incentive to respond to such a red flag by investigating the matter. But once facts are discovered that show or at least strongly indicate potential wrongdoing, what to do next has been a more complicated decision. Voluntary disclosure to enforcement authorities often led to enforcement proceedings and/or actions that result in severe adverse consequences to companies and their shareholders. Those adverse consequences might include a prosecution, a deferred prosecution agreement or at the very least, an extensive and expensive government investigation.

The fine print

The new policy essentially gives a pass to companies that find, fix and disclose. But before companies rush headlong to the disclosure window, several reservations in the DOJ policy announcement are worth noting.

  1. Culpable individuals are not covered. While corporations may escape criminal prosecution, culpable individuals can expect to be investigated and prosecuted.
  2. Voluntary disclosure and remediation do not guarantee that a company will not be prosecuted criminally. Rather, the policy has a presumption of a declination of prosecution.
  3. The policy creates an expectation of full and complete cooperation. Any company that is aware of or suspects FCPA violations will be expected to come forward with evidence and cooperate fully and completely in any follow-up investigation. That means conducting an internal investigation that meets government expectations for thoroughness and competence such that proof against culpable individuals would stand up in a court of law.
  4. The commitment to compliance must be real. To benefit from the policy the company will have to demonstrate that its compliance commitment is real and its compliance program meets standards articulated by the government, even if scaled to the size and complexity of the business entity employing it.
  5. Remediation must be genuine and sufficient. A company will have to show remedial steps that are genuine and sufficient to assure the government that the conduct in question is unlikely to recur.

A sea change

Taking these conditions of participation in this voluntary disclosure program into account does nothing to diminish the tremendous value to US companies that this change in enforcement policy presents. This policy is essentially an assurance that in the almost all circumstances a company that polices its own operations effectively, diligently looks into possible FCPA violations, and discloses and remediates any that it finds, will not be prosecuted. That is a sea change in announced intentions by the Department of Justice and will tip the balance in most cases toward engaging in remediation and voluntary disclosure. The relative certainty that this policy provides should be a welcome step in a more positive relationship between government enforcers and the vast majority of US businesses that are committed to legal compliance and strong business ethics. It should also help to eliminate the trend to “gotcha” prosecutions of the past that led to outlandish penalties greatly disproportionate to the underlying conduct that they supposedly were addressing.

Enforcement and Prosecution Policy and Trends, Securities and Commodities

SEC to Begin Regulating Initial Coin Offerings More Heavily

On November 16, 2017, U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton announced in a symposium on cybersecurity and financial crimes that the SEC would start taking enforcement action against coin offering issuers who fail to register with the SEC.

As cryptocurrencies, like Bitcoin, have become increasingly popular, startup companies have turned to a method known as an initial coin offering (“ICO”) to raise capital. Law 360 explains, “ICOs are used by the creators of blockchain-based structures to raise funds, usually for projects. . . . Instead of stock, investors receive tokens that can either be traded in the secondary market or used within the blockchain project.” This method closely resembles an initial public offering, but the key difference is that ICOs have largely been able to avoid federal regulations. These offerings have flown under the radar, at least up until now, because the technology is still in its early stages.

This unregulated method of raising capital creates the potential for significant fraud and abuse. As such, the SEC intends to regulate the practice, so much so that the Securities and Exchange Commission decided to form a Cyber Unit earlier this year. According to the SEC, the Cyber Unit will focus on targeting cyber-related misconduct, such as:

  • Market manipulation schemes involving false information spread through electronic and social media;
  • Hacking to obtain material nonpublic information;
  • Violations involving distributed ledger technology and initial coin offerings;
  • Misconduct perpetrated using the dark web;
  • Intrusions into retail brokerage accounts; and
  • Cyber-related threats to trading platforms and other critical market infrastructure

The creation of a Cyber Unit within the SEC is a clear indicator that the SEC will regulate cryptocurrency more heavily. As Chairman Clayton noted, “I think that now we have given the market a sufficient warning where we can move from level-setting the field to enforcing it.”

ICOs are not just in the crosshairs of American regulators, rather European regulators have also raised significant concerns about the practice. In fact, earlier this November, the European Securities and Markets Authority (ESMA) issued a statement warning firms involved in ICOs that they need to “comply with relevant legislation” and that “[a]ny failure to comply with the applicable rules will constitute a breach.”

