January 4, 2010
"One can say without exaggeration that this past year was probably the most dynamic single year in the more than thirty years since the FCPA was enacted." So began Assistant Attorney General Lanny Breuer in a recent recap of 2009 Foreign Corrupt Practices Act ("FCPA") enforcement. Indeed, for the fourth time in the last five years, the Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC"), the statute’s dual enforcers, set a record by bringing more FCPA prosecutions than in any prior year in the FCPA’s history. Foreign anti-corruption prosecutions also have reached unprecedented levels. Once an erratic enforcement priority, combating international corruption has now garnered attention at the highest levels of U.S. and foreign regulatory circles and with CEOs and board chairmen of multinational companies around the globe.
This update provides an overview of the FCPA and a survey of FCPA enforcement activities during 2009. It also analyzes recent enforcement trends and offers practical guidance to help companies and their executives avoid or minimize liability under the FCPA. A collection of Gibson Dunn’s publications on the FCPA, including prior enforcement updates and more in-depth discussions of the statute’s complicated framework, may be found on our FCPA Website. Later this month, we plan to release another update surveying recent developments in foreign anti-corruption enforcement activities. And, for additional insight and analysis, please watch for an invitation to our complimentary FCPA and international anti-corruption enforcement webcast briefing, which is scheduled to take place in late January 2010.
The FCPA’s anti-bribery provisions make it illegal to offer or provide money or anything of value to officials of foreign governments or foreign political parties with the intent to obtain or retain business. The anti-bribery provisions apply to "issuers," "domestic concerns," and "agents" acting on behalf of issuers and domestic concerns, as well as "any person" that violates the FCPA while in the territory of the United States. The term "issuer" covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d). In this context, the approximately 1,500 foreign issuers whose American Depository Receipts ("ADRs") are traded on U.S. exchanges are "issuers" for purposes of this statute. The term "domestic concern" is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has a principal place of business in the United States.
In addition to the anti-bribery provisions, the FCPA’s books-and-records provision requires issuers to make and keep accurate books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets. Finally, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations. Regulators have frequently invoked these latter two sections – collectively known as the accounting provisions – in recent years when they cannot establish the elements for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations. Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency.
2009 Year-End Figures
In what is becoming nearly an annual event, 2009 once again saw record levels of FCPA enforcement actions brought by DOJ and the SEC. Although it is fast becoming clichéd to continuously hype this trend, the enduring explosion of FCPA prosecutions is best captured in the following table and graph, which each track the number of FCPA enforcement actions brought by DOJ and the SEC during the past six years.
It is clear that this trend of heightened enforcement activity will not soon subside. Mark Mendelsohn, the peripatetic Deputy Chief of the Fraud Section in DOJ’s Criminal Division and the government’s top criminal FCPA enforcer, recently confirmed that DOJ has least 130 open FCPA investigations. And – based on our representation of corporations and individuals, our network of relationships, and our constant review of public disclosures – we believe that the SEC also has a robust stock of FCPA matters under investigation, many of which it is running in tandem with DOJ. With so many active matters in the pipeline, we expect that the continuing upswing in FCPA enforcement will continue for the foreseeable future.
2009’s Top Six Developments in FCPA Enforcement
Typically, we condense the year’s most important trends in FCPA enforcement into five key developments. But this past year of record-breaking enforcement activity defies convention, compelling expansion of our "Top 5" list into a "Top 6." And although one could argue credibly for the inclusion of other trends, we believe that the following six developments of 2009 FCPA enforcement best highlight the myriad risks facing companies and their employees doing business internationally:
SEC Rolls Out Aggressive New Enforcement Theories
In a shot heard in corporate "C-suites" across the nation, on July 31, 2009, Utah-based nutritional product manufacturer Nature’s Sunshine Products, Inc. ("NSP") and two of its former officers, CEO Douglas Faggioli and CFO Craig D. Huff, settled civil FCPA charges with the SEC arising from the alleged payment of bribes to customs officials in Brazil. The complaint alleges that, in 2000 and 2001, after the Brazilian government reclassified NSP’s products in a manner that subjected them to enhanced registration requirements, employees of NSP’s Brazilian subsidiary used third-party brokers to funnel approximately $1 million to customs officials in an effort to circumvent those registration requirements. These payments were improperly classified in the books of NSP’s Brazilian subsidiary as "importation advances," and those inaccurate books were then rolled up into NSP’s ledger as part of the year-end financial consolidation process. An operations manager for the company’s Brazilian subsidiary notified U.S.-based controllers that he had concerns that NSP products were being illegally imported into the country and that NSP was paying exorbitant fees to its customs brokers to facilitate this, but apparently the controllers did not investigate these alleged "red flags."
Although the fact pattern described above is largely standard FCPA fare, the cases against Faggioli and Huff are remarkable in that they represent the SEC’s first use of a "control person" theory of liability to hold U.S.-based executives responsible for alleged corrupt payments made at the foreign subsidiary-level when the U.S. officers did not authorize or even have knowledge of the payments. Section 20(a) of the Securities Exchange Act of 1934 provides that anyone "who, directly or indirectly, controls any person liable" for violating the Act is himself or herself liable to the same extent as the violator. Proceeding on this theory, the SEC charged Faggioli and Huff solely because of their alleged supervisory responsibilities over the people and processes implicated in the alleged payments. As CEO, Faggioli allegedly had supervisory responsibility over senior management and policies concerning the export and sales of NSP’s products. Huff, as CFO, allegedly had supervisory responsibility for senior management and policies regarding the making and keeping of the company’s books and records, including those relating to the registration of NSP’s products sold in Brazil. Therefore, the SEC concluded that both executives failed to supervise NSP personnel to ensure that the company’s books and records were accurately prepared and that an adequate system of internal controls was in place to monitor the registration of NSP products sold in Brazil. But, once again, the SEC did not allege that Faggioli or Huff had any involvement in the payment of bribes or any knowledge that corrupt activity was occurring in Brazil. Without admitting or denying the charges, Faggioli and Huff each agreed to pay $25,000 in civil penalties to settle the SEC’s novel charges.
Although it has received comparatively less attention from FCPA commentators, the charges against NSP are themselves interesting. On these facts, a corporate defendant typically expects to find itself charged with violations of the FCPA’s books-and-records, internal controls, and perhaps anti-bribery provisions. And NSP was charged with all of these. But NSP also was charged with engaging in a fraudulent scheme in connection with the sale of its securities, in violation of Section 10(b) and Rule 10b-5 thereunder, and with filing materially inaccurate quarterly and annual reports with the Commission that failed to accurately reflect the allegedly corrupt purpose and nature of the improper payments. Without admitting or denying the charges, NSP agreed to pay a $600,000 civil penalty.
Commenting on the "control person" aspects of the settlement, on September 24, 2009, SEC Assistant Director Kara N. Brockmeyer publicly opined that when the SEC invokes this theory of liability, it is "signaling that it believes there were red flags" to which the alleged control person "should have been paying more attention." Relating these comments back to Faggioli and Huff, the silence of their response to the concerns voiced by the Brazilian operations manager is deafening.
Only time will tell how broadly the SEC will utilize control person liability in future FCPA enforcement actions. But this much is clear – U.S.-based corporate officers are now on notice of the SEC’s view of their responsibilities for FCPA compliance in foreign subsidiaries. For more on the NSP/Faggiolli/Huff settlements, please see Gibson Dunn’s article, Corporate Officers Beware: SEC Fines U.S. "Control Persons" for FCPA Violations of Foreign Subsidiary.
Another 2009 FCPA enforcement action evidencing the SEC’s increasingly aggressive enforcement agenda is that against Bobby Benton, the former Vice President of Western Hemisphere Operations for Texas-based offshore oil rig operator Pride International, Inc. On December 11, 2009, the SEC charged Benton with FCPA violations arising from his alleged involvement in three separate improper payment schemes occurring between 2003 and 2005. One of the three schemes is rather unremarkable by FCPA standards, in that Benton is alleged to have authorized a $10,000 payment to a third-party agent with the expectation that the agent would tender all or a portion of the funds to a Mexican customs official in return for lenient treatment in connection with an inspection of port facilities leased by Pride’s Mexican subsidiary. The other two schemes, however, are much more intriguing.
