Executive Summary & Key Takeaways

This issue of Executives at Risk reviews some of the most important legal developments affecting corporate executives so far this year. Most notably: 

• U.S. Attorney's Offices (USAOs) in New York and California unveiled pilot programs designed to incentivize voluntary self-disclosures and whistleblowing. Meanwhile, the U.S. Supreme Court held that whistleblowers protected by the Sarbanes-Oxley Act (SOX) need not show that employers acted with retaliatory intent when taking adverse action against the whistleblower, expanding protections for whistleblowers. 
• The Supreme Court also held that defendants facing civil penalties for securities fraud from the Securities and Exchange Commission (SEC) are entitled to a jury trial under the Seventh Amendment. The decision raises serious questions about the use of agency enforcement proceedings more broadly. 
• The Department of Justice's (DOJ) Task Force KleptoCapture took a number of enforcement actions aimed at individuals affiliated with Russia. It has been two years since Russia invaded Ukraine and the U.S. government continues to prioritize sanctions, export restrictions, and other economic countermeasures. 
• The U.S. Sentencing Commission amended the Sentencing Guidelines to prohibit judges from imposing sentences based on acquitted conduct. 

Policy Updates 

USAOs Introduce Pilot Whistleblower Programs: The USAOs for the Southern District of New York (SDNY) and the Northern District of California (NDCA) launched whistleblower pilot programs in February and March 2024, respectively, aimed at encouraging voluntary self-disclosure of certain non-violent criminal conduct.

The SDNY Whistleblower Pilot Program encourages voluntary self-disclosure of certain financial crimes, including fraud, corporate control failures, and conduct which affects market integrity, as well as "state or local bribery or fraud relating to federal, state, or local funds." The NDCA Whistleblower Pilot Program similarly applies to certain financial crimes and local bribery schemes, as well as to "intellectual property theft and related violations." 

Both programs permit the use of non-prosecution agreements (NPAs) with whistleblowers provided that the whistleblower agrees to forfeiture of any criminal proceeds. Factors to consider in offering NPAs include whether the disclosed conduct was previously known to the government and the ability of the whistleblower to provide "substantial assistance in the investigation and prosecution of one or more equally or more culpable persons and the individual's culpability relative to others."

Both programs echo efforts by other components of the DOJ to encourage voluntary self-disclosure but are not intended to supersede those efforts. The SDNY program explicitly excludes violations of the Foreign Corrupt Practices Act (FCPA) and certain other federal laws and the NDCA program broadly may not apply where violations are "subject to approval requirements by other DOJ components."

Actions Against Individuals

Sanctions and Export Controls

R&D Company Employee Charged with Stealing Military Technology to Benefit Chinese Entities: The DOJ filed a criminal complaint for theft of trade secrets against a former manager at a California-based research and development (R&D) company with a government contract concerning infrared sensor technology. The manager allegedly transferred proprietary and trade secret information related to the detection and tracking of missiles to his personal storage devices. The manager sought to participate in the state-sponsored "Talent Programs" through which the People's Republic of China (PRC) government "identifies individuals located outside the PRC who have expert skills, abilities, and knowledge that would aid in transforming the PRC's economy, including its military capabilities." 

DOJ's Task Force KleptoCapture Announces Russian Sanctions Enforcement Actions: In February 2024, the DOJ announced a series of criminal charges, arrests, and forfeitures including: 

