May 17th, 2012

The Donald Goes Off And Conflates The Issues

Business mogul Donald Trump (who in recent years flirted with a Presidential run) recently went off on the Foreign Corrupt Practices Act on CNBC’s Squawk Box program. (See here for the video – the FCPA portion begins at approximately minute 14). Joining Trump in the discussion was Tom Stemberg of Highland Capital Partners. You will hear during the program views that FCPA enforcement has become “absolutely crazy,” and that the FCPA is a “horrible law.”

As with most post-News Corp. and post-Wal-Mart commentary, Trump conflates two issues: (1) the FCPA as passed by Congress and (2) the FCPA as enforced by the DOJ and SEC. Many of the concerns Trump and Stemberg raise were addressed by Congress when Congress elected not to capture payments to “foreign officials” in connection with ministerial or clerical acts. For more on this issue, see this previous post “Understanding Wal-Mart.”

You will also hear during the Squawk Box program a suggestion that instead of prohibiting improper payments, the FCPA should merely require disclosure of such payments. I do not agree with the suggestion, but it is not an outlandish suggestion. Indeed, as discussed in several prior posts (see here for instance) in the mid-1970′s Congress considered two main competing legislative proposals to deal with the so-called foreign corporate payments problem: prohibition vs. disclosure.

The disclosure regime was favored by the administration of Gerald Ford. President Ford’s point person on the issue was Elliot Richardson (Secretary of Commerce) who, in a letter to Senator William Proxmire (a Congressional leader on the issue), summarized the work of the Ford Task Force as follows. “The Task Force has concluded that the criminalization approach would represent little more than a policy assertion, for the enforcement of such a law would be very difficult if not impossible. [...] The criminal approach would represent poor public policy. [...] At the same time, the Task Force perceived several very positive attributes of systematic disclosure.” President Ford stated as follows. “The reporting requirement covers a broad range of payments relative to government transactions as well as political contributions and payments made directly to foreign public officials. By requiring reporting of all significant payments, whether proper or improper, made in connection with business with foreign government, the legislation will avoid the difficult problems of definition and proof that arise in the context of enforcement of legislation that seeks to deal specifically with bribery and extortion abroad.”

The disclosure regime was rejected by Congressional leaders. A Senate Report stated as follows. “The Committee concluded that an outright prohibition would be at least as feasible to enforce as any meaningful disclosure requirement. [...] Clearly, in order to enforce such a disclosure requirement and apply sanctions for failure to file reports, it would be necessary to prove that the undisclosed payment was actually made, and that it was made with an improper purpose. Thus, the same evidence necessary to prove a violation of a direct prohibition would have to be marshalled in order to enforce a disclosure statute. Accordingly, the Committee concluded that a disclosure approach has at least the same enforcement problems inherent in the direct prohibition approach and none of its advantages.”

Jimmy Carter (who favored a prohibition regime over a disclosure regime) defeated Ford in the 1976 election and the rest is history.

Posted by Mike Koehler at 5:00 am. Post Categories: FCPA Reform • Legislative History • Permits / Licenses / Customs / Tax

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May 16th, 2012

Judge Selna Rejects State Actor Theory

Prior posts (here, here, and here) discussed a motion to suppress and a motion to dismiss brought by various defendants in the Carson matter. Given the recent guilty pleas of Stuart Carson and Hong Carson (see here), as a practical matter the motions only affected the remaining defendants – Paul Cosgrove and David Edmonds.

In the motion to suppress, defendants moved to suppress statements which they made to attorneys from Steptoe & Johnson during the course of Steptoe’s internal investigation on behalf of Control Components, Inc. and its parent IMI plc. The theory of the motion was that the Steptoe attorneys were part of the Government’s investigation and therefore state actors.

Judge Selna rejected the state actor theory – see here for his tentative order. Judge Selna stated as follows. “As a matter of fact finding, there is no basis to conclude on the basis of events that transpired prior to the interviews or in the aftermath that the Steptoe lawyers were acting as agents of the Government.” The tentative order states as follows. “Steptoe contacted the Department of Justice. [...] There is no evidence that the Government had any input in the determination of which employees to interview or what they should be asked. Although [Mark] Mendelsohn [former DOJ FCPA Unit Chief] was advised of the first day of interviews via e-mail, he did not provide guidance or input for the next day’s interviews, and put off discussing the ‘specifics’ of the interviews until the following week.”

