Archive for the ‘FCPA Trials’ Category

The Coming Battle Over The Status Of Ecopetrol

Thursday, April 30th, 2015

EcopetrolAs recently highlighted here by the Wall Street Journal, the Foreign Corrupt Practices Act criminal trial of former PetroTiger CEO Joseph Sigelman, originally scheduled to begin this week, was “pushed back for two months to allow him assistance from an unlikely ally: the former Colombian official he is accused of bribing.”  As noted in the article, “Mr. Sigelman is accused of paying David Duran, a former official at Colombia’s Ecopetrol SA to win business for his oil services company, PetroTiger.”

This November 2014 post highlighted how Sigelman is challenging various aspects of the DOJ’s case, including its interpretation and application of the “foreign official” element to Ecopetrol. Similar to previous “foreign official” challenges, the DOJ argued that the dispute is an issue of fact inappropriate for pre-trial disposition.  Accordingly, as in the previous “foreign official” challenges, the “foreign official” issue is moving to other phases of the case.

Recently the DOJ and Sigelman filed motions foreshadowing the evidence the parties intend to offer to prove or disprove whether Ecopetrol is an “instrumentality” of the Colombian government and thus whether Duran is a “foreign official” under the FCPA.

Although not binding in the Sigelman case pending in federal court in New Jersey, approximately one year ago in U.S. v. Esquenazi, the 11th Circuit concluded, in a case of first impression at the appellate level, that “an ‘instrumentality’ [under the FCPA] is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” (emphasis added).

In this letter the DOJ provides notice that it may call (1) Alejandro Linares Cantillo and (2) Carlos Mantilla McCormick to provide expert testimony.  In pertinent part, the letter states:

Alejandro Linares Cantillo

Mr. Linares is the Vice President for Legal Affairs and General Counsel of Ecopetrol S.A., and he has been in this position since October 2014. Mr. Linares’s testimony is based on his training, education, and experience as described in his curriculum vitae, including his experience at Ecopetrol S.A. (“Ecopetrol”), as well as his review of relevant material including, but not limited to, Ecopetrol’s Forms 20-F filed with the U.S. Securities and Exchange Commission, Colombian laws and regulations, scholarly articles and books, and Ecopetrol company materials. If called as a witness, Mr. Linares would generally testify about the history, business, and structure of Ecopetrol over time. Mr. Linares would also testify about the Colombian government’s control of Ecopetrol and the company’s functions as a government-controlled entity, particularly as it relates to the Mansarovar contract at issue in this case. More specifically, if called as a witness, we anticipate Mr. Linares would testify to the following:

In Colombia, the state owns all hydrocarbon reserves. To ensure proper management and supply of hydrocarbon resources to the nation, the Colombian government has adopted laws, regulations, and policies to ensure an appropriate supply of energy to the nation while responsibly maintaining the nation’s hydrocarbon resources. It effectuates these goals through various agencies and state-controlled entities, including Ecopetrol.

Ecopetrol was originally incorporated by the Colombian government on August 25, 1951, as the Empresa Colombiana de Petróleos S.A. It functioned as a governmental industrial and commercial company responsible for administering Colombia’s hydrocarbon resources.

The company’s legal form has evolved since its inception. For example, in 1970, the company adopted its first by-laws, ratifying its nature as a stateowned industrial and commercial company linked to the Ministry of Mines and Energy and fiscally supervised by the Office of the General Controllership.

In 2003 the government restructured Empresa Colombiana de Petróleos into a 100% state-owned corporation by shares linked to the Ministry of Mines and Energy and renamed the company Ecopetrol S.A. (hereinafter referred to as “Ecopetrol” regardless of time period).

In 2006 the legal nature of Ecopetrol was changed to one of a mixed economy corporation, linked with the Ministry of Mines and Energy and funded by Colombian government and private capital.

The Republic of Colombia is required by law to own at least 80% of the outstanding voting shares of Ecopetrol. In 2009 and 2010 the government owned roughly 90% of the outstanding voting shares, and it currently owns roughly 88.5% of Ecopetrol’s outstanding voting shares. Ecopetrol has had American Depository Shares trading on the New York Stock Exchange since 2008.

In 2003 the Colombia government created the National Hydrocarbons Agency (NHA), and the government granted the NHA authority over, among other things, the design, promotion, negotiation, conclusion, tracking, and management of new exploration and exploitation of Colombian hydrocarbon resources. The Ministry of Mines and Energy continues to administer the overall oil policy and planning coordination, and together with the Oil and Gas Regulation Commission it also regulates the downstream sector.

Prior to December 31, 2003, Ecopetrol exercised administrative, industrial, and commercial powers over Colombian hydrocarbon resources owned by the Republic of Colombia.

After December 31, 2003, as a mixed economy company, Ecopetrol retained authority to engage in industrial and commercial activities, under the indirect control of the Colombian government, with respect to, among other things, the exploration, exploitation, transportation, and supply and marketing of Colombian hydrocarbon resources, as well as related concessions, assets, and real estate. It does so as an association contracts administrator in the commercial sphere on behalf of the Colombian government.

Ecopetrol has also retained certain administrative functions with regard to association contracts it entered into prior to December 31, 2003, including the Mansarovar contract at issue in this case. Administrative functions retained by Ecopetrol after December 31, 2003, with respect to association contracts include, but are not limited to, the following:  management, development, and negotiation of exploration and exploitation rights in connection with hydrocarbon resources; overseeing the advancement of programs that benefit the communities in the areas of influence of the contracts; managing the Colombian government’s share of moneys and in-kind resources obtained from the exploitation of hydrocarbon resources; and managing and disposing of the assets and real estate associated with exploration and exploitation of hydrocarbon resources at the end of the Association contracts.

Ecopetrol may extend association contracts, at its sole discretion, which is an administrative function. If Ecopetrol refuses to extend an association contract, the right to exploit the hydrocarbon reserves that are the subject of the contract would revert to Ecopetrol, and Ecopetrol would have the right to exploit those reserves for an indefinite period at no additional cost to it.

