First, what to make of this month’s enforcement activity?  Quite frankly, not much as I told Samuel Rubenfeld (Wall Street Journal) last week in this article.  Much of this “new” enforcement activity is really not ”new.”  For instance, the BizJet individual enforcement actions were filed in 2011 and in 2012, but recently unsealed.  Parker Drilling disclosed last year its settlement and the amount, it just took a while for resolution documents to be finalized.  It was publicly reported last year that former Siemens executive Uriel Sharef was going to settle the SEC enforcement action, it just took a while for the resolution documents to be finalized.  And finally, the charges against Rothschild and Pierucci discussed below were filed last year, but recently unsealed.

This post summarizes the Rothschild information (dated November 2, 2012) and plea agreement (dated November 2, 2012) and then the Pierucci indictment (dated November 27, 2012).

Pierucci, a French national, has been identified as a current executive of Alstom and he was arrested on April 14th at JFK airport in New York City.  Rothschild is a former vice president of sales for Alstom Power Inc., a Connecticut-based subsidiary of Alstom.

According to this report, Alstom said in a statement that it “has been working  constructively with the Justice Department for the last two years to address allegations of past misconduct.” It went on to say that Pierucci, its current executive, is entitled to the presumption of innocence.  “We urge everyone to respect the judicial process, which will provide a full  and fair opportunity for the facts to be adjudicated,” the statement read.

Rothschild Information

The conduct at issue concerned the Tarahan coal-fired steam power plant project in Indonesia.  According to the charging documents Perusahaan Listrik Negara (“PLN”) “the state-owned and state-controlled electricity company in Indonesia and an ‘agency’ and ‘instrumentality’ of a foreign government [...] was responsible for sourcing the Tarahan Project.

The officials allegedly involved were.

“Official 1  … a member of Parliament in Indonesia [who] had influence over the award of contracts by PLN, including on the Tarahan Project”

“Official 2 … a high-ranking official at PLN [who] had broad decision-making authority and influence over the award of contracts by PLN, including on the Tarahan Project”

“Official 3 … an official at PLN [who] was a high-ranking member of the evaluation committee for the Tarahan Project.  Official 3 had broad decision-making authority and influence over the award of the Tarahan contract.”

The information charges one count of conspiracy and alleges that Rothschild and others, between 2002 through 2009, conspired to make “corrupt payments to a member of Parliament in Indonesia, officials at PLN, and others in order to obtain and retain business related to the Tarahan Project on behalf of the following entities and in violation of the FCPA’s anti-bribery provisions.

Alstom

Alstom Power Inc.

Power Company Switzerland – an indirect subsidiary of Alstom.

Power Company Indonesia – an indirect subsidiary of Alstom.

Consortium Partner – “a trading company … headquartered in Japan, incorporated in Japan, an in the business of providing power generation related services around the world.”  According to the information, this entity “acted as the partner” of the above Alstom entities “in the bidding and carrying out of the Tarahan Project in Indonesia.”  Consortium Partner would sure seem to be Marubeni Corp. of Japan.  (See here for its 2004 press release concerning the Tarahan Project).  This will be interesting to follow as Marubeni in 2012 resolved an FCPA enforcement action concerning conduct at Bonny Island, Nigeria (see here for the prior post) and is currently under a two year DPA.

Specifically the information alleges various telephone and e-mail communications between Rothschild and others concerning the alleged bribe payments and efforts to “conceal the payments to foreign officials by entering into consulting agreements with Consultant A (described as a “consultant who purportedly provided consulting related services [for the above companies] in connection with the Tarahan Project in Indonesia”) and Consultant B (same description) in order to disguise the bribe payment to the foreign officials.”

All of the alleged overt acts in the information allegedly occurred between 2002 and 2004, although the information does allege the following wire transfers:

In 2005 “200,064 from [Alstom Power Inc.'s] bank account to the bank account of Consultant A in Maryland”

In 2006 “200,064 from [Alstom Power Inc.'s] bank account to the bank account of Consultant A in Maryland”

In 2007 “200,064 from [Alstom Power Inc.'s] bank account to the bank account of Consultant A in Maryland”

In 2009, “66,688″ from [Alstom Power Inc.'s] bank account to the bank account of Consultant A in Maryland”

Other individuals generically identifed in the information include the following.

“Executive A – Senior Vice President for the Asia Region at [Alstom].  Executive A’s responsibilities at [Alstom] included oversight of [Alstom's] and [Alstom's] subsidiaries’ efforts to obtain contracts with new customers and to retain contracts with existing customers in Asia, including the Tarahan Project in Indonesia.”

“Executive B – who held executive level positions at [Alstom Power Inc.] and [Alstom], including Vice President of Global Sales [this is Pierucci].  Executive B’s responsibilities at [Alstom Power Inc.] included oversight of [Alstom Power Inc.] efforts to obtain contracts with new customers and to retain contracts with existing customers around the world, including the Tarahan Project in Indonesia.”

“Employee A - Vice President of Regional Sale at [Alstom Power Inc.]  Employee’s A’s responsibilities at [Alstom Power Inc.] included obtaining contracts with new customers retaining contracts with existing customers in various countries, including the Tarahan Project in Indonesia.”

“Employee B – the General Manager of Power Company Indonesia.  Employee B’s responsibilities at Power Company Indonesia including obtaining contracts with new customers and retaining contracts with existing customers in Indonesia, including the Tarahan Project in Indonesia.”

“Employee C – Director of Sales at Power Company Indonesia. Employee C’s responsibilities at Power Company Indonesia including obtaining contracts with new customers and retaining contracts with existing customers in Indonesia, including the Tarahan Project in Indonesia.”

In the plea agreement, Rothschild pleaded guilty to the one count information charging him with conspiracy to violate the FCPA.  According to the plea agreement, the offense carries a maximum penalty of 5 years imprisonment and a $250,000 fine.  Other than setting forth the DOJ’s recommendation that the court reduce by two levels Rothschild’s offense level “based on the defendant’s prompt recognition and affirmative acceptance of person responsibility,” the plea agreement does not set forth any further specifics concerning sentencing.

Pierucci Indictment

The indictment is based on the same core set of facts alleged above in the Rothschild information.  Because it is an indictment, and not an information, the Pierucci indictment is more detailed and indeed contains additional charges beyond the one count of conspiracy to violate the FCPA.  In addition, Pierucci is charged with four substantive counts of FCPA anti-bribery violations, money laundering conspiracy and four substantive counts of money laundering.

In the indictment, the DOJ alleges that “Pierucci was one of the people responsible for approving the selection of, and authorizing payments to, Consultants A and B, knowing that a portion of the payments to Consultants A and B was intended for Indonesian officials in exchange for their influence and assistance in awarding the Tarahan Project contract to [Alstom] and its subsidiaries.”

The indictment further alleges that Pierucci and others “came to the conclusion that Consultant A was not effectively bribing key Indonesian officials” and accordingly in 2003 Pierucci and others concluded “that Consultant A would be responsible only for paying bribes to Official 1, a member of the Indonesian Parliament” and that Alstom and its subsidiaries would retain another consultant to pay bribes to PLN officials.”

In this release, Acting Assistant Attorney General Mythili Raman stated as follows.

“Frederic Pierucci and David Rothschild allegedly used outside consultants to bribe foreign officials in Indonesia in exchange for lucrative power contracts.  Stamping out foreign bribery is a Justice Department priority, and we are determined to continue our vigorous enforcement of the Foreign Corrupt Practices Act.”

Today’s post also highlights documents recently unsealed in the DuBois and Uhl action which reveal a trove of information of interest to anyone curious about the inner workings of an FCPA enforcement action and connecting the dots to other FCPA enforcement actions.

DuBois was charged via a criminal information (here) with one count of conspiracy to violate the FCPA’s anti-bribery provisions and one substantive FCPA anti-bribery violation.  The conduct at issue is the same core set of conduct at issue in 2012 BizJet corporation action, as well as the criminal indictments against Kowalewski and Jensen.  That is a scheme to “obtain aircraft maintenance, repair and overhaul (“MRO”) service contracts and other business [for BizJet] from foreign government customers, including the Mexican Federal Police, the Mexican President’s Fleet, Sinaloa and the Panama Aviation Authority, by paying bribes to government officials employed by the foreign government customers.”

The DuBois information was filed on December 27, 2011 and the related motion by the DOJ to seal the docket (since unsealed) reveals the following.

As part of his plea agreement, DuBois worked in an undercover capacity for the government.  The motion specifically states as follows.  “As part of his work in an undercover capacity, Mr. DuBois has recorded conversations with former BizJet executives and other subjects of the government’s ongoing investigation.”  Later, the motion to seal states that “public identification of Mr. DuBois as a defendant who likely is cooperating with the government may jeopardize the undercover aspect of the government’s investigation.”

In the plea agreement, DuBois agreed to pay a forfeiture amount of $98,950 “representing proceeds derived by defendant in connection with the conspiracy” and to pay an additional $61,000 as the amount DuBois “received … as a result of his participation in the conspiracy.”

The DOJ’s memo in support of a downward departure for sentencing states as follows.

DuBois “assisted in the investigation from the outset and cooperated fully with the government throughout its investigation.  DuBois submitted to multiple interviews by the government and has assisted in every way that the government has asked.  DuBois told the truth to the government from the outset and continued to do so up until this very day.  DuBois’ cooperation not only assisted the government in connection with its investigation into BizJet, but also led to the investigation of another maintenance, repair, and overhaul company engaged in a similar scheme to pay bribes to government officials overseas.”

This last portion of the DOJ’s memo makes clear that the 2012 FCPA enforcement action against NORDAM Group (see here for the prior post) had its origins in the BizJet enforcement action.  Both BizJet and NORDAM Group are Tulsa, OK based aircraft maintenance companies.  The link and information about DuBois’ undercover role also raises the issue of whether individual prosecutions related to the NORDAM Group corporate enforcement action are also forthcoming.

As noted in the DOJ release, DuBois was sentenced to 60 months probation and eight months home detention.