Judge Selna further stated as follows. “The facts here do not establish more than a unilateral determination on the part of CCI and its parent to cooperate with the Government. Surely, it was in CCI’s interest and a legitimate activity to investigate potential criminal conduct in its business operations. The Government had no involvement with the Defendants’ interviews, and it cannot be said that Steptoe’s action were so intertwined with the Government that those interviews may be ‘fairly treated’ as the conduct of the Government. [...] The record is clear that CCI through its parent IMI had made a decision to conduct an internal investigation before Steptoe contacted the Government.”

*****

Judge Selna also issued a tentative ruling (here) denying defendants’ motion to dismiss the indictment “on a series on individual grounds upon which they claim to have been denied due process and on the basis of the cumulative effect of these individual deficiencies.”

Judge Selna noted that “a number of claims [were] predicated on the theory that Steptoe & Johnson … was the agent of the Government and joint investigator” and that such issues were properly resolved in the above-described tentative order.

As to the Defendants’ assertion that the FCPA and Travel Act lacked clarity, Judge Selna stated that “this is simply a cameo reprise of their earlier attacks on these statutes which the Court addressed at length, and rejected.”

As to the Defendants’ theories regarding denial of access to witnesses, missing documents, and foreign documents, Judge Selna concluded that none of these issues were “attributable to unilateral government action.” As to Brady issues, Judge Selna concluded that “the Government has used its reasonable efforts to secure materials in the possession of CCI.”

*****

During Monday’s hearing on the motions, Judge Selna indicated that he will soon be issuing formal denials of the motions. The remaining defendants in the Carson matter – Paul Cosgrove and David Edmonds – are scheduled to stand trial in late June.

Posted by Mike Koehler at 5:06 am. Post Categories: David Edmonds • Internal Investigation Issues • Paul Cosgrove

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May 15th, 2012

Hit And Misses

Recently on his Forbes column (here), Howard Sklar paused to rethink some of his FCPA positions based on my recent post (here) and this recent article by former Attorney General Michael Mukasey. On the theory (perhaps presumed) that others derive value from FCPA Commentariat (that’s Howard’s term, not mine) debates, this post discusses Howard’s hits and misses and encourages him to keep rethinking.

I agree with Howard (in fact, I know from my prior FCPA practice experience) that DPAs and NPAs seldom tell the complete story. This truism seems to give Howard comfort that perhaps all DPA and NPAs represent actual, provable FCPA violations notwithstanding the conduct actually set forth in the resolution documents. However, this truism causes me discomfort because, based on my experience, for every aggravating fact left out of the resolution documents there are also frequently two mitigating facts left out of the resolution documents.

Howard is spot on though when he says that “the DOJ must realize that the information they disclose forms the enforcement record they have to defend.” Criticism as to the actual facts and conduct the DOJ sets forth in an NPA or DPA - and the resulting analysis as to the ultimate issue of whether the conduct actually violates the FCPA – are problems entirely of the DOJ’s own making.

Why?

Because the DOJ encourages those subject to the FCPA to look to these documents as evidence of conduct violating the FCPA and for guidance as to enforcement theories. In “The Facade of FCPA Enforcement” (here at pgs. 998-1000) I called this the “absurdity of FCPA caselaw.” For instance in this GAO report (Appendix III), the DOJ explained, in its view, why NPAs/DPAs ”are beneficial” including that “DPAs and NPAs benefit the public and industries by providing guidance on what constitutes improper conduct.” Furthermore, in the aftermath of the November 2010 Senate FCPA hearing, the DOJ was asked various ways about FCPA uncertainty and lack of guidance. The DOJ responded (see here) that it “provides clear guidance to companies with respect to FCPA enforcement through a variety of means” including “charging documents, plea agreements, deferred prosecution agreements and non-prosecution agreements, press releases, and relevant pleadings and orders.” The DOJ stated that “these documents are lengthy and detailed.” You might want to re-read the Lufthansa Technik NPA (here) at this point – the last words that should enter your brain are lengthy and detailed.