Ecopetrol is the largest company in Colombia as measured by revenue, assets, and shareholder’s equity. It is also the main producer and supplier of fuel and refined products in Colombia. In recent years it has contributed approximately 15% of the Colombian government’s annual revenues through royalties, taxes and dividends, and it remains the single largest source of revenue for the government. Oil production and exports account for a significant part of Colombia’s economy. Ecopetrol accounts for a significant percentage of Colombia’s oil production, exports of crude oil, imports of refined oil products, and refining capacity.

Ecopetrol owns outright 42% of the total crude oil pipeline shipping capacity in Colombia, and in conjunction with partners 99% of the total product pipeline shipping capacity in Colombia. The Colombian government controls and regulates the pipelines through the Ministry of Mines and Energy by establishing hydrocarbon transportation tariffs and transportation regulations.

Ecopetrol is the only producer of asphalt in the country and accounts for nearly all domestic consumption.

Ecopetrol owns and manages nearly all oil refining capacity in Colombia. Because domestic demand outstrips domestic refining capacity, Ecopetrol also imports refined oil products, including gasoline. The Colombian government, by means of The Oil Prices Stabilization Fund, may control the price of gasoline and other fuels by setting prices for them domestically through the Ministry of Mines and Energy below prices in the international market. The government makes payments to refiners and importers, principally Ecopetrol, to account for any fuel price differential, in favor of Ecopetrol, caused by these domestic fuel price subsidies. The government controls the timing of such payouts to Ecopetrol and other refiners and importers.

While the Colombian government enjoys the advantages of a natural monopoly over many aspects of the management, development, and supply of hydrocarbon resources in Colombia through its control of Ecopetrol, it also restricts Ecopetrol’s market share in other areas. For example, the government prohibits Ecopetrol from owning more than 25% of any natural gas transportation company.

The Colombian government’s budget is set in part based on expected revenues from Ecopetrol. As a result of falling world prices of crude oil, it is anticipated that Ecopetrol’s revenues and profits will decline in 2015, and the Colombian government has had to cut its budget for 2015.

In addition to exerting control over Ecopetrol through law, regulation, and policy, Colombia controls Ecopetrol through its majority shareholding position, through which it directly appoints a majority of the board of directors and indirectly the chief executive officer. The board consists of nine members. As the majority shareholder, the Colombian government has the right to elect the majority of the directors. Ecopetrol’s by-laws establish that three of its directors will be the Minister of Mines and Energy, the Minister of Finance, and the Director of the National Planning Agency. The board also has the authority to hire and fire the chief executive officer of the company.

As the majority shareholder in Ecopetrol, the Colombian government may propose and approve decisions that are in furtherance of its own economic and political interests that do not necessarily benefit minority shareholders and may not be in the interest of Ecopetrol. It may also approve dividends at the ordinary general shareholders’ meeting, notwithstanding the interest of minority shareholders, in an amount that results in Ecopetrol having to reduce its capital expenditures, thereby negatively affecting Ecopetrol’s prospects, results of operations and financial condition.

In order for Ecopetrol to issue debt in international or Colombian markets with a tenor greater than one year, or incur any other form of indebtedness, the Ministry of Finance and Public Credit must first authorize the issuance of such debt and register any external debt with the Colombian Central Bank. The Colombian government has the authority to refuse to approve such issuances. These restrictions do not apply to private companies.

Ecopetrol reserves the right to plead sovereign immunity under the U.S. Foreign Sovereign Immunities Act of 1976 with respect to actions brought against it under U.S. or state securities laws.

The Office of the Controller General (“OCG”) is a government institution that acts as the highest form of fiscal control in Colombia. It is charged with ensuring the proper management of public resources and funds. The OCG has oversight responsibility for various public entities in Colombia, including Ecopetrol. As a state-controlled entity, Ecopetrol is subject to review by the OCG and has reporting requirements to it regarding the management of public funds or resources. OCG may bring actions against Ecopetrol’s employees for mismanagement of public funds or resources.

The Office of the Inspector General of Colombia (“OIG”) is an independent public institution with authority over public conduct of those in authority or exercising a public function. The OIG is charged with overseeing public officials’ performance, intervening in defense of the legal order, public funds, and fundamental rights, and instituting disciplinary actions against public officials. Ecopetrol employees are subject to the purview of the OIG.

The National Accounting Office of the Colombian government adopted accounting principles for state-owned entities in 2007 known as the Regime of Public Accounting (“RCP”). RCP differs in some regards from the accounting principles required for private enterprises. Ecopetrol has been required to prepare its financial statements in accordance with RCP since 2008. In its Form 20-F, Ecopetrol refers to this accounting regime as Colombian Government Entity GAAP.

Ecopetrol is subject to the jurisdiction of Colombia’s administrative court system. Disputes between Ecopetrol and private companies must be addressed within the administrative court system, whereas disputes between private parties are handled within Colombia’s ordinary court system.

Ecopetrol’s employees are subject to prosecution under Colombia’s laws against public corruption.

Ecopetrol is subject to Colombia’s Transparency Law, which applies to entities that exercise a public function. This law is similar to the Freedom of Information Act in the U.S.

As a government-controlled entity, Ecopetrol is required to unilaterally terminate contracts with contractors who finance terrorist activities. Private companies are not subject to this requirement.

Ecopetrol is controlled by the Colombian government. Ecopetrol functions as an instrumentality of the state, including as an industrial and commercial operator with respect to exploring, exploiting, transporting, and supplying hydrocarbon resources for the Colombian state. Ecopetrol also functions as an instrumentality of the state through its administrative functions in connection with association contracts entered into prior to December 31, 2003, including the Mansarovar contract at issue in this case. Ecopetrol also manages public resources.