Given the increasingly burdensome regulatory environment surrounding initial coin offerings and cryptocurrency, startups and other companies utilizing ICOs would be well advised to seek legal counsel so as to comply with all federal laws and or SEC regulations.

Anti-Bribery and Corruption, Enforcement and Prosecution Policy and Trends

SEC Expected to Expedite FCPA Investigations in Light of Kokesh

On November 9, 2017, Steven R. Peikin, Co-Director of the SEC’s Division of Enforcement, delivered a keynote speech at a conference commemorating the 40th anniversary of the enactment of the Foreign Corrupt Practices Act (“FCPA”) in which he reflected on “the past, present, and future” of the SEC’s enforcement of the FCPA.

After confirming the SEC’s commitment to robust FCPA enforcement, Peikin noted that a “principal challenge” the SEC is now facing is “the interplay between the length of time it takes to conduct an FCPA investigation and the statute of limitations” imposed by the recent Supreme Court decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017).  Specifically, in June 2017, the Supreme Court unanimously held that SEC enforcement actions seeking disgorgement are subject to a five-year statute of limitations.  Id. at 1639.  Accordingly, in light of Kokesh, the SEC is no longer able to seek disgorgement from defendants for claims that accrue outside of the five-year limitations period.

Although Kokesh is not unique to FCPA matters, Peikin anticipates that the ruling “will have particular significance for [the SEC’s] FCPA cases” for two main reasons.  First, it is common practice for the SEC to seek disgorgement in FCPA matters.  Second, FCPA investigations are among the most lengthy for the SEC because: (a) “[i]n many instances, by the time a foreign corruption matter hits [the SEC’s] radar, the relevant conduct may already be aged;” and (b) once initiated, FCPA investigations are time-consuming in that they are factually complex and require the collection of evidence from foreign jurisdictions.

Therefore, Peikin declared that the SEC has “no choice but to respond by redoubling [its] efforts to bring cases as quickly as possible” in order to pursue all available remedies.  Peikin also expects that the Enforcement Division will continue to work closely with foreign law enforcement and regulators to both maximize efficiencies and to target assets held outside of the United States.

The full text of Peikin’s speech can be found at:

Enforcement and Prosecution Policy and Trends, Financial Institution Regulation, Securities and Commodities, Uncategorized

SEC Approves New PCAOB Standard

Recently, the SEC approved the PCAOB’s new auditor reporting standard, AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. Hailed as the most significant change to the auditor report’s format in over 70 years, AS 3101 significantly changes the format of the existing auditor’s report, arming investors and market participants with increased information to navigate an ever-expanding and increasingly complex and global marketplace.

Adopted by the PCAOB on June 1, 2017, AS 3101 requires auditors to provide new information about the audit and present a more informative and relevant auditor’s report to investors and other financial statement users. The new requirements include:

  • Communication of critical audit matters (CAMs) – i.e., matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment;
  • Disclosure of the year the auditor began serving as the issuer’s auditor; and
  • A number of other improvements to the auditor’s report to clarify the auditor’s role and responsibilities, and make the auditor’s report easier to read.

The most controversial aspect of the new standard, the communication of CAMs, met with opposition from industry trade groups citing several concerns to the SEC:

  • Disclosure of immaterial information;
  • Replacing of management as the source of original information;
  • Imposing additional expenses on firms; and
  • A chilling effect on the audit committee/auditor relationship.

SEC Chairman Jay Clayton acknowledged these concerns, but expressed his support for the SEC’s unanimous decision to approve the PCAOB’s new standard. Clayton noted that AS 3101 “provide[s] investors with meaningful insights into the audit . . . [such as the] auditor’s perspective on matters discussed with the audit committee that relate to material accounts.” Clayton identified company independent audit committees “as one of the most significant and efficient drivers of value to Main Street investors [and] impairing or otherwise negatively affecting the work of well-functioning audit committees could have significant adverse effects on investors.”

AS 3101 will come into effect for large accelerated filers with fiscal years ending on or after June 30, 2019 and for all other companies to which the requirement applies with fiscal years ending on or after December 15, 2020. The PCAOB will be monitoring its progress through a post-implementation review.