Uhl was charged via a criminal information (here - filed on December 28, 2011) with one count of conspiracy to violate the FCPA’s anti-bribery provisions.  The conduct at issue is the same core set of conduct as indicated above, that is a scheme to “obtain aircraft maintenance, repair and overhaul (“MRO”) service contracts and other business [for BizJet] from foreign government customers, including the Mexican Federal Police, the Mexican President’s Fleet, Sinaloa and the Panama Aviation Authority, by paying bribes to government officials employed by the foreign government customers.”  See here for the Uhl plea agreement.

In the Uhl matter, the DOJ’s motion for a downward departure states as follows.

 Uhl ”agreed to a voluntary proffer session and, when confronted by the government, admitted to the illegal conduct.  Throughout the course of the investigation, Uhl was cooperative and provided truthful information that substantially assisted the government in confronting other co-conspirators and witnesses.  Uhl offered to assist in any way that he could.”

As noted in the DOJ release, Uhl was sentenced to 60 months probation, eight months home detention, and was ordered to pay a $10,000 fine.

The motions to seal in both the DuBois and Uhl actions further state as follows. ”BizJet’s corrupt payments were not limited to Mexico.  BizJet employees bribed key decision makers in a number of countries, including Panama, Brazil, and Chile.”  This is notable in that the 2012 BizJet corporate enforcement action made no mention of conduct in Brazil or Chile.  This demonstrates that resolution documents in a corporate FCPA enforcement action are the result of negotiations and that final documents rarely offer the complete picture of the conduct that allegedly occurred.

Both the DuBois and Uhl plea agreements further indicate that BizJet’s bribery scheme was not just in foreign countries.  Both plea agreements state that the customers or potential customers BizJet bribed “included customers both in the United States and abroad.

If the DOJ’s rhetoric of holding individuals accountable in the context of corporate resolutions is to mean anything (as noted in this prior post, since 2008 approximately 75% of DOJ corporate enforcement have not resulted in any related individual charges against company employees) the BizJet corporate action was one where related individual enforcement actions were to be expected given the DOJ’s prior specific allegations concerning the above individuals.

It turns out that the above individuals were criminally charged some time ago, but last Friday, in this release, the DOJ unsealed the actions and revealed the names of the above individuals.

Executive A is Bernd Kowalewski; Executive B is Peter DuBois; Executive C is Neal Uhl; and Sales Manager A is Jald Jensen.

In the release, the DOJ announced as follows.

“Kowalewski and Jensen were charged by indictment filed in U.S. District Court for the Northern District of Oklahoma on Jan. 5, 2012, with conspiring to violate the Foreign Corrupt Practices Act (FCPA) and to launder money, as well as substantive charges of violating the FCPA and money laundering.  The two defendants are believed to remain abroad.”

The DOJ further announced as follows.

“DuBois and Uhl pleaded guilty on Jan. 5, 2012, to criminal informations, and their pleas were unsealed [last Friday].  DuBois pleaded guilty to one count of conspiracy to violate the FCPA and one count of violating the FCPA.  Uhl pleaded guilty to one count of conspiracy to violate the FCPA.  Both defendants were sentenced [last Friday] by U.S. District Judge Gregory K. Frizzell in the Northern District of Oklahoma.  DuBois’s sentence was reduced from a sentencing guidelines range of 108 to 120 months in prison to probation and eight months home detention based on his cooperation in the government’s investigation.  Uhl’s sentence was similarly reduced for cooperation from a guidelines range of 60 months in prison to probation and eight months home detention.”

The conduct at issue in the indictments and informations is the same core set of conduct at issue in the 2012 BizJet corporate enforcement action.  That is, DOJ allegations that the individuals ”paid bribes to officials employed by the Mexican Policia Federal Preventiva, the Mexican Coordinacion General de Transportes Aereos Presidenciales, the air fleet for the Gobierno del Estado de Sinaloa in Mexico, the air fleet for the Estado De Roraima in Brazil, and the Republica de Panama Autoridad Aeronautica Civil in exchange for those officials’ assistance in securing contracts for BizJet to perform MRO [aircraft maintenance, repair and overhaul] services.”

This post summarizes the indictments (here and here) against Kowalewski (the President and CEO of BizJet between 2004 through March 2010) and Jensen (a regional sales manager at BizJet between 2004 and 2010).  A future post will summarize the enforcement actions against DuBois and Uhl.  The informations in those cases (here and here) have been released, but the plea agreements and sentencing documents are not yet in the public domain.

Kowalewski Indictment

At its core, the indictment alleges a scheme “to obtain and retain MRO service contracts and other business for BizJet and others from foreign government customers, including the Mexican Federal Police, the Mexican President’s Fleet, Sinaloa, the Panama Aviation Authority, the State of Roraima, and other customers, by paying bribes to foreign officials employed by such customers.”  According to the indictment, the bribe payments were called ‘commission,’ ‘incentives’ or ‘referral fees.”  The indictment also alleges that Kowalewski and others “would and did attempt to conceal the payments to foreign officials by using Avionica [a California company owned by Jensen and located at his personal residence that operated "under the pretense of providing aircraft maintenance brokerage services"] to funnel the payments to the foreign officials by making payments in cash delivered by hand to the foreign officials.”

The six counts of FCPA anti-bribery violations are based on the following:

• “check mailed in the amount of $20,000 by BizJet in Tulsa, OK to [Panamanian Official] in return for [the official's] assistance in securing business for BizJet with the Panama Aviation Authority”
• “wire transfer in the amount of $30,000 from BizJet’s bank account in New York to Avionica’s bank account in California for use to bribe [Mexican Official] in return for [the official's] assistance in securing business for BizJet with the Mexican President’s Fleet”
• “wire transfer in the amount of $18,000 from BizJet’s bank account in New York to Avionica’s bank account in California for use to bribe [Mexican Official] in return for [the official's] assistance in securing business for BizJet with Sinaola”
• “wire transfer in the amount of $176,000 from BizJet’s bank account in New York to Avionica’s bank account in California for use to bribe foreign officials employed by the Mexican Federal Police in return for their assistance in securing business for BizJet with the Mexican Federal Police”
• “wire transfer in the amount of $210,000 from BizJet’s bank account in New York to Avionica’s bank account in California for use to bribe foreign officials employed by the Mexican Federal Police in return for their assistance in securing business for BizJet with the Mexican Federal Police”
• “two checks mailed in the amount of $22,912.38 and $6,417.44 by BizJet in Tulsa, OK to [Mexican Official] in return for [the official's] assistance in securing business for BizJet with Sinaloa.”

Like the BizJet corporate enforcement action, the Kowalewski indictment also contains allegations which suggest a complicit board of directors at the company.  The indictment states as follows concerning a November 2005 board meeting:

• Kowalewski explained at the meeting that “directors of maintenance and chief pilots in the past received ‘commission’ of $3,000 to $5,000 but were now demanding $30,000 to $40,000 in ‘commission.”
• In response to a question by a director about how BizJet would survive the next six months without ‘burning cash,’ Kowalewski stated that BizJet expected to gain market share by paying ‘referral fees’ just as the competition was doing.

The indictment also alleges as follows.

“[In January 2010], after receiving an e-mail stating that the internal auditors of BizJet’s parent company would be conducting a detailed audit of BizJet’s incentive payments and requesting that Kowalewski prepare and make available all relevant documents, Kowalewski caused deletion software to be installed and run on his computer that erased content from his computer.”

Based on the above allegations, the DOJ charged Kowalewski with one count of conspiracy to violate the FCPA’s anti-bribery provisions, six counts of FCPA anti-bribery violations.  In addition, the indictment charges one count of money laundering conspiracy and three counts of substantive money laundering.

Jensen Indictment

At its core, the indictment alleges the same scheme as in the Kowalewski indictment, including the same six substantive FCPA anti-bribery violations, as well as money laundering conspiracy and three counts of substantive money laundering.  The Jensen indictment further alleges FCPA and money laundering forfeiture allegations which state that “upon conviction” of the offenses, Jensen “shall forfeit” to the U.S. “any property, real or personal, which constitutes, or is derived from, proceeds traceable to the offenses.”

Acting Assistant Attorney General Mythili Raman stated in the DOJ release as follows.

“The charges announced today allege a conspiracy by senior executives at BizJet to win contracts in Latin American countries through bribery and illegal tactics.  Former BizJet executives, including the former president and chief executive officer, allegedly authorized and caused hundreds of thousands of dollars to be paid directly and indirectly to ranking military officials in various foreign countries, and two former executives have pleaded guilty for their roles in the conspiracy.  These charges reflect our continued commitment to holding individuals accountable for violations of the FCPA, including, as in this instance, after entering into a deferred prosecution agreement with their employer.”

Assistant Director in Charge Valerie Parlave of the FBI’s Washington Field Office stated in the DOJ release as follows.

“Business executives have a responsibility to act appropriately in order to maintain a fair and competitive international market.  The unsealing of these bribery charges, and today’s sentencing, demonstrate that the FBI is committed to curbing corruption and will pursue all those who try to advance their businesses through bribery.”

The former BizJet executive enforcement action announced last Friday is the first FCPA enforcement action of 2013.  The last DOJ FCPA enforcement action (of any kind – corporate or individual) was in September 2012 and the last time the DOJ brought an FCPA enforcement action against an individual was in April 2012. (See here for the prior post).

For additional coverage, see here from Tulsa World.

The year was 1982 and the Foreign Corrupt Practices Act was nearing five years old.  Up to this point, enforcement was sparse and focused on single-actor type cases.  See here, here, here, here and here for FCPA enforcement actions up to this point.

In 1982, the first FCPA mega-case was brought and it involved five corporate defendants and twelve individual defendants.

Specifically, in October 1982, the DOJ brought an indictment (here) against:

• Crawford Enterprises Inc. (“CEI”) (a Houston based private company that sold compression equipment systems to oil and gas companies);
• Donald Crawford (CEI’s Chairman and sole shareholder and, at certain relevant times, CEI’s President);
• William Hall (CEI’s Executive Vice President and, at certain relevant times, CEI’s President);
• Ricardo Beltran (President and majority shareholder of Grupo Industrial Delta, a Mexican corporation);
• Mario Gonzalez (a U.S. citizen who assisted Grupo Delta and CEI communicate with certain alleged foreign officials);
• Andres Garcia (a U.S. citizen who assisted Grupo Delta and CEI communicate with certain alleged foreign officials);
• George McLean (Vice President of Solar Turbines International (“Solar”), a division of International Harvester Company);
• Luis Uriarte (the Latin American Regional Manager of Solar);
• Al Eyester (President of Ruston Gas Turbines “Ruston”);and
• James Smith (Vice President of Ruston).

