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Analyzing Allianz

Wednesday, December 19th, 2012

Earlier this week, $12.3 million flowed into the U.S. treasury.

Why?

Because a German company used to have shares and bonds registered with the SEC. The German company had a German subsidiary that invested in an Indonesian joint venture. The Indonesian joint venture made, without any apparent knowledge or approval of the German company, alleged improper payments to employees of state-owned entities in Indonesia between seven to eleven years ago. When the German company learned of suspicious account activity at the Indonesian joint venture seven years ago, it directed the joint venture to close the suspicious account. The joint venture agreed to close the account and stop making the payments, even though it continued to make the payments through 2008.

The above paragraph pretty much explains the SEC’s Foreign Corrupt Practices Act enforcement action earlier this week against Allianz SE , a German company engaged in property and casualty insurance, life and health insurance, and asset management businesses around the world.

From November 2000 to October 2009, Allianz’s American Depositary Shares and bonds were registered with the SEC and it was thus an “issuer” under the Foreign Corrupt Practices Act.

In 1989 PT Asuransi Allianz Utama Indonesia (“Utama”) was formed as a joint venture. JV members included Allianz of Asia-Pacific and Africa GmbH (AZAP - a German company and a wholly-owned subsidiary of Allianz), PT Asuransi Jasa Indonesia (“Jasindo”) (“an Indonesian state-owned entity) and PT Asuransi Wuwungan. According to the SEC, during the relevant time period, AZAP owned 75% of Utama.

In the administrative cease and desist order (here) announced (here) earlier this week, the SEC found improper payments by Utama to employees of state-owned entities in Indonesia in order to obtain or retain business. The order also found that the payments were improperly recorded and that Allianz failed to devise and maintain a sufficient system of internal controls.

The SEC order states, in summary, as follows.

“These proceedings arise out of violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Allianz SE (“Allianz” or the “Company”), through its Indonesian majority-owned subsidiary, PT Asuransi Allianz Utama (“Utama”). Between 2001 and 2008, Utama managers made improper payments to employees of state-owned entities in Indonesia in order to obtain and retain business. Allianz learned of the improper payments from two complaints made several years apart. The first complaint was submitted in 2005 alleging significant misconduct, including unsupported payments to agents. A subsequent audit of Utama’s accounting records uncovered that managers at Utama were using “special purpose accounts” to make illicit payments, many to government officials, in order to secure business in Indonesia. Despite the audit, the conduct continued. The second complaint was lodged in 2009 to Allianz’s external auditors and alleged that Allianz created illicit off-the-books accounts. In response, Allianz began an internal investigation. The Commission staff opened an investigation in April 2010 after receiving an anonymous complaint of possible FCPA violations. The investigation determined that from at least 2001 through December 2008, the Utama managers, with the assistance of others in the Indonesian office, made payments to employees of state-owned entities in Indonesia to procure or retain insurance contracts related to large government projects in Indonesia. As a result of improper payments of approximately $650,626 to agents and employees of state-owned entities and others, Allianz realized $5,315,649 in profits. The payments were improperly recorded as legitimate transaction costs, thereby causing Allianz’s books and records to be inaccurate. Allianz failed to devise and maintain a system of internal controls sufficient to provide reasonable assurances to detect and prevent such payments.”

The order contains the following additional facts.

“In 1989, Allianz established Utama and continued the practice of using special purpose accounts for paying commissions to agents that generated business for Allianz. However, in February 2001, Indonesian Agent, an agent for Utama, Utama CEO 1 [a German citizen who was the Utama CEO from 1998 to 2001] and Utama’s Chief Financial Officer opened a separate, off-the-books account in the Indonesian Agent’s name (the “Agent special purpose account”). The Agent special purpose account was used to make improper payments to employees of Indonesian state-owned entities and others for the purpose of obtaining and retaining insurance contracts. In February 2001, Indonesian Agent and Utama CEO 1 executed a “Paying Agency Agreement” that set up the scheme to make the payments to employees of state-owned entities. This agreement established the off-the-books account that served as a slush fund to make bribe payments to foreign officials and others as instructed by Utama.”

Under the heading “Utama’s 2001-2005 Improper Payments” the order states, in pertinent part, as follows.