Carlos Mantilla McCormick

Mr. Mantilla is the Vice President of Hydrocarbon Contracts of the NHA, and he has been in this position since 2014. Mr. Mantilla’s testimony is based on his training, education, and experience as described in his curriculum vitae, including his experience at NHA, as well as his review of relevant material including, but not limited to, Colombian laws and regulations and NHA materials. If called as a witness, Mr. Mantilla would generally testify about the history and structure of the NHA since its inception in 2003 to present, as well as the history and background of Ecopetrol as further described above in the description of Mr. Linares’s anticipated testimony. Mr. Mantilla would also testify about the Colombian government’s control of Ecopetrol and the functions that Ecopetrol and the NHA have performed and continue to perform, as described in greater detail above. More specifically, if called as a witness, we anticipate Mr. Mantilla would testify to the following:

In 2003, Colombia created the NHA and granted the NHA authority over, among other things, the design, promotion, negotiation, conclusion, tracking, and management of new exploration and exploitation of Colombian hydrocarbon resources.

After December 31, 2003, Ecopetrol continued to administer substantial hydrocarbon resources covered by association contracts with third parties, and it remained the government’s principal instrument of engaging in commercial and industrial activity in the hydrocarbon market. The NHA took over certain administrative and regulatory functions from Ecopetrol in the upstream sector, except as to those resources covered by Ecopetrol’s association contracts entered into prior to December 31, 2003. Ecopetrol has retained certain administrative functions with regard to association contracts it entered into prior to December 31, 2003, including the Mansarovar contract at issue in this case.

As a state-controlled entity, Ecopetrol is charged with exploring, extracting, processing, transporting, and marketing Colombia’s hydrocarbon resources. It is also charged with the administration of hydrocarbon resources related to association contracts entered into prior to December 31, 2003, as well as exploiting those resources and others administered by other agencies as an operator in the commercial sphere as an instrumentality of the Colombian government.

Ecopetrol is still a counterparty to the contracts that it signed before January 1, 2004, including the Mansarovar contract at issue in this case. Those contracts have clauses providing, at Ecopetrol’s sole option, for extensions. If Ecopetrol were to refuse to extend one of those contracts, the right to exploit the hydrocarbon reserves that are the subject of the contract would revert to Ecopetrol, and Ecopetrol would have the right to exploit those reserves for an indefinite period at no additional cost to it.

After NHA was created, Ecopetrol continued to perform administrative functions with regard to association contracts and performed many of the same governmental functions with respect to those contracts after NHA was created that it had performed before NHA was created.

NHA sets oil prices for exploration and production contracts that it controls, but has no role in setting prices for association contracts controlled by Ecopetrol. With regard to exploration and production contracts, NHA establishes plans related to drilling, budget, extraction, general rules, and contracting. In association contracts maintained by Ecopetrol, Ecopetrol carries out those functions, and NHA has no role in those decisions.

NHA plays no part in approving contracts with service providers with respect to association contracts, and it has no role in ensuring that private companies that sign association contracts with Ecopetrol adhere to their agreements. Ecopetrol had that responsibility before NHA was created and has retained that responsibility. NHA has certain authority over all oil fields, and thus has limited functions with respect to association contracts, including: NHA conducts technical inspections of all oil fields in Colombia. Once an association contract ends, Ecopetrol may continue to maintain the oil fields that the contract covered. To do so, Ecopetrol must submit a petition for NHA’s approval to continue to administer the oil fields covered by the contract. Ecopetrol is the only company that may submit such a petition. Royalties that are paid for oil extraction are set by NHA.

NHA has significant authority over exploration and production contracts signed after December 31, 2003.

In this letter, Sigelman’s defense counsel provides notice of the expert testimony it intends to offer.  In pertinent part, the letter states:

Justice Carlos G. Arrieta

We anticipate that Justice Arrieta will offer testimony regarding Ecopetrol, including the functions it performed between 2009 and 2010 and its relationship with the Republic of Colombia (“Colombia”) during that period. This testimony is expected to include Ecopetrol’s history, the laws and regulations bearing on its functions and its relationship with Colombia, Ecopetrol’s internal governance and operations, and the role of Ecopetrol’s employees. Justice Arrieta has already provided one declaration in this matter, [...]  and we expect that his testimony at trial will be consistent with and supplemental to that declaration.

Justice Arrieta is qualified to offer this testimony on the basis of his education, professional training, academic research, and experience in administrative law. His extensive judicial experience includes terms as Justice on Colombia’s State Council (Colombia’s highest court for administrative law disputes) and as adjunct Justice on Colombia’s Constitutional Court (Colombia’s highest court for constitutional law matters). In addition, he served for four years as Colombia’s Attorney Inspector General. Justice Arrieta’s private practice experience includes litigation and client advisory services related to administrative law issues prevalent in the oil and gas industry. He also acts as an arbitrator in disputes arising from public and commercial contracts. Additionally, Justice Arrieta was a professor of law at the Los Andes School of Law in Bogota, Colombia, for many years and served as the school’s Dean from 1986-89.

Professor David R. Mares

We anticipate that Professor Mares will offer testimony regarding the characteristics and relative autonomy of various nationally-owned and private oil and gas companies, including Ecopetrol. Professor Mares is also expected to provide testimony regarding the political, social, and economic factors influencing the creation and/or privatization of national oil companies. Professor Mares is qualified to offer this testimony on the basis of his extensive academic research of Latin American energy issues. In addition to his current teaching position at the University of California, San Diego, Professor Mares is the Baker Institute Scholar for Latin American Energy Studies at Rice University. Professor Mares has also held teaching posts at El Colegio de Mexico; the Universidad de Chile; FLACSO Ecuador; Harvard University; Stanford University; and a fellowship at the Oxford Institute for Energy Studies. In the course of his scholarship, Professor Mares has written or edited nine books, as well as hundred journal articles, book chapters, and reports. Professor Mares’s teaching includes classes on energy politics.

Justice Jorge A. Gomez

We anticipate that Justice Gomez will offer testimony regarding Colombia’s criminal laws and procedure, including the effects of certain criminal penalties. Justice Gomez is expected to provide testimony as to the penalty of debarment from performing public functions as well as to the effect of such penalty on crimes against the public administration of Colombia, such as bribery. Justice Gomez is qualified to offer this testimony on the basis of his education, professional training, academic research, and experience. His professional background includes extensive judicial experience, including terms on the Criminal Section of Colombia’s Supreme Court of Justice (Colombia’s highest court for criminal matters) as well as appellate and trial courts with jurisdiction over criminal matters. In addition, Justice Gomez’s private practice experience focuses on criminal law matters. He has taught Colombian criminal law at several universities and published academic articles in Colombian legal journals.