Only time will tell whether the new disclosures will provide the intended benefit to the marketplace.

Enforcement and Prosecution Policy and Trends, Immigration and Worksite Enforcement

Increased Immigration Worksite Enforcement Looming in 2018

 The days of speculation may have ended. Immigration and Customs Enforcement’s (ICE) acting director recently made clear that Form I-9 audits and worksite enforcement actions will surge in the coming year.

In line with the Trump Administration’s tough position on immigration and its budget requests, most employers have anticipated increased immigration-focused audits and enforcement actions. But we did not see a noticeable uptick during the first three quarters of 2017.

Lest employers become complacent, on October 17, ICE’s Acting Director Thomas Homan announced that ICE would increase worksite audits by “four or five times” in the next year. This comes after a January Executive order and more recent statement by ICE announcing plans to hire 10,000 new worksite enforcement officers.

All the signs now clearly point to an increase in audits and worksite enforcement in 2018. It will take time to hire and train this large volume of new officers. Therefore, it won’t be until next year—likely next summer—before we see a big impact on employers. This provides a short window for many companies to shore up their immigration compliance efforts or else face substantial penalties. Even simple mistakes, like paperwork violations, can cost companies between $220 and $2,191 per Form I-9.  The most recent increased penalties are available here.

As a start, it is always a good practice to conduct internal I-9 audits to ensure compliance.  The Department of Justice and ICE have provided joint guidance on conducting internal audits: Companies should also ensure they are using the most recent version of the Form I-9.  This version was published in July 2017 and became mandatory in September 2017.  Finally, companies should ensure they retain experienced immigration compliance counsel to assess the adequacy of immigration policies and procedures, ensure compliant Form I-9 practices, and defend the company should a government audit or investigation arise.

Financial Institution Regulation

The New CFPB Consumer Protection Principles

This post originally appeared in our sister publication, Password Protected.

On October 18, 2017, the Consumer Financial Protection Bureau (CFPB) issued a set of Consumer Protection Principles regarding the sharing and aggregation of consumers’ financial data. The timing of the announcement in light of last month’s disclosure of the Equifax breach of approximately 140 million consumers’ financial data seems noteworthy, as all companies whose businesses rely on the consumer-authorized financial data market are scrambling to regain consumer trust.

Noting the “growing market” for consumer-authorized financial data aggregation services, the CFPB has promulgated nine principles which, in the words of CFPB Director Richard Cordray “express [the Bureau’s] vision for realizing an innovative market that gives consumers protection and value.” (See CFPB press release).

Many of the principles themselves will be familiar to anyone who has paid attention to consumer privacy discourse over the last 30+ years. They are in many ways a restatement of the OECD Guidelines, published in 1980 by the Organisation for Economic Co-operation and Development, but with a few useful additions. The “new” CFPB principles include time-tested privacy principles of:

  1. informed consent & control over data sharing
  2. notice and transparency regarding the third parties’ access to and use of consumer data
  3. data quality & accuracy and the right of consumers to dispute inaccuracies
  4. an expectation of security and safeguards to protect consumer data
  5. a right of access by consumers to their own data; and
  6. accountability to the consumer for complying with the foregoing principles.

In addition, however, the CFPB principles contain some fairly specific guidance that is particularly useful in the context of financial data and may have a significant impact on the way financial data is gathered, marketed and retained. For example, the CFPB Principles contain a specific principle (#4) regarding payment authorization:

  • Authorizing Payments. Authorized data access, in and of itself, is not payment authorization. Product or service providers that access information and initiate payments obtain separate and distinct consumer authorizations for these separate activities. Providers that access information and initiate payments may reasonably require consumers to supply both forms of authorization to obtain services.

The above principle is one of several that illustrate the CFPB’s disapproval of broad, open-ended consents from consumers, favoring instead tailored, purpose-specific access. Principle #2 (Data Scope and Usability) is another example of this theme. It reads in part, “Third parties with authorized access only access the data necessary to provide the product(s) or service(s) selected by the consumer and only maintain such data as long as necessary.”

It remains to be seen how these principles might be applied to data collectors like credit bureaus, who typically hold consumer data for as long as a consumer’s lifetime in many cases. The CFPB’s press release emphasized that the principles are not intended to supercede or interpret any existing consumer protection statutes or regulations and that they are not binding. Still, they do provide a window into the CFPB’s mindset and the likely trend for future regulation.