“During the period 2001 to 2005, Utama Marketing Manager [an Indonesian citizen] made payments from the Agent special purpose account to account introducers employed by state-owned entities to secure insurance contracts on large government projects in Indonesia. Utama Marketing Manager received approval from Utama management to use the Agent special purpose account for improper purposes. Utama CEO 2, the CEO from 2003-2006, was aware of the Agent special purpose account and the improper payments to foreign officials. [...] The improper payments made to foreign officials were disguised in the Utama insurance contracts as “overriding commissions.” Despite the fact that Allianz has a majority share of Utama and consolidated the subsidiary’s accounts into its own books and records, Utama’s accounting system was maintained in Indonesia and Allianz did not have effective controls over the accounting. Allianz did not have the ability to access Utama’s accounting system and, therefore, did not detect the movement of funds to the Agent special purpose account. In addition, the Agent special purpose account was maintained in the name of the Indonesian Agent to make it appear that all movement of funds to this account was for legitimate commission payments. Likewise, Allianz did not have effective controls over the commission payment request process, which allowed payments to go to the Agent special purpose account without supporting documentation. [...] On December 1, 2005, a whistleblower complaint concerning the special purpose account was submitted to both the Allianz whistleblower hotline and Utama’s joint venture partner Jasindo, and then forwarded to the head of AZAP. The complaint itemized a number of control weaknesses, most notably, the existence of the Agent special purpose account and its lack of transparency. On December 8, 2005, Allianz Group Audit initiated an audit of the Indonesian office; however, the review was limited to embezzlement from the Company. [...] However, no additional steps were taken to determine the nature and purpose of the accounts or to identify the recipients of payments from the accounts. On December 12, 2005, based on the audit findings Allianz directed the Utama management to close the Agent special purpose account. Although the Utama management agreed to close the account and to stop making the payments, it continued making improper payments to secure business for Allianz through 2008.”

Under the heading “Utama’s Post-2005 Improper Payments” the order states, in pertinent part, as follows.

“Despite the directive to close the account and to stop making payments, Utama Marketing Manager continued to use the Agent special purpose account to make improper payments to foreign officials from 2005 to 2008. [...] Utama CEO 2 approved the continued use of the Agent special purpose account to make payments on the two government insurance contracts at issue. Later, Utama Marketing Manager and his staff expanded the improper payments to numerous other foreign officials on government insurance contracts. From 2005 to 2008, Utama Marketing Manager employed various methods to make payments to foreign officials. In addition to booking payments through the Agent special purpose account, Utama Marketing Manager made payments by either: 1) booking commissions to an agent that was not associated with the account for the government insurance contract and then withdrawing the funds booked to the agent’s account as cash to pay the foreign official; or 2) overstating the amount of a client’s insurance premium, booking the excess amount to an unallocated account and then “reimbursing” the excess funds to the foreign officials, who were responsible for procuring the government insurance contracts. Similar to the Agent special purpose account, Allianz did not have effective controls over the Utama accounting system or the commission payment process, which allowed payments to be made to an agent’s account without supporting documentation. Allianz did not have any controls over the use of the unallocated account that was maintained at Utama. As a result, Utama Marketing Manager was able to take funds from Utama to pay foreign officials without detection. In March 2009, Allianz’s outside auditor received an anonymous complaint alleging that an Allianz executive created or initiated slush funds during his tenure with AZAP. Between December 2005, when the Allianz Executive Vice-President of the Asia-Pacific Division directed Utama to close the Agent special purpose account and the March 2009 Whistleblower complaint, Allianz took no steps to ensure that the Agent special purpose account was closed and that similar improper payments were not being made.”

Under the heading “Investigation and Remediation” the order states, in full, as follows.

“In response to the March 2009 Whistleblower complaint, Allianz convened a Whistleblower Committee to do an internal investigation and retained counsel to conduct an internal investigation of Utama’s payment practices in Indonesia. Allianz did not report the conduct to the Commission staff. In April 2010, the staff opened an investigation after receiving an anonymous complaint of possible FCPA violations. The staff contacted Allianz concerning the allegations. Allianz’s cooperation in the staff’s investigation and the timeliness of its response to the Commission’s requests for documents and information improved over time. Allianz hired new counsel and took steps to further its cooperation and remedial efforts. The staff’s investigation uncovered 295 government insurance contracts that were obtained or retained by improper payments of approximately $650,626 to Indonesian government officials and others from 2001 through 2008. As stated above, in some instances the nature of the improper payments was disguised in invoices as an “overriding commission” or as a commission for an agent that was not associated with the government insurance contract. In other instances the improper payments were structured as an overpayment by the government insurance contract holder, who was later “reimbursed” for the overpayment. The excess funds were then paid to foreign officials, who were responsible for procuring the government insurance contracts. Allianz took various remedial measures, including employment action against several individuals who were involved in the conduct or failed to stop the conduct. Allianz issued new or enhanced FCPA compliance and internal accounting control policies and procedures, including mandating strict scrutiny of payments to third party intermediaries. Allianz also updated the anti-corruption clause in its third-party contracts to specifically refer to the FCPA. Allianz provided enhanced FCPA compliance training to its employees and improved its current global anti-corruption compliance program.”