In the third scheme, Benton allegedly received a report of a $15,000 payment made by Pride’s customs agent in Mexico to a Mexican customs official to ensure the timely export of an oil rig. Benton did not authorize the payment, but is alleged only to have failed to inform the company’s management, legal department, and internal auditors of the matter. Further, he is charged with allowing the false record created in connection with this payment to remain on Pride’s books and records.
In one, Benton allegedly received from Pride’s Venezuelan country manager a "draft action plan addressing internal control weaknesses," including approximately $384,000 in improper payments to officials of Venezuela’s state-owned oil company that were uncovered as part of an audit of vendor practices in the country. Benton is not alleged to have authorized or had contemporaneous knowledge of these payments, but he is charged with allegedly "redact[ing] all references" to the bribes in a revised, "cleaned up" version of the action plan that he sent back to the country manager.
Having knowledge of the improper payments described above, Benton allegedly falsely certified to Pride’s accountants that he knew of no bribes or other FCPA violations by Pride and its subsidiaries. Benton tendered these allegedly false certifications to Pride’s accountants in connection with their review of the company’s operations for its 2004 and 2005 annual reports.
Benton is charged with violating the FCPA’s anti-bribery, books-and-records, and internal controls provisions, as well as with aiding and abetting Pride’s violations of the same. Further, he is charged with making false or misleading statements to the company’s accountants in connection with their review of a report to be filed with the Commission.
Charging Benton for what appears to be editing a document by deleting references to suspected improper payments and failing to inform the company’s managers and lawyers of those suspected payments is a new theory of FCPA liability, and it will be interesting to watch how this theory develops. Additionally, the fact that Benton did not settle the charges against him is remarkable in and of itself. The last unsettled civil action filed by the SEC in an FCPA case was the April 2007 complaint against Baker Hughes employee Roy Fearnley. Fearnley never responded to the SEC’s complaint and, on December 16, 2009, the SEC moved for an Order of Default Judgment against him. Benton has until February 2010 to file a response in his matter.
DOJ Expands Prosecutorial Net to Capture Third Parties and Foreign Government Officials
In his remarks at a recent FCPA conference, DOJ’s Mendelsohn noted that a "number of intermediaries" were charged with FCPA violations in 2009, calling this "an interesting trend." In all, five intermediaries, commonly referred to as third parties or agents, were charged with FCPA violations in 2009. But perhaps even more intriguing, 2009 saw DOJ’s first attempt, using a novel legal theory, to prosecute the foreign government official recipients of bribes.
The first third-party agent case in 2009 was the indictment of Jeffrey Tesler, a U.K. solicitor who acted as an agent for a four-party joint venture formed to bid on engineering, procurement, and construction contracts to build the Bonny Island natural gas pipelines in Nigeria. Tesler was indicted on February 17, 2009, along with Wojciech Chodan, a former sales vice president and consultant of Halliburton Co. Halliburton and its former subsidiary, Kellogg, Brown & Root LLC, had resolved criminal and civil FCPA charges just one week earlier, with the former agreeing to disgorge $177 million in alleged illicit profits to settle an SEC complaint and the latter paying a $402 million fine in connection with a guilty plea to criminal charges brought by DOJ. The corporate settlements, which resulted in the second highest financial penalty ($579 million) in FCPA history, are described in detail in our 2009 Mid-Year FCPA Update.
According to the indictment, Tesler received $132 million from the Bonny Island joint venture participants from 1995 to 2004 and passed portions of those funds to top-level officials in the executive branch of the Nigerian government, including three successive vice presidents, in exchange for the award of more than $6 billion in contracts to the joint venture. Both Tesler and Chodan were arrested by London Police, leading to extradition proceedings that are still ongoing. At a November 23, 2009 extradition hearing before the Horseferry Road Magistrates Court in London, Tesler argued that the alleged offenses were "directed against the country of Nigeria" and that the United States therefore lacks jurisdiction over him. Further, Tesler argued that it would be unfair to extradite him in light of a pending criminal investigation by Britain’s own Serious Fraud Office ("SFO"). In response, the United States argued that the "SFO has ceded jurisdiction to the United States" and that the United States had sufficient jurisdictional contacts because Tesler was an "agent" of a U.S. issuer under 15 U.S.C. § 78dd-1 and because the bribe payments were routed through a New York bank account.
Another third-party agent currently contesting FCPA extradition proceedings is Ousama M. Naaman, a dual citizen of Canada and Lebanon and a resident of the United Arab Emirates, who, on July 30, 2009, was arrested by German authorities at DOJ’s behest. With his arrest, a 2008 indictment was unsealed charging Naaman with a seven-year conspiracy to make improper payments to the Iraqi government and its officials. The indictment charges that, between 2001 and 2003, Naaman improperly funneled approximately €1.3 million to the Iraqi Ministry of Oil in connection with three contracts under the United Nations Oil-for-Food Program ("OFFP") and agreed to make payments in connection with another two, on behalf of his client. Naaman also allegedly paid $150,000 in bribes in 2006 and 2007 for the personal benefit of certain Iraqi officials within the Ministry of Oil to induce them to alter the results of a field test for a chemical in competition with his client’s product at the Ministry, thereby allegedly ensuring that the competitor’s product could not be sold in the Iraqi market.
Naaman is charged with violating the FCPA’s anti-bribery provisions only with respect to the 2006 and 2007 payments. As explained in our prior FCPA updates, Naaman could not be charged under the anti-bribery provision for the OFFP payments, because they did not benefit any particular Iraqi official. With respect to the OFFP charges, Naaman is charged with a conspiracy to commit wire fraud and to falsify the books and records of the issuer for which he served as an agent.
In another example of a third-party intermediary being charged alongside an issuer’s employee, on November 23, 2009, DOJ announced a guilty plea to FCPA conspiracy charges by Fernando Maya Basurto, a Mexican citizen and agent of Swiss ADR-issuer ABB Ltd., and the indictment and arrest of John Joseph O’Shea, the General Manager of ABB’s Texas-based subsidiary, on eighteen FCPA, money laundering, and record falsification counts. According to the charging documents, ABB’s Texas subsidiary hired Basurto’s company to act as its third-party representative in connection with contracts with the Comisión Federal de Electricidad ("CFE"), a Mexican state-owned electricity company. O’Shea, Basurto, and others thereafter conspired with CFE officials to kick back to the government officials 10% of CFE contracts awarded to ABB. In 2004 alone, these kickbacks, which were occasionally referred to by the co-conspirators as the "Third World Tax," exceeded $1.3 million.
ABB discovered the conspiracy in 2004, promptly stopped the transfer of an additional $900,000 in corrupt payments, and disclosed the activity to DOJ, the SEC, and Mexican authorities. O’Shea and Basurto allegedly thereafter continued to conspire with one another to conceal their corrupt arrangements with the CFE officials by creating "fake, back-dated correspondence that purported to show" legitimate services performed by Basurto’s company in return for the corrupt payments funneled through it.
The final case of 2009 involving third-party intermediaries charged with FCPA violations concerns an investigation of several Florida-based telecommunications companies and their allegedly corrupt arrangements with officials of Telecommunications D’Haiti ("Haiti Teleco"), Haiti’s state-owned telecommunications company and the sole provider of landline telephone service to and from the island nation. The first charges in the investigation were filed in April 2009, when Antonio L. Perez, the former controller of a Miami telecommunications company that has since been identified as Terra Telecommunications, and Juan Diaz, the president of a shell company that served as an intermediary between Terra and Haiti Teleco, each pleaded guilty to a two-prong conspiracy count involving the FCPA and the money laundering statute. Perez admitted that he personally authorized more than $36,000 in bribe payments to Haiti Teleco officials between 2001 and 2003 to reduce the amounts that Terra owed to the state entity, including by reducing per-minute rates and the number of minutes for which payment was owed. Diaz admitted to collecting more than $1 million in "commissions" and "vendor payments" from Terra and two other Miami-based telecommunications companies, keeping $73,824 for himself and passing the balance to Haiti Teleco officials.
The next charges in the investigation came more than six months later, when DOJ unsealed FCPA indictments against Joel Esquenazi and Carlos Rodriguez, respectively Terra’s president and executive vice president, and Marguerite Grandison, the president of yet another shell company allegedly used to funnel bribe payments from Terra to Haiti Teleco. The indictment alleges that, between 2001 and 2005, Esquenazi and Rodriguez authorized more than $800,000 in bribes, including $70,000 channeled through the accounts of Grandison’s company, to Haiti Teleco officials. Esquenazi, Rodriguez, and Grandison are all also charged with money laundering and wire fraud offenses.