Howard next admits to his “true bias” (as a former SEC attorney) and is confident in his ability to size up people and is confident that prosecutors would never bring bad cases even if the “asynchronous information can make it seem that way.” I’ll let Judge Richard Leon and Judge Alex Kozinski respond to that issue. When granting the DOJ’s motion to dismiss the Africa Sting cases, Judge Leon spoke of how prosecutors can become ”so convinced of the righteousness of their position.” (See here for the prior post). As noted in this recent post, the Ninth Circuit recently addressed the DOJ’s “trust us” position and stated as follows. “The government assures us that, whatever the scope of the CFAA, it won’t prosecute minor violations. But we shouldn’t have to live at the mercy of our local prosecutor. [...] And it’s not clear we can trust the government when a tempting target comes along.”

Howard next asserts that despite the temptation DOJ prosecutors may have to resolve cases via an NPA vs. doing nothing, he “suspects that is less of a problem that you’d think.” Credible evidence suggests otherwise. See e.g., Peter Spivak & Sujit Raman, Regulating the ‘New Regulators’: Current Trends in Deferred Prosecution Agreements, 45 Am. Crim. L. Rev. 159, 176 (2008) (“we heard from colleagues in the defense bar of prosecutors who, in their haste to compel the company’s cooperation in pursuit of individuals, have pressed the entity to enter into a diversion agreement before any particular’s guilty could definitely be established). Even Mark Mendelsohn (former DOJ FCPA unit chief) has indicated that a ”danger” with NPAs and DPAs ”is that it is tempting” for the DOJ “to seek to resolve cases through DPAs or NPAs that don‟t actually constitute violations of the law.” See Corporate Crime Reporter, Sept. 13, 2010.

The clincher, in Howard’s mind, that NPAs and DPAs have never been used to resolve cases that do not actually represent FCPA violations seems to be this – he has not heard any complaint “from any practitioners, on or off the record, in public or in private” of this being the case.

There is a very simple explanation for this. These resolution vehicles muzzle the companies and their defense counsel. The following template clause (from the recent BizJet International DPA – here) is common.

Public Statements by BizJet

BizJet expressly agrees that it shall not, through present or future attorneys, officers, directors, employees, agents or any other person authorized to speak for BizJet make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by BizJet set forth above or the facts described in the attached Statement of Facts. Any such contradictory statement shall, subject to cure rights of BizJet described below, constitute a breach of this Agreement and BizJet thereafter shall be subject to prosecution as set forth in [this] Agreement. The decision whether any public statement by any such person contradicting a fact contained in the Statement of Facts will be imputed to BizJet for the purpose of determining whether they have breached this Agreement shall be the sole discretion of the Department.

No FCPA lawyer representing a company party to an FCPA NPA or DPA is going to risk breaching the agreement just to make a splash on the FCPA conference circuit.

Another template clause in such resolution vehicles (as in the recent BizJet DPA) is the requirement that the company “shall first consult” with the DOJ to see if it has any objection before the company issues a press release or holds a press conference in connection with the resolution.

As noted in this prior post, when the U.K. Serious Fraud Office inserted such language into its Innospec settlement, it received a lashing from Lord Justice Thomas who stated as follows. “It would be inconceivable for a prosecutor to approve a press statement to be made by a person convicted of burglary or rape; companies who are guilty of corruption should be treated no differently to others who commit serious crimes.”

Finally, the least persuasive of Howard’s points in favor of NPAs and DPAs is that without such agreements “our lowered enforcement would reflect in international efforts as well” and that Russia ”would certainly not take its responsibilities seriously – if it saw reduced enforcement in the U.S.”

I take Howard’s point and on this issue I largely blame civil society and monitoring organizations (who do good work in other areas) but put out misleading report cards when it comes to enforcement statistics. For instance, as noted in this prior post concerning the OECD’s Phase 3 Review of the U.S., one of the many ironies of the review was that while loudly praising the U.S. for its “high level” of enforcement, the Report quietly criticized and questioned many of the policies and enforcement theories which yield the “high level” of enforcement. More to the point, the OECD noted ”one of the reasons for the impressive FCPA enforcement record in the U.S.” is the use of NPAs and DPAs, yet the report noted that these agreements are subject to little or no judicial scrutiny.