Enforcement and Prosecution Policy and Trends

Profiting from Human Rights Abuses

The Criminal Finances Act 2017 runs to nearly 150 pages. It was hurried through Parliament shortly before the June 2017 election.  It is an example of lazy and confusing legislating, where numerous sections and sub-sections are added on to existing legislation, giving rise to the creation of sections numbered 339ZD and 396L which pile uncertainty on to the already unsatisfactory provisions of the Proceeds of Crime Act 2002.

The 2017 Act, in addition to being impenetrable in its quest to tighten up the rules of confiscation and compensation, has added some interesting new provisions. Much has already been said about Part 3, the corporate offence of failure to prevent facilitation of tax evasion.  It will be surprising if any corporation is prosecuted under this section, but it may assist in making board members more circumspect about tax schemes.  It will certainly encourage corporates to seek advice about how to undertake risk assessments, secure top level commitment from the board, and develop implementation and communications plans.

Less comment has been made about Chapter 3 of Part 1 of the Act. None of the nine Factsheets published by the Home Office refer in any detail to these provisions.  No guidance has been issued – HMRC has produced a 48 page guide to the failure to prevent tax evasion offence.  Nevertheless, section 13 of the Act adds three pages of verbiage to section 241 of POCA, which, in three lines, defines unlawful conduct for the purpose of implementing the civil recovery of the proceeds of unlawful conduct: in short, conduct which is criminal under UK law, or which, where the offence is committed in another jurisdiction, is a criminal offence under the law of that jurisdiction and under UK law.

What has been added by section 13 is that conduct which constitutes gross human rights abuses or violations outside the UK is a type of ‘unlawful conduct’ which can lead to an action in the High Court for civil recovery from a person or entity of the financial proceeds of such abuses or violations. It may be noted in passing that there must have been a recognition by the Home Office that this procedure would be better positioned as a civil recovery rather than relying on a criminal conviction, followed by confiscation proceedings.  It may also be noted that civil recovery actions have been few and far between in the last 15 years (in June 2014 the CPS stated that it had obtained just 2 civil recovery orders, but was embarking on a new strategy to improve its record).

Section 241A POCA, as added by the 2017 Act, sets out the three conditions which have to be met before any conduct can be deemed to be a gross human rights abuse or violation. First, that the abuse must be against a person who has sought to expose illegal activity by a public official; or against a person who has sought to uphold human rights or fundamental freedoms.  Second, that the unlawful conduct must be a consequence of the victim seeking to expose illegal activity or uphold human rights.  Third, the conduct must be carried out by a public official or with their consent or acquiescence.

Section 241(A)(5) states that conduct is connected with the commission of a gross human rights abuse if it is conduct by a person that involves acting as an agent for another, or directing or sponsoring, or profiting from, or materially assisting, such activities.

The conduct must involve the intentional infliction of severe pain and suffering, either physical or mental.

Other provisions define the limits of the offence, including time limits – proceedings may be brought up to 20 years from the date on which the offending conduct occurred.

Therefore, the provisions are aimed specifically at the conduct of foreign public officials, and there is on the face of it no obvious connection between what such an official may do to a man or woman who is protesting about human rights abuses in a foreign jurisdiction, and money or goods received by a UK company. Some improbable scenarios may be imagined: AminingCo PLC faces a strike in sub-Saharan Africa, and public officials, allegedly paid by AminingCo, round up the ring-leader and torture him.  The strike is brought to an end by this means, and production continues, bringing revenue to a UK company which buys the product.  But there are a number of points in this story which will surely be difficult to prove, and it is very difficult to imagine any case being established, even to the civil level of proof, that will result in the recovery of the proceeds of this ‘crime’.  For a start, how will the benefit be assessed?

What can, or should, corporates do about this? What risks are they taking in their production lines around the world?  The answer may be that they simply need to beef up their anti-bribery compliance manual.  If AUKCO PLC pays a sub-Saharan public official, or connives in such a payment by Aminingco, to beat up a protester, it is committing an act of bribery, which may be easier to prove than the abuse of human rights offence.  The company can be fined a large sum, and no complex proceedings in the High Court need to be embarked on.  AUKCO PLC will suffer the same level of opprobrium, perhaps more, than if it has some assets seized by a High Court action.