Under the heading, “FCPA Violations” the order states, in pertinent part, as follows.

“Utama, a majority-owned subsidiary of Allianz, made improper payments to foreign officials to obtain or retain government insurance contracts. Utama improperly recorded the payments as legitimate transaction costs. Utama’s financial statements were consolidated into Allianz’s financial statements. As a result of the conduct described above, Allianz violated Section 13(b)(2)(A) of the Exchange Act, which requires issuers to keep accurate books, records and accounts. Further, as evidenced by the extent and duration of Utama’s improper payments and their improper recordation, and the fact that Allianz was not aware that Utama’s commission payment request process allowed funds to be diverted for improper payments, Allianz failed to recognize the compliance risks posed by Utama. Allianz also failed to devise and maintain an effective system of internal controls sufficient to provide reasonable assurances that improper payments were not being made by its subsidiary. As a result of the conduct described above, Allianz violated Section 13(b)(2)(B) of the Exchange Act, which requires issuers to devise and maintain a sufficient system of internal accounting controls. [...] Section 13(b)(2)(A) of the Exchange Act does not require that the amounts involved be “material,” nor is it necessary to prove “scienter” under its provisions. SEC v. World-Wide Coin Invs. Ltd., 567 F. Supp. 724, 749-51 (N.D. Ga. 1983). Similarly, there is no scienter requirement for establishing a violation of Section 13(b)(2)(B).

According to the SEC release, “without admitting or denying the findings, Allianz agreed to cease and desist from further violations and pay disgorgement of $5,315,649, prejudgment interest of $1,765,125, and a penalty of $5,315,649 for a total of $12,396,423.”

See here for a prior guest post discussing the Dodd-Frank provision granting the SEC authority to impose civil monetary penalties in administrative proceedings such as the Allianz matter.

There is much to analyze in the nine-page cease and desist order.

For starters, the SEC required disgorgement even though no FCPA anti-bribery violations were alleged or asserted. This prior post highlighted an article concerning ”no-charged bribery disgorgement” by various Debevoise & Plimpton attorneys, including Paul Berger (here) a former Associate Director of the SEC Division of Enforcement. The article concluded that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” The article noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”

Your first reaction might be – the SEC could have charged Allianz with FCPA anti-bribery violations given the findings of the cease and desist order, but choose not to. If that is your reaction, based on the information in the cease and desist order, you are wrong.

Contrary to popular misperception, the FCPA’s anti-bribery provisions apply to foreign issuers only to the extent “mails or any means or instrumentality of interstate commerce” are used in connection with the improper payments. The SEC’s order does not contain any findings concerning any U.S. nexus in regards to the payments at issue.

The above paragraph, in addition to the notion that the SEC’s order does not contain any findings to suggest willful violations of the FCPA’s books and records or internal control provisions, helps explain the lack of DOJ involvement in the matter. Nevertheless, some (see here) used the “d” word (as in declination) in describing the DOJ’s decision not to bring charges against Allianz. However, for the reasons explained above, there appears to have been no criminal charges to bring against Allianz. This is not a declination.

In this regard, the Allianz enforcement action is similar to the 2011 enforcement action against Diageo (see here for the prior post).

According to this Wall Street Journal Corruption Currents post, “Claudius Sokenu of Arnold & Porter LLP conducted the company’s internal investigation and Joel Cohen of Gibson Dunn & Crutcher LLP was brought in subsequently to assist as the company neared a resolution.”

The Guidance And Declinations

Tuesday, November 27th, 2012

Much of the buzz surrounding the Guidance concerns six anonymized examples of matters DOJ and SEC declined to pursue, including a discussion of the facts DOJ and SEC considered when choosing to decline the particular matters. However, contrary to the buzz, this is not first time, nor most detailed instance, of the DOJ publicly disclosing it FCPA “declination” decisions.

In 1983 in the context of FCPA reform hearings, a House Committee wanted to better understand and access the DOJ’s FCPA enforcement program. To this end, it requested a variety of information from the DOJ, including its closed FCPA cases. The DOJ responded with “summaries of all closed investigations of alleged FCPA violations” and its response detailed 83 investigations summarized over 18 pages.

In reading the summaries, it is interesting to note that several instances concern conduct that would very likely be the basis of an FCPA enforcement action in this current era. It is further interesting to observe from the summaries something old-fashioned on display. That is the DOJ being mindful of the evidentiary burdens it would be put to in bringing an action (either in persuading a grand jury to indict or ultimately prevailing at trial). For most of the FCPA’s history, the DOJ had two choices when faced with conduct that might implicate the FCPA: prosecute or do not prosecute. In this era, the DOJ has created and championed a system with a third option – non-prosecution and deferred prosecution agreements. Since introduced to the FCPA context in 2004, this third option is one of the more obvious reasons for the increase in FCPA enforcement.

