White Collar Criminal Defense Group

SEC Settlement Contains Rare Clawback Provisions For Individual Executives

On Friday, the U.S. Securities and Exchange Commission (“SEC”) announced a settlement with Computer Sciences Corp. (“CSC”) related to allegations of misleading investors and manipulating financial results regarding its $5.4 billion contract with the United Kingdom’s National Health Service (“NHS”).  In a rare move, the $190 million fine included clawbacks of executive pay.  These clawbacks underline a developing trend in SEC and other federal enforcement actions emphasizing individual accountability and individual culpability.

The SEC alleges that CSC’s project to build an electronic patient record system for the NHS experienced technical problems and delays almost from the start.  As other contractors bowed out, CSC’s role expanded.  While the contract initially had the potential to earn $5.4 billion in revenue for the company, those profits depended on CSC delivering products and services under specific timeframes and volumes, with steep penalties for missed deadlines.  After software implementation delays caused CSC to fall behind in performing the contract in 2008, the company renegotiated an amended contract, effective April 2009. 

But over the next two years, delays continued to plague CSC’s performance of the amended contract and the company repeatedly missed its deadlines.  As its expected profit dwindled, rather than revise its projections downward and alert investors to the problems it was facing, former CEO Michael Laphen and former CFO Michael Mancuso allegedly failed to disclose these issues to investors – even going so far as to repeatedly make public statements that the company was meeting its targets and was on track to fully perform its obligations. 

The SEC has also brought charges against former CSC finance executives Robert Sutcliffe, Edward Parker, and Chris Edwards concerning their alleged roles in the company’s accounting irregularities.  After realizing CSC would lose money on the contract with the NHS because it could not meet its deadlines, Sutcliffe, a finance director overseeing the deal, allegedly avoided having to make large reductions in the company’s earnings in 2010 and 2011 by basing its accounting on terms it was negotiating with NHS rather than the actual terms it struck.  Parker, serving as controller in Australia, allegedly overstated CSC’s earnings in the region by exploiting certain “cookie jar” reserves.  And Edwards, a finance minister for CSC’s Nordic region, allegedly improperly recorded certain expenses as “prepaid assets” so as not to reduce the company’s earnings.

Under the terms of Friday’s settlement, Laphen has agreed to return $3.7 million in compensation to CSC and to pay a $750,000 penalty.  Mancuso has agreed to return $369,100 in compensation and pay a $175,000 penalty.  Under the terms of the settlement, CSC, Laphen, and Mancuso did not admit wrongdoing.

Third Circuit Steadfast In Fifth Amendment’s Unavailability To Corporate Custodians

In May, the Third Circuit affirmed a New Jersey district court’s finding that even a one-person corporation cannot assert a Fifth Amendment privilege regarding corporate documents. The ruling agrees with established precedent indicating that neither corporations nor their custodians of record are entitled to invoke the Fifth Amendment’s privilege against self-incrimination.

The appellant, a medical doctor identified as “John Doe, D.O.,” organized his medical practice as a “professional association,” a type of corporation doctors are permitted to form under the laws of New Jersey. Doe was the sole medical practitioner and proprietor of his medical practice.

The government alleged that between 2006 and 2013, Doe was referring his patients to a blood-testing service in exchange for monetary kickbacks. The district court held Doe’s medical practice in civil contempt for his refusal to produce documents pursuant to a grand jury subpoena, which directed Doe – as the medical practice’s custodian of records – to produce documents relating to the government’s allegations.

On appeal, Doe argued that as the sole owner and only employee of his practice he was entitled to invoke his Fifth Amendment rights against self-incrimination and refuse compliance with the subpoena. The three-judge panel disagreed, relying on Supreme Court, Third Circuit, and other circuit court holdings that individuals or corporate record custodians who produce documents in response to a subpoena of a corporation are acting on behalf of the corporate entity, no matter how small the corporation may be. Accordingly, these individuals cannot rely on the Fifth Amendment to avoid producing corporate records in their possession as corporate representatives, even if the records may also personally incriminate the individuals.

The Court remained “steadfast in its conclusion that the Fifth Amendment privilege against self-incrimination is unavailable to corporate custodians.” The Court reasoned that “[h]aving taken advantage of the benefits of incorporation for over forty years, Doe may not discard the corporate form simply because he now finds it desirable to do so.”

The appeal is In Re: The Matter Of The Grand Jury, No. 15-1264 (3d Cir. 2015).