• Yacht-Related Sanctions Evasion: As we previously reported, in January 2023, the DOJ charged a Russian national and a U.K. national with sanctions and money laundering violations for attempting to hide the fact that superyacht Tango was owned by a sanctioned Russian oligarch. In January 2024, the grand jury issued a superseding indictment against the Russian national, who remains at large, adding five new counts of bank fraud connected with the operation of the Tango. That indictment was unsealed in February. That same month, a grand jury indicted the sanctioned president and chairman of Russian state-owned VTB Bank, a Russian national (and U.S. legal permanent resident) and a U.S. national. The charges relate to two superyachts – the Sea Rhapsody and the Sea & Us – and a home in Aspen, Colorado for the benefit of the sanctioned individual, in violation of sanctions and money laundering laws. The sanctioned individual remains at large. 
• Other Oligarch Sanctions Evasion: A Florida grand jury indicted a pro-Russian Ukrainian oligarch for his role in a $330 million sale of industrial metals products with U.S. persons using a network of shell companies. Also in Florida, the U.S. filed a civil forfeiture complaint against two condominiums located in the Ritz Carlton in Bal Harbour, Florida. The government alleges that the properties were transferred to an LLC in violation of sanctions against the properties' owner, a co-founder of a Russia-based construction company responsible for constructing a highway in Russia-occupied Crimea.
• Money Transmittal Exec Pleads Guilty: An Atlanta, Georgia resident pled guilty to one count of conducting an unlicensed money transmitting business for his role in a scheme using shell companies to move over $150 million. He is scheduled to be sentenced this July. Following his plea, a federal grand jury indicted his co-conspirators, the two Russia-based owners of KSK Group, a sanctioned Russian money transfer company, as well as KSK Group itself, for their alleged conduct in connection with the scheme. Through KSK Group, the co-defendants allegedly worked to coordinate money transfers, including to send at least $65 million to the Singapore Precious Metal Exchange to purchase gold bullion. 

State Department and OFAC Target Executives for Sanctions: The Department of State and Department of the Treasury's Office of Foreign Assets Control (OFAC) continue to target individual executives for sanctions, demonstrating a focus on holding accountable those in leadership roles and those involved in businesses in sanctioned economic sectors or in sanctionable activities. In the first quarter of 2024, OFAC and State designated a number of business executives based on those individuals' provision of financial, material, or technological support for sanctioned governments and organizations. While, in terms of overall number, sanctions designations have been most pronounced with respect to Russia, OFAC has also designated a number of individual executives in connection with the U.S. government's sanctions programs targeting Iran, Burma, global terrorism, and cyber-related conduct. As highlighted previously, the individuals sanctioned consisted not only of persons located in targeted jurisdictions, such as Iran or Russia, but also included persons based in other countries, such as Turkey and Germany.

Securities and Accounting Fraud

Supreme Court Limits SEC's Use of Administrative Proceedings: In June 2024, the Supreme Court held in SEC v. Jarkesy that defendants facing civil penalties in administrative actions brought by the SEC are entitled to a jury trial under the Seventh Amendment. The Supreme Court's 6-3 decision will result in many SEC actions being brought in federal court and raises serious questions about the use of Administrative Law Judges (ALJs) to oversee civil enforcement proceedings in more than 30 administrative agencies across the federal government. More than a decade ago, the SEC initiated an administrative action against George Jarkesy, Jr., and his firm, Patriot28, LLC, alleging securities fraud. Based on findings from one of its ALJs, the SEC ordered Jarkesy and his firm to pay a penalty of $300,000, disgorge $685,000, and refrain from any future investment-related activities. The Court held that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles that defendant to a jury trial. The SEC has already reduced its use of administrative proceedings for contested matters. However, the Court's decision raises the likelihood of future constitutional challenges to administrative proceedings at other agencies in the federal government, which employs more than 2,000 ALJs responsible for adjudicating matters related to sanctions, workplace rights, and other topics.

Paving the Way for Whistleblowers: The Supreme Court ruled unanimously in Murray v. UBS Securities LLC that a whistleblower need not "prove that his employer acted with 'retaliatory intent'" to avail themselves of the SOX whistleblower-protection provision. SOX retaliation protections provide that "no covered employer may 'discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of' protected whistleblowing activity." The Court held that "discriminate" means nothing more than the act of treating one employee differently than another and there is no need for an employee to show animus, punishment, or retaliatory intent as the motivating factor for the difference in treatment. However, an employee must still establish that the difference was due to the protected whistleblowing activity. The burden then shifts to employers to prove that the discriminatory treatment did not occur because of the employee's whistleblowing activities. Executives should carefully consider whether their companies' culture and the policies, procedures, and controls protecting whistleblowers are appropriately designed to reduce litigation risk to both themselves and their companies.