It is plainly obvious (as noted in this prior post) that a reason (there are other reasons as well noted in the post) for the divergent level of enforcement in OECD countries is due to the fact that, to the best of my knowledge, only the U.S. has three options in “prosecuting” such cases: charge, don’t charge, or use an NPAs or DPA. Given the, what at times seems like a new “global arms race” to see which country can move up the enforcement score cards, other countries – most notably the U.K. – want these agreement as well. However, this is all the more reason to get things right in this country least our “facade of FCPA enforcement” be further exported. Quality should matter more than quantity when it comes to criminal law enforcement.

Keep rethinking Howard.

Posted by Mike Koehler at 5:04 am. Post Categories: BizJet International • Deferred Prosecution Agreements • Lufthansa Technik • Non-Prosecution Agreement • OECD

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May 14th, 2012

Noteworthy

Recently Paul Weiss released “Overview of the Foreign Corrupt Practices Act: A Practical Guide for Businesses” (see here). Nothing noteworthy there as law firms frequently market FCPA services.

Nor are the below snippets from the Paul Weiss guide noteworthy as law firms (and others in FCPA Inc.) frequently use the current aggressive FCPA enforcement environment, the broad interpretations by the enforcement agencies, and the lack of government guidance in marketing efforts.

“Although Congress indicated its intent to exclude certain widespread practices from the scope of the Act, it is often difficult to determine where the lines are to be drawn.”

“In addition to pushing the boundaries of jurisdiction for substantive FCPA charges, U.S. enforcement officials have employed other tools to target international bribery with some link to the United States.”

“U.S. enforcement personnel have interpreted this language [the FCPA's "obtain or retain business" element] broadly to encompass any business purpose, and thereby to apply to payments made to avoid or reduce customs, income or other taxes, to bypass customs, health, or other inspections, or otherwise to change the enforcement or application of laws or regulations.”

“[I]t is not necessarily easy to identify the dividing line between a permitted facilitating payment and a prohibited bribe …”.

“In addition to the severe penalties that can apply to violations, there are very good reasons why issuers and U.S. companies have committed significant resources to FCPA compliance in recent years. The language of most of the relevant FCPA provisions is broadly phrased and broadly interpreted by the DOJ and SEC. Neither agency has issued regulatory or other material that provides “bright lines” or other clear guidance in interpreting the Act, and very few issues of interpretation have been litigated. By and large, business entities are extremely reluctant to litigate FCPA enforcement cases, and virtually all DOJ and SEC enforcement cases against business entities are settled.”

What is noteworthy about the Paul Weiss guide is it authors.

Mark Mendelsohn is listed as the lead author and the author group also includes Walter Ricciardi and Bruce Searby.

Mendelsohn’s Paul Weiss bio page (here) states as follows. “Prior to joining Paul, Weiss, Mr. Mendelsohn served as the deputy chief of the Fraud Section of the Criminal Division of the United States Department of Justice (DOJ), and is internationally acknowledged and respected as the architect and key enforcement official of DOJ’s modern Foreign Corrupt Practices Act (FCPA) enforcement program. As deputy chief of the Fraud Section from 2005 to 2010, Mr. Mendelsohn was responsible for overseeing all DOJ investigations and prosecutions under the FCPA …”. [...] During his tenure administering the DOJ’s FCPA enforcement program, DOJ brought more than 50 prosecutions against corporations for violations of the FCPA and related offenses, resulting in more than $1.5 billion in criminal penalties. During that same period, DOJ brought approximately 80 prosecutions against individuals.”

Ricciardi’s Paul Weiss bio page (here) states as follows. “Prior to joining Paul, Weiss in June 2008, Mr. Ricciardi was the Deputy Director of the SEC’s Division of Enforcement, where he supervised many of the Commission’s most significant investigations related to financial fraud, FCPA, insider trading and broker-dealer and mutual fund compliance issues.

Searby’s Paul Weiss bio page (here) states as follows. “Prior to joining Paul, Weiss, Mr. Searby served as an assistant United States attorney in the Central District of California as a member of the Public Corruption and Civil Rights Section and the Major Frauds Section. While at the U.S. Attorney’s Office, he worked on several cases involving violations of the Foreign Corrupt Practices Act (“FCPA”). Mr. Searby was co-lead counsel on the first case brought under the FCPA in the entertainment industry, in which both defendants were convicted at a jury trial in late 2009.”