The indictment charged a conspiracy between the defendants and others to pay money to Mexican foreign officials and Grupo Delta “knowing that all or a portion of such money would be offered, given or promised directly or indirectly” to foreign officials for the purpose of influencing the acts and decisions of the officials “in their official capacity, and inducing them to use their influence with Pemex so as to affect and influence the acts and decisions of Pemex in order to assist” Crawford, the other defendants, and others in “obtaining or retaining business with Pemex.”

The indictment alleges that Petroleos Mexicanos (“Pemex”) was the “national oil company wholly owned by the Government of the Republic of Mexico and was responsible for the exploration and production of all of the oil and natural gas resources of Mexico and for acquiring the equipment, including compression equipment systems, necessary for such exploration and production.”

The indictment alleged that “Pemex was an instrumentality of a foreign government” and that two individuals (Ignacio de Leon and Jesus Chavarria) were “foreign officials” based on their positions of “subdirector of Pemex responsible for the purchase of goods and equipment on behalf of Pemex” and “subdirector of Pemex responsible for the exploration and production of Mexican oil and natural gas.”

[As an aside, it should be noted that in the recent "foreign official" challenges, the DOJ has argued that its charging decision in the Crawford cases as to Pemex demonstrated the validity of its position that employees of SOEs are "foreign officials" under the FCPA.  For instance, the recent FCPA Guidance states that the SEC and DOJ ‘‘have pursued cases involving instrumentalities since the time of the FCPA’s enactment’’ and that the ‘‘second-ever FCPA case charged by the DOJ’’ involved bribes to executives of the Mexican national oil company.  

However being consistently wrong, does not make one right and, as noted in my article "Grading the FCPA Guidance," missing from the Guidance discussion or associated citations on this issue, is any reference to the fact that George McLean, the only defendant in the series of related cases to put DOJ to its burden of proof at trial, was found not guilty by the jury.]

The conspiracy charge alleged that CEI and Crawford agreed to pay and paid the “foreign officials” “bribes equalling approximately 4.5% of each Pemex purchase order for compression equipment systems in which” CEI participated and that “it was further a part of the conspiracy” that CEI and Crawford arranged with defendants Beltran, Gonzalez and Garcia that Grupo Delta would: “(a) hold itself out as the Mexican agent of CEI, while in truth acting primarily as the conduit for the bribe payments; (b) disguise the bribe payments as ‘commissions’ due by providing to CEI false and fictitious invoice for each payment received; and (c) provide Gonzalez and Garcia with a base of operations from which to perform their function as middlemen and channels of communications between the co-conspirators” and the foreign officials.”

The indictment further alleged that the defendants used the term “folks” as a code word for the “foreign officials” “in order to conceal from others their true identities as Pemex officials and the existence of the bribe scheme.”  The indictment alleged that “in order to create a pool of money with which to pay bribes” CEI along with Solar and Ruston “submitted to Pemex bids which were inflated to include a 4.5% markup for the “folks.”

The indictment alleged that CEI, along with Solar and Ruston received purchase orders from Pemex for compression equipment systems in the approximate amount of $225 million and that approximately $10 million in bribe payments were made to the “foreign officials” as part of the bribery scheme.

In addition to the conspiracy charge, the indictment also alleged approximately fifty substantive FCPA anti-bribery violations against various combinations of the defendants.  The indictment also charged CEI, Crawford and Hall with an obstruction charge based on allegations that the defendants destroyed certain documents relevant to a grand jury subpoena.

Media reports described the action as the first major criminal investigation under the FCPA.  According to the reports, in November 1982, CEI, Crawford, Hall, Garcia, McLean, Uriate, and Eyster pleaded not guilty.  Crawford and Hall stated that while commission payments were made to Grupo, no such bribes were paid to Pemex officials.

CEI released a statement which said that “despite vigorous and repeated denials by Crawford Enterprises of any wrongdoing in connection with these allegations, the investigation has continued for nearly 3.5 years.”  The company said that Pemex and the Mexican government had looked into similar charges and found no wrongdoing in the award of Pemex contracts to Crawford.  The company’s statement further indicated as follows.  “Four factors accounted for CEI’s success in becoming one of Pemex’s principal gas compression contractors:  its proven experience in the industry; its aggressive delivery schedules that other firms simply could not match; its maintenance and repair of equipment installed in Mexico; and the lower costs to Pemex as a result of all the above.”

Prior to the above-reference October 1982 indictment, in September 1982 the DOJ charged Ruston Gas Turbines Inc., C.E. Miller Corporation and Charles Miller based on the same core set of allegations.  The DOJ charged Ruston Gas Turbines in a one count criminal information (see here) with a substantive FCPA violation and the company pleaded guilty and was ordered to pay a $750,000 fine (see here).  The DOJ charged C.E. Miller Corporation and Miller (President, Chairman of the Board, and majority shareholder of the company) in a one count criminal information charging substantive FCPA violations and aiding and abetting FCPA violations. (See here).  C.E. Miller Corporation and Miller both pleaded guilty and the company was ordered to pay a $20,000 fine and placed on probation for three years (see here) and Miller was sentenced to three years probation (see here).

Prior to the above-referenced September 1982 charges, in May 1981 the DOJ charged Gary Bateman (an International Sales Manager for CEI and also Chairman of the Board, President and sole shareholder of Applied Process Products Overseas, Inc.) in a multi-count information (see here) charging various misdemeanor violations of the Currency and Foreign Transactions Reporting Act concerning the transportation of money to Mexico in connection with the bribery scheme.  Bateman pleaded guilty and agreed to pay a civil penalty of approximately $330,000.  In January 1983, the DOJ also charged Applied Process Products Overseas, Inc. in a one-count information (here) charging a substantive FCPA violation based on the same core set of allegations.  The company pleaded guilty and was ordered to pay a $5,000 fine.  (See here).

After the above-referenced October 1982 charges, in November 1982 the DOJ also filed a criminal information against International Harvester (see here).  The information was based on the same core set of allegations as set forth above and based on the conduct of its employees McLean and Uriarte.  International Harvester pleaded guilty to conspiracy to violate the FCPA (see here) and was ordered to pay a $10,000 fine and agreed to also pay $40,000 civil cost reimbursement.

The DOJ’s offer of proof in the International Harvester case (see here) contained the following statement.

“After Solar had agreed to participate and to cooperate with CEI, and pursuant to the 1977 enactment of the Foreign Corrupt Practices Act [International Harvester's long-standing Policy on Conflicts of Interest and Ethical Business Conduct] was revised and supplemented to affirm that improper payments prohibited by the Act were also prohibited as a matter of company policy.  In 1977, 1978, 1979, and 1980, through an annual audit process, each International Harvester managerial employee was required to certify his or her compliance and to report any action that might conflict with company policy for review by the Office of the General Counsel and corrective action, if warranted.  During those years, Uriarte and McLean each reported in the annual audit process that he was aware of International Harvester policy and had taken no action in violation thereof.  Insofar as each of them participated in the conspiracy described herein, he accordingly concealed from International Harvester his participation and the participation of the Solar Turbine Division.  Neither Solar employee held a position which required him to report to International Harvester management.  There has been no evidence that any officers, directors or management of International Harvester knew of or participated in the conspiracy charged.”

In January 1983, the DOJ charged Marquis King (an officer and director of C.E. Miller) in a one-count information charging a misdemeanor violation of the Currency and Foreign Transactions Reporting Act concerning the transportation of money to Mexico in connection with the bribery scheme. (See here).  King pleaded guilty and he was sentenced to 14 months probation and ordered to pay a $5,000 fine.  (See here).

In June 1985, CEI pleaded guilty to conspiracy to violate the FCPA and 46 substantive FCPA violations.  (See here).  CEI agreed to pay a $10,000 criminal fine as to the conspiracy charge and $75,000 as to each of the 46 substantive charges for a total fine amount of $3,460,000.  At the same time, the following defendants pleaded nolo contendere:  Donald Crawford, Al Eyster, James Smith, Andres Garcia, and William Hall.  Crawford pleaded nolo contendere to conspiracy to violate the FCPA and 46 substantive FCPA violations and was ordered to pay a total fine amount of $309,000 (see here); Eyster pleaded nolo contendere to conspiracy to violate the FCPA and 41 substantive FCPA violations and was ordered to pay a total fine amount of $5,000 (see here); Smith pleaded nolo contendere to conspiracy to violate the FCPA and 44 substantive FCPA violations and was ordered to pay a total fine amount of $5,000 (see here); Garcia pleaded nolo contendere to conspiracy to violate the FCPA and 46 substantive FCPA violations and was ordered to pay a total fine amount of $75,000 (see here); and Hall pleaded nolo contendere to conspiracy to violate the FCPA and 32 substantive FCPA violations and was ordered to pay a total fine amount of $150,000 (see here).

That leaves McLean and Uriarte.  Stay tuned for the rest of the story.

Of further note from this enforcement action, Pemex filed a civil suit in U.S. District Court in Houston against Crawford, CEI, the two foreign officials, and twelve others in a bid to recover monies allegedly extracted from Pemex.  In its complaint, Pemex sought several million dollars in both compensatory and punitive damages from Crawford and the other entities based upon the same conduct that was alleged in the DOJ enforcement actions.  Pemex’s suit was based upon alleged violations of the Sherman Antitrust Act,  the Robinson-Patman Act, and the Racketeering Influenced and Corrupt Organizations Act.  Pemex also asserted causes of actions based upon commercial bribery and common law fraud.  Various of the defendants in the civil action sought relevant documents from Pemex and it was ultimately held in contempt for not producing the documents.  For additional background on this case, see 643 F.Supp. 370; 826 F.2d 392.

The first Foreign Corrupt Practices Act enforcement action to involve business conduct in Nigeria was a 1985 enforcement action against W.S. Kirkpatrick, Inc. (a privately held New Jersey avionics supply firm) and Harry Carpenter (Chairman and CEO of the company).