But what makes this case particularly noteworthy is that the indictment also charges the foreign government officials who allegedly received the improper payments. Although the FCPA does not criminalize the receipt of bribes by foreign officials, the grand jury charged Robert Antoine and Jean Rene Duperval, successive holders of the office of Haiti Teleco’s Director of International Relations, with participating in a money laundering conspiracy and, in Duperval’s case, substantive money laundering charges, arising from the movement of the bribe payments through U.S. financial institutions. The requisite unlawful activities from which the proceeds allegedly derived include violations of the FCPA, the U.S. wire fraud statute, and Haiti’s criminal bribery laws. We believe this to be DOJ’s first attempt to prosecute foreign government officials as part of an FCPA conspiracy, which evidences the U.S. government’s increasingly aggressive stance in foreign corruption prosecutions and promises an intriguing legal challenge.
Whether DOJ’s prosecution of foreign officials, such as Antoine and Duperval, will be replicated in other contexts remains to be seen. In most circumstances, foreign governments are unlikely to be so accommodating in the prosecution of their own government officials in U.S. courts. Crucial to DOJ’s investigation was the Republic of Haiti’s close cooperation with DOJ, including the arrest of Duperval by a specialized financial unit of the Haitian National Police. Indeed, this investigation may have been set in motion several years ago by the Haitian government itself, with a 2005 civil suit filed in the U.S. District Court for the Southern District of Florida by the Republic of Haiti and Haiti Teleco against the nation’s deposed President, Jean-Bertrand Aristide, and several other former Haitian officials, including Duperval. In relevant part, Haiti’s complaint, brought under the Racketeer Influenced and Corrupt Organizations Act, alleged that Duperval caused Haiti Teleco to grant U.S. and Canadian telecommunications companies, including Terra, artificially low service rates in return for kickbacks inuring to his personal benefit – essentially the scheme that would be alleged four years later in a grand jury indictment. Haiti’s civil suit was voluntarily dismissed one year after it was filed, and the current status of that litigation, if any, is unknown.
DOJ Follows the Money
In tandem with DOJ’s efforts to prosecute foreign government officials who receive bribes from U.S. persons is a newly invigorated effort by the agency to recover the proceeds of foreign bribery. U.S. money laundering laws enable DOJ to bring separate criminal counts seeking forfeiture of the proceeds of criminal offenses, including foreign bribery in violation of the FCPA, or separate, civil in rem actions against the proceeds themselves.
On November 7, 2009, speaking at the Opening Plenary of the Sixth Ministerial Global Corruption Forum on Fighting Corruption and Safeguarding Integrity in Doha, Qatar, Attorney General Eric Holder urged his fellow Global Forum members to "work together to ensure that corrupt officials do not retain the illicit proceeds of their corruption." Referring to asset recovery as a "global imperative," Holder announced "a redoubled commitment on behalf of the United States Department of Justice to recover such funds."
Ten days later, following on Holder’s comments, Lanny Breuer, the articulate and energetic Assistant Attorney General of DOJ’s Criminal Division, announced at an FCPA conference that he has directed all Criminal Division prosecutors to determine in every case whether it is appropriate to seek forfeiture. He noted that FCPA prosecutors in the Fraud Section will be working with DOJ’s Asset Forfeiture and Money Laundering Section attorneys "to forfeit and recover the proceeds of foreign corruption offenses."
DOJ prosecutors have clearly heeded the calls of their superiors. In ten of DOJ’s twenty-six FCPA prosecutions in 2009, the charges included a forfeiture count. And, in one particularly interesting case, DOJ brought a freestanding forfeiture in rem action against nearly $3 million in alleged bribes paid to Arafat Rahman, the son of former Bangladeshi Prime Minister Khaleda Zia, by Siemens Bangladesh and China Harbor Engineering Company. DOJ’s complaint alleges that Siemens and China Harbor paid Rahman these bribes as "protection money" to ensure that he did not obstruct the procurement process for the award of a digital cellular mobile phone network contract and a mooring container terminal contract, respectively. The bribe monies sought by DOJ allegedly moved through U.S. financial accounts, thereby affording DOJ jurisdiction, before coming to rest in the accounts of third-party intermediaries from whom DOJ seeks to recover the funds. This litigation is ongoing.
DOJ and the SEC Permit Corporate Self-Monitoring
Our next key development in 2009 FCPA enforcement spawns from two settlements involving relatively mundane allegations of FCPA misconduct. On July 30, 2009, Helmerich & Payne, Inc. ("H&P"), an Oklahoma-based provider of oil rig equipment and personnel, settled FCPA books-and-records and internal controls charges with DOJ and the SEC arising from alleged payments to customs officials in Argentina and Venezuela. According to the charging documents, between 2003 and 2008, employees of H&P’s Argentinean and Venezuelan subsidiaries authorized customs brokers to pay approximately $173,000 to customs officials in both countries to secure favorable treatment in connection with import and export decisions, inspections, and duty rate calculations. In addition to these allegedly corrupt payments, H&P employees authorized an additional $10,000 in payments to facilitate routine government action. Although these latter payments appear to have been lawful under the FCPA’s facilitating payments exception, they were recorded inaccurately in H&P’s accounts in violation of the books-and-records provision. H&P discovered these payments on its own, conducted a thorough internal investigation, and voluntarily disclosed its findings to DOJ and the SEC.
On December 31, 2009, UTStarcom, Inc., a California-based telecommunications company, settled FCPA anti-bribery, books-and-records, and internal controls charges with DOJ and the SEC arising from the company’s operations in China, Mongolia, and Thailand. In a case reminiscent of Lucent Technologies, Inc.’s 2007 FCPA settlement, the government alleged that, between 2001 and 2007, UTStarcom:
Both H&P and UTStarcom entered into non-prosecution agreements with DOJ and settled administrative/civil actions brought by the SEC. H&P paid a $1 million criminal fine to DOJ and disgorged $375,681.22 in illicit profits and prejudgment interest to the SEC. UTStarcom paid a $1.5 million criminal fine to DOJ and a $1.5 million civil penalty to the SEC.
What makes the H&P and UTStarcom settlements so noteworthy is their forward-looking corporate compliance monitoring provisions. It has become commonplace in recent years for DOJ and the SEC to require settling defendants to retain an external corporate compliance consultant to monitor and report on the implementation of new compliance policies within the company. Indeed, Gibson Dunn has performed that role in connection with two FCPA settlements. The government’s imposition of these consultants has been a lightning rod of controversy – perhaps exemplified by the 2007 award of an 18-month consulting contract worth an estimated $28-$52 million to former Attorney General John Ashcroft in a non-FCPA matter – leading to legislative hearings and new DOJ policies on the use of monitors (for more on this controversy, please see our 2008 Year-End Update on Corporate Deferred Prosecution and Non-Prosecution Agreements). But in the H&P and UTStarcom resolutions, DOJ agreed to allow the companies to self-monitor and report on the implementation of their improved compliance policies without mandating the oversight of an external compliance monitor.
Speaking at a recent FCPA conference, Mendelsohn cited the H&P self-monitoring arrangement as an example of DOJ’s efforts to refine its usage of corporate compliance monitors. At this same conference, Breuer echoed this sentiment, noting that self-monitoring was a direct result of H&P’s voluntary disclosure of the allegedly improper payments and "forward leaning, pro-active, highly cooperative approach" to DOJ’s investigation. Although we certainly have not seen the end of external compliance monitors, corporations negotiating FCPA resolutions with monitoring components should aggressively advocate for self-monitoring as a way to minimize the collateral costs of the resolution while still providing the government with the monitoring benefits that it seeks.
"The Year of the FCPA Trial"
For the past several years now, DOJ and the SEC have been aggressively targeting individual defendants for FCPA prosecutions. DOJ, in particular, has been seeking increasingly severe sanctions in individual prosecutions, including those of very senior corporate executives. Perhaps the most prominent spillover effect of this more aggressive enforcement posture is that individual defendants are increasingly opting not to plea bargain, but instead to put the government to its burden at trial. So, after nearly five years without a single FCPA trial, 2009 saw four individuals take their case all the way to a jury of their peers, leading Breuer to declare this "the year of the FCPA trial."
