Judge Takes Aim at Another S.E.C. Settlement

An obscure settlement announced in March 2011 has triggered questions from a federal judge about how much accountability the Securities and Exchange Commission should demand when it resolves a case.

Following a path started by Jed S. Rakoff, a Federal District Court judge in Manhattan, Judge Richard J. Leon of the Federal District Court in Washington, D.C., has held up the settlement for nearly two years because of his demands for greater disclosure to ensure the public’s interest is protected.

The case involves violations of the Foreign Corrupt Practices Act by International Business Machines from 1999 to 2008 for payments made to foreign government officials. The amounts involved were not significant, about $207,000 paid in Korea and a slush fund of undisclosed size to pay for overseas trips by Chinese officials.

The settlement called for the company to pay $10 million. That included a civil penalty of $2 million, an amount that is small compared with some other recent overseas bribery cases. For example, Eli Lilly agreed last week to pay more than $29 million to settle with the S.E.C., with $8.7 million designated as a civil penalty.

Unlike the recent reporting by The New York Times about widespread bribery paid by Wal-Mart to officials in Mexico, the I.B.M. case created hardly a ripple when the S.E.C. announced it. It looked like a routine matter in which the company promised not to violate the law again and paid its fine in much the same way that you would pay a parking ticket.

That is, until Judge Leon took a hard look at the terms of the settlement. In a hearing last Thursday, Bloomberg reported, the judge raised questions about the deal, saying, “I’m not just going to roll over like the S.E.C. has.”

The proposed settlement involved the “books and records” provisions of the overseas bribery law that requires companies to properly report their transactions and maintain adequate internal controls. To ensure it does not violate the law again, Judge Leon has demanded that I.B.M. provide annual reports on its compliance with the Foreign Corrupt Practices Act and any possible accounting violations in the company.

The S.E.C. and I.B.M. defended the settlement and said that the additional reporting requirements would be too difficult for the company to comply. Judge Leon expressed some skepticism, asking “why, for one of the largest companies in the world, this is too burdensome.”

The judge is no stranger to Foreign Corrupt Practices Act cases. Last year, he acquitted two defendants in the “Africa sting” case. The Justice Department accused 22 defendants of violations, relying on an undercover operative to record the defendants discussing payments to obtain fictitious contracts from an African government. Federal prosecutors eventually dropped the entire case after Judge Leon questioned the fairness of the prosecution.

Judge Leon’s unwillingness to approve the settlement with I.B.M. raises the issue of the proper role the courts should play in overseeing how a government agency decides to resolve a case before trial.

Last year, Judge Rakoff rejected a settlement between the S.E.C. and Citigroup over the bank’s marketing of a collateralized debt obligation tied to subprime mortgages. The settlement imposed a $285 million penalty, but it did not include an admission of any wrongdoing. The judge found that without some basis to find the bank had violated the law, the proposed consent judgment was “neither fair, nor reasonable, nor adequate, nor in the public interest.”

Whether Judge Rakoff’s tough stand survives is questionable. The United States Court of Appeals for the Second Circuit is considering an appeal of his rejection of the settlement, having indicated in a preliminary decision that the S.E.C. was likely to succeed in compelling the court to approve it.

Unlike Judge Rakoff’s broad demand for accountability, Judge Leon is taking a much narrower approach. He wants I.B.M. to report on its continuing compliance with the law and disclose other potential violations it discovers. Such a mandate does not require the company to admit to anything improper but only how it is meeting the requirements of the settlement.

This case was not the first time I.B.M. had run afoul of the Foreign Corrupt Practices Act. In December 2000, the company settled a S.E.C. case by agreeing to not commit future violations of the same “books and records” provisions and paid a $300,000 penalty.

So, Judge Leon may have good grounds for seeking information about I.B.M.’s continuing compliance with the law because it is a prior offender of the overseas bribery law.

How this case will be resolved remains to be seen, as Judge Leon appears to be taking tough stance. Bloomberg reported that the judge told an S.E.C. lawyer at one point during the hearing, “I guess you want that $10 million judgment on your list of achievements this year. Well, it’s not going to happen.”
It looks like the settlement will continue to languish until the S.E.C. can come up with some type of continuing disclosure requirement that is palatable to both I.B.M. and Judge Leon.

The S.E.C. and I.B.M. could try to go over Judge Leon’s head by seeking a writ of mandamus from the United States Court of Appeals for the District of Columbia Circuit directing him to approve the settlement. But appellate courts are reluctant to issue such orders. A number of overseas bribery cases are filed in the Federal District Court in Washington, D.C., so trying to bypass Judge Leon could cause the S.E.C. problems in other cases.

Whatever the resolution, the tussle is another signal that federal judges will not just rubber-stamp settlements by the S.E.C.