The criminal informations filed against the company (here) and Carpenter (here) alleged one count of violating the FCPA’s anti-bribery provisions and contains the same concise allegation.

“On or about December 21, 1982 … W.S. Kirkpatrick, Inc. … used a means and instrumentality of interstate commerce, that is, a Western Union international telex from Fairfield, New Jersey, to New York, New York, to order Standard Chartered Bank of New York to pay $580,973 to the Bank of New York for the account of Bank of Commerce and Credit International in Luxembourg corruptly in furtherance of an offer, payment, promise to pay and authorization of the payment of money to: (a) a person, that is Benson ‘Tunde’ Akindale through two companies, Deriks and Los, Panamanian bearer share corporations, while having reason to believe that a portion of such money would be offered, given, or promised, directly or indirectly to foreign officials, Nigerian Air Force officers, the Party of Nigeria, the Minister of Nigeria and other government defense personnel for the purpose of influencing the acts and decisions of such foreign officials and others in their official capacity and inducing them to use their influence within the Government of Nigeria in order to obtain a contract for flight training equipment for W.S. Kirkpatrick, Inc.”

An offer of proof filed in Carpenter’s case contains the following additional information.

Carpenter learned of the opportunity to sell various equipment to the Nigerian Air Force and he “believed Kirkpatrick needed an agent in Nigeria to assist in negotiating and obtaining the contract.”  “On recommendation of two British businessmen, Carpenter contracted a London solicitor, who in turn put him in touch with Benson ‘Tunde’ Akindele, a Nigerian national.”  According to the offer of proof, “Akindele offered to assist Kirkpatrick by serving as its local agent in Nigeria.  Carpenter negotiated an agreement with Akindele which provided that Kirkpatrick would pay a commission equal to twenty percent of the contracted price of [the equipment] to two Panamanian bearer share corporations, which were set up, and controlled by Akindele to receive payments from Kirkpatrick.”

W.S. Kirkpatrick Inc. pleaded guilty and was fined $75,000 (see here) and Carpenter pleaded guilty, was sentenced to three years probation and ordered to pay a $10,000 fine (see here).  Noted white collar criminal defense attorney Theodore Wells (here) represented Carpenter.

See here for the DOJ’s release which notes that the contract at issue was worth $10.8 million.

After the DOJ enforcement action, Environmental Tectonics Corporation (“ETC” –  an unsuccessful bidder for certain of the Nigerian contracts which first brought the problematic conduct to the attention of the Nigerian Air Force and the U.S. Embassy) brought a civil action against W.S. Kirkpatrick, Carpenter, Akindele and others seeking damages under the Racketeer Influenced and Corrupt Organizations Act, the Robinson-Patman Act and the New Jersey Anti-Racketeering Act.

The defendants moved to dismiss the complaint on the ground that the action was barred by the act of state doctrine.  The district court granted the motion and concluded that the act of state doctrine applies “if the inquiry presented for judicial determination includes the motivation of a sovereign act which would result in embarrassment to the sovereign or constitute interference in the conduct of foreign policy of the United States.”  See 659 F.Supp. 1381.    The court held that ETC’s suit had to be dismissed because, in order to prevail, it would have to show that “the defendants or certain or them intended to wrongfully influence the decision to award the Nigerian Contract by payment of a bribe, that the Government of Nigeria, its officials or other representatives knew of the offered consideration for awarding the Nigerian Contract to Kirkpatrick, that the bribe was actually received or anticipated and that ‘but for’ the payment or anticipation of the payment of the bribe, ETC would have been awarded the Nigerian Contract.”

The Third Circuit reversed finding that application of the act of state doctrine was unwarranted given the facts of the case.  In particular, the Third Circuit found persuasive a letter to the district court by the State Department legal adviser which stated that a judicial inquiry into the purpose behind the act of a foreign sovereign would not produce the ‘unique embarrassment, and the particular interference with the conduct of foreign affairs that may result from the judicial determination that a foreign sovereign’s acts are invalid.”

Defendants then appealed to the Supreme Court which agreed to hear the case.

In 1990, Justice Scalia authored the opinion of a unanimous Supreme Court.  See 493 U.S. 400.  The opinion begins as follows.  “In this case, we must decide whether the act of state doctrine bars a court in the United States from entertaining a cause of action that does not rest upon the asserted invalidity of an official act of a foreign sovereign, but that does require imputing to foreign officials an unlawful motivation (the obtaining of bribes) in the performance of such an official act.”

The Court concluded that the “factual predicate for application of the act of state doctrine does not exist” because nothing in the case required the Court to declare invalid the official act of a foreign sovereign.  The Court reasoned that “neither the claim nor any asserted defense requires a determination that Nigeria’s contract with Kirkpatrick International was, or was not, effective,” that ETC “was not trying to undo or disregard the governmental action,” but rather that ETC was only trying to “obtain damages from private parties who had procured” the contract.

In short, the Court stated that the act of state doctrine “has no application to the present case because the validity of no foreign sovereign act is at issue.”

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.

As noted in the previous post, in the Noble Corporation enforcement action it was stated, not once but twice, that the payments at issue “would not constitute facilitation payments for routine governmental actions within the meaning of the FCPA.”  I noted then that one can reasonably conclude that if the DOJ felt the need to express such a statement twice, that the FCPA’s facilitating payment exception should probably be on the minds of many in connection with the CustomsGate enforcement  actions.

Against the backdrop of recent and well-deserved scrutiny of the DOJ’s FCPA enforcement program, the SEC reminds us all that it too can enforce the FCPA.  [As an aside, Professor Barbara Black (University of Cincinnati College of Law) recently released her forthcoming scholarship - see here - "The SEC and the Foreign Corrupt Practices Act:  Fighting Global Corruption is Not Part of the SEC's Mission].

Last Friday, the SEC announced here charges against “three oil services executives with violating the FCPA by participating in a bribery scheme to obtain illicit permits for oil rigs in Nigeria in order to retain business under lucrative drilling contracts.”

In this complaint filed in the S.D. of Texas, the SEC charged Mark Jackson (former Noble Corporation CEO) and James Ruehlen (current Director and Division Manager of Noble’s subsidiary in Nigeria) based on the same core set of facts relevant to the prior corporate enforcement action – namely that Noble and its wholly-owned subsidiary (Noble-Nigeria) “authorized its customs agent to pay bribes” on the companies behalf “to Nigerian government officials to influence or induce them to (1) favorably process false paperwork, (2) grant temporary import permits (TIPs) based on the false paperwork, and (3) favorably exercise or abuse their discretion in granting extensions to these illicit TIPs.”

The complaint (a meaty 46 pages) next states, in summary fashion, as follows.

“Defendants approved payment of the bribes.  Defendant Ruehlen also assisted the customs agent in preparing false documents, processed the customs agent’s invoices for the bribes, and signed the checks reimbursing the customs agent for the bribes he paid to Nigerian government officials.  Defendants acted in this way to obtain TIPs and TIP extensions and retain business under drilling contracts in Nigeria.  As a consequence, Defendants violated the anti-bribery provisions [of the FCPA.]  Defendants also took steps to circumvent Noble’s internal controls and to falsely record these bribes as legitimate operating expenses on Noble’s books.  Defendant Jackson failed to implement internal accounting controls to prevent the bribery and false recording of the bribes.  As a consequence, Defendants violated the records falsification and internal control provisions of the Exchange Act and aided and abetted Noble’s violations of the books and records and internal control provisions [of the FCPA].  Defendant Jackson misled Noble’s auditors about the bribes and signed certifications required by the Sarbanes-Oxley Act of 2002 falsely stating that he had created and maintained effective internal controls, and that there were no internal control weaknesses, fraud or FCPA violations.  As a consequence, Jackson violated Rules 13b2-2 and 13a-14 of the Exchange Act.  During the violations, Jackson was Noble’s Chief Financial Officer, Chief Operating Officer, and ultimately President and Chief Executive Officer, and Chairman of the Board of Directors.  Jackson directly or indirectly controlled Noble, Defendant Ruehlen, and others, and therefore is liable as a control person under Section 20(a) of the Exchange Act for all of their violations.”

[For previous Section 20(a) control person (or similar) FCPA enforcement actions - see here and here.]

Unlike the vast majority of FCPA defendants (corporate and individual) charged in an SEC enforcement action, Jackson and Ruehlen appear poised to launch a defense.

Jackson’s lawyer, David Krakoff (here - BuckleySandler) stated as follows.  “We unequivocally deny the SEC’s baseless allegations. Mr. Jackson will vigorously defend himself in court where the evidence will show what the SEC already knows, that at all times Mr. Jackson acted in good faith at Noble. He looks forward to clearing his good name in this proceeding.”

Ruehlen’s lawyer F. Joseph Warin (here - Gibson Dunn & Crutcher) told the Wall Street Journal  that his client was the one who initially raised concerns about the payments and that Ruehlen ”fully cooperated throughout the investigation and always acted in an ethical and transparent manner.”  Warin stated that “the claims against Mr. Ruehlen are wrong and they will be proven so at trial.”

This will be most interesting to follow as the SEC is rarely put to its burden of proof in FCPA enforcement actions (or any of its actions for that matter).  This is due to the SEC’s long-standing policy of allowing defendants to settle SEC complaints without admitting or denying the SEC’s allegations.  For recent judicial scrutiny of this settlement device, see this prior post.

The last time the SEC is believed to have been put to its burden of proof in an FCPA enforcement action was in the Eric Mattson and James Harris enforcement action also filed in the S.D. of Texas.  Like the Jackson and Ruehlen enforcement action, the Mattson and Harris enforcement action involved conduct outside the context of foreign government procurement.  As detailed in this Memorandum and Order, the SEC had its FCPA anti-bribery charges dismissed in that case.  The case involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment.  The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the Court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment.  When Mattson and Harris was decided, the S.D. of Texas in U.S. v. Kay case had already dismissed that case finding that the plain language of the FCPA does not prohibit goodwill payments to foreign government officials to reduce a tax obligation.  The SEC attempted to distinguish the trial court’s Kay ruling by arguing that in the civil enforcement context, the Court should interpret the FCPA’s language more liberally than in criminal cases.  The Court rejected the SEC’s arguments and followed the trial court’s analysis in Kay that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.”