What, therefore, is behind section 13 of the 2017 Act? Is it gesture legislating, like the Modern Slavery Act, seeking to demonstrate that the UK takes human rights abuses as seriously as slavery, and thereby encouraging better behaviour, but without any realistic prospect of any proceedings being brought?  It is self-evident that there are human rights abuses and torture in many parts of the world, but proving that such abuses lead to unlawful financial gain may be a stretch.  I predict that it will be some time before we see a civil recovery order procedure in the High Court under section 13 of the Criminal Finances Act 2017.

Enforcement and Prosecution Policy and Trends

Will Supreme Court Narrow The Broadest Tax Crime?

In the October 2017 term, the Supreme Court will take up its first criminal tax case in almost a decade, Marinello v. United States.  At issue is a longstanding circuit split about a mainstay of the federal government’s arsenal in financial crime cases, the tax obstruction statute, which makes a felon of anyone who “corruptly … obstructs or impedes, or endeavors to obstruct or impede, the due administration” of the Internal Revenue Code.  26 U.S.C. § 7212(a).  Marinello will decide whether this law only prohibits efforts to obstruct a pending IRS audit or collection proceeding, or instead whether (as the DOJ argues and most circuits agree) it also reaches any other conduct affecting federal taxes.

Often described as a “one-man conspiracy” statute, § 7212(a)’s reach at present is limited mainly by DOJ’s self-restraint.  Every other tax crime of consequence – tax evasion, filing false returns, failure to file, failure to pay, conspiracy to defraud – can also be charged as § 7212(a) on the government’s reading of the statute, which has been endorsed by most circuit courts.  It is undoubtedly the broadest tax crime.

But the government does not need the broad reading of § 7212(a) to fully and fairly enforce the tax laws.  The IRS already has more-specific criminal charges it commonly relies on to combat false tax returns and underpaid taxes – like tax evasion, filing false returns, or aiding and abetting.  DOJ usually relies on section § 7212(a) as a stopgap, precisely to cover conduct that can’t be readily prosecuted under more-specific laws.

The statute’s use as a stopgap also clarifies its potential for misuse.  Like conspiracy, § 7212(a) permits prosecutors to allege that otherwise-lawful acts become criminal because they are performed with wrongful intent.  But unlike the conspiracy charge for which it sometimes serves as a substitute, the DOJ’s broad reading of § 7212(a) cannot be justified by the law’s longstanding assumption that criminally-minded schemers become more dangerous when working together than when operating separately.

Some courts have suggested that tax enforcement needs a capacious charge like § 7212(a) to respond to criminal ingenuity.  Yet DOJ already has such a flexible charge: tax evasion, which similarly can be predicated on otherwise-lawful acts, like using corporate shells or stashing money abroad, if done with the requisite criminal intent.  Unlike the tax obstruction statute, though, tax evasion has a measure of built-in protection against government overreach: it requires proof beyond a reasonable doubt that the IRS suffered a financial loss, and proof of willfulness, that the defendant knew his conduct was illegal.  The prospect of subjecting the government’s theories of intent and taxation to adversarial testing deters charges in dubious cases.  An overbroad view of tax obstruction lessens the deterrent.

In that regard, Marinello touches on an important theme of the Supreme Court’s recent white collar crimes jurisprudence: the Court’s increasing distrust of prosecutorial discretion as a trustworthy safeguard against the abuse of broadly-worded federal criminal statutes.  Yates, construing the Sarbanes-Oxley Act, and McDonnell, addressing corruption offenses, both chose narrower interpretations of the respective crimes in part out of concern that an expansive interpretation of a broadly-worded crime left open too many possibilities for overreach.

In DOJ’s view, tax obstruction is a crime broad enough to penalize acts that are otherwise-lawful, result in no false document, and produce no financial loss to the government.  That much discretion may well be more than the Court is prepared to allow.