More recently, the DOJ provided information concerning its FCPA “declination” decisions in follow-up answers to questions asked at the June 2011 House FCPA hearing. (See here for the prior post). The information DOJ provided to Congress then is substantively similar to the “declination” information included in Guidance.

Aside from not being as revolutionary as observers may think, the Guidance “declination” examples raise more questions than answers. For instance, in three of the examples, it is not even clear based on the information provided that the FCPA was violated. For instance, Example 1 at most indicates that a company received competitor bid information from a third party with connections to a foreign government and discovered various FCPA red flags during an internal investigation. Example 4 at most indicates that a customs agent engaged by a company’s foreign subsidiary made small bribe payments without any discussion of whether the company or its foreign subsidiary possessed the requisite knowledge under the FCPA’s third-party payment provisions. Example 5 at most indicates that a company, in connection with its acquisition of a foreign company, learned of potential improper payments without any discussion of whether the foreign company was subject to the FCPA’s jurisdiction. (For additional reading on this quality of the examples, see this recent Guidance alert authored by WilmerHale - specifically pgs. 8-9).

Moreover, in all of the declination examples in the Guidance, the factors motivating the “declination” decision – such as voluntary disclosure and cooperation, effective remedial measures, small improper payments – can often be found in many instances in which FCPA enforcement actions were brought.

The discussion of so-called “declinations” in the Guidance raises once again the pressing question of how the enforcement agencies actually define a “declination.” To my knowledge, the DOJ has never offered a definition, but perhaps in an effort to portray a fair and balanced FCPA enforcement program, the DOJ appears to be advocating an expansive definition. However, in the criminal context the term “declination” should be reserved for instances in which the DOJ concludes that it can prove beyond a reasonable doubt all the necessary elements of a cause of action, yet decides not to pursue the action.

With this definition, many of the Guidance “declination” examples are like a police officer “declining” to issue a speeding ticket in instances in which the driver was not speeding. This is not a “declination”- it is what the law commands – and such reasoning applies in the FCPA context as well.

Two Scoops Of Opaqueness

Wednesday, October 31st, 2012

As noted in this previous post, in 2010 Digi International had a quick and strange disappearing act.

In a July 22, 2010 SEC filing, the company disclosed as follows.

“As previously reported, after receiving allegations regarding possible violations of our gifts, travel and entertainment policy for activities in the Asia Pacific region by a few employees, we initiated an investigation of these policy and corresponding internal control issues, and any possible related violations of applicable law, including the Foreign Corrupt Practices Act (FCPA). We voluntarily disclosed the allegations to the United States Department of Justice (DOJ) and the United States Securities and Exchange Commission (SEC). The investigation has been under the direction of the Audit Committee, comprised solely of independent directors, utilizing outside counsel, and focused on the APAC region. For completeness purposes, the investigation reviewed certain other foreign regions where no allegations have been made. We believe the investigation is substantially complete, pending the input from the DOJ and SEC. We have been providing the DOJ and SEC with updates and our proposed remediation plan. We will continue to cooperate fully with the SEC and DOJ process, which could include additional investigative procedures. This investigation found violations of company policy and internal controls that primarily involved three individuals in Hong Kong and our Chief Financial Officer. All four individuals have either been terminated or resigned from the company. The investigation also identified certain books and records and related internal controls issues under the FCPA. The ultimate impact and outcome of the DOJ and SEC process is unknown at this time. ” (emphasis added).

The prior post noted that SEC filings are carefully crafted, tightly worded documents created by in-house specialists and often vetted by outside professionals. In short, words matter in SEC filings and given the above italicized words, it would seem reasonable to conclude that Digi (with the assistance and input from outside counsel) identified conduct that implicated the FCPA. Why else would the disclosure contain the clause “under the FCPA”?

However, as noted in the previous post, approximately ten days after its SEC filing, Digi (a leading supplier of multifunction communication devices to the U.S. Federal Government) issued a press release (here) stating that: “Digi has now received confirmation through discussions with representatives of the DOJ and the SEC that they will not be initiating any enforcement proceedings against Digi.”

It was quite the disappearing act and a quick one at that. I highlighted in the previous post that FCPA enforcement (or lack of enforcement) is already largely an opaque process and Digi’s curious disappearing act served as another example for why transparency and accountability in FCPA enforcement is needed.

Digi’s 2010 disappearing act was merely the first scoop of opaqueness.

The second scoop was added last month when the SEC charged Digi’s former Chief Financial Officer Subramanian Krishnan.