*****

Sigelman’s trial in U.S. District Court, District of New Jersey – Camden, is scheduled to begin on June 1st.

A Comprehensive FCPA Resource

Wednesday, November 5th, 2014

The question was recently asked: ”will there ever be a classic treatise on the FCPA?”New Era

According to Webster’s, a treatise is a book, article, etc., that discusses a subject carefully and thoroughly.

With that definition in mind, I invite you to consider my new book “The Foreign Corrupt Practices Act in a New Era.”  Inside you will find:

  • A thorough telling of the story of the FCPA told largely through original voices of actual participants who shaped the pioneering law;
  • Foundational knowledge (such as DOJ and SEC policy and resolution vehicles and the realities of the global marketplace) that best enhance understanding and comprehension of specific FCPA topics;
  • A comprehensive analysis of the FCPA’s anti-bribery provisions and for each element, exception or affirmative defense discussion of all legal sources of authority (including all relevant substantive FCPA judicial decisions) as well as non-legal sources of information (including discussion of over 70 FCPA enforcement actions);
  • Discussion of other legal issues also relevant to FCPA enforcement;
  • A comprehensive analysis of the FCPA’s books and records and internal controls provisions including legal authority as well as non-legal sources of information;
  • Analysis of the typical origins of FCPA scrutiny and enforcement;
  • Discussion of FCPA settlement amounts, how they are calculated, and analysis of legal and policy issues relevant to settlement amounts;
  • Discussion of FCPA sentencing issues, how sentences are calculated, and an analysis of legal and policy issues relevant to sentencing decisions;
  • An extended discussion and analysis of an often overlooked topics, “FCPA Ripples,” and how settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement;
  • An exploration of practical and provocative reasons for the general increase in FCPA enforcement during this new era including a discussion of FCPA Inc. and the business of bribery;
  • Identification and discussion of FCPA compliance best practices and benchmarking metrics; and
  • An in-depth discussion and analysis of FCPA reform designed to ensure that the FCPA is best achieving the original goals of the law and that FCPA enforcement is transparent and consistent with rule of law principles.

Whether the above topics highlighted and explored in “The FCPA in a New Era” make it a classic treatise, well, I invite you to come to your own conclusion.  At the very least, you will have to agree that the cover of the book is more inviting than a typical treatise.

While I am certainly not going to ascribe labels to my own work, I am pleased to share what others have said about “The FCPA In a New Era.”

Michael Mukasey, former U.S. Attorney General

“Professor Koehler has brought to this volume the clear-eyed perspective that has made his FCPA Professor website the most authoritative source for those seeking to understand and apply the FCPA. This is a uniquely useful book, laying out systematically the history and rationale of the FCPA, as well as its evolution into a structure governed as much by lore as by law. It will be valuable both to those who counsel international corporations, whether in connection with immediate crises or long-term strategies; and to those who contemplate what the FCPA has become, and how it can be improved.”

Professor Daniel Chow, The Ohio State University Moritz College of Law

“This is the single most comprehensive academic treatment of the Foreign Corrupt Practices available. Professor Koehler’s book will become the authoritative standard for the field. The book not only treats the history of the FCPA, but analyzes the statute’s elements in detail, discusses current cases, and makes proposals for reforms where the current law is deficient. The book is written in a clear, accessible style and I will use it often as a resource for my own scholarly work.”

 Richard Alderman, former Director of the UK Serious Fraud Office

“An excellent and thought-provoking book by a great expert. Backed up by rigorous analysis of cases, Professor Koehler constantly challenges those involved in anti-corruption work by asking the question ‘why?’ He puts forward many constructive and well-argued suggestions for improvements that need to be considered. I have learned a lot from Professor Koehler over the years and I can thoroughly recommend this book.”

Thomas Fox, FCPA Compliance and Ethics Blog and FCPA Practitioner

“The Foreign Corrupt Practices Act in a New Era” should become one of the standard texts for any FCPA compliance practitioner, law student studying the FCPA or anyone else interested in anti-bribery and anti-corruption. It should be on your FCPA library bookshelf.”

Barry Vitou, thebriberyact.com and Compliance Practitioner

“If you only read one book on the US FCPA, read this one. [...] Mike Koehler’s new book is probably the best book we’ve read about the FCPA. [...] For those wanting a pair of ‘FCPA goggles’ no book is, in our opinion, better.”

To order a hard copy of the book, see here and here; to order an e-copy of the book, see here and here.

For media coverage of the book including Q&A’s, see here from Corporate Counsel, here from Global Investigations Review, and here from Corporate Counsel Weekly.

*****

Looking for even more information and analysis of the FCPA and FCPA enforcement?

I invite you to all also consider the following year in review articles.  Granted the below articles are not found between two covers, but you will find approximately 500 pages of FCPA statistics, trends and analysis over time.

For 2013, see here.

For 2012, see here.

For 2011, see here.

For 2010, see here.

For 2009, see here.

An FCPA Enforcement Action With Many Interesting Wrinkles

Wednesday, August 27th, 2014

[This post is part of a periodic series regarding "old" FCPA enforcement actions]

The 1998 Foreign Corrupt Practices Act enforcement action against Saybolt Inc., Saybolt North America Inc. and related individuals had many interesting wrinkles:  a unique origin; a rare FCPA trial; a fugitive still living openly in his native land; and case law in a related civil claim.

As to the unique origin, Saybolt Inc. was a U.S. company whose primary business was conducting quantitative and qualitative testing of bulk commodities, such as oil, gasoline, and other petrochemicals, as well as grains, vegetable oils and other commodities.  The Environmental Protection Agency, Criminal Investigation Division (“EPA-CID”) was investigating the company for allegedly submitting false statements to the EPA about the oxygen content of reformulated gasoline blended in accordance with the requirements of the Clean Air Act.  The investigation was initiated by reports of data falsification at Saybolt’s Massachusetts facility.

