The Perfect Storm- FCPA

The Perfect Storm was a movie depicting the 1991 confluence of unusual meterological events that caused a storm resulting in damages of over 200 million dollars and the loss of 13 lives.  Although I wouldn’t expect much loss of life resulting from applying the whistleblower provisions of Dodd Frank to the Foreign Corrupt Practices Act (FCPA), 200 million dollars will be a pittance.  Book it.

I believe this based on what happened to the False Claims Act (FCA) enforcement environment after passage of the 1986 act which strengthened the whistleblower protections, among other things.  Look at the growth curve:

As you can see, the growth curve was exponential before leveling off in 1997 through today (although the last couple of years have seen another  jump).

Although the number of cases leveled off after 1998, the dollar value of settlements has skyrocketed.

Wouldn't you like to have invested in that income stream?  Well, I have some news for you.  If you are a shareholder, you have a chance to invest again right now, just like in 1987.  The only problem is the government is buying this stock.  You are shorting it.


This average dollar per settlement increase is largely due to a shift from relatively small health care providers to large pharma/med device companies.  One could infer, however, that it is also due to an increase in the sophistication of the government, relators and relator attorneys.  Oh, I forgot to mention relator attorneys.

Do a Google search on FCPA violations.  What is the first item that appears?

You see, back in 1987, when the qui tam provisions of the FCA were enhanced, Al Gore was in the senate and the internet had not yet become a part of our lives.  This lack of access of potential whistleblowers to qui tam attorneys created an elongated “ramp up” in cases.  As you can see, this is no longer a barrier to growth.

If I haven’t worried you already, let me go further.  FCA violations typically occur primarily in two industries- government contractors and health care.  That is a fairly discreet and small pool of potential violators.  As a matter of fact, while health care and defense contractors only comprise 13% of the S&P 500 (by market cap) the revenues associated with foreign operations are over 46% of the S&P 500 revenues.  I know market cap and revenues are a little apples and oranges, but directionally the pool of potential violators is much bigger.

I haven’t yet touched on a comparison of the inherent risk of a violation between FCA and FCPA.  Nor have I addressed the relative strength of control environments designed to address those risks.  Nor have I touched on the risk that a violation will not be detected.  All of these are factors articulated in the principles of corporate prosecution articulated by the DOJ in this link.

http://www.justice.gov/opa/documents/corp-charging-guidelines.pdf

That fun will be for another day.  I will give you a hint though.  The perfect storm is about to become a perfect tsunami.