Posted by Mike Koehler at 5:06 am. Post Categories: FCPA Inc.

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May 11th, 2012

Friday Roundup

Shining a light on monitor reports, the Wal-Mart effect, when the dust settles, and Alberto Gonzalez joins the club, it’s all here in the Friday roundup.

Shining A Light on Monitor Reports

As Willkie Farr & Gallagher notes in this recent client alert, although the imposition of compliance monitors in FCPA enforcement actions is less frequent than it used to be, “companies that do receive monitors must now be concerned that their reports may be publicly disclosed.” This is due to a recent decision (here) in SEC v. American International Group. Inc. (D.D.C.) in which Judge Gladys Kessler granted journalist Sue Reisigner’s Motion for Leave to Intervene and for Access to Monitor’s Reports.

In 2004, the SEC filed a complaint against AIG alleging violations of the federal securities laws. Under the terms of the settlement consent order, AIG, among other things, agreed to retain an independent consultant, selected by the Fraud Section of the DOJ and acceptable to the SEC to review various AIG transactions. At the conclusion of the consultant’s review, the consultant was required to provide copies of reports of his or her findings to the SEC and DOJ. Thereafter, the SEC and AIG filed a joint motion for clarification stating that it was not the intent of the parties that information provided by AIG to the independent consultant be disseminated or available to anyone outside of the entities identified in the consent order. The court granted the motion.

Enter Sue Reisinger who filed Freedom of Information Act requests requesting disclosure of the consultant reports. Her requests were denied citing the court’s order restricting dissemination of the reports. Thereafter, Reisinger filed a Motion to Intervene and for Access to Monitor’s Reports. The SEC and AIG filed a joint opposition. Reisinger argued that “the Court should order the SEC to make the IC Reports publicly available on two grounds: (1) a First Amendment right to access to judicial proceedings and (2) a common law right of access to judicial records.

As to the second issue, the key issues were whether the IC reports are a “judicial record” and if so, competing interests in publicity and secrecy. Judge Kessler concluded that the IC reports “are relevant to the judicial function and therefore are properly considered judicial records.” Judge Kessler stated as follows. “The Reports may provide information leading the SEC to return to this Court to secure further relief. In other words, the Consent Order empowers the Court to retain jurisdiction for the purposes of enforcing the Consent Order, including compliance with the IC Reports.” In addition, Judge Kessler concluded that “the central role the IC Reports play in the operation of the Consent Order makes them precisely the kind of documents that must be open to the public in order for the federal courts ‘to have a measure of accountability and for the public to have confidence in the administration of justice.’” As to the balancing of interests, Judge Kessler stated that the public’s interest in favor of disclosure of the IC Reports “is overwhelming” and that “there is no question that the public interest far outweighs AIG’s or the SEC’s interest in confidentiality …”.

As to the first issue, Judge Kessler concluded that there is no First Amendment right of access to the IC Reports because the SEC “brought a civil, not criminal, action against AIG” and “Reisinger has not even attempted to make the requisite showing that ‘such access has historically been available.” As the Willkie client alert notes however, given that Judge Kessler’s analysis as to this first issue focused on the civil nature of the proceedings, it leaves “the door open for an additional argument that the First Amendment would mandate public disclosure of corporate monitor reports in the context of a criminal settlement.”

As to monitors, Professor Brandon Garrett (University of Virginia Law School) and the Corporate Crime Reporter are seeking information on certain corporate monitors in the FCPA context and otherwise – see here.

The Wal-Mart Effect

Wal-Mart is clearly not the only company subject to the FCPA that needs licenses, permits and the like when doing business in Mexico. It is likely that Wal-Mart’s potential FCPA exposure has caused sleepless nights for many company executives doing business in Mexico and the general region.

The FCPA is also on the minds of investors of other companies doing business in Mexico – such as Kimco Realty Corporation (here).

In a recent earnings call, a UBS analyst asked the following question. “I hate to even ask this question. But I’m wondering if you have any comments on the Wal-Mart allegations down in Mexico and if Kimco had conducted any reviews, maybe not so much of your local Mexico employees. Maybe my concern is more toward JV partners to make sure that they’re operating to the same high ethical standards that Kimco has already operated toward.”