During the course of the investigation EPA-CID interviewed Steven Dunlop (the general manager for Latin American operations for Saybolt) who provided the following information.

During a trip to Panama in 1994, Dunlop was advised of new business opportunities that were being offered to Saybolt Panama through the Panamanian Ministry of Commerce and Industries.  Specifically, the DOJ’s criminal complaint alleged that Hugo Tovar (the General Director of the Hydrocarbon Directorate, a division of the Ministry of Commerce and Industries) and Audo Escudero (the Sub-Director of the Hydrocarbon Directorate), offered to Saybolt Panama an opportunity to: (1) receive a substantial reduction in Saybolt Panama’s tax payments to the government of Panama; (2) obtain lucrative new contracts from the government of Panama; and (3) secure a more permanent facility for Saybolt Panama’s operations on highly coveted land near the Panama Canal.  According to the criminal complaint, this parcel of land was coveted because Saybolt Panama “only had a tenuous legal claim on its existing facility” and as a result its operations were continually at risk.

The complaint details various communications between Dunlop and David Mead (the President and CEO of Saybolt) in which Dunlop informed Mead of a $50,000 “fee” that would be needed to accomplish the above opportunities.

The complaint details a 1995 board of directors meeting at Saybolt during which discussion concerned the “$50,000 payoff demanded by the Panamanian officials with whom Saybolt was negotiating.  According to the complaint, present at this meeting were Board members Frerik Pluimers and Philippe Schreiber as well as Mead and Saybolt’s Chief Financial Officer Robert Petoia.  According to the complaint, Dunlop received instructions from Mead that he was to “take the necessary steps to ensure that the $50,000 was paid to the Panamanian officials in order to secure the deal” and that Schreiber was to be his primary contact on all issues concerning the Panamanian transaction.

According to the complaint, “in the minutes leading up to the time he was scheduled to leave his house for the airport” to travel to Panama,” Dunlop had a telephone conversation with Schreiber who advised him “that the action [he] was about to take would constitute a violation of the FCPA.”

According to the complaint, while in Panama Dunlop “learned that the Saybolt funds needed to make” the payment had not yet been received and that Dunlop then tried to contact Mead.  According to the complaint, Mead sent Dunlop an e-mail which stated: “Per telecon undersigned and capo grande Holanda the back-up software can be supplied from the Netherlands.  As previously agreed, you to detail directly to NL attn FP.” According to the complaint, “capo grande Holanda” was a reference to Pluimers (the President of the Dutch holding company that controlled Saybolt, Inc.” and the “back-up software” was a reference to the $50,000 payment.”

The complaint alleged that the funds never arrived in Panama and that Dunlop was receiving pressure from the Panamanian officials “to make the $50,000 payment prior to the upcoming Christmas holidays.”  According to the complaint, Mead told Dunlop on a telephone call to make the $50,000 payment using funds that were in the operating account of Saybolt Panama.

According to the complaint, the $50,000 in cash was obtained by laundering a check through a local construction company and that a “sack full of currency” was handed over to Escudero at a bar in Panama City by the individual who was serving as Saybolt Panama’s liaison with Escudero.  Further, according to the complaint, “shortly after this payment was made, the Ministry of Commerce and Industries and other necessary government agencies acted favorably on Saybolt’s proposal.”

In April 1998, the DOJ filed this indictment against Mead (a citizen of the U.K. and resident of the U.S. and Pluimers (a national and resident of the Netherlands) based on the above conduct.  The indictment charged Mead and Pluimers with conspiracy to violate the FCPA’s anti-bribery provisions and the Travel Act, two substantive violations of the FCPA, and two substantive violations of the Travel Act.

According to the indictment, the purposes and objectives of the conspiracy were:

  • To obtain contracts for Saybolt de Panama and its affiliates to perform import control and inventory inspections for the Ministry of Hydrocarbons, and the Ministry of Commerce and Industries, both departments of the Government of the Republic of Panama;
  • To obtain and to expedite tax benefits for Saybolt de Panama and its affiliates from the Government of the Republic of Panama, including exemptions from import taxes on materials and equipment and reductions in annual profit taxes;
  • To obtain from an agency of the Government of the Republic of Panama a secure and commercially attractive operating location for an inspection facility in Panama; and
  • To “lock out” Saybolt’s competitors by retaining possession and control of Saybolt de Panama’s existing location in Panama.

In September 1998, the DOJ filed this superseding indictment substantially similar to the first and including the same charges.

Mead moved to strike the indictment of allegations that he violated the FCPA and for dismissal of the indictment for failure to state an offense under the Travel Act, and for a Bill of Particulars.   In a one page order, U.S. District Court Judge Ann Thompson denied the motions. Dunlop was given full immunity as was the American attorney present at the board meeting and involved in several conversations with Pluimers, Mead, and Dunlop concerning the alleged payments.

Mead argued that the FCPA only prohibited payments to assist a domestic concern in obtaining and retaining business” and he used Saybolt’s rather complex corporate structure to argue that the business sought to be obtained or retained was for a different Saybolt entity, not a domestic concern.  In his motion, Mead stated “because the government ignores the corporate legal structure and does violence to the FCPA by attempting to end-run congressional policy, the Court must justifiably refuse.”  Elsewhere, the motion stated:

“Whether the government labels foreign corporations as ‘agents of a domestic concern’ or members of an ‘unincorporated organization,’ the government still may not manipulate the Act’s broad language to end-run this congressional policy (of deliberately excluding both foreign subsidiaries and non-subsidiary foreign corporations from FCPA liability).”

The motion also argued that the indictment was devoid of any allegation that Mead acted “willfully” (i.e. with the specific intent to violate the law) because he followed the legal advice of counsel in making the alleged payments.