FCPA

Charges Brought against Stericycle Executives in Latin America Bribery Scheme: Two former Stericycle, Inc. executives were charged for an alleged bribery scheme involving Mexico, Brazil, and Argentina. The former senior vice president of Stericycle's Latin America division pled guilty to paying approximately $10.5 million in bribes to secure medical waste collection contracts, obtain the release of payments owed, and avoid fines and the former finance director of the Latin America division was indicted for the same scheme. Based on the former senior vice president's admissions, the scheme was carried out by the former finance director and employees of Stericycle's subsidiaries in Mexico, Brazil, and Argentina, in some cases with the assistance of local vendors that entered into "sham" contracts with the subsidiaries. The bribes were typically paid in cash and documented in tracking spreadsheets under code names. The former senior vice president was sentenced in June to seven months in prison and three years of supervised release, in addition to a $250,000 fine and $100 special assessment. The case against the former finance director remains ongoing.

Maxwell Technologies Executive Pleads Guilty For Role in Chinese Bribery Scheme: In March 2024, the former senior vice president and general manager of Switzerland-based Maxwell Technologies S.A. (Maxwell S.A.) pled guilty to a single charge of falsifying the books and records of U.S.-based parent company Maxwell Technologies, Inc. (Maxwell). Under the plea agreement, DOJ agreed to dismiss the other eight pending charges and the former executive agreed to pay a $55,000 fine. As discussed in more detail in our Winter 2014 FCPA Review, the indictment alleged the former executive and others authorized over $2 million in payments to a Chinese agent who used the funds to bribe officials at state-owned and/or -controlled utility companies. The former executive admitted to knowing that the agent was receiving payments from Maxwell S.A. that were falsely described in invoices. The payments were then recorded incorrectly by Maxwell S.A. and transmitted to Maxwell for consolidation. In May, the former executive was sentenced to two years of probation, during which he must complete 300 hours of community service in addition to paying the agreed upon $55,000 fine and a $100 assessment. 

Oil Trader Convicted for Ecuadorian and Mexican Bribery Scheme: Earlier this year, a former oil trader was convicted for his role in a bribery scheme to secure contracts with Petroecuador, Ecuador's state-owned oil company. The jury also determined that the former oil trader conspired to launder the corrupt funds used to carry out both the Ecuadorian bribery scheme as well as a similar bribery scheme in Mexico. As previously reported, the former trader was indicted in both New York and Texas for his role in facilitating the Ecuadorian and Mexican schemes, with some charges related to the Mexican scheme having previously been dismissed in New York for lack of venue. Additional charges related to the Mexican bribery scheme are currently pending against the oil trader in Texas. After the former trader was convicted in New York, the Texas court delayed its trial until September. The trader's conviction and recent rulings in the case are discussed in greater detail in our Spring 2024 FCPA Review.

Cartel and Government Contracts Fraud

Judge Dismisses Convictions of Naval Officers in "Fat Leonard" Case Due to Prosecutorial Misconduct: A judge in the Southern District of California dismissed bribery related charges against five naval officers due to prosecutorial misconduct. The government had asked the court to allow the five defendants to withdraw their guilty pleas and in some cases replead to misdemeanor charges resulting to time served. According to the government's filing, numerous issues infected the proceedings, including non-disclosure of key information, incorrect statements by prosecutors during the case, treatment of "Fat Leonard" Francis, admission of improperly authenticated documents, and more. Francis is still awaiting sentencing, as previously reported. 

Third South Korean National Indicted in Military Contract Bid-Rigging Conspiracy: The DOJ's Procurement Collusion Strike Force (PCSF) has announced a superseding indictment charging two additional defendants – Korean company DESCA Co. Ltd. (DESCA) and its Chief Executive Officer (CEO) – for rigging bids for contracts at U.S. military facilities in South Korea. Two executives of another Korean company were indicted for their participation in the same conspiracy in March 2022, as previously reported. The charges in this investigation are some of the few that the Antitrust Division has brought in a cross-border cartel case in recent years.