Of course, the 5th Circuit overturned the Kay trial court ruling and held that making payments to a “foreign official” to lower
taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business.  However, the Kay court emphatically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. The 5th Circuit then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country. On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.  The court specifically stated:  “[i]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

The point of this extended discussion in the context of Jackson and Ruehlen is two-fold:  (1) that the SEC has already lost a non-government procurement FCPA case in the S.D. of Texas; and (2) even with the 5th Circuit precedent in Kay, and even taking the SEC’s allegations as true, payments in connection with TIPs would seem to be only to increase the profitability of an existing profitable company and thus - following the logic of the Fifth Circuit – fall outside of the FCPA’s anti-bribery provisions.

It will be interesting to see how this plays out should the SEC’s FCPA anti-bribery charges be fully litigated in the Jackson and Ruehlen enforcement action.

As noted in the SEC’s release last week, the Noble executive enforcement action also involved a separate complaint (here) against Thomas O’Rourke (the former controller and head of internal audit at Noble).  The complaint alleged that O’Rourke: (1) aided and abetted Noble’s violations of the FCPA anti-bribery provisions, books and records and internal controls provisions; and (2) directly violated the FCPA’s internal controls provisions and false records provisions of the Exchange Act.

Under the heading “defendants’ violations” the SEC alleged, among other things, that O’Rourke: (1) ”understood that Noble-Nigeria had used false paperwork to obtain TIPs, and that Noble-Nigeria paid its customs agent for ‘special handling charges’ that were passed through to Nigerian officials; (2) “knew that the ‘special handling charges’ were entered into Noble-Nigeria’s books as legitimate operating expenses, and he knew or was reckless in not knowing that those entries were improper”;  (3) “knowingly allowed TIP-related payments to government officials to be improperly accounted for as legitimate operating expenses.

Like the vast majority of FCPA defendants in SEC enforcement actions, O’Rourke chose to settle the SEC’s complaint without admitting or denying the SEC allegations.  According to the SEC release, O’Rourke consented to entry of a court order requiring him to pay a $35,000 civil penalty and permanently enjoining him from future violations.

*****

Last week I participated in a discussion with Howard Sklar regarding a potential FCPA compliance defense (see here for the webcast.)  In the aftermath of the SEC’s charges against the Noble executives, Sklar penned a Forbes blog (here) and stated as follows.  “One example Mike brings to prove his point [that the FCPA should be amended to include a compliance defense] is the Panalpina line of cases, including Noble.  I don’t think he’ll be able to use the Noble case as an example after today.  These complaints are against the CEO (who formerly held the CFO spot) and the country leader for Nigeria.  Plus, there’s Thomas O’Rourke. Thomas O’Rourke was Noble’s Director of Internal Audit, Controller, and VP of Internal Audit.”

Nice try Howard, but you are off-target.

Sklar is correct that I discuss the Noble Corp. enforcement action (and other related CustomsGate enforcement actions) in my “Revisiting a Foreign Corrupt Practices Act Compliance Defense” article (see here at pgs. 9-12 ).  However, that discussion is focused on specific reasons warranting an FCPA compliance defense, including that in many markets, companies subject to the FCPA must navigate challenging environments replete with barriers and other conditions that serve as breeding grounds for payments implicating (at least in the eyes of the enforcement agencies) the FCPA.

In discussing harassment bribes, I then talk about the notoriously corrupt Nigerian Customs Service (“NSC”) and how business interactions with NSC officials have been the basis for several FCPA enforcement actions including the coordinated enforcement actions from November 2010 involving Noble Corp. and others.  Anticipating the counter-argument that the FCPA does not need a compliance defense due to the harassment bribery conditions many companies face in foreign markets because the FCPA already contains a facilitating payments exception, I then stated that so long as the DOJ refuses to recognize a facilitating payments exception to the FCPA, that Congressional intent on the facilitating payments issue is best advanced through an FCPA compliance defense in which a company can assert, as a matter of law, that its pre-existing FCPA policies and procedures sought to prevent such payments in foreign markets.

In short, I was using the Noble Corporation enforcement action in connection with a discussion of facilitating payments, not using that particular enforcement action to support an FCPA compliance defense because it somehow was based on low-level employee conduct.  Indeed, in the DOJ’s non-prosecution agreement (here) which I discussed in this previous post, “Senior Executive,” “Executive A” and “Executive B” are all specifically mentioned as participating in the alleged improper conduct and an FCPA compliance defense would not apply to corporate conduct engaged in by executive officers.

The point of the Noble Corp. reference in my article was that the company should not have been the subject of an FCPA enforcement action based on the alleged conduct because Congress intended to exempt such payments from the FCPA’s anti-bribery provisions (regardless of who made, directed, or authorized the payments).

Total fines and penalties were approximately $95 million ($59.6 million against Magyar Telekom via a DOJ deferred prosecution agreement, $4.4 million against Deutsche Telekom via a DOJ non-prosecution agreement,  and $31.2  million against Magyar Telekom via a settled SEC civil complaint).  The SEC action against former Magyar executives remains active.

Because Magyar Telekom and Deutsche Telekom were “foreign issuers,” jurisdiction under the FCPA’s anti-bribery provisions require “use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance” of a bribery scheme.  The sole jurisdictional allegations in the enforcement action (other than the companies made filings with the SEC) are two e-mails that passed through, were stored on, and transmitted to servers located in the U.S. 

It is also noteworthy that the companies faced FCPA exposure based on the conduct of a few Magyar executives who concealed their conduct from others.  Indeed, the DOJ alleged that the existence and true purpose of the sham contracts used in the bribery scheme “were unknown to anyone within Magyar Telekom and Deutsche Telekom other than [two executives]‘ and a relatively small number of additional participants.”  Furthermore, the DOJ alleges that the executives, assisted by Greek intermediaries, circumvented Magyar Telekom’s internal controls by, among other things, backdating contracts and creating other fabricated documents.

The DOJ’s NPA with Deutsche Telekom states that the DOJ ”will not criminally prosecute Deutsche Telekom … for any crimes … related to the offering or making of improper payments by employees of Magyar Telekom to foreign officials, foreign political parties, and officials of foreign political parties in Macedonia and the accounting and record-keeping associated with these improper payments in violation” of the FCPA’s books and records provisions.”  Yet one struggles to find any facts that would justify criminal charges against Deutsche Telekom.  The DOJ has said in the past that it “does not prosecute corporations based on the acts of a single rogue employee.”   Yet all one learns from reading the NPA is that a Deutsche Telekom executive was a board member of Magyar Telekom and one of its subsidiaries and that the  executive had passive knowledge of the scheme and later learned of the Magyar Telekom executives circumvention of Magyar Telekom’s internal controls.  In all other respects, Deutsche Telekom’s criminal and civil exposure appears to be based on a strict liability like theory in that Magyar Telekom’s financial results were incorporated into Deutsche Telekom’s for purposes of financial reporting.

DOJ

The DOJ enforcement action involved a criminal information (here) against Magyar Telekom resolved through a deferred prosecution agreement (here) as well as a non-prosecution agreement (here) with Deutsche Telekom.

Criminal Information

The information focuses on conduct in Macedonia and Montenegro.

Macedonia

As to Macedonia, the information alleges as follows.   ”During 2005 and 2006, certain executives then employed by Magyar engaged in a course of conduct with consultants, intermediaries and other third parties, including contracting through sham contracts to pay an aggregate amount of  €4.875 million to

the Cypriot Shell Company [a shell company controlled by Greek Intermediary #1 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials), Greek Intermediary #2 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials), and Greek Intermediary #3 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials) that executed contracts with, submitted paperwork to, and received payments from, Magyar Telekom and its subsidiaries]

and one of its affiliates, under circumstances in which they knew, or were aware of a high probability that circumstances existed in which, all or a portion of the proceeds of such payments would be offered, given, promised or paid, directly or indirectly to

Macedonian Government Official #1 [a high-ranking government official with responsibility related to telecommunications laws and regulations and a leader of Macedonian Political Party A],

Macedonian Government Official #2 [a high-ranking government official with responsibility for telecommunications laws and regulations and a leader of Macedonian Political Party B],

Macedonian Political Party A, and/or Macedonian Political Party B [collectively political parties in the Macedonian governing coalition each representing a traditional ethnic group in Macedonia] 

with the intention of obtaining business and advantages for Magyar Telekom.  In addition, Macedonian Political Party B was offered the opportunity to designate the beneficiary of a business venture in exchange for the party’s support of Magyar Telekom’s desired benefits.”

According to the information, in early 2005, the Macedonian Parliament enacted a law designed to liberalize the telecommunications market in a manner that would have been unfavorable to Magyar Telekom.  Specifically the law authorized the telecommunications regulatory bodies in Macedonia to hold a public tender for a license to operate a third mobile telephone business that would directly compete in Macedonia against Magyar Telekom’s Macedonian subsidiary, MakTel, and imposed increased frequency fees and other regulatory burdens.  According to the information, certain Magyar Telekom executives and the Greek Intermediaries met with Macedonian Official #1 and others to “inform them that a third mobile license was not acceptable.”

According to the information, certain Magyar Telekom executives approved and executed two secret agreements with Macedonian Official #1 to delay or preclude the issuance of a third mobile telephone license and to mitigate the other adverse effects of the new law, including not requiring MakTel to pay the full amount of the increased frequency fee.  The information alleges, among other things, that an e-mail was sent to a Macedonian government official “at his U.S. based e-mail address” that “was passed through, stored on, and transmitted from servers located in the United States” and that a MakTel executive received an e-mail discussing the secret agreements in his “Hotmail email account, which passed through, was stored on, and transmitted to servers located in the United States.”

The information alleges that between 2005 and 2006 Magyar Telekom received the benefits promised in the agreements and that Magyar Telekom executives authorized MakTel and other Magyar Telekom subsidiaries to enter into a series of sham contracts and to pay an aggregate amount of  € 4.875 million under those contracts to the Cypriot Shell Company and one of its affiliates, under circumstances in which the Magyar Telekom Executives knew, or were aware of a high probability that circumstances existed in which, all or a portion of the proceeds of such payments would be offered, given, promised, or paid, directly or indirectly to Macedonian government officials. 