In response, the DOJ stated that the indictment “describes in detail how Mead – himself a U.S. resident, and also the President of one U.S. corporation (Saybolt Inc.), Executive Vice-President of a second U.S. corporation (Saybolt North America Inc.), and Chief Executive Officer of an unincorporated association (Saybolt Western Hemisphere) – and others decided to send a Saybolt Inc. employee to Panama City, Panama, to oversee the payment of a $50,000 bride, which they believed would be provided to high level government officials, in exchange for favorable treatment of Saybolt’s business interests in Panama.  The Indictment charges that Mead gave the order to go forward with the bribe and it details the contents of the e-mail message that Mead sent from his office in New Jersey to the Saybolt employee in Panama City.”

At trial, Mead argued that the Government failed to meet its burden of proof and that he acted in good faith belief that the payment to the Panamanian officials was lawful.  The relevant jury instructions stated as follows.

“If the evidence shows you that the defendant actually believed that the transaction was legal, he cannot be convicted.  Nor can he be convicted for being stupid or negligent or mistaken.  More is required than that.  But a defendant’s knowledge of a fact may be inferred from “willful blindness” to the knowledge or information indicating there was a high probability that there was something forbidden or illegal about the contemplated transaction and payment.  It is the jury’s function to determine whether or not the defendant deliberately closed his eyes to the inferences and the conclusions to be drawn from the evidence here.”

According to this docket sheet, Mead’s trial occurred in October 1998 and he was found guilty of all charges.  According to the docket, Mead was sentenced to four months imprisonment, to be followed by four months of home confinement, to be followed by three years of supervised release.  According to the docket, he was also ordered to pay a $20,000 criminal fine. After sentencing, US Attorney Donald Stern of Boston, stated: ”This sentence puts American executives on notice there will be a price to pay, far more than the monetary cost of the birbe, when they buy off foreign officials.”  For additional reading on Mead’s case, see this transcript of an in-depth CNN story about Mead that aired in 1999.

What about Pluimers?

As indicated by this docket sheet, there has been no substantive activity in the case since 1999 and Pluimers remains a fugitive – albeit living openly in his native Netherlands.  According to this 2011 New York Times article citing a Wikileaks cable, “Pluimers simply has too much influence with high-ranking Dutch officials to be handed over to U.S. authorities.”

What about Saybolt?

In August 1998, the DOJ the filed two separate criminal informations against Saybolt Inc. and its parent corporation Saybolt North American Inc. The first information charged Saybolt with conspiracy and wire fraud related to the company’s “two year conspiracy to submit false statements to the EPA about results of lab analyses. The second information charged Saybolt and Saybolt North America with conspiracy to violate the FCPA and one substantive charge of violating the FCPA.

As noted in this plea agreement, Saybolt agreed to plead guilty to all charges in the informations and agreed to pay a total fine of $4.9 million allocated as follows:  $3.4 million for the data falsification violations and $1.5 million for the FCPA violation. Saybolt also agreed to a five year term of probation.

The conduct at issue in the Saybolt and related enforcement actions also spawned a related civil malpractice action alleging erroneous legal advice by counsel regarding the above-described payments to Panamanian officials.  In Stichting v. Schreiber, 327 F.3d 173 (2d Cir. 2003), the Second Circuit analyzed whether a company, in pleading guilty to FCPA anti-bribery violations, acknowledged acting with intent thus undermining its claims that the erroneous legal advice was the basis for its legal exposure.

The court stated:

“Knowledge by a defendant that it is violating the FCPA – that it is committing all the elements of an FCPA violation – is not itself an element of the FCPA crime.  Federal statutes in which the defendant’s knowledge that he or she is violating the statute is an element of the violation are rare; the FCPA is plainly not such a statute.”

The court also stated concerning “corruptly” in the FCPA:

“It signifies, in addition to the element of ‘general intent’ present in most criminal statutes, a bad or wrongful purpose and an intent to influence a foreign official to misuse his official position.  But there is nothing in that word or anything else in the FCPA that indicates that the government must establish that the defendant in fact knew that his conduct violated the FCPA to be guilty of such a violation.”

A Focus On FCPA Civil Trials

Thursday, May 15th, 2014

Yesterday’s post focused on FCPA criminal trials.

You might be wondering, what about FCPA civil trials?

To my knowledge, there has never been a FCPA civil trial in which the SEC has been put to its burden of proof.

The SEC has otherwise been put to its burden of proof in FCPA enforcement actions, although a scant four times in the FCPA’s 37 year history.

This post highlights those four instances (including two matters that remain pending and which may ultimately result in a FCPA civil trial).

Eric Mattson and James Harris

As highlighted in this previous post, in 2002 a judge in S.D. of Texas dismissed an SEC complaint against Eric Mattson and James Harris.  The enforcement action 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.”  See here for the court’s Memorandum and Order.

The SEC’s FCPA website contain no mention of the ultimate outcome of the charges against Mattson and Harris.

Herbert Steffen

As highlighted in this previous post, in 2013 a judge in the S.D. of New York dismissed an SEC complaint against Herbert Steffen, a former Siemens executive, based on alleged improper conduct in Argentina.  In dismissing the case against the German national, the judge concluded, as an initial threshold matter, that personal jurisdiction over Steffen exceeded the limits of due process.  The judge stated, in pertinent part, as follows.

“If this Court were to hold that Steffen’s support for the bribery scheme satisfied the minimum contacts analysis, even though he neither authorized the bribe, nor directed the cover up, much less played any role in the falsified filings, minimum contacts would be boundless.  [...] [U]nder the SEC’s theory, every participant in illegal action taken by a foreign company subject to U.S. securities laws would be subject to the jurisdiction of U.S. courts no matter how attenuated their connection with the falsified financial statements.  This would be akin to a tort-like foreseeability requirement, which has long been held to be insufficient.”

In connection with the same core enforcement action, the SEC also voluntarily dismissed charges against Carlos Sergi.

The SEC’s FCPA website contain no mention of the ultimate outcome of the charges against Steffen and Sergi.

Elek Straub, Andras Balogh and Tamas Morvai

As highlighted in this previous post, in February 2013 a judge in the S.D. of New York denied the defendants’ motion to dismiss the SEC’s charges in an enforcement action alleging a bribery scheme in Macedonia.

In sum, the foreign national defendants, former executives of Magyar Telekom, moved to dismiss the SEC’s complaint on three principal grounds:  (1) the court lacked personal jurisdiction over them; (2) the SEC’s claims were time-barred; and (3) the complaint failed to state claims for certain of its causes of action.