The SEC’s complaint (here) alleges in summary form, among other things, that Krishnan “in his role as Chief Financial Officer [...] engaged in certain actions and inactions, a result of which corporate funds were used to pay for unauthorized expenses” and that he “authorized such expenses for Digi employees, resulting in the filing of inaccurate expense reports, caused the Company to file inaccurate reports, failed to enforce Digi’s internal controls, demonstrated a lack of management integrity, failed to act to reveal inaccurate reports and wrongly certified the effectiveness of Digi’s internal controls and disclosed they were effective.” As to certain of the expenses, the complaint alleges as follows. “Krishnan approved corporate travel and entertainment expenses which appeared to have marginal, if any, business purpose.” Based on these allegations, and others in the complaint, the SEC charged Krishnan with aiding and abetting violations of the FCPA’s books and records provisions and substantive FCPA internal controls violations. As noted in this SEC release, without admitting or denying the SEC’s allegations, Krishnan consented to a final judgment permanently enjoining him from future securities law violations and to a bar from serving as an officer or director of any issuer. As noted in the release, the duration of the bar, and the amount of disgorgement and the civil penalty will be determined at a later date.

The FCPA provisions at issue in the Krishnan enforcement action of course are generic and can be implicated as to conduct that does not involve payments to individuals deemed “foreign officials” by the enforcement agencies. Yet it would seem unusual for a company to voluntarily disclose, as Digi did, violations of its gifts, travel and entertainment policy for activities in the Asia Pacific region that did not involve expenditures made to, or on behalf of, “foreign officials.” Indeed, several FCPA enforcement actions have been based in whole or in part on excessive travel and entertainment expenses made to or on behalf of “foreign officials” in the Asia Pacific region.

What type of FCPA issues did Digi disclose in 2010? Why did Digi’s FCPA scrutiny quickly and strangely disappear? What sort of travel and entertainment expenses that had marginal business purpose did Digi’s CFO approve?

Because of the lack of transparency surrounding most things FCPA related, we are left to wonder. All the public has to nibble on is two scoops of opaqueness and it leaves us hungry for more.

Friday Roundup

Friday, August 24th, 2012

The sting may be over but it effects are not, Orthofix information unsealed, checking in on Wal-Mart, a pipeline report, a safe assumption, and the alternative reality. It’s all here in the Friday roundup.

Stung By The Sting

The manufactured Africa Sting case may be over, but it effects are still being felt.

Allied Defense Group (“ADG”) employed Mark Frederick Morales, one of the individuals charged in the case. The company stated in its recent quarterly filing (here) as follows.

“In February and March, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. Since this time, the Company’s FCPA counsel has had several discussions with the DOJ and SEC regarding the agencies’ respective inquiries. Based upon these discussions, it appears likely that resolution of these inquiries will involve a payment by the Company to at least one of these government agencies in connection with at least one transaction involving the former employee of Mecar USA. At this point, the amount of this payment is undeterminable.”

As noted in this previous post, in January 2010, ADG agreed to be acquired by Chemring Group PLC.

Another publicly traded company that employed an Africa Sting defendant, Amaro Goncalves, is Smith & Wesson. The company disclosed in its most recent quarterly filing (here) as follows.

“On February 21, 2012, the DOJ filed a motion to dismiss with prejudice the indictments of the remaining defendants who are pending trial, including our former Vice President-Sales, International & U.S. Law Enforcement. On February 24, 2012, the district court granted the motion to dismiss. We cannot predict, however, when the investigation will be completed or its final outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.”

Even though the individual Africa Sting cases are over, the case provided a point of entry into several companies and an entire industry and its effects are still being felt as demonstrated by the above disclosures.

Orthofix

This previous post discussed the July enforcement action against Orthofix International. As noted in the post, the specifics of the DOJ’s allegations were not known as the information against Orthofix was filed under seal. The information (here) was recently unsealed. In summary fashion, the DOJ alleged as follows under the heading “corrupt conduct.” “From [2003 through March 2010], with the knowledge of Orthofix Executive A [a citizen of Peru and legal permanent resident in the U.S. who was a senior manager of Orthofix Inc. (an indirectly wholly owned subsidiary) and responsible for sales operations in Latin America], Promeca [an entity incorporated and headquartered in Mexico and an indirectly wholly owned subsidiary of Orthofix International] and its employees paid approximately $300,000 to Mexican officials, in return for agreements with IMSS and its hospitals to purchase millions of dollars in Orthofix International products.”

IMSS is a social service agency of the Mexican government that provided public services to Mexican workers and their families and the Mexican Officials identified in the information are as follows.