David Henry (Kimco Realty Corporation – Vice Chairman, President, CEO) answered as follows. “Obviously, we anticipated this question, so permit me to be very, very specific in a response, and I’d like to make the following points. One, the extent of what we know about the Wal-Mart actions is what we read in the New York Times article, the same way you did. We are not aware of any Wal-Mart improprieties with respect to any of our Mexican properties or any of our Mexican operating partners. The acquisitions and development of the Wal-Mart projects in our portfolio occurred in 2005 or later, and this is a year after the activities that were described in the article occurred. With respect to all of our Wal-Mart projects, the developer obtained the building permit, not Wal-Mart. We employ a third-party consultant to oversee the construction process. There’s a construction manager in many cases right on site that reviews and approves every payment we make on these development projects. We also have our own Kimco employees provide asset management and oversee the project construction and approve the individual payments. As part of our normal operating procedures, all of our local Mexican development partners execute letters certifying to us they are not aware of any kind of improper payments. We have a very comprehensive FCPA policy, foreign corrupt practices act policy, at Kimco that includes extensive training for all of our employees that are directly or indirectly involved with any international projects. The training includes members of senior management and our Board are taken through this training on an annual basis. And then I just have to zoom up to the highest level. From the very beginning, when we went to both Canada and Mexico and then South America, we really tried to set the right tone because we’ve always emphasized that we are a public company and as a public company we adhere to the highest ethical standards and we expect that all of our local operating partners to also meet those standards. So that gives you the highest level of flavor I can give you at this point.”

When the Dust Settles

In 2010, Daimler (and certain of its subsidiaries) resolved a wide-ranging FCPA enforcement – see here for the prior post.

As to conduct in Russia, the DOJ also filed a two count criminal information against DaimlerChrysler Automotive Russia SAO (“DCAR”), a “Moscow-based, wholly-owned subsidiary of Daimler” that “sold Daimler spare parts, assisted with the sale of vehicles from various Daimler divisions in Germany, including in particular its overseas sales division (“DCOS”), to government customers in [Russia], and also imported Daimler passenger and commercial vehicles into Russia for sale to customers and distributors.”

The charged conduct focused on Daimler’s, DCAR’s and DCOS’s relationships with: “the Russian Ministry of Internal Affairs (“MVD”) a department and agency of the Russian government principally responsible for police, militia, immigration and other functions” including supervising the “Russian traffic police; “the Special Purpose Garage (“SPG”) an ‘instrumenality’ of the Russian government” whose employees were “foreign officials” under the FCPA; “Machinoimport a Russian government-owned and controlled purchasing agent for the City of Moscow,” an “instrumentality of the Russian government” whose employees were “foreign officials” under the FCPA; and “Dorinvest a Russian government-owned and controlled purchasing agent for the City of Moscow,” an “instrumentality of the Russian government” whose employees were “foreign officials” under the FCPA.

The information charged that “Daimler, through DCAR, made improper payments at the request of Russian government officials or their designess in order to secure business from Russian government customers.” Among other things, the information charges that: “between 2000 and 2005″ Daimler’s sale of vehicles to Russian government customers was approximately “€64,660,000″ and that “in connection with these vehicle sales, DCAR and Daimler made over €3 million in improper payments to Russian government officials employed at their Russian governmental customers, their designess, or to third-party shell companies that provided no legitimate services to Daimler or DCAR with the understanding that the funds would be passed on, in whole or in part, to Russian government officials.”

In this recent article, The Moscow Times reports that Russian “investigators have reportedly dropped inquiries against military officials and employees of four companies implicated in a 2010 corruption case involving kickbacks for state purchases of Mercedes automobiles.”

For more on the dynamic of what I’ve called “when the dust settles” – see this prior post.

Alberto Gonzalez Joins the Club

What club you ask?

The former Attorney General who has taken a great interest in the FCPA club. Former Attorney General Michael Mukasey’s FCPA reform activities are well known, this prior post discussed a recent FCPA speech by former Attorney General John Ashcroft, and in this recent article in Corporate Counsel, Gonzalez and his co-authors forecast the future of FCPA enforcement.

*****

A good weekend to all.

Posted by Mike Koehler at 5:06 am. Post Categories: Daimler • Monitor • Permits / Licenses / Customs / Tax • Russia • Wal-Mart

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