The two most important aspects of the judge’s decision concerned statute of limitations and the jurisdictional element of an FCPA anti-bribery violation.

As to statute of limitations, the judge exhibited judicial restraint in concluding that the plain language of the applicable statute of limitations compelled the conclusion that the limitations period did not begin to run because the foreign national defendants were not physically present in the U.S.

As to the jurisdictional element of an FCPA anti-bribery violation, the judge found the jurisdictional element of 78dd-1 (use of the “mails or any means or instrumentality of interstate commerce”) to be ambiguous and he thus consulted legislative history.  In reviewing the legislative history, the judge concluded that the corrupt intent element of the FCPA did not apply to the jurisdictional component of the FCPA.  Accordingly, the judge concluded that e-mails routed through and/or stored on network servers located within the U.S. are sufficient to plead the jurisdictional element of an FCPA anti-bribery violation even if the defendant did not personally know where his e-mails would be routed and/or stored.

A trial date has not been set in this case.  The current discovery deadline is May 2015.

Mark Jackson and James Ruehlen

As highlighted in this previous post, in December 2012 a judge in S.D. of Texas granted – in an SEC FCPA enforcement action involving alleged conduct in Nigeria –  Mark Jackson and James Ruehlen’s motion to dismiss the SEC’s claims that sought monetary damages while denying the motion  to dismiss as to claims seeking injunctive relief.  Even though the court granted the motion as to SEC monetary damage claims, the dismissal was without prejudice meaning that the SEC was allowed to file an amended complaint.  As noted in this prior post, that is indeed what happened next, and as noted here a second round of briefing began anew.

As noted in this previous post, in the Defendant’s renewed motion to dismiss they argued that the SEC could not rely on the fraudulent concealment or continuing violations doctrine to extend the limitations period to cover certain claims.  A week later the Supreme Court issued its unanimous decision in SEC v. Gabelli (see here for the prior post) and soon thereafter the Defendants filed a notice of supplemental authority with the court arguing that Gabelli “bolstered” their position.  On the same day the SEC’s opposition brief was due, the parties jointly notified the court “that in lieu of opposing the [motion to dismiss] the SEC intends to file a Second Amended Complaint.”  The filing noted that the then proposed Second Amended Complaint “moots the relief sought in the [the motion to dismiss] because it clarifies that, among the violations alleged, the SEC seeks civil penalties … only to the extent such violations accrued on or before [a certain date].  In short, after being put to its initial burden of proof, the SEC’s case against Jackson and Ruehlen remains a shell of its former self.

The SEC’s case against Jackson and Ruehlen is currently scheduled for trial to begin on July 9, 2014.

A Focus On FCPA Criminal Trials

Wednesday, May 14th, 2014

As previously highlighted, last week the DOJ formally announced a criminal indictment against Joseph Sigelman charging the former co-CEO of PetroTiger “with conspiracy to violate the FCPA and to commit wire fraud, conspiracy to launder money, and substantive FCPA and money laundering violations.”  This enforcement action – via a criminal complaint – was initially announced in January 2014 (see here).

This Wall Street Journal Risk & Compliance Journal post suggests that Sigelman will put the DOJ to its burden of proof at trial.

That alone makes the Sigelman action unique as few individual FCPA defendants are willing to “test their innocence” (see here for a prior post).  Indeed, Sigelman’s co-defendants Knut Hammarskjold and Gregory Weisman have pleaded guilty.

The Sigelman action will also be interesting to follow as the FCPA charges, and no doubt other charges linked thereto, are premised on the enforcement theory that employees of alleged state-owned or state-controlled entities are “foreign officials” under the FCPA.  Specifically, the Sigelman action alleges that Ecopetrol is “the state-owned and state-controlled petroleum company in Colombia.”

The most recent relevant jury instruction occurred in the so-called Carson enforcement action in which Judge James Selna (C.D. Cal.) issued the following “knowledge of status of foreign official” instruction (see here).

[.....]

“(4) The defendant offered, paid, promised to pay, or authorized the payment of money, or offered, gave, promised to give, or authorized the giving of anything of value to a foreign official;

(5) The payment or gift at issue in element 4 was to (a) a person the defendant knew or believed was a foreign official or (b) any person and the defendant knew that all or a portion of such money or thing of value would be offered, given, or promised (directly or indirectly) to a person the defendant knew or believed to be a foreign official. Belief that an individual was a foreign official does not satisfy this element if the individual was not in fact a foreign official.

(6) The payment or gift at issue was intended for at least one of four purposes: a. To influence any act or decision of a foreign official in his or her official capacity; b. To induce a foreign official to do or omit to do any act in violation of that official’s lawful duty; c. To secure any improper advantage; or d. To induce a foreign official to use his or her influence with a foreign government or department, agency, or instrumentality thereof to affect or influence any act or decision of such government, department, agency, or instrumentality.”

Very soon after this pro-defendant jury instruction in the Carson enforcement action, the DOJ offered the defendants lenient plea deals which they accepted thus avoiding a trial.

As readers likely know, the SOE “foreign official” theory is currently on appeal to the 11th Circuit, the first instance in FCPA history in which an appellate court has a chance to directly address the issue.  (See here).

The remainder of this post summarizes the six most recent instances in which the DOJ has been put to its burden of proof in an FCPA trial.

Africa Sting

In January 2010, the DOJ announced criminal charges against 22 executives and employees of companies in the military and law enforcement products industry for engaging in a scheme to pay bribes to the minister of defense of an African country.  However, there was no actual involvement from any minister of defense, rather it was a manufactured sting operation.  Given the number of defendants, four separate trials were scheduled.

The first Africa Sting trial started in May 2011 and involved four defendants.  At the close of the DOJ’s case, Judge Richard Leon dismissed a substantive FCPA charge against one defendant (Pankesh Patel), dismissed another substantive FCPA charge against another defendant (Lee Tolleson) and dismissed the money laundering count against all defendants (Patel, Tolleson, Andrew Bigelow, and John Weir).  In July 2011, Judge Leon declared a mistrial as to all remaining counts against all defendants.