Additional Convictions and Guilty Pleas in Ready-Mix Concrete Case: In July 2024, a federal jury convicted two managers of ready-mix concrete suppliers, Gregory Hall Melton and John David Melton, for fixing prices, rigging bids, and dividing the market for concrete sold in Georgia. The convictions come on the heels of the guilty plea in March of Evans Concrete, LLC, and its owner, Tim Strickland, for their role in the conspiracy. The government recommended a sentence of not more than 12 months for Strickland and a fine of $150,000. The plea agreements (Evans Concrete; Strickland) were announced weeks after another, John David Melton, lost an Eleventh Circuit appeal seeking to dismiss the charges against him based on procedural irregularities in the grand jury that allegedly violated his Fifth Amendment right to due process. The appellate court found that the challenges were not yet appealable because he had not been convicted or sentenced. As previously covered, Evans Concrete and four concrete executives were indicted for their alleged involvement in the conspiracy in 2020. These latest pleas come after another Evans Concrete executive pled guilty in S2023 based on a "conduit," or facilitation, theory. Gregory Hall Melton and John David Melton have yet to be sentenced.

Unlike the executive who pled guilty in December 2023, however, the government alleged that the owner of Evans Concrete not only facilitated the conspiracy but exchanged "price increase letters" with competitors to ensure that all conspirators raised their prices together. Additionally, the government alleged that the executive allocated jobs with competitors. The executive will be sentenced in August 2024.

Defense Contractor Charged in Significant Bribery Scheme: A former defense contractor executive and a Navy contracting officer were charged with engaging in an alleged bribery scheme related to technical and consulting information technology (IT) contracts. The defense contractor allegedly bribed the contracting officer with free restaurant meals, a ticket to the 2018 MLB All Star game, and purported salary payments in exchange for directing more than $100 million in IT contracts to the defense contractor. The bribery scheme is one of the largest in the government contracting space in years. 

Anti-Money Laundering and Fraud

Cryptocurrency Executive Sentenced for Anti-Money Laundering (AML) Violations: Changpeng "CZ" Zhao, the founder and former CEO of Binance, the largest cryptocurrency exchange in the world, was sentenced in the Western District of Washington to four months in prison. Zhao and Binance had previously pleaded guilty in November 2023, admitting in part that Binance had violated the Bank Secrecy Act (BSA) by failing to maintain an effective AML program, enabling hundreds of millions of dollars linked to U.S.-sanctioned entities to pass through Binance's cryptocurrency platform. In addition to his prison sentence, Zhao was ordered to pay a $50 million criminal fine and forfeit $50 million to the Commodity Futures Trading Commission (CFTC). Binance agreed in November to forfeit more than $2.5 billion and pay a criminal fine of more than $1.8 billion. Zhao's four-month sentence is shorter than the three years sought by prosecutors and is below the 12 to 18 months recommended by federal sentencing guidelines. Judge Richard Jones, who issued the sentence, noted that a three-year sentence was inappropriately harsh. One day before Zhao's sentencing, the DOJ sent a letter to Congress urging lawmakers to strengthen penalties for BSA violations.

Cryptocurrency Executives Convicted for Role in Crypto Ponzi Scheme: Two leaders of a purported cryptocurrency mining and trading company, IcomTech, were convicted by a jury on one count each of conspiracy to commit wire fraud. As we previously reported, prosecutors alleged that the executives orchestrated a scheme to entice investors to purchase non-existent cryptocurrency packages, subsequently barred the investors from accessing their funds, and redirected new investments to pay prior investors and finance extravagant promotional events, luxury goods, and real estate. 

The two executives served as central figures in the fraudulent scheme, with one luring new investors by hosting lavish events across the world and the other operating IcomTech's website and online portal. They are scheduled to be sentenced at the end of June. As previously reported, in January 2024, the former CEO of IcomTech was sentenced to a five-year prison term and two years of supervised release, and was ordered to forfeit $914,000. The former CEO and others are also facing a parallel civil enforcement action by the CFTC. The IcomTech scheme specifically targeted Spanish-speaking investors—a fact prominently highlighted by the CFTC.