Mexican Official 1 – a deputy administrator of Magdelena de las Salinas (a hospital in Mexico City that IMSS owned and controlled)

Mexican Official 2 – the purchasing director of Magdelena de las Salinas

Mexican Official 3 – the purchasing director of Lomas Verdes (a hospital in the State of Mexico that IMSS owned and controlled)

Mexican Official 4 – a sub-director of IMSS

According to the information, “Executive A knew of the payments and things of value [provided to the Mexican Officials] but failed to stop the scheme or report the scheme to Orthofix Interntional or Orthofix’s Inc.’s compliance department.”

Under the heading “Internal Controls” the information alleges, among other things, as follows. “Orthofix International,which grew its direct distribution footprint in part by purchasing existing companies, often in high-risk markets, failed to engage in any serious form of corruption-related diligence before it purchased Promeca. Although Orthofix International promulgated its own anti-corruption policy, that policy was neither translated into Spanish nor implemented at Promeca. Orthofix International failed to provide any FCPA-related traning to many of its personnel, including Executive A. Orthofix also failed to train Promeca personnel for years on the FCPA, to test regularly or audit particular transactions, or to ensure that subsidiary maintained controls sufficient to detect, deter or prevent illicit payments to government officials.”

The information charges one count of violating the FCPA’s internal control provisions.

Checking In On Wal-Mart

During the media feeding frenzy after the New York Times Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV. At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.

Spitzer of course was right.

During its second quarter earnings call (see here for the transcript) Wal-Mart executives stated as follows. ”Within core corporate, we incurred approximately $34 million in expenses related to third-party advisors reviewing matters involving the Foreign Corrupt Practices Act and we expect these expenses to continue through the rest of the year.” Later in the call, the following was said. “We also expect to incur approximately $35 to $40 million in expenses for the review of matters relating to the Foreign Corrupt Practices Act during each of the remaining quarters for this fiscal year.”

In other news, on the civil litigation front, as noted in this Reuters article “an Indiana union pension fund that owns shares in Wal-Mart Stores Inc has sued the company to gain access to thousands of internal documents related to allegations that a Wal-Mart subsidiary bribed Mexican government officials.” According to the report, the lawsuit, filed in Delaware’s Chancery Court, alleges the “company had made a ‘woefully deficient’ production of documents following an earlier out-of-court demand and that hat documents were produced were ‘so heavily redacted,’ or blacked out, they were nearly worthless.”

Turning to Capital Hill, several prior posts have chronicled efforts by Representative Elijah Cummings and Henry Waxman to conduct a shadow investigation of Wal-Mart in the aftermath of the New York Times article (see here for the previous post). As indicated in this recent press release and this recent letter the lawmakers are growing impatient. In pertinent part, the letter to Wal-Mart CEO Michael Duke stated as follows.

“We are writing to give you a final opportunity to respond to our requests for information about allegations that your company violated the Foreign Corrupt Practices Act. Although you have stated on multiple occasions that you intend to cooperate with our investigation, you have failed to provide the documents we requested, and you continue to deny us access to key witnesses. Your actions are preventing us from assessing the thoroughness of your internal investigation and from identifying potential remedial actions.

During the course of our investigation, we have learned that Wal-Mart’s concerns about potential violations of the Foreign Corrupt Practices Act are not limited to operations in Mexico, but are global in nature. Your outside counsel informed us that, before allegations of bribery in Mexico became public, Wal-Mart retained attorneys to conduct a broad review of the company’s anti-corruption policies. This review identified five “first tier” countries “where risk was the greatest.” Wal-Mart then conducted a worldwide assessment of the company’s anti-corruption policies, culminating in a series of recommendations and policy changes based on those findings.

In addition, we have obtained internal company documents, including internal audit reports, from other sources suggesting that Wal-Mart may have had compliance issues relating not only to bribery, but also to “questionable financial behavior” including tax evasion and money laundering in Mexico.”

Pipeline Report

Add NCR Corporation and Expro International to the list of companies under FCPA scrutiny.

NCR

Global technology company NCR Corp. recently disclosed here as follows.

“NCR has received anonymous allegations from a purported whistleblower regarding certain aspects of the Company’s business practices in China, the Middle East and Africa, including allegations which, if true, might constitute violations of the Foreign Corrupt Practices Act. NCR has certain concerns about the motivation of the purported whistleblower and the accuracy of the allegations it received, some of which appear to be untrue. NCR takes all allegations of this sort seriously and promptly retained experienced outside counsel and began an internal investigation that is ongoing. NCR does not comment on ongoing internal investigations. Certain of the allegations relate to NCR’s business in Syria. NCR has ceased operations in Syria, which were commercially insignificant, notified the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) of potential apparent violations and is taking other measures consistent with OFAC guidelines.”

Based on the disclosure, an analyst downgraded NCR stock (see here) causing shares to drop approximately 10%.