The second Africa Sting trial began in September 2011.  At the close of the DOJ’s case, Judge Leon dismissed the conspiracy charge against all defendants (John Mushriqui, Jeana Mushriqui, Patrick Caldwell, Stephen Giordanella, John Godsey, and Mark Morales).  Because Giordanella faced only that conspiracy charge, he was exonerated.  The trial proceeded, the charges went to the jury, the jury deliberated, and in January 2012, the jury found two defendants (Caldwell and Godsey) not guilty.  The jury hung as to the remaining defendants, and once again Judge Leon declared a mistrial as to all remaining counts against the remaining defendants.

Shortly after conclusion of the second trial, the jury foreman published this guest post on FCPA Professor and shortly thereafter the DOJ moved to dismiss with prejudice the criminal charges against all of the remaining defendants including those initially charged but not yet tried (Helmie Ashiblie, Yochanan Cohen, Amaro Goncalves, Saul Mishkin, David Painter, Lee Wares, Ofer Paz, Israel Weisler and Michael Sacks).  The next day, Judge Leon granted the motion to dismiss and stated (see here) “this appears to be the end of a long and sad chapter in the annals of white collar criminal enforcement.”

John O’Shea

In November 2009, John O’Shea was charged with FCPA and related offenses for allegedly making improper payments to alleged Mexican “foreign officials.”  O’Shea mounted a defense and proceeded to trial.  In January 2012, following the DOJ’s case, Judge Lynn Hughes (S.D. Tex.) dismissed the FCPA charges against O’Shea.  In doing so, Judge Hughes stated:  ”The problem here is that the principal witness against Mr. O’Shea … knows almost nothing.”  (See here).  During the trial, Judge Hughes also admonished other aspects of the DOJ’s case stating:   “I don’t know what was presented to the Grand Jury, but … the Government should have been prepared before they brought the charges to the Grand Jury. It’s something you have to prove. And you shouldn’t indict people on stuff you can’t prove.”  (See here).

Lindsey Manufacturing et al

In 2010, the DOJ charged Lindsey Manufacturing Co. and two of its executives (company CEO Keith Lindsey and company CFO Steve Lee) with FCPA offenses for their alleged roles in a conspiracy to pay bribes to alleged Mexican “foreign officials.”  In May 2011, Lindsey Manufacturing, Lindsey, and Lee were found guilty of various FCPA charges after a five-week jury trial.  (See here).

However, after months of post-trial legal wrangling, Judge Howard Matz (C.D. Cal.) vacated the convictions and dismissed the indictment after finding numerous instances of prosecutorial misconduct.  In the words of Judge Matz, the instances of misconduct were so varied and occurred over such a long time “that they add up to an unusual and extreme picture of a prosecution gone badly awry.”  (See here).

[For more on the above instances of the DOJ being put to its burden of proof at trial, see my article “What Percentage of DOJ FCPA Losses Is Acceptable?“]

Esquenazi / Rodriguez

In August 2011, Joel Esquenazi and Carlos Rodriguez were convicted by a jury of one count of conspiracy to violate the FCPA and wire fraud; seven counts of FCPA violations; one count of money laundering conspiracy; and 12 counts of money laundering in connection with an alleged bribery scheme involving Haiti Teleco officials.  (See here).

In October 2011, Judge Jose Martinez (S.D. Fl.) sentenced Esquenazi to 15 years in prison and Rodriguez to 7 years in prison. (See here).  Several stunning and strange developments (see here and here), among other things, resulted in the defendants appealing their convictions to the 11th Circuit.  Among the issues presented on appeal is whether employees of alleged SOE’s are “foreign officials” under the FCPA.  (See here for the post regarding the October 2013 oral arguments as well as links to the briefing).

Greens

In September 2009, husband and wife Gerald and Patricia Green were found guilty after a jury trial of conspiracy to violate the FCPA, substantive FCPA violations and other charges in connection with a bribery scheme involving a Thailand tourism official. (See here).

Notwithstanding the guilty verdict, in sentencing the Greens, Judge George Wu (C.D. Cal.) rejected the DOJ’s 10 year sentencing recommendation and sentenced the Greens to six months in prison, followed by three years probation (including six months of home confinement) (See here).  As highlighted here, Judge Wu saw “shades of gray” in the conduct at issue and believed that the Greens helped make the the project at issue a success, performed the services it was engaged to perform in a professional manner, and increased revenue for the country of Thailand.

Bourke

The FCPA enforcement action against Fredric Bourke was arguably the most complex and convoluted case in the history of the FCPA.  It involved an alleged bribery scheme by Bourke and others in connection with the privatization of the alleged state oil company of Azerbaijan.  The action involved a nearly decade long investigation which spanned the globe, dismissal of FCPA substantive charges on statute of limitations grounds, reinstatement of the FCPA substantive charges, a superseding indictment which then dropped the FCPA substantive charges in exchange for conspiracy to violate the FCPA and other charges.

Following a six week jury trial, in July 2009 Bourke was found guilty of conspiracy to violate the FCPA and Travel Act and making false statement to the FBI.  As highlighted here, in November 2009 Judge Shira Scheindin (S.D.N.Y.) sentenced Bourke to a year and a day in federal prison (followed by three years probation) and ordered him to pay $1 million fine. The DOJ sought a 10 year prison sentence.

Even though Judge Scheindin denied Bourke’s post-trial motions, it was notable that she stated at sentencing as follows.  “After years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both.”

As highlighted here, in December 2011 the Second Circuit affirmed Bourke’s conviction.   The Bourke appeal was principally based on knowledge issues which present narrow, factually unique issues.   Nevertheless the Second Circuit’s holding on conscious avoidance was noteworthy in terms of FCPA jurisprudence.  In short, the Second Circuit held that Bourke enabled himself to participate in a bribery scheme without acquiring actual knowledge of the specific conduct at issue and that such conscious avoidance, even if supported primarily by circumstantial evidence, is sufficient to warrant an FCPA-related charges.