Significantly, the recent uptick in FCPA litigation has resulted in a number of judicial rulings – many of which we discussed in our 2009 Mid-Year FCPA Update – that are beginning to fill the relative void of judicial precedent defining the statute’s contours. And as the prospect of harsh sentences continues to encourage more and more defendants to try their cases before a jury, additional rulings are likely to emerge that might assist the FCPA defense bar in representing clients charged with bribery of foreign officials.
In the latest development in one of the longest-running FCPA cases ever (which we have covered for the past several years), on July 10, 2009, Frederic Bourke was convicted by a jury in the Southern District of New York following a five-week trial. Bourke’s conviction stemmed from his $8 million investment in a business partnership that sought to gain control of the State Oil Company of Azerbaijan Republic ("SOCAR"). DOJ alleged that one of Bourke’s co-conspirators, current fugitive Viktor Kozeny, masterminded a scheme to bribe Azeri government officials, including the then-president of Azerbaijan, in order to ensure the privatization of SOCAR, leading to substantial windfall profits for Kozeny and his investment partners. Bourke was not accused of paying any bribes himself, or even directing others to pay bribes. Rather, he was charged with conspiring to violate the FCPA by investing and participating in a business partnership that he knew or strongly believed was engaged in a bribery scheme. Prosecutors summarized the government’s theory of the case to the jury by stating that Bourke either knew that Kozeny was bribing Azeri officials or Bourke "had enough understanding to know that something … was occurring," yet "ke[pt] his head in the sand."
The jury found Bourke guilty of conspiracy to violate both the FCPA and the Travel Act and of making false statements to the FBI during the government’s investigation. He was acquitted of a related charge of conspiracy to commit money laundering. On November 10, 2009, Judge Shira Scheindlin sentenced Bourke to one year and one day in prison and ordered him to pay a $1 million fine. This sentence was substantially below the 10-year sentence sought by the government. Judge Scheindlin’s relatively lenient treatment of Bourke may have reflected her uncertainty regarding his guilt. At sentencing, she stated: "After years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both." This remark highlights the central question in this case: Did Bourke know enough about Kozeny’s bribery scheme or do enough to be held criminally liable?
The FCPA prohibits giving money or anything of value to a third party while "knowing" that the third party will make a corrupt payment. In this context, "knowledge" means either being aware of such conduct, being substantially certain that such conduct will occur, or simply consciously disregarding a "high probability" that a corrupt payment or offer will be made. When instructing the jury on "knowledge," Judge Scheindlin stated that the government need not prove that Bourke actually knew that Kozeny was bribing Azeri officials and provided a so-called "ostrich" instruction: Bourke’s willful ignorance or conscious avoidance of the fact that Kozeny was paying bribes permitted the jury to conclude that Bourke knew about them. Judge Scheindlin explained:
Knowledge may be established if a person is aware of a high probability [that corrupt payments are being offered or made, but] consciously and intentionally avoided confirming that fact … because he wanted to be able to deny knowledge…. [However,] knowledge is not established … if the person merely failed to learn the fact through negligence.
The ostrich instruction was essential to Bourke’s conviction because the government lacked clear evidence that Bourke knew that Kozeny was offering, facilitating, or paying bribes to Azeri government officials. Indeed, in a post-trial ruling affirming the jury’s verdict, Judge Scheindlin concluded that sufficient evidence existed for a jury to conclude that Bourke either had knowledge of the bribes or consciously avoided learning about them, despite various red flags, including evidence that Bourke knew about rampant corruption in Azerbaijan, corruption tainting prior privatization efforts in other post-Communist states, and Kozeny’s own past "exploits and misdeeds." The Court admitted this background evidence over a defense objection because it supported the government’s contention that Bourke must have been aware of the high probability that the partnership was paying bribes. Other evidence supporting the conclusion that Bourke suspected that Kozeny was paying bribes included a tape-recorded conversation in which Bourke wondered aloud whether Kozeny was paying bribes to government officials in the region and expressed fear of discovering this fact. The jury foreman confirmed the significance of this evidence after the trial: "We thought the tape was damning."
Judge Scheindlin’s ostrich instruction, although frequently issued in conspiracy cases, is becoming increasingly controversial. The distinction between guilt (actual knowledge or the purposeful avoidance thereof) and innocence (should have known) is an extraordinarily difficult one to parse and may have been lost on the jury, resulting in a conviction without the necessary finding of criminal intent. The jury foreman’s post-verdict comments to reporters substantiate this concern: "We thought he knew. He definitely should have known. He’s an investor. It’s his job to know." Clearly, from the jury’s perspective, caveat emptor.
Look for Bourke to challenge the use of the ostrich instruction in his upcoming appeal to the U.S. Court of Appeals for the Second Circuit. Judge Scheindlin has ruled that Bourke may remain free while he appeals his conviction, making the rare finding that the appeal raises a "substantial question of law or fact likely to result in reversal, a new trial," or a lesser sentence.
The broader lesson of the Bourke case is that individuals and entities doing business in countries with a reputation for corruption or with partners with suspect backgrounds must undertake robust due diligence and make good faith efforts to ensure that their investment is not used to make improper payments to government officials. Bourke’s conviction demonstrates that almost any inkling that a business partner is acting corruptly may be sufficient to impose liability and that failure to investigate such red flags is no defense.
On August 5, 2009, after five days of deliberations, the trial of former Congressman William J. Jefferson in the Eastern District of Virginia concluded with the jury convicting Jefferson on eleven of sixteen counts charged in the indictment. As reported in our 2009 Mid-Year FCPA Update, Jefferson was on trial for a number of alleged schemes in which he variously played the role of briber and bribee. Among the charges was one substantive count of violating the FCPA and one three-pronged conspiracy count alleging conspiracy to violate the FCPA, solicit bribes, and deprive U.S. citizens of their intangible right to his honest services as their congressman. The FCPA charges were based on allegations that Jefferson attempted to bribe then-Nigerian Vice President Atiku Abubakar to obtain favorable regulatory decisions for the Kentucky-based company for which Jefferson was serving as an agent. The government alleged that a cooperating witness gave Jefferson $100,000 in marked bills with which to bribe Abubakar and that the FBI recovered $90,000 of that money from a freezer in Jefferson’s home (hidden in Pillsbury pie crust and Boca burger boxes).
Jefferson was acquitted of the substantive FCPA count, but convicted of the conspiracy count. Because the verdict form did not require the jury to specify which of the three alleged objects of the conspiracy served as the basis for its guilty verdict, however, it is unclear whether Jefferson was actually convicted of an FCPA-related offense. The jury could have convicted him of the conspiracy count solely for conspiring to solicit bribes or deprive citizens of honest services.
On November 13, 2009, District Judge T.S. Ellis sentenced Jefferson to five-years imprisonment for his conspiracy conviction, but ruled that the sentence should run concurrent with the 13-year sentence imposed for the other, non-conspiracy counts. Despite its harshness, this sentence was significantly less than the Sentencing Guidelines range of 262-327 months and the 27-year sentence sought by the government.
The Jefferson case demonstrates the difficulty of defense efforts to collect evidence located overseas. After a five-week case-in-chief put on by the government, the defense case was presented in only a few short hours, ninety minutes of which consisted of playing tape-recorded conversations. In pre-trial litigation, Jefferson unsuccessfully sought to obtain testimony from two alleged Nigerian co-conspirators. He requested that the Court order the U.S. government to invoke its rights under the U.S.-Nigeria Mutual Legal Assistance Treaty or issue a letter rogatory, but the request was denied. And although the district court ultimately issued a limited letter rogatory requesting assistance from Nigerian judicial officials to determine whether the two witnesses would assert their Fifth Amendment rights against self-incrimination, the Nigerian government never responded. After several months, the Court withdrew the letter. Because much of the evidence in FCPA cases may be located overseas, these types of issues will continue to plague defendants who seek exculpatory evidence that is beyond their reach.
Gerald and Patricia Green
The third FCPA trial of 2009 concluded with the convictions of husband and wife film producers Gerald and Patricia Green for bribing a Thai tourism official in exchange for Thai government contracts. On September 11, 2009, after a trial lasting two-and-a-half weeks in the Central District of California, a jury found the Greens guilty of one count of conspiracy to violate the FCPA, nine substantive FCPA counts, and seven counts of money laundering. Patricia Green was also convicted of two counts of filing false tax returns, which stemmed from her mischaracterization of the bribes as tax-deductible "commissions." The government agreed to dismiss a substantive money laundering count during trial, and the jury could not reach a verdict on an obstruction of justice charge against Gerald Green.