Expro

As reported in this Wall Street Journal Corruption Currents post, Expro International (an oil field management company owned by a Goldman Sachs-backed private equity consortium) “is re-investigating claims that its employees paid bribes in Kazakhstan.” The report states as follows. “Expro International and the consortium, Umbrellastream, received allegations from an anonymous tipster in May that two of Expro’s former operations coordinators in Western Kazakhstan oversaw and approved bribes to customs officials there from 2006 until summer 2009, according to an email reviewed by Corruption Currents. The alleged bribes were paid to clear Expro’s equipment through customs to avoid costly delays, the tipster said. The allegations have sparked an internal investigation by Expro’s lawyers at Gibson, Dunn & Crutcher LLP into the claims, according to another email. But it appears the investigation is not the first time Expro has scrutinized its operations in Kazakhstan.”

Add a few, but take one off.

As noted in this recent Friday roundup, Academi, Inc., formerly known as Xe Services, formerly known as Blackwater recently resolved a non-FCPA case and the DPA specifically stated that the agreement “does not apply to the Foreign Corrupt Practices Act investigation independently under investigation by the DOJ.” As noted in this previous post, Blackwater has been under investigation for FCPA violations in Iraq and as noted in this previous post, its FCPA scrutiny in Iraq inspired Representative Peter Welch to introduce H.R. 5366, the “Overseas Contractor Reform Act,” an impotent debarment bill that passed the House in September 2010 (see here).

However, as on-line news agency Main Justice reports here, reference to the FCPA investigation in the recent DPA appears to have been a drafting error. Citing a July 19th letter to the company, Main Justice reports that the DOJ has closed its “foreign bribery inquiry” of the company. Main Justice cites the following portion of the declination letter. “[The DOJ has closed its inquiry] based on a number of factors, including but not limited to, the investigation undertaken by Academi and the steps taken by the company to enhance its anti-corruption compliance program.”

A Safe Assumption

This previous post regarding the recent Pfizer enforcement action raised the following question(s).

Does anyone truly believe that the only reason Chinese doctors prescribed Pfizer products was because under the “point programs” the physician would receive a tea set? Does anyone truly believe that the only reason Czech doctors prescribed Pfizer products was because the company sponsored educational weekend took place at an Austrian ski resort? Does anyone truly believe that the only reason Pakistani doctors offered Wyeth nutritional products to new mothers was because the company provided office equipment to the physicians?

The questions were asked in the context of disgorgement remedies, but can also be asked in the context of product safety. One can safely assume that if the enforcement agencies had any evidence to suggest that the products at issue jeopardized public safety, the enforcement agencies would have alleged such facts, as they occasionally do in FCPA enforcement actions (see Innospec for instance).

The absence of such allegations make this recent article by Online Pharmacy Safety foolishly speculative. The article states as follows.

“[The conduct at issue in the enforcement action] puts the safety of consumers at risk. If large companies are able to bribe their way to getting more business, and anticipate government officials to turn a blind eye, the wrong products could be getting into the hands of consumers worldwide. The Pfizer products approved by foreign governments and prescribed by doctors may not have been the best product available, which could endanger consumers. Doctors put selfishness at the expense of patients, and the company was putting profits ahead of its public safety.”

Alternative Reality

Harvey Silverglate (author of Three Felonies a Day: How the Feds Target the Innocent) hit the ball out of the park with this recent Wall Street Jouranl op-ed. Referring to the recent Gibson Guitar Lacey Act enforcement action and how the resolution documents muzzle the company (as is typical in FCPA NPAs and DPAs), Silverglate wrote as follows.

“Through these and myriad other techniques, federal investigator and prosecutors create an alternative reality that favors their own institutional interests, regardless of the truth or of justce. All citizens and companies become subject to the Justice Department’s essentially unfettered power. Remedying this problem cannot be left to the victims of this governmental extortion, because their risks are too high if they fight; nor will their lawyers likely blow the whistle, since the bar makes a tidy living by playing the game. It is up to the rest of civil society to let the Justice Department emperor know that we see he is not wearing clothes.”

*****

A good weekend to all.

Judge (Again) Significantly Rejects DOJ’s Recommendation In Sentencing Garth Peterson, Peterson Goes On Offense And Says The DOJ Is Lying About Morgan Stanley’s FCPA Compliance Procedures

Monday, August 20th, 2012

While FCPA enforcement is largely devoid of judicial scrutiny, sentencing of individual FCPA defendants remains a judicial function and provides an opportunity for someone other than the DOJ to have input on some aspect of the DOJ’s positions when it comes to FCPA enforcement.

While there are a few examples of federal court judges harshly sentencing defendants consistent with DOJ sentencing recommendations (the majority of those sentences have been issued by Judge Jose Martinez in the S.D. of Florida), the clear trend is for judges to significantly reject the DOJ’s FCPA sentencing recommendations. See here, here, here and here for previous posts among others.