False Claims Act, Kickbacks, and Other Fraud

Two More Airline Executives Plead Guilty in Kickback Scheme: Two executives at Polar Air Cargo Worldwide Inc. (Polar) pled guilty to defrauding the company through kickback arrangements between Polar executives and the company's vendors. Twelve individuals have been indicted as part of the scheme, as previously reported. All but one have pled guilty. The Chief Operating Officer (COO) agreed to forfeit $6.7 million and pay $33 million in restitution to Polar. In March 2024, he was sentenced to four years in prison. Meanwhile, the former vice president agreed to give up $7.2 million and pay $22 million in restitution but has not yet been sentenced. 

Pandemic Fraud Leads to High Number of False Claims Act (FCA) Lawsuits in 2023: The DOJ announced that a record number of False Claims Act settlements and judgments were recorded in 2023 and provided updated FCA enforcement statistics for fiscal year (FY) 2023. According to the DOJ, the U.S. government and whistleblowers were party to 543 settlements and judgments in 2023. The increase in FCA cases is likely the result of increased enforcement relating to the Paycheck Protection Program (PPP). Notably, $48.23 million was recovered from fraudulent PPP loans. The PPP loan program was enacted during the COVID-19 pandemic to allow for small businesses to take out loans to ensure the businesses could continue to pay their employees. Since the program's inception, the DOJ has used the FCA to pursue companies that submitted fraudulent claims. According to the DOJ, it resolved 270 FCA matters in 2023 in connection with improper PPP loans. 

Staffing Company Executives Plead Guilty to Multi-million-Dollar Fraud Scheme: Two brothers who served as the CEO and Chief Financial Officer (CFO) of a large staffing company in Florida pled guilty to running a multi-million-dollar fraud scheme. Federal prosecutors in New York alleged that the brothers created more than 2,000 fraudulent invoices to misrepresent their company's volume of business and used those inflated figures to borrow more than $500 million — an amount for which the company would not otherwise qualify — from an unnamed bank. The brothers actively concealed the fraud scheme to investors, inflated the value of the company, and sold the company to an unnamed investor group in May 2018, profiting at least $17.5 million from the sale.

Extradition & Extraterritoriality

South Korean Crypto CEO Misses Start of SEC Trial While Montenegro Courts Consider Competing Extradition Requests: The Montenegro Supreme Court suspended lower court rulings that ordered the extradition of co-founder and former CEO of cryptocurrency firm Terraform Labs Do Kwon to his native South Korea instead of the U.S., continuing extradition proceedings to resolve competing extradition requests from the U.S. and South Korea. Following Kwon's arrest in Montenegro last year, federal prosecutors in Manhattan indicted the cryptocurrency entrepreneur for his role in a $40 billion scheme to defraud investors into purchasing his company's so-called "stablecoin" currencies, which collapsed in May 2022. South Korea also sought Kwon's extradition on similar charges.

Kwon consented to extradition to the U.S. so he could attend a civil trial in Manhattan, where the SEC claims that Kwon and his company deceived investors about both the ability of the cryptocurrencies to maintain a constant price of $1 and the coin's use by a popular South Korean mobile payment application. Nevertheless, Kwon's ongoing extradition proceedings resulted in several divergent decisions among the lower courts in Montenegro regarding whether to extradite Kwon to South Korea or the U.S. Kwon ultimately missed the March 25, 2024, start of his civil trial and the court refused any further postponement.