The information alleges that following the sham contracts “the Macedonian government delayed the introduction of a third mobile telephone competitor until 2007 and reduced the frequency fee tariffs imposed on Magyar Telekom’s Macedonian subsidiary, MakTel.”

According to the information, “the existence and true purpose of the agreements were unknown to anyone within Magyar Telekom and Deutsche Telekom other than [the two executives] and a relatively small number of additional participants.”  In fact, the information alleges that the two executives, assisted by Greek Intermediary #1, circumvented Magyar Telekom’s internal controls by, among other things, backdating contracts or creating other fabricated documents.

Nevertheless the information alleges as follows.  “The payments made under these sham contracts were recorded on Magyar Telekom’s books and records in a manner that did not accurately reflect the true purposes of the contracts under which they were made, and the false books and records were consolidated into DT’s financial statements.”

Based on the above allegations as to Macedonia, the information charges FCPA anti-bribery violations and FCPA books and records violations.

Montenegro

The information states as follows.  “In October 2004, the Government of Montenegro issued a tender to privatize its approximately 51% stake in the state-owned telecommunications company TCG [Telekom Crne Gore A.D.].  Magyar Telekom submitted a bid that sought to obtain a super-majority ownership stake, consisting of the government’s 51% share, plus enough additional minority shares from private investors to give Magyar Telekom ownership of at least two-thirds of TCG.”  According to the information, in March 2005 Magyar Telekom succeeded in acquiring an approximately 73% stake in TCG, and after the Government of Montenegro facilitated Magyar Telekom’s acquisition of shares of TCG from minority shareholders, certain Magyar Telekom executives caused Magyar Telekom, TCG, and/or its affiliates to enter into four contracts that purported to relate to the TCG acquisition and/or Magyar Telekom’s operations in Montenegro, but under which no valuable performance was actually rendered.  The information alleges that “payments under those contracts were not recorded accurately on Magyar Telekom’s or Magyar Telekom’s subsidiaries’ books and records.”

According to the information, “the payments under the four contracts … were recorded on Magyar Telekom’s books and records, or those of certain of Magyar Telekom’s subsidiaries, in a manner that did not accurately reflect the true purposes of the contracts under which they were made, and the false books and records were consolidated into Magyar Telekom’s and DT’s financial statements.”

Based on the above conduct as to Montenegro, the information charges FCPA books and records violations.

DPA

The DOJ’s charges against Magyar Telekom were resolved via a deferred prosecution agreement.  Pursuant to the DPA, Magyar Telekom admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees, agents, and those of Magyar Telekom’s subsidiaries as charged in the Information.”

The term of the DPA is two years and it states that the DOJ entered into the agreement based on the following factors.

(a) following reports by the company’s auditors, Magyar Telekom made a timely and voluntary disclosure to the DOJ and SEC about potential misconduct;

(b) over the course of several years, Magyar Telekom’s audit committee led a thorough global internal investigation concerning bribery and related misconduct;

(c) Magyar Telekom’s audit committee reported its findings to the DOJ and SEC;

(d) the pervasiveness of the scheme, the involvement of a number of now-former senior managers at Magyar Telekom and certain of its subsidiaries , and conduct by some of those employees designed to obstruct the audit committee’s investigation;

(e) Magyar Telekom undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures; and

(f) Magyar Telekom agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of Magyar Telekom’s current and former employees, agents, consultants, contractors, subcontractors, and subsidiaries relating to violations of the FCPA.

As detailed in the DPA, the advisory Sentencing Guidelines range for the charges at issue was $72.5 million – $145 million.  Pursuant to the DPA, Magyar agreed to pay $59.6 million (18% below the minimum Guidelines range).  According to the DPA, this amount was “appropriate given the nature and extent of Magyar Telekom’s cooperation in this matter and the remediation undertaken by Magyar Telekom.”

Pursuant to the DPA, Magyar Telekom represented that “it has implemented and will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA” and related laws throughout its operations.  The specific compliance provisions are set forth in an attachment to the DPA.  In addition, Magyar Telekom agreed to “report to the DOJ annually during the term of the Agreement regarding remediation and implementation of the compliance measures” set forth in the attachment.  As is common in FCPA DPA’s Magyar Telekom expressly agreed “that it shall not [directly or indirectly through others] make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by Magyar Telekom” of the above described facts.

The DOJ’s enforcement action also included a non-prosecution agreement  against Deutsche Telekom.  It states that the DOJ “will not criminally prosecute Deutsche Telekom … for any crimes … related to the offering or making of improper payments by employees of Magyar Telekom to foreign officials, foreign political parties, and officials of foreign political parties in Macedonia and the accounting and record-keeping associated with these improper payments in violation” of the FCPA’s books and records provisions.

The DOJ agreed to enter into the NPA based on the following factors: ”(a) DT’s timely, voluntary, and complete disclosure of the facts [described below]; (b) DT’s thorough cooperation with the DOJ and SEC; and (c) DT’s remedial efforts already undertaken and to be undertaken, including enhancements to its compliance program …”.

The NPA relates only to conduct in Macedonia and the NPA contain similar facts as described above.  The NPA also states that a DT Executive was a board member of Magyar Telekom and a MakTel mobile subsidiary.  According to the NPA, the “DT Executive supported” Magyar Telekom entering into an agreement described above and the DT executive was aware an executed agreement “was not kept in Magyar Telekom’s books and records.”  As to the sham contracts with Greek Intermediaries used to circumvent Magyar Telekom’s internal controls and to avoid detection, the NPA states that the DT Executive “later learned of these contracts and the circumstances in which they were executed.”

Under the section heading “Impact on DT’s Books and Records,” the NPA states as follows.  “Magyar Telekom recorded the payments under [the sham contracts] on its books and records in a manner that did not accurately reflect the true purpose of the contracts.  The false entries in Magyar Telekom’s books and records were consolidated into the books and records of DT, which reported the results of Magyar Telekom’s operations in its consolidated financial statements.”

The NPA has a term of two years and, as is standard, DT agreed not to make any public statements contradicting the described facts.  Under the NPA, DT agreed to pay a monetary penalty of $4.36 million.

See here for the DOJ’s release.

SEC

The SEC enforcement action involved a settled complaint against Magyar Telekom and Deutsche Telekom as well as a separate complaint against former Magyar Telekom executives.

The SEC’s settled civil complaint (here) against the companies involves “multiple violations” of the FCPA by Magyar Telekom and “corresponding violations of the books and records and internal controls provisions of the FCPA by Magyar Telekom’s parent company Deutsche Telekom.”  The complaint concerns the same Macedonia and Montenegro schemes identified in the DOJ enforcement action. 

In summary fashion, the SEC complaint alleges as follows.  “During the relevant time period, Magyar Telekom and Deutsche Telekom lacked sufficient internal accounting controls to prevent and detect violations of the FCPA.  As a result, the contracts described above [used in furtherance of the schemes] were not subjected to meaningful review, and substantially all of the amounts were paid without question, prior to the initiation of an internal investigation at the direction of the Audit Committee of Magyar Telekom.  Magyar Telekom recorded the payments to third-parties under these contracts on its books and records in a manner that did not accurately reflect the true purpose of the contracts.  The false entries in Magyar Telekom’s books and records were consolidated into the books and records of Deutsche Telekom, which reports the results of Magyar Telekom’s operations in its consolidated financial statements.”

Based on the above allegations, the SEC complaint charges FCPA anti-bribery, books and records and internal controls violations as to both the Macedonia and Montenegro conduct.  As stated in the SEC’s release (here), without admitting or denying the allegations in the SEC’s complaint, Magyar Telekom agreed to settle the SEC’s charges by paying approximately $31.2 million in disgorgement and pre-judgment interest; Deutsche Telekom settled the SEC’s charges, and as part of a non-prosecution agreement with the Department of Justice agreed to pay a penalty of $4.36 million.

The SEC’s complaint (here) against the former Magyar Telekom executives, Elek Straub (former Chairman and CEO of Magyar Telekom) and Andras Balogh and Tamas Morvai (two former senior executives in Magyar Telekom’s Strategy Department), is also based on the same Macedonia and Montenegro schemes.  In both schemes, the SEC alleged that the individuals authorized or caused the payments at issue with “knowledge, the firm belief, or under circumstances that made it substantially certain” that all or a portion of the money would be forwarded to foreign officials.  The complaint also alleges that the individuals caused the payments to be falsely recorded in Magyar Telekom’s books and records. 

In addition, the complaint alleges that the individuals “made false or misleading statements or omissions to Magyar Telekom’s auditors in connection with the preparation of the company’s financial statements.”  Specifically, the SEC alleged that the individuals signed management representation letters or management sub-representation letters that contained false or misleading information.  The complaint states as follows.  “Had Magyar Telekom’s auditors known [the various facts falsified or concealed] they would not have accepted the management representation letters and other representations provided by Straub.  Nor would the auditors have provided an unqualified audit opinion to accompany Magyar Telekom’s annual report.”

The SEC’s complaint against Straub, Balogh, and Morvai alleges that they violated or aided and abetted violations of the anti-bribery, books and records, and internal controls provisions of the FCPA; knowingly circumvented internal controls and falsified books and records; and made false statements to the company’s auditor. The SEC seeks disgorgement and penalties and the imposition of permanent injunctions.

Magyar Telekom’s release (here) (which per the DPA needed to be cleared by the DOJ) states as follows.  “As previously disclosed, the Audit Committee of Magyar Telekom conducted an internal investigation regarding certain contracts relating to the activities of the Company and/or its affiliates in Montenegro and Macedonia that totaled more than EUR 31 million. In particular, the internal investigation examined whether the Company and/or its Montenegrin and Macedonian affiliates had made payments prohibited by U.S. laws or regulations, including the FCPA. The Company’s Audit Committee informed the DOJ and the SEC of the internal investigation. The DOJ and the SEC commenced investigations into the activities that were the subject of the internal investigation. The Company has previously disclosed the results of the internal investigation. As also previously disclosed, the Company’s Board of Directors approved an agreement in principle with the staff of the SEC to resolve the SEC’s investigation through a settlement.”  The release further states as follows.  “The final settlements recognize the DOJ’s and the SEC’s consideration of the Company’s self-reporting, thorough internal investigation, remediation and cooperation with the DOJ’s and the SEC’s investigations. The Company has undertaken several remedial measures to address the issues identified during the course of these investigations. These measures include steps designed to revise and enhance the Company’s internal controls, as well as the establishment of the Corporate Compliance Program. The Corporate Compliance Program promotes awareness of the Company’s compliance policies and procedures through training, the operation of a whistleblower hotline, and monitoring of, and communications with, employees and subsidiaries of the Company. The Company remains fully committed to responsible corporate behavior.”