The government’s trial evidence showed that the Greens funneled approximately $1.8 million in bribes from their California-based film production company to Juthamas Siriwan, then-governor of the Tourism Authority of Thailand ("TAT"), over the course of four years. In return, Siriwan caused the TAT to award the Greens $13.5 million in contracts, including a contract to operate and manage the Bangkok International Film Festival from 2002 until 2007. The Greens allegedly made the improper payments by entering into contracts with inflated budgets and then paying kickbacks disguised as sales commissions to Siriwan. The kickbacks were paid directly through in-person cash transfers and indirectly through transfers into the overseas bank accounts of intermediaries, including Siriwan’s daughter.
The prosecution of the Greens is noteworthy for at least three reasons. First, this case represents the government’s first FCPA enforcement action involving the film industry. As the costs of domestic film production increase, and exotic overseas venues become more commonplace, expect greater scrutiny of payments for licenses obtained for international film projects. In recent years, U.S. authorities have repeatedly leveraged an investigation concerning a single business into wide-ranging probes of an entire industry’s business practices. As but one example, Assistant Attorney General Breuer recently warned attendees at a recent pharmaceutical industry compliance conference that "one area of criminal enforcement that will be a focus for the Criminal Division in the months and years ahead [will be] the application of the [FCPA] to the pharmaceutical industry." Companies must therefore take careful notice when those who operate in the same space announce FCPA resolutions or even investigations.
Second, the government reportedly used several proactive investigative methods to obtain crucial evidence in its prosecution of the Greens. FBI agents engaged the Greens’ bookkeeper as a confidential informant and offered her immunity in exchange for surreptitiously recording conversations with the Greens. In addition, the government introduced Swiss bank account records of Siriwan’s daughter to establish the financial connection between the Greens and Siriwan. The records were obtained through a Mutual Legal Assistance Treaty request issued to the Swiss government. Finally, the government attempted to introduce privileged documents prepared by the Greens’ business attorney through the crime/fraud exception to the attorney-client privilege, although the district court ultimately suppressed those documents after a detour to the Ninth Circuit Court of Appeals. Although these techniques are not particularly innovative as compared to the FBI’s traditional investigative tactics, their use in the FCPA context is a recent development signifying increased FBI resources devoted to FCPA investigations. Indeed, Supervisory Special Agent Andrew Sekela, one of eleven special agents detailed to the FBI’s International Corruption Unit, recently noted at an FCPA conference that the FBI is constantly "look[ing] for opportunities to apply more proactive techniques" in the Bureau’s ninety open FCPA investigations.
Third, DOJ is seeking substantial prison terms for the Greens that have astonished FCPA practitioners everywhere. The government recently filed an objection to Gerald Green’s Presentence Investigation Report, arguing that the proposed Sentencing Guidelines range of 235-293 months is not harsh enough. Due to his alleged role as the ringleader of the bribery scheme and the fact that he allegedly perjured himself during the trial, the government argued that Gerald Green should receive a life sentence. Sentencing for both defendants is currently set for January 21, 2010.
Numerous Executives of Control Components, Inc.
In the wake of the three FCPA cases tried in 2009, additional individual defendants appear poised to litigate the criminal FCPA charges brought against them in 2010. Most notably, four executives of Control Components, Inc. ("CCI"), indicted on April 8, 2009, are scheduled for trial on November 2, 2010, in the Central District of California for alleged violations of the FCPA’s anti-bribery provision and the Travel Act. According to the indictment, the defendants – Stuart Carson, Hong "Rose" Carson, Paul Cosgrove, and David Edmonds – conspired to make hundreds of corrupt payments with the purpose of influencing the recipients to award contracts to CCI or skew technical specifications of competitive tenders in CCI’s favor. Two additional CCI employees, Flavio Ricotti and Han Yong Kim, who were charged in the same indictment, have yet to make an appearance.
On July 31, 2009, CCI itself pleaded guilty to substantive FCPA anti-bribery charges and to conspiring to violate both the FCPA and the Travel Act. CCI admitted that, between 2003 and 2007, its employees made more than 150 corrupt payments, totaling approximately $4.9 million, to officials of state-owned enterprises in China, Korea, Malaysia, and the United Arab Emirates, and paid $1.95 million in bribes to officers and employees of foreign and domestic private companies in violation of the Travel Act. CCI agreed to pay a criminal fine of $18.2 million and to retain an independent compliance monitor for three years. And, as described in prior FCPA Updates, CCI’s former Director of Worldwide Factory Sales, Mario Covino, and Finance Director, Richard Morlok, pleaded guilty to FCPA conspiracy charges in December 2008 and February 2009, respectively. Both are awaiting a February 2011 sentencing date.
One notable development highlighted by the CCI case is DOJ’s use of the Travel Act to reach alleged corrupt payments to private, non-governmental customers – conduct beyond that prohibited by the FCPA. The Travel Act criminalizes the use of a facility of interstate or foreign commerce for the purpose of violating a federal or state criminal statute, including the FCPA and state commercial bribery statutes such as the California law invoked in the CCI case. Arguments that the recipient of the improper payments was not a foreign government official were once a staple of the FCPA defense bar’s repertoire. But, through the FCPA’s accounting provisions applicable to issuers (as utilized in the OFFP prosecutions) and the Travel Act and wire fraud statutes applicable to both issuers and non-issuers, federal prosecutors are attempting to broaden their reach beyond areas traditionally covered by the FCPA.
There have been two other developments of interest in the CCI cases. First, on May 18, 2009, Judge James Selna granted the remaining individual defendants’ motion for a bill of particulars. The defendants argued that the indictment was inadequate because it made sweeping allegations about a worldwide scheme in which the defendants conspired to make 236 payments in more than thirty countries, totaling $6.85 million, but specifically identified only thirty of the payments. The Court granted the motion and ordered the government to identify each allegedly illegal payment by date, amount, and business affiliation of the recipient or intended beneficiary. The court concluded that each alleged bribe was itself a crime, meaning that all 236 payments "were not mere overt acts to be swept away along with nominally benign conduct in furtherance of the conspiracy." In other words, the government could not leave it to the defense to guess which transactions were allegedly corrupt.
The second development arose from the company’s guilty plea. More than two years before the six executives currently under indictment were charged, CCI’s outside counsel assembled a database of approximately 75 million pages of documents in support of CCI’s internal investigation. In its plea agreement, CCI agreed to provide to the government, on request, any document related to an allegedly corrupt payment, including documents from the database. The individual defendants filed a motion requesting an order granting them access to CCI’s database, arguing that DOJ’s right to obtain the documents on request rendered the database within the government’s "control" under Rule 16(e) of the Federal Rules of Criminal Procedure and the Brady doctrine. As such, defendants argued, DOJ was required to turn over exculpatory material and other documents material to the defense contained in the database. Judge Selna rejected this argument, and the defendants have filed a petition with the U.S. Court of Appeals for the Ninth Circuit seeking review of the ruling.
Nexus Technologies, Inc. and Several of Its Executives
In addition to the above-described matters, Nexus Technologies and three of its officers – An Quoc Nguyen, Kim Anh Nguyen, and Nam Quoc Nguyen – remain under a 2008 indictment for allegedly bribing Vietnamese officials to purchase various equipment and technology from Nexus. As noted in our 2009 Mid-Year FCPA Update, on June 29, 2009, a fourth employee, Joseph T. Lukas, pleaded guilty in connection with this scheme and is presently awaiting sentencing.
On December 2, 2009, Judge Timothy J. Savage of the Eastern District of Pennsylvania granted the remaining defendants’ motion for a bill of particulars and ordered the government to disclose the name, job title, and employer of each individual whom it alleged received an improper payment. After DOJ filed its response to the order granting the bill of particulars, the defendants filed a motion to compel, claiming that the response was inadequate because it did not identify the recipients of each alleged payment. The government replied that it does not possess information sufficient to identify each of the recipients. This dispute has hindered discovery, and we expect that 2010 will see additional litigation as the parties move toward trial, which is currently scheduled for April 1, 2010.
Organizational Changes at DOJ and the SEC
No summary of 2009’s FCPA developments would be complete without mentioning the pending departure of DOJ’s top FCPA enforcer, Mark Mendelsohn. After four years of stellar performance as a Deputy Chief in the Criminal Division’s Fraud Section and more than a decade as a federal prosecutor, Mendelsohn will leave government service and enter private practice in 2010. Confirming the widespread rumors of Mendelsohn’s departure with glowing reflections, Assistant Attorney General Breuer described Mendelsohn as "an exceptional public servant and a visionary steward of the FCPA program."