Enforcement and Prosecution Policy and Trends

Recent Privilege Decision Raises Questions for Internal Investigations

A recent federal district court case raises significant issues regarding privilege that should be on the radar of any in-house or outside counsel conducting an internal investigation with the goal of producing a public report. As discussed in a recent Privilege Points, the investigation at issue was conducted for the Washington Metropolitan Area Transit Authority (WMATA) and focused on evaluating its business practices and the standard of conduct for its directors. As part of the investigation, the law firm conducted more than 30 interviews and created 51 interview memoranda, all of them marked as work product. The law firm created an investigative report of its findings and the WMATA board publically released the report.

In civil litigation related to the investigation, plaintiffs sought production of the interview memoranda. The court’s decision, Banneker Ventures, LLC v. Graham, 2017 U.S. Dist. LEXIS 74155 (D.D.C. May 16, 2017), held that WMATA had waived privilege as to the subject matter of the memoranda by publically releasing the report. A key point of the decision was that the final report had extensively cited to the interview memoranda, referencing many of the memoranda multiple times. The court also focused on the fact that WMATA had tried to use the final report as part of its defense to the civil litigation and that as a matter of fairness it could not then refuse to disclose the underlying memoranda.

The decision, if followed by other courts, raises significant questions regarding internal investigations and suggests several best practices for organizations considering beginning internal investigations:
• Have a clear understanding of the goals of an investigation from the onset including whether a public report will be desirable.
• Generate interview memoranda and other documents with the understanding that they may become public if there is a public report.
• When drafting a public report, consider whether a report with less specific detail or more general statements could accomplish the same goal while being more likely to preserve privilege.
• Consider releasing only an executive summary or a report drafted specifically to be a high-level description of findings.
• Consider avoiding citation to or detailed discussion of confidential underlying documents.

Most importantly, when determining whether to publically release a report of an investigation, any organization should be aware of the likelihood that such a release will waive privilege, and consider the potential implications for civil litigation and government investigations.

Fraud, Deception and False Claims

Ninth Circuit Ruling Weakens Materiality Standard under the FCA

Last year in Universal Health Services, Inc. v. United States ex rel. Escobar et al. (discussed on this blog), the Supreme Court reminded litigants that the False Claims Act “is not an all-purpose antifraud statute.” In that case, the Court expanded upon the FCA’s materiality standard, calling it both “rigorous” and “demanding.” How demanding that standard would be in practice, however, depended on the lower courts. Earlier this month, a Ninth Circuit panel issued an opinion that appeared to relax that demanding standard.

In United States ex rel. Campie v. Gilead Sciences, relators alleged that Gilead lied to the FDA to secure approval to manufacture three anti-retroviral drugs using certain facilities in China and Canada. (Relators also alleged that Gilead manufactured the drugs in these facilities before getting FDA approval and falsified records to conceal the fact.) Gilead later submitted requests for payment for these drugs through a number of federal programs, each of which makes FDA approval a precondition for payment. Relators argued that the FDA would not have approved these drugs but for Gilead’s misrepresentations. Thus, they argued that Gilead made false claims when it sought payment for FDA-approved drugs. Gilead countered that, in fact, many of the issues it allegedly misrepresented to secure FDA approval became known to the FDA in the years after approval. Despite this knowledge, the FDA never withdrew its approval.

The Ninth Circuit reiterated Escobar’s materiality standard and observed that “[r]elators thus face an uphill battle in alleging materiality.” Nonetheless, the panel found that standard met. It equated Gilead’s submissions to the FDA seeking approval with actionable false claims. Finding that the misrepresentations to the FDA could have impacted the approval decision, the court concluded that those misrepresentations could therefore have affected the government’s decision to pay. The panel also rejected Gilead’s government knowledge defense of materiality, finding that issue to be a factual one. It observed that there could be many reasons why the FDA declined to withdraw its approval after learning of problems. At its core, the decision’s animating concern is preventing FDA approval from being used “as a shield against liability for fraud.”

This decision reduces the rigor of Escobars materiality analysis, allowing the relators to claim a more attenuated connection between the materiality of false statements and the government’s decision to pay. As a result, it substantially increases the opportunities to bring FCA claims under a “fraud-on-the-agency” theory. Late last year, the First Circuit rejected this theory of liability, in part because it found that under Escobar, the fraudulent representation must itself be material to the decision to pay. It thus rejected a fraud-on-the-agency theory of liability. Should more courts follow the approach in Gilead, however, FCA defendants in regulated industries may find themselves increasingly re-litigating agency proceedings in FCA cases.