Peter Clark (Cadwalader, Wickersham & Taft – here - a former DOJ FCPA Unit chief) represented Magyar Telekom.  Debevoise & Plimpton attorneys Mary Jo White (here – the former U.S. Attorney for the S.D. of N.Y.) and Jonathan Tuttle (here) represented Deutsche Telekom.

Once again, the end of the year sees a telecom company resolving an FCPA enforcement action.  In 2007, it was Lucent Technologies (see here and here);  in 2009 it was UTStarcom (see here for the prior post); in 2010 it was Alcatel-Lucent (see here for the prior post); and in 2011 it is Magyar Telekom and Deutsche Telekom.

Earlier today, the DOJ and SEC announced (see here and here) parallel FCPA enforcement actions against Magyar Telekom (a Hungarian telecommunications company) and Deutsche Telekom (a German telecommunications company that is the majority owner of Magyar).  Fines and penalties in the DOJ and SEC enforcement actions is approximately $95 million.

DOJ

The DOJ release states that the companies agreed to pay a combined $63.9 million criminal penalty to resolve an FCPA investigation into activities by Magyar Telekom and its subsidiaries in Macedonia and Montenegro. 

The DOJ filed a three-count information (see here) against Magyar Telekom charging it with one count of violating the FCPA’s  anti-bribery provision and  two counts of violating the FCPA’s  books and records provisions.  The DOJ release notes that at the time of the charged conduct, Magyar Telekom’s American Depository Receipts (ADRs) traded on the New York Stock Exchange. 

The DOJ’s release states as follows.  “Magyar Telekom’s scheme in Macedonia stemmed from potential legal changes being made to the telecommunications market in that country.    In early 2005, the Macedonian government tried to liberalize the Macedonian telecommunications market in a way that Magyar Telekom deemed detrimental to its Macedonian subsidiary, Makedonski Telekommunikacii AD Skopje (MakTel).   Throughout the late winter and spring of 2005, Magyar Telekom executives, with the help of Greek intermediaries, lobbied Macedonian government officials to prevent the implementation of the new telecommunications laws and regulations.  Magyar Telekom eventually entered into an agreement with certain high-ranking Macedonian government officials to resolve its concerns about the legal changes.   In the secret agreement, a so-called “protocol of cooperation,” Macedonian government officials agreed to delay the entrance of a third mobile license into the Macedonian telecommunications market, as well as other regulatory benefits.   Magyar Telekom executives signed two copies of the protocol of cooperation, each with high-ranking officials of the different ruling parties of Macedonia.   The Magyar Telekom executives then kept the only executed copies outside of Magyar Telekom’s company records.   According to court documents, in order to secure the benefits in the protocol of cooperation, the Magyar Telekom executives engaged in a course of conduct with consultants, intermediaries and other third parties, including through sham consultancy contracts with entities owned and controlled by a Greek intermediary, to pay €4.875 (approximately $6 million) under circumstances in which they knew, or were aware of a high probability that circumstances existed in which, all or part of such payment would be passed on to Macedonian officials.   The sham contracts were recorded as legitimate on MakTel’s books and records, which were consolidated into Magyar Telekom’s financials.   Deustche Telekom, which owned approximately 60 percent of Magyar Telekom, reported the results of Magyar Telekom’s operations in its consolidated financial statements.  Additionally, the criminal information charges Magyar Telekom with falsifying its books and records in regard to its activity in Montenegro.   According to the court filing, Magyar Telekom made improper payments in connection with its acquisition of a state-owned telecommunications company in Montenegro.   These payments were documented on Magyar Telekom’s books and records through the execution of four bogus contracts.   For example, two of the contracts were backdated and concealed the true counterparties, and no legitimate services were provided under the contracts even though the contracts were for €4.47 million.”

The criminal charges against Magyar Telekom were resolved via a deferred prosecution agreement (see here).  Pursuant to the DPA, Magyar Telekom agreed to pay a $59.6 million penalty for its illegal activity, implement an enhanced compliance program and submit annual reports regarding its efforts in implementing the enhanced compliance measures and remediating past problems.

The DOJ also entered into a two-year non-prosecution agreement (see here)  with Deutsche Telekom for its failure to keep books and records that accurately detailed the activities of Magyar Telekom.   At the time of the conduct at issue, Deutsche Telekom’s ADRs traded on the NYSE.  The NPA requires Deutsche Telekom to pay a $4.36 million penalty and to enhance its compliance program.

The DOJ release states as follows.  “Both agreements acknowledge Magyar Telekom and Deutsche Telekom’s voluntary disclosure of the FCPA violations to the department and the leadership of Magyar Telekom’s audit committee in pursuing a ‘thorough global internal investigation concerning bribery and related misconduct.’   In addition, the agreements highlight that the companies have already undertaken remedial measures and have committed to further remedial steps through the implementation of an enhanced compliance program.”

SEC

Based on the same core conduct, the SEC also charged (see here for the complaint) Magyar Telekom and Deutsche Telekom.  Magyar Telekom is charged with FCPA anti-bribery violations as well as books and records and internal controls violations.   Deutsche Telekom is charged with FCPA books and records and internal controls violations.

Without admitting or denying the SEC’s allegations, Magyar Telekom and Deutsche Telekom consented to the entry of final judgments.  Magyar Telekom agreed to settle the SEC’s charges by paying $31.2 million in disgorgement and pre-judgment interest.

The SEC also alleged in a separate complaint (see here) that the three former top executives at Magyar Telekom “orchestrated, approved, and executed”  the Macedonia and Montenegro bribery schemes.  Charged in the complaint are:  Elek Straub (former Chairman and CEO); Andras Balogh (former Director of Central Strategic Organization); and Tamas Morvai (former Director of Business Development and Acquisitions). 

The complaint alleges that the individuals violated or aided and abetted violations of the FCPA’s anti-bribery, books and records, and internal controls provisions; knowingly circumvented internal controls and falsified books and records; and made false statements to the company’s auditor.  Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated as follows.  “Magyar Telekom’s senior executives used sham contracts to funnel millions of dollars in corrupt payments to foreign officials who could help them keep competitors out and win business.  They purposely structured the sham contracts to circumvent internal review, and when questions were eventually raised about their use of ‘consulting’ contracts, they reconfigured them as ‘marketing’ contracts to avoid scrutiny and prolong their scheme.”  The SEC seeks disgorgement and penalties and the imposition of permanent injunctions against the individuals.

Stay tuned for additional analysis of the enforcement actions.

DOJ Indictment

As noted in the previous post, the DOJ indictment (here) charges the following individuals.  Uriel Sharef, Herbert Steffen, Andres Truppel, Ulrich Bock, Stephan Signer, Eberhard Reichert, Carlos Sergi and Miguel Czysch.

The below defendants are  described as “officers, directors, employees and agents” of an “issuer” (Siemens AG).

According to the indictment, Sharef (a dual citizen of Israel and Germany) was employed by Siemens from 1978 to December 31, 2007.  The indictment alleges that from 2000 until his departure from Siemens, Sharef was a member of Siemens AG’s Managing Board and Corporate Executive Committee (“CEC”), with oversight responsibilities for Siemens AG’s power operations group, including Siemens Power Transmission and Distribution (“Siemens PTD”), and Siemens AG’s operations in the Americas region, including Siemens Argentina.

According to the indictment, Steffen (a German citizen) was a long-time Siemens employee who left the company in 2003.  The indictment alleges that Steffen, at various times, was: group president of Siemens AG’s transportation systems operating division; group president of Siemens PTD; CEO of Siemens Argentina; and chairman of the Supervisory Board of Siemens Argentina.

According to the indictment, Truppel (a dual citizen of Germany and Argentina) was employed by Siemens until 2002 when he then became a consultant to Siemens until 2004.  The indictment alleges that until his “shift to consultant status” Truppel was CFO of Siemens Argentina.

According to the indictment, Bock (a German citizen) was a long-time employee of Siemens until 2001 when he then became a paid consultant to Siemens until 2007.  While a Siemens employee, Bock was commercial head of Siemens Business Services (“SBS” – a wholly-owned subsidiary of Siemens AG and a unit in Siemens information and communications operating group).

According to the indictment, Reichert (a German citizen) was a long-time Siemens employee until 2001.  He was the technical head of SBS’s Major Projects subdivision.

According to the indictment, Signer (a German citizen) was a long-time Siemens employee until 2011.  The indictment alleges that from 2000 to 2007, Signer worked for SBS as a commercial director in various capacities.

The below defendants are described as “agents” of Siemens AG who served as “intermediaries between Siemens and officials of the Government of Argentina” – the so-called “Intermediary Defendants.”

According to the indictment, Sergi (a citizen of Argentina) “was a prominent businessman in Latin America with extensive high-level government contacts in Argentina.”  The indictment states that Sergi was for a 15 year period ending in 2003 a member of the Supervisory Board of Siemens Argentina along with Sharef.

According to the indictment, Czysch (a German citizen and resident of Switzerland) was a business associate of Sergi.

For both set of defendants, the indictment invokes 78dd-1 of the FCPA.   The jurisdictional hook under 78dd-1 for non-U.S. “issuers” is “use of the mails or any means or instrumentality of interstate commerce” in furtherance of a bribery scheme.  As described below, the indictment alleges certain conduct in the U.S. as well as wire transfers of money through U.S. bank accounts in furtherance of the bribery scheme.

The indictment also refers to six unindicted co-conspirators (two individuals described an attorneys in Argentina and former senior officials in the Argentine Ministry of Justice; a former CEO of Siemens Argentina; a former deputy general counsel in the Legal Services office at Siemens AG headquarters; a business partner of Sergi; and a business partner of Czysch).