Although Mendelsohn’s successor has yet to be named, when he or she takes the post, they will find substantially greater resources at their disposal than when Mendelsohn arrived. Over the past several years, DOJ has added new prosecutors to work exclusively on FCPA investigations, aggressively cross-designated prosecutors from other working groups in the Fraud Section, and first created, then expanded, a squad of dedicated agents from the Federal Bureau of Investigation. And with more than 130 open investigations, as reported by Mendelsohn at a recent FCPA conference, DOJ has sought to further leverage its resources by establishing partnerships with more than a dozen U.S. Attorney’s Offices around the country, as well as with the National Criminal Enforcement Section of DOJ’s Antitrust Division, and new investigative partnerships with agencies like the Internal Revenue Service’s Criminal Investigations Division.
Even as the SEC continued its robust pace of FCPA enforcement in 2009, changes are afoot at the Commission. On August 5, 2009, in a speech marking his first 100 days in office, SEC Director of Enforcement Robert Khuzami outlined a plan to create a national specialized unit dedicated to FCPA enforcement. Headed by a yet-to-be-named Unit Chief, the FCPA Unit will be "more proactive in investigations, work more closely with [the SEC’s] foreign counterparts, and tak[e] a more global approach to [FCPA] violations." Other initiatives unveiled by Khuzami include the following:
- a streamlined internal review process for issuing formal orders of investigation and the subpoenas that accompany them;
- a strong policy against routine use of tolling agreements;
- the creation of a "Seaboard Memo" for individuals, designed to foster and incentivize the cooperation of corporate officers and employees; and
- the use of DOJ-style deferred prosecution agreements, by which the SEC would agree to forego enforcement actions in return for compliance with certain terms.
With the creation of a unit dedicated exclusively to FCPA inquiries, streamlined investigative processes, and new tools designed to foster cooperation and fashion creative resolutions, look for increased enforcement statistics from the SEC in 2010 and beyond.
Rounding Out the 2009 Enforcement Docket
The following cases, many of which are discussed in our 2009 Mid-Year FCPA Update, round out the balance of 2009’s enforcement docket:
Without admitting or denying the allegations, ITT agreed to pay a $250,000 civil penalty and to disgorge $1,428,650 in profits plus prejudgment interest.
The Latin Node case is the first FCPA enforcement action ever filed based entirely on pre-acquisition conduct that was unknown to the acquirer when the transaction closed. Mendelsohn, speaking at an FCPA conference, recently referred to this settlement as a "cautionary tale" of what can happen when an acquirer conducts "little, if any, [FCPA] due diligence." The entire value of eLandia’s $20 million-plus investment in the Latin Node business was wiped out following the discovery that sizeable portions of its operations were predicated upon business obtained through improper payments. The substantial implications of this settlement and the government’s recent focus on successor liability prosecutions more generally are discussed in detail in our 2009 Mid-Year FCPA Update.
To settle their respective liabilities, Novo Nordisk and AGCO each consented to the filing of a civil complaint by the SEC charging FCPA books-and-records and internal controls violations and entered into a deferred prosecution agreement with DOJ alleging a conspiracy to violate the books-and-records and wire fraud statutes. Novo Nordisk paid $18,030,145 in criminal and civil fines, disgorgement, and prejudgment interest, and AGCO paid $19,907,393. Both companies also consented to criminal forfeiture actions in Denmark, which is particularly remarkable in the case of AGCO. Although foreign prosecutors have, for the past several years, been increasingly asserting jurisdiction to prosecute companies based in their home country, AGCO is a U.S.-based corporation with a Danish subsidiary.
Taking UIC’s remedial efforts into account, the SEC issued a cease-and-desist order that required UIC to pay $337,679.42 in disgorgement and prejudgment interest, but it did not assess a civil penalty. Wurzel consented to the entry of a permanent injunction against future violations of the FCPA and agreed to pay a $35,000 civil penalty.
To settle the SEC investigation, Avery agreed to disgorge $318,470 in profits plus prejudgment interest and to pay a $200,000 civil penalty. DOJ closed its investigation without filing criminal charges. This resolution demonstrates that companies that self-disclose potential FCPA violations in one country may later find themselves compelled to conduct a wider FCPA compliance review of their operations in other regions, potentially resulting in the discovery of new issues.
Without admitting or denying the allegations in the complaint, Meza agreed to pay a $30,000 civil penalty and $26,707 in disgorgement and pre-judgment interest.
Jumet is scheduled to be sentenced on March 26, 2010. His plea agreement sets forth a proposed sentencing range of 87-108 months. Warwick’s arraignment is set for January 11, 2010.
2009 DOJ FCPA Opinion Procedure Releases
By statute, DOJ must provide a written opinion at the request of an "issuer" or "domestic concern" regarding whether DOJ would prosecute the requestor under the FCPA’s anti-bribery provisions for prospective conduct that the requestor is considering taking. DOJ publishes these opinions on its FCPA website, but only a party who joins in the request may authoritatively rely on it. The SEC does not itself issue FCPA opinion procedure releases, but has opted as a matter of policy not to prosecute issuers that obtain clean opinions from DOJ. After issuing three opinions in each of the past two years, DOJ issued only one release in 2009. The DOJ has now issued fifty-one opinions over the course of the FCPA’s thirty-two years.
FCPA Opinion Procedure Release 2009-01
DOJ released its only opinion of this year on August 3, 2009, in response to an inquiry from a U.S. medical devices company ("Requestor") represented by Gibson Dunn. In hopes of expanding its market base, Requestor met with a senior official of a government agency in a certain foreign country in which Requestor did not previously conduct business. The official informed Requestor that the foreign government planned to purchase a number of devices and subsidize their resale to domestic patients, but only after it evaluated and approved the devices. To facilitate the evaluation, the official asked Requestor to donate one hundred sample devices, along with any necessary accessories and support, to ten government medical centers around the country. The total value of the devices was estimated at approximately $1.9 million.
The Requestor represented to DOJ that the patients who would receive the sample devices would be selected by a working group of health care professionals in the country, including a physician employed by Requestor who had received FCPA compliance training, based on specific criteria, including economic need. Close relatives of officials in the senior official’s agency would be excluded from consideration, unless the particular official in question was not in a position of influence, and the relative was "more suitable" than other potential patients. The evaluation would be conducted by medical professionals based on objective criteria. And if the Requestor’s products were evaluated favorably, they would be deemed eligible for the subsidy program, but not promoted over the eligible products of Requestor’s competitors. Requestor had no reason to believe that the senior official would personally benefit from the donation of the sample devices.
DOJ concluded that Requestor’s proposed donation of sample devices fell "outside the scope of the FCPA in that the donated products will be provided to the foreign government, as opposed to individual government officials, for ultimate use by patient recipients selected in accordance with specific guidelines." Thus, DOJ stated that it would not pursue an enforcement action with respect to this proposed donation.
Collateral Civil Litigation
The rising tide of private litigation collateral to government enforcement actions that we have observed in previous FCPA updates showed no signs of abating in 2009. With increasing frequency, companies prosecuted by DOJ and the SEC are also finding themselves to the right of the "v" in subsequent, private civil actions. Although there is no private right of action under the FCPA, enterprising plaintiffs’ lawyers have managed to parlay alleged FCPA violations into a number of civil causes of action, including securities fraud actions, shareholder derivative suits, tort claims, and contract claims. In addition, frustrated former employees have claimed that they were terminated for blowing the whistle on potential FCPA violations. On the other hand, some companies that have been prosecuted by U.S. regulators have successfully brought suit against the individual officers who were allegedly responsible for the violations that gave rise to the enforcement actions.
Securities Fraud Actions
On July 23, 2009, an investment fund holding a 5% stake in Panalpina World Transport (Holding) Ltd. filed a complaint against the company in the U.S. District Court for the Southern District of Texas alleging violations of Sections 10(b) and 20 of the Securities Act, along with common law fraud and negligent misrepresentation claims, all in connection with the company’s withdrawal from Nigeria following revelations that the company concealed bribes allegedly paid to Nigerian officials in violation of the FCPA. It has been widely reported, dating back to mid-2007, that the Swiss freight forwarder is under investigation for alleged bribery of customs officials in numerous countries. Recent reports suggest that the company will resolve criminal FCPA charges with DOJ in the near future. In the civil litigation, Panalpina has filed a motion to dismiss the claims on forum non conveniens grounds.