Portuguese Hacking Forum Administrator Pleads with U.K. Government Against Extradition to U.S.: Portuguese national Diogo Santos Coelho asked the U.K. Minister of State for Security to extradite him to Portugal instead of the U.S. where he faces cybercrime charges. Federal prosecutors in Virginia indicted Coelho for administering the website RaidForums, where cybercriminals allegedly buy and sell hacked personal and confidential data, such as bank account numbers, credit card information, logins, and social security numbers. Coelho argued that the U.K. Minister should deny extradition to the U.S. due to the U.S.'s retributive philosophy of criminal justice, the severity of Coelho's potential sentence, and because Coelho has been diagnosed with autism and had been assessed as having high risk of suicide. The U.K. government has not ruled on Coelho's request.

The U.K. government has previously agreed not to extradite other defendants to the U.S. for similar reasons. In 2012, U.K. Home Secretary Theresa May refused to extradite an alleged British computer hacker, who was indicted for hacking U.S. military computers at the Pentagon and the National Aeronautics and Space Administration (NASA) to find evidence of unidentified flying objects (UFOs). Citing medical reports that he suffered from Asperger's syndrome, depression, and a high risk of suicide, Secretary May exercised her discretion under the U.K.'s Human Rights Act to deny the extradition request.

Noteworthy Sentencings

Federal Sentencing Commission Amends Guidelines to Restrict Use of Acquitted Conduct in Sentencing: In April, the U.S. Sentencing Commission unanimously passed amendments to the federal Sentencing Guidelines (Guidelines) that will prohibit judges from imposing longer sentences for criminal defendants based on conduct they were acquitted of in federal court. Section 1B1.3 of the Guidelines allows judges to consider "relevant conduct" to determine the guideline range for sentencing, which can include conduct relevant to the preparation, commission, or coverup of the convicted offenses. The Guidelines require only that relevant conduct be established by a preponderance of the evidence, a lower standard than the reasonable doubt standard required for criminal convictions. This has allowed defendants to be subjected to longer sentences for conduct for which they were never charged, as well as conduct for which they were acquitted.

In June 2024, the Supreme Court denied certiorari in several cases challenging the use of acquitted conduct in sentencing. Justices Sotomayor, Kavanaugh, Gorsuch, and Barrett issued statements regarding the denial of certiorari in one such case, McClinton v. United States, noting that the cases raised "important questions" but that the Court was opting not to review the issue of acquitted-conduct sentencing at that time because the Sentencing Commission was actively considering the issue. The amendment is subject to revision until the Sentencing Commission submits it to Congress and is scheduled to take effect on November 1, 2024.

FTX Founder Sentenced to 25 Years In Multi-Billion-Dollar Fraud Scheme: Sam Bankman-Fried, the founder and CEO of defunct cryptocurrency exchange FTX, was sentenced to 25 years after a jury convicted him in November 2023 of a massive fraud scheme. As previously reported, the FTX founder was extradited from the Bahamas to face trial after an initial indictment in December 2022 for charges of securities fraud, money laundering, and conspiracy arising from a scheme to misappropriate billions of customer deposits held by FTX and to mislead investors in FTX and the cryptocurrency hedge fund Alameda Research, which he also founded. 

In its sentencing memorandum, the government calculated the applicable Guidelines sentence to be 110 years, but advocated for a term of 40-50 years, citing the defendant's age (32) relative to other defendants who have committed "enormous frauds" as a reason to avoid a functional life sentence. The government calculated the loss from the founder's fraud to amount to over $10 billion, including over $8 billion lost by FTX customers, and over $1 billion in losses each for FTX equity investors and Alameda lenders. The government also highlighted attempted witness tampering, perjury, infractions during pre-trial supervision, and failure to take responsibility for his crimes. The defense's sentencing memorandum advocated for a sentence of 63-78 months and argued for a loss calculation of zero.

Editors: Katherine E. Pappas, Ian A. Herbert, Lauren E. Briggerman

Authors: Maame Esi Austin, Alexandra Beaulieu, Connor W. Farrell, Brittany Huamani, Calvin Lee, Manuel Levitt, Rachel Mendelson, Sandeep A. Prasanna, Alexandra S. Prime, Jesse Schwab, Rebecca Tweedie

Contributors: Kirby D. Behre, John E. Davis, Alex L. Sarria, Laura Deegan

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