Under the heading “Overview of the Conspiracy” the indictment alleges as follows.  “In or about August 1994, the Government of Argentina issued a tender for bids to replace an existing system of manually created national identity booklets with state-of-the-art national identity cards” – the so-called DNI (Documento Nacional de Identidad) project.  According to the indictment, the “total estimated value of the DNI project was approximately $1 billion.”    In 1998, the President of Argentina issued a decree awarding the DNI project to Siemens IT Services S.A. (“SITS”), a special-purpose subsidiary created by SBS for the purpose of bidding on the DNI project.  According to the indictment, from 1996 to 2009, the defendants and others “engaged in a conspiracy on behalf of Siemens to obtain the lucrative proceeds of the DNI project, and to foster future business, by means of bribery, fraud, and other forms of corruption.”

The indictment specifically alleges as follows.  “Members of the conspiracy won the DNI project for Siemens by bribing Argentine government officials.  They paid more bribes in the hope of reviving the project when, in or about 2001, the DNI project was stalled.  Ultimately [...] the DNI project was terminated altogether.  Even after this point, members of the conspiracy continued to pursue the profits that Siemens had expected to gain from the project.  They did so through additional bribes and corrupt conduct, including the pursuit of a fraudulent arbitration in Washington, D.C. against the Argentine government, demanding nearly $500 million while actively hiding the corruption from the tribunal.”

According to the indictment, “some of conspirators were employed by Siemens as executives, lawyers, and managers working on DNI project matters; others served as agents and conduits for the payment of bribes to Argentine government officials who were in a position to influence the direction of the DNI project.”  The indictment alleges as follows.  “Integral to the conspiracy, and to the concealment of the illegal objects of the conspiracy, was the conspirators’ use of at least 17 conduit entities (collectively, the ‘Conduit Entities’) controlled or otherwise affiliated with the Intermediary Defendants and with various Argentine government officials and candidates for office who were the recipients or intended recipients of bribe payments (the ‘Argentine Officials’).

The conduct alleged in the indictment starts with “initial bribe commitments and payments.”   The indictment alleges that various co-conspirators “committed Siemens to paying nearly $100 million in bribes to sitting officials of the Argentine government, members of the opposition party, and candidates for office who were likely to come to power during the performance of the project.”   According to the indictment, many of these payments were made pursuant to “black contracts, that is unwritten contracts” with third-parties who later sought reimbursement from Siemens.

Argentine officials described in the indictment are “Argentine Official A” (a senior official in the Office of the President and thereafter a candidate for office and member of the Argentine Congress), “Argentine Official B” (a senior official in the Ministry of Interior and thereafter a member of the Argentine Congress); and “Argentine Official C” (a senior official in the Ministry of Migration and the Office of Internal Security and thereafter a member of the Argentine Congress).  The indictment alleges that certain defendants “caused SBS to transfer two wires in the aggregate amount of approximately $7.4 million to a bank account in Manhattan, New York” in furtherance of the bribe scheme.

The indictment next alleges that in 1999 “with work on the DNI project underway, the Government of Argentina suspended the project, as the country faced a mounting economic crisis and a presidential election” and that a “new administration, which came to power [...] maintained the suspended status of the DNI project.”  The indictment alleges that Sharef and Steffen “led a campaign on Siemens’s part to restart the DNI project” and that “renegotiation of the contract governing the DNI project was a part of the campaign.”  The indictment charges that various defendants “lobbied Argentine government officials” and that Sharef met with a “Argentine Official D” (a senior official in the office of the Argentine President).  According to the indictment, “the meeting engendered optimism at Siemens that the President of Argentina would soon issue a decree authorizing the resumption of the DNI project” and that “continuing the payment of bribes was part of the conspirators’ effort to revive the DNI project.”

According to the indictment, the conspirators committed to pay additional bribes to Argentine Officials A, B, C, D, as well as “Argentine Official E” (a senior official in the Ministry of the Interior and thereafter a member of Congress), “Argentine Official F” (a senior official in the Ministry of the Interior and thereafter a candidate for office in the Argentine Congress), and “Argentine Official G” (a senior official in the Ministry of Interior).  According to the indictment, conspirators “agreed to funnel payments on all existing and new bribe obligations through the Intermediary Defendants” and “also agreed to conceal the bribe payments under a ‘white contract’ – that is, a contract that appeared legitimate on its face, but which did not reflect an actual transaction of business.”

The indictment next alleges that in 2001 “the anticipated decree authorizing the resumption of the DNI project still was not issued.”  According to the indictment, “the Argentine government was instead conducting an assessment of the merits of continuing the DNI project through a body” called the General Accounting Agency of the Nation (“SIGEN”) and that “in a further effort to prevent termination of the DNI project, members of the conspiracy determined to influence SIGEN’s assessment in Siemens’s favor by bribing a SIGEN board member (“Argentine Official H”).

According to the indictment, “despite Siemens’s efforts and bribe payments intended for various foreign officials, the Government of Argentina officially terminated the DNI project” in 2001.  Nevertheless, the indictment alleges that certain defendants and conspirators assembled a Crisis Management Team (“CMT”) continued a bribe scheme to “(i) ensure that Siemens recognized the economic benefits of the contract for the DNI project, notwithstanding its termination and the corrupt manner by which it had been procured, (ii) prevent public disclosure of the bribery associated with the DNI project, and (iii) ensure Siemens’s ability to secure future government contracts in Argentina and elsewhere in the region.”  According to the indictment “the conspirators sought to achieve these related goals by paying down outstanding bribe obligations to Argentine Officials through a complex series of transactions, paying down bribe obligations through a sham arbitration in Switzerland, and seeking to recoup the anticipated financial benefits of the DNI project through a fraudulent arbitration in Washington D.C.”

Specifically, the indictment charges that certain defendants met with Sergi and Czysch in Miami, Florida to “re-negotiate the amount of outstanding bribe commitments to the Argentine Officials.”  The indictment further alleges certain “wire transfer instructions for payment through a bank account in Manhattan, New York” and payments through a New York-based account.  The indictment further alleges that one of the Conduit Entities had Miami, Florida addresses.  The indictment further alleges that certain defendants also met in Manhattan, New York “to discuss the outstanding bribe obligations.”

Thereafter, the indictment alleges that Sergi (the prominent businessman in Latin America with extensive high-level government contracts in Argentina who served as an agent of Siemens AG) filed a formal claim against SBS in a Swiss arbitral tribunal in 2005 to recover under a sham contract used to make certain bribe payments.  The indictment states that “although the members of the conspiracy knew that none of the services described in the contract were performed and were not expected to be performed, and that the contract was a sham used to disguise illegal bribe obligations, none of the conspirators acknowledged as much before the Swiss tribunal.”   According to the indictment,  SBS settled the claim for approximately $8.8 million, but that the “settlement was actually a mechanism to disguise a partial payment of bribe obligations to the Argentine Officials.”  According to the indictment, certain of the settlement money passed through bank accounts in Manhattan, New York.

As to the Washington D.C. arbitration, the indictment alleges that certain of the defendants and co-conspirators “orchestrated the filing of a fraudulent arbitration claim in Washington D.C. in 2002 to cause the Argentine government to pay Siemens AG damages in an amount equivalent to incurred expenses and the total profits the company would have earned from the DNI project had it not been terminated.”  According to the indictment, “exposure of the bribery associated with the DNI project would have likely rendered the arbitration claim futile because the contract would have been procured through illegal corruption.”  The indictment alleges that certain defendants and co-conspirators “successfully kept evidence of bribery out of the arbitration in Washington D.C.” by filing witness statements containing “material misrepresentations and omissions relating to the DNI’s project origins, among other matters.”  According to the indictment, despite later claims by Argentina that the DNI project bidding was corrupted – claims Siemens denied, the arbitral tribunal sided with Siemens AG and on February 2007 it awarded Siemens AG approximately $218 million in loss of investment, plus interest.  However, the factual portion of the indictment ends with the following statement – in August 2009 “Siemens AG personnel who were not members of the conspiracy caused the company to waive its right to the award.”

Based on the above conduct, the indictment charges the defendants with conspiracy to violate the FCPA’s anti-bribery, books and records and internal control provisions; conspiracy to commit wire fraud; conspiracy to commit money laundering; and substantive wire fraud.

SEC Complaint

The SEC’s complaint (here) is based on the same core conduct alleged above.  Reichert and Czysch are not named as defendants in the SEC action, but the SEC complaint includes as a defendant Bernd Regendantz (the CFO of SBS who allegedly authorized certain bribe payments).  Each of the SEC defendants are charged with violating the FCPA’s anti-bribery provisions;  aiding and abetting Siemens’ FCPA violations – both anti-bribery violations and books and records and internal controls; and violating other securities laws by falsifying documents, including invoices and sham consulting contracts in furtherance of the bribery scheme.

According to the SEC, “over the course of the bribery scheme, Siemens paid an estimated total of over $100 million in bribes, approximately $31.3 million of which were made after [...] Siemens became subject to the U.S. securities laws.”

In addition, Regendantz is charged with violating Rule 13b2-2 by signing false internal certifications pursuant to SOX.  As to Regendatz, the SEC complaint alleges that he “had no prior dealings with the DNI contract” when he became CFO of SBS in 2002 and that he had resisted other defendants pressure to authorize additional bribe payments.  According to the complaint, “Regendantz sought guidance from Siemens’ Head of Compliance, Chief Financial Officer, Chief Executive Officer, and two members of the Managing Board.”  The complaint alleges that “in each instance, Regendantz explained that the payment demands lacked any legitimate commercial basis and that he was reluctant to authorize them.”  The complaint then states as follows.  “In each instance, Regendantz explained that the payment demands lacked any legitimate commercial basis and that he was reluctant to authorize them.  In each instance, Regendantz’s superiors gave every indication that they were familiar with the DNI Contract and with the nature of the payment demands.  And in each instance, his superiors told Regendantz that it was his responsibility to find a solution to the problem.  Regendantz understood these responses from his superiors to be an instruction that he authorize the bribe payments.”

The SEC’s release noted that Regendantz settled the SEC charges without admitting or denying the allegations and consented to entry of a final judgment that enjoins him from future violations.  The release states that Regendantz previously paid a $40,000 administrative fine ordered by the Munich prosecutor.