After reaching record-shattering FCPA settlements with DOJ and the SEC in 2008, Siemens AG was sued by a class of shareholders in 2009. On December 4, 2009, the class filed a lawsuit in the U.S. District Court for the Eastern District of New York alleging that Siemens committed securities fraud by knowingly misleading and defrauding investors through statements and representations that the company would remain highly profitable after it was compelled to discontinue violations of the FCPA. According to the complaint, Siemens’s officers knew that the company’s profitability was dependent on illegal bribes, but nevertheless told investors in late 2007 and early 2008 that it would continue to meet publicly announced revenue and earnings projections. These alleged misrepresentations artificially inflated Siemens’s stock price, causing "billions of dollars in damages" to shareholders. Siemens has not yet responded to the complaint.
In addition to these new cases, there was movement in 2009 in several long-running securities actions filed in prior years. As reported in our 2009 Mid-Year FCPA Update, the 2004 securities fraud case against UTStarcom, Inc., which just settled criminal and civil FCPA charges with DOJ and the SEC, finally seems to be building some forward momentum. The plaintiff-shareholders’ complaint alleges that UTStarcom knowingly violated the FCPA by bribing officials in China, India, and Mongolia, triggering government investigations that culminated in the above-described settlements. After initially scheduling a class certification hearing for September 2009, the U.S. District Court for the Northern District of California stayed the case in July while the parties went to mediation. A settlement agreement did not materialize, however, and the plaintiffs again filed a motion seeking class certification in October. A hearing on the class certification motion is now scheduled for February 22, 2010.
Greater success with mediation was seen in the shareholders’ suit against Nature’s Sunshine Products, Inc. Originally filed in 2006, this lawsuit stems from allegations that the company and its officers violated the FCPA by failing to maintain adequate internal controls and disclose that the CEO approved an unlawful payment. In 2008, the U.S. District Court for the District of Utah ordered the parties to mediation, which took place in June 2009. The mediation was successful, and the Court issued an order granting preliminary approval to the $6 million settlement and settlement class on October 8, 2009. A final settlement approval hearing is scheduled to take place on February 9, 2010.
Shareholder Derivative Suits
The pending Texas state derivative suit arising from an alleged breach of fiduciary duties by current and former directors of Halliburton Co. and KBR, Inc., which was first filed in May 2009, recently completed a brief detour to federal court. The defendants removed the case in June under the Federal Officer Removal Statute, but on September 8, 2009, Judge Gilmore of the U.S. District Court for the Southern District of Texas granted the plaintiffs’ motion to remand the case back to the state system, finding that federal jurisdiction was inappropriate. The state complaint, which cites the defendants’ settlement of FCPA claims brought by DOJ and the SEC as evidence of a clear failure to oversee the companies’ operations, was reinstated in the district court in Harris County, Texas, on October 26, 2009.
A similar shareholder suit against BAE Systems PLC alleging breach of fiduciary duties and waste of corporate assets arising from the alleged payment of bribes to a Saudi government official in order to secure arms sale contracts, was dismissed by Judge Rosemary Collyer of the U.S. District Court for the District of Columbia in September 2008. Judge Collyer ruled that D.C. choice-of-law rules require that the case be decided by British law, under which the plaintiff, a city employees’ retirement system, lacked standing to bring a derivative suit. Plaintiffs appealed the dismissal to the United States Court of Appeals for the D.C. Circuit, which affirmed the District Court’s ruling on December 29, 2009.
Another appeal of a derivative suit dismissal is pending in California state court, where Superior Court Judge David Flinn dismissed a derivative suit filed on behalf of the Chevron Corporation in March 2009. As noted in our 2009 Mid-Year FCPA Update, Judge Flinn found little evidence that Chevron’s Board had acted improperly in determining that a lawsuit would not be in the company’s best interest, and therefore deferred to the Board’s decision in accordance with the business judgment rule. Plaintiffs filed an appeal of this dismissal in California’s First Appellate District on May 1, 2009. The case has been fully briefed and is awaiting oral argument.
Lawsuits Brought by Foreign Sovereigns and Business Partners or Competitors
On December 18, 2009, Aluminum Bahrain BSC ("Alba") filed a Racketeer Influenced and Corrupt Organizations Act lawsuit against Sojitz Corporation and its U.S. subsidiary, Sojitz Corporation of America, in the U.S. District Court for the Southern District of Texas. Alba, which is majority owned by a sovereign wealth fund of the government of Bahrain, alleges in its complaint that Sojitz paid almost $15 million in bribes to two Alba employees to obtain illegal discounts on aluminum. An initial pretrial and scheduling conference has been set for April 14, 2010. This case is the second such suit filed by Alba. The first suit, which was filed against Alcoa, Inc., in February 2008, has been stayed at the request of DOJ during its investigation of the improper payments alleged in that lawsuit. DOJ has not yet intervened in the Sojitz action.
In 2009, the case filed by the Republic of Iraq against ninety-one companies and two individuals for allegedly conspiring with the Saddam Hussein regime to make corrupt payments in connection with the United Nations Oil-for-Food Program began to gather steam. After much of the year was spent with the Iraqi government effecting service on the many defendants, on December 28, 2009, the U.S. District Court for the Southern District of New York entered an order proposed by the Iraqi plaintiffs and the majority of the defendants providing that the stipulating defendants will file a consolidated brief in support of their motion to dismiss in January 2010.
In a similar case, the United States Court of Appeals for the Second Circuit made a key decision in the 2006 case filed on behalf of a class of Iraqi citizens against AWB Limited, BNP Paribas, and various other defendants. The lawsuit, which alleges that the defendants violated the Racketeer Influenced and Corrupt Organizations Act and were unjustly enriched by misappropriating funds under the U.N. Oil-for-Food Program to pay bribes to Iraqi officials, was dismissed by the U.S. District Court for the Southern District of New York in September 2008 for lack of standing. On October 2, 2009, the Second Circuit affirmed this dismissal, concluding that the plaintiffs failed to allege an injury-in-fact fairly traceable to the defendants’ conduct.
Rejecting an attempt to target corrupt foreign officials more directly, in February 2009 the U.S. District Court for the Southern District of New York dismissed a November 2006 suit filed by RSM Production Corp. against Gregory Bowen, the former Deputy Prime Minister in charge of energy issues in Grenada, and various oil companies and executives. The suit alleges that Bowen solicited bribes from RSM, which RSM refused to pay. Other companies allegedly did pay the bribes, however, thereby tortiously interfering with RSM’s contracts. The District Court ruled that Bowen is immune from suit under the Foreign Sovereign Immunities Act and held that the remaining defendants were not the proximate cause of RSM’s loss. RSM filed an appeal on March 23, 2009, which remains pending before the U.S. Court of Appeals for the Second Circuit.
A motion to dismiss was also recently considered in the suit filed by Supreme Fuels Trading FZE against its competitor International Oil Trading Co. ("IOTC"). The complaint alleges that IOTC tortiously interfered with Supreme Fuels’ business relations and violated the Racketeer Influenced and Corrupt Organizations Act by bribing Jordanian officials to secure the only license for transporting fuel through the country to Iraq. On November 6, 2009, the U.S. District Court for the Southern District of Florida heard oral arguments that the complaint should be dismissed for lack of evidence, insufficient service and lack of personal jurisdiction, forum non conveniens, and inadequacy of the complaint. On December 18, 2009, the Court ordered limited discovery on personal jurisdiction issues.
Finally, on November 18, 2009, Argo-Tech Corp. settled a civil suit against Yamada Corp. and Yamada’s subsidiary, Upsilon International Corp. Argo-Tech had alleged in its complaint that Yamada and Upsilon, authorized distributors of Argo-Tech products in Japan, had breached their distributorship agreement by engaging in unlawful acts, including violations of the FCPA. The case was referred to mediation on September 30, 2009, and dismissed with prejudice upon settlement.