Given this trend, it is not surprising that last week Judge Jack Weinsten (E.D.N.Y.) significantly rejected the DOJ’s sentencing recommendation of 51-60 months in sentencing Garth Peterson to 9 months in prison. See here for the Reuters article. See here for the previous post discussing the April 2012 DOJ and SEC enforcement action against Peterson.

Of note, in its sentencing memo (here), the DOJ accused Peterson of making several misrepresentations in his sentencing submission. The DOJ stated as follows. “Peterson’s efforts to mislead the Court concerning the genesis of his crime – a crime fundamentally based upon deceit – call into serious question his assertion that he understands the gravity of the crime he committed, that he is unlikly to engage in such deception in the future, and that he accepts responsibiity for his wrongful conduct. Peterson should be sentenced within the advisory guidelines because he circumvented Morgan Stanley’s internal controls to bribe an official of the Chinese government – an action that has serious consequences for the United States and for American companies transacting business in China.”

The sentencing memos of both parties (see here for Peterson’s sentencing submission and here for his reply) also shed light on additional information relevant to Morgan Stanley’s so-called declination (see here for the prior post). In its submission, the DOJ stated that Peterson “repeatedly and consistently lied to his Moran Stanley supervisors and c0-workers” concerning the conduct at issue and that “each of Peterson’s [Morgan Stanley required FCPA certifications] was but another lie that lulled his employer in trusting Peterson.” In his sentencing submission, Peterson stated as follows concerning the Chinese Official he had a relationship with prior to joining Morgan Stanely. “The Chinese Official was a close friend of Peterson’s – in many ways a father figure to him – and Peterson helped him in order to repay the help that the Chinese Official had given him through his career.” Peterson also asserts that his attempt to influence the ”father figure” Chinese Official in the investment project giving rise to the enforcement action was an attempt to recoup an investment for this mother.

*****

On the eve of his sentence, Peterson sat for an exclusive interview on CNBC. See here a video clip, here for the transcript.

In the interview, Peterson stated as follows concerning the investment at issue in the enforcement action.

“The government hasn’t released some important background about that. I made that investment before I joined Morgan Stanley. When I joined, I declared it to Morgan Stanley. Then, Morgan Stanley became familiar with that deal, and decided they wanted to buy in as well. So, I helped them to do that. Then, in– two– about a year and a half after that– essentially, just to make it very simple, Morgan Stanley forced me out of that deal. And I felt that was unfair, because it had been something I’d had before. Then, I brought them in, and then they were forcing me out. And so, about a year after that, I found a way to buy back in at the same price that I’d been forced out at. That’s still—a wrong action. When Morgan Stanley forced me out of the deal, I should’ve either quit, and thereby kept the investment, or I should’ve just accepted that they didn’t want me to be involved in the deal as long as the company was involved. But I don’t believe that that should be characterized as a, “web of deceit,” and whatever, to– you know, to take things from Morgan Stanley.”

The following exchange occurred between Scott Cohn (CNBC) and Peterson as to his decision to plead guilty.

COHN: So, why did you plead guilty to anything?

PETERSON: You know, it’s– I think, hopefully most people will never be in the position I had to be in. But when you’re an individual against the weight of the U.S. Government– and the U.S. Government, the Department of Justice, the SEC, perhaps it’s their way of doing things. They can have—a heavy stick, you know. That if you don’t cooperate with us, you’ll– you know, we’re going to do all these other things. And so, I just cooperated. You know, everybody’s different. Some people are fighters. I guess I’m not.

COHN: But, I mean, you– you’re giving away a lot. You’re– potentially giving away your freedom for a number of years?

PETERSON: In some sense, they took that away a long time ago in reality. Because once I started to cooperate– when they wanted to speak to me, I had to go speak to them. They were– literally, the SEC was harassing my family for years. But– at the end of the day, like I said, I agreed to cooperate, and so, I took that path.

In the interview Peterson criticized Morgan Stanley’s FCPA procedures and said the DOJ is lying to the public.

COHN: Do you– do you– do you feel like Morgan Stanley threw you overboard?

PETERSON: Yeah. Look, I did things wrong. I deserved to get fired. I never bribed anybody, so it’s still a mystery, a little bit why– you know, this whole case is– has been focused on that. Because as I’ve said, I know what I did. These are the things I did wrong. Morgan Stanley got off scot-free. And I think, you know, I have no– you know, desire for them to be harmed in any way, or you know. So– it’s not that. But what I feel bad about is– the government lying to the– to the public. And– saying that– they had this wonderful compliance– program, when in fact the government knows that it wasn’t getting into people’s heads. Which is what really matters.