Shareholders and businesses were not the only ones filing civil complaints against companies alleged to have violated the FCPA in 2009. In two recent cases, former employees have filed suit alleging retaliation for reporting potential FCPA violations. In May 2009, Kimberly Lebron filed suit in the U.S. District Court for the Southern District of New York against AIG, Inc. Lebron alleges that her employment was terminated because she reported a potential FCPA violation to the company’s Global Anti-Corruption Officer. In particular, she claims to have reported that AIG sponsored a six-week paid vacation for an employee of the Korea Post, an entity owned and operated by the government of South Korea, in exchange for a $50 million investment by the Post in an AIG-managed fund. On October 19, 2009, the Court dismissed the claim for lack of subject matter jurisdiction because Lebron did not timely appeal the Department of Labor’s findings of fact in her original case before the Occupational Safety and Health Administration. Those findings became final and binding thirty days after they were issued.
Alcatel-Lucent has been less successful in its efforts to deflect allegations stemming from a 2007 lawsuit claiming that it unlawfully terminated the employment of Fadi Kanafani in retaliation for anonymously reporting potential FCPA violations to the company’s legal department. On September 18, 2009, the U.S. District Court for the District of New Jersey denied Alcatel-Lucent’s motion for summary judgment, holding that Kanafani alleged a prima facie case of retaliatory discharge and that the burden therefore shifted to Lucent to provide a legitimate reason for his termination. The Court has ordered the parties to hold a status/settlement conference on January 5, 2010.
Lawsuits Filed by Companies that Have Settled FCPA Actions
This past year also saw several companies accused of violating the FCPA take the offensive in collateral civil litigation. Almost one year after Siemens settled civil and criminal FCPA charges with DOJ and the SEC, it began settling cases against former executives for their roles in causing the violations that were the basis for the record-breaking enforcement actions. On December 2, 2009, former Chairman Heinrich Von Pierer, and his successor, Klaus Kleinfeld, agreed to pay €5 million and €2 million, respectively. Four other former Board members agreed to pay an additional €11 million combined. Three other former Board members have reached similar settlements in the past several years.
Settlements have not been so forthcoming in a similar case filed by Willbros International, Inc., against two former employees. Defendant James Tillery, who has also been criminally charged with violations of the FCPA and remains a fugitive, has not responded to Willbros’s complaint. Defendant Paul Novak, who pleaded guilty to criminal FCPA charges on November 12, 2009, filed a motion to dismiss, which was denied on June 17, 2009.
Additional opportunities for U.S. corporations to initiate their own FCPA-related litigation may be on the horizon. As reported in the 2009 Mid-Year FCPA Update, H.R. 2152, the Foreign Business Bribery Prohibition Act of 2009, would create a private right of action allowing entities subject to the FCPA to sue foreign concerns not subject to the FCPA for actions that would constitute FCPA violations if the jurisdictional element of the statute were satisfied. There has been no action on this legislation since it was referred to the Subcommittee on Crime, Terrorism, and Homeland Security in June 2009.
To Disclose or Not To Disclose? That is the Question.
Echoing a key message that U.S. regulators have articulated during the past several years, senior personnel at both DOJ and the SEC continued to encourage companies in 2009 to self-report potential FCPA violations that they discover through internal investigations. For example, Assistant Attorney General Lanny Breuer stated recently: "I strongly urge any corporation that discovers an FCPA violation to seriously consider making a voluntary disclosure and always to cooperate with the Department." He reiterated that "a company will receive meaningful credit for that disclosure and that cooperation" and stated that "the Department’s commitment to meaningfully reward voluntary disclosures and full and complete cooperation will continue to be honored in both letter and spirit." Earlier that day, Associate Director Cheryl Scarboro, one of the main FCPA enforcers at the SEC, similarly suggested that companies that voluntarily disclose violations will receive a real benefit.
To be sure, a company that voluntary discloses a potential FCPA violation to DOJ and the SEC will be better situated than one that otherwise finds itself across the table from the government having not disclosed the conduct. DOJ’s Principles of Federal Prosecution of Business Organizations, the SEC’s Seaboard Memorandum, and the U.S. Sentencing Guidelines all compel consideration of a company’s disclosure, or lack thereof, in making charging, settlement, and sentencing decisions. And our survey of enforcement actions from the past five years confirms that DOJ rarely offers a non-prosecution agreement to a settling company that has not reported the allegedly unlawful conduct to DOJ. Moreover, as SEC Assistant Director Brockmeyer pointed out at a recent District of Columbia Bar roundtable on the FCPA, the full benefits of self-disclosure are difficult to substantiate empirically because information regarding "no actions" against companies that self-report is not made public. Thus, practitioners will always under-calculate the true value of voluntary disclosure.
On the other hand, there is substantial debate about just how "tangible" the benefits of voluntary disclosure truly are. For example, the SEC often takes the position that disgorgement of ill-gotten profits – typically the largest component of a monetary resolution – is non-negotiable regardless of disclosure. And the past five years of enforcement actions suggest that the benefits of reporting violations to the government are nearly impossible to predict or quantify. Although some corporate defendants that self-reported misconduct have certainly received relatively lenient treatment, it is not clear that voluntary disclosure was the reason for any particular settlement term.
Although it is certain that companies do receive some benefit for self-reporting FCPA violations, the real question is whether the company considering a voluntary disclosure is better off for having made the disclosure, which is not necessary one-and-the-same. Because voluntary disclosure makes the government aware of alleged improper conduct that it otherwise may have never discovered on its own, the likelihood of the government uncovering the misconduct through other means, such as a whistleblower, foreign government investigation, tip from a competitor or business partner, or industry-wide investigation, is a critical factor in determining whether to make a voluntary disclosure. Other factors to be considered when making a disclosure decision, which Breuer has acknowledged is often a difficult one, include the following:
Given the multitude of factors to consider when making a voluntary disclosure decision, it is often challenging to make such a significant decision with any degree of confidence that a particular course of action is the right one. This task is made even more difficult by the uncertainty of obtaining any particular benefits for disclosing. At the very least, however, it is important to make such a critical decision only after carefully considering and weighing all of the relevant factors. We have advised multiple clients in connection with voluntary disclosure decisions and have developed substantial analytics associated with those decisions.
Throughout 2009, U.S. authorities charged with enforcing the FCPA continued to step up their efforts to combat corruption by aggressively prosecuting individuals and entities that participated in schemes to bribe foreign officials. As this culture of aggressive enforcement becomes increasingly entrenched, new enforcement trends along the lines of those that we saw in 2009 will continue to emerge. For additional analysis and guidance, we encourage you to participate in our upcoming complimentary FCPA webcast in late January, which is a must-attend program for directors, senior executives, in-house counsel, compliance personnel, finance and audit personnel, and any other employees with responsibility for anti-corruption compliance. For a detailed look at the enforcement activities of foreign anti-corruption regulators, please watch for Gibson Dunn’s upcoming client alert on foreign international anti-corruption enforcement activity in 2009.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 65 attorneys with FCPA experience, including a number of former federal prosecutors, spread throughout the firm’s domestic and international offices. Joe Warin, a former Assistant U.S. Attorney, currently serves as FCPA counsel for the first non-U.S. compliance monitor and recently completed his compliance consultancy for Statoil A.S.A. pursuant to its DOJ and SEC FCPA enforcement action. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
F. Joseph Warin (202-887-3609, [email protected])
Daniel J. Plaine (202-955-8286, [email protected])
Judith A. Lee (202-887-3591, [email protected])
David P. Burns (202-887-3786, [email protected])
Jim Slear (202-955-8578, [email protected])
Brian C. Baldrate (202-887-3717, [email protected])
Michael S. Diamant (202-887-3604, [email protected])
John W.F. Chesley (202-887-3788, [email protected])
Patrick F. Speice, Jr. (202-887-3776, [email protected])
Joel M. Cohen (212-351-2664, [email protected])
Lee G. Dunst (212-351-3824, [email protected])
Mark A. Kirsch (212-351-2662, [email protected])
Jim Walden (212-351-2300, [email protected])
Alexander H. Southwell (212-351-3981, [email protected])
Lawrence J. Zweifach (212-351-2625, [email protected])
Nicola T. Hanna (949-451-4270, [email protected])
J. Scot Kennedy (949-451-3805, [email protected])
Eric Raines (949-451-4050, [email protected])
Bryan E. Smith (949-451-4055, [email protected])
Debra Wong Yang (213-229-7472, [email protected]),
the former United States Attorney for the Central District of California,
Michael M. Farhang (213-229-7005, [email protected])
Douglas M. Fuchs (213-229-7605, [email protected])
Marcellus A. McRae (213-229-7675, [email protected])
Melissa Epstein Mills (213-229-7314, [email protected])
© 2010 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.