Archive for the ‘General Electric’ Category

A Reminder That The FCPA Has Long Tentacles

Monday, April 28th, 2014

The FCPA has long tentacles as FCPA scrutiny and enforcement can impact a wide range of business activities.

Such as merger and acquisition activity.

Two recent developments serve as a reminder.

As noted here, Zimmer Holdings Inc. agreed to acquire Biomet Inc. in a cash and stock transaction valued at approximately $13.35 billion.

In March 2012 Biomet resolved a $22.8 million Foreign Corrupt Practices Act enforcement action  ($17.3 million via a DOJ deferred prosecution agreement and $5.5 million via a settled SEC civil complaint).  The DPA had a three year term and, as is common, contained the following clause:

Sale or Merger:  Biomet agrees that in the event it sells, merges, or transfers all or substantially all of its business operations as they exist as of the date of this Agreement, whether such sale is structured as a stock or asset sale, merger, or transfer, it shall include in any contract for sale, merger, or transfer a provision binding the purchaser, or any successor in interest thereto, to the obligations described in this Agreement.”

The Zimmer – Biomet merger highlights how FCPA compliance obligations of a target company can be inherited by the acquiring company.

News of General Electric’s possible purchase of Alstom’s energy business highlights how FCPA scrutiny of a target company can be, depending on how the transaction is structured, inherited by the acquiring company.

Alstom has been under FCPA (and related) scrutiny for several years.  Among other things, former Alstom employees and business partners have resolved FCPA enforcement actions concerning the Tarahan power plant project in Indonesia (see here and here for prior posts).  Documents filed in connection with the individual enforcement actions suggest that the following Alstom projects are also under scrutiny: (i) ”projects in Indonesia other than the Tarahan Project, including intended payments to government officials in connection with the Labuan Angin and the Maura Tawar projects;” (ii) ”projects in India, including intended payments to government officials in connection with the Sipat, Barh I, and Barh II projects;” and (iii) the following projects in China - ”Baima PRC Project,” ”Qilu, Maoming, Guangzhou, Wuhan, Jin Men,Yueyang.”

In short, Alstom’s FCPA scrutiny is well known.  Thus, a potential GE – Alstom transaction would not seem to implicate many of the thorny due diligence issues discussed in certain FCPA Opinion Procedure Releases or certain hypotheticals discussed in the FCPA Guidance.

In any event, the FCPA Guidance states:

“Companies acquire a host of liabilities when they merge with or acquire another company, including those arising
out of contracts, torts, regulations, and statutes. As a general legal matter, when a company merges with or acquires another company, the successor company assumes the predecessor company’s liabilities Successor liability is an integral component of corporate law and, among other things, prevents companies from avoiding liability by reorganizing. Successor liability applies to all kinds of civil and criminal liabilities, and FCPA violations are no exception. Whether successor liability applies to a particular corporate transaction depends on the facts and the applicable state, federal, and foreign law.”

As referenced in the FCPA Guidance “whether successor liability applies to a particular corporate transaction depends on the facts and the applicable state, federal, and foreign law.”

Here it is important to recognize the following black-letter legal principles.

In a stock purchase agreement, the acquiring company will ordinarily inherit the target company’s pre-acquisition legal liability. In an asset purchase agreement, the acquiring company ordinarily (subject to certain limited exceptions) does not inherit pre-acquisition legal liability of the seller.

In this area, as in others, the free-for-all nature of FCPA enforcement is apparent.

In “The Federal Common Law of Successor Liability and the Foreign Corrupt Practices Act” forthcoming in the William & Mary Business Law Review, Taylor Phillips (Bass Berry) writes:

“Although successor liability is a key aspect of the government’s FCPA enforcement policy, the Department of Justice and the Securities and Exchange Commission have not distinguished clearly between the contexts of mergers, stock purchases, and asset acquisitions. As demonstrated by this article, asset purchases should be recognized as an acquisition structure that minimizes the risk of FCPA liability. That is because the law that should be applicable to such transactions is not a relatively broad federal common law of successor liability. Instead, it is state common law, which traditionally concedes only very narrow exceptions to the general rule of successor nonliability. Furthermore, given the remedial foundations of most successor liability doctrines, it is not obvious that traditional state common law encompasses punitive — much less criminal — successor liability theories.”

Decision In GE Whistleblower Case Creates An Odd Dynamic

Thursday, July 5th, 2012

As noted in this prior post, in February Khaled Asadi (previously employed by G.E. Energy (USA) LLC (“GE Energy”) as its Country Executive for Iraq, located in Amman, Jordan) filed a civil complaint (here) in the Southern District of Texas against G.E. Energy.   GE Energy is a wholly-owned subsidiary of General Electric Company (“GE”).

The complaint alleged that G.E. harassed and pressured Asadi to vacate his position, and ultimately terminated him after he informed his supervisor and G.E.’s Ombudsperson “regarding potential violations of the Foreign Corrupt Practices Act committed by G.E. during negotiations for a lucrative, multi-year deal with the Iraqi Ministry of Electricity.”  The substance of Asadi’s complaint was that “on or about June of 2010 Mr. Asadi was alerted by a source in the Iraqi Government that GE had hired a woman closely associated with the Senior Deputy Minister of Electricity (Iraq) to curry favor with the Ministry while in negotiation for a Sole Source Joint Venture Contract with the Ministry of Electricity. (According to the complaint, the Joint Venture Agreement between GE and the Ministry of Electricity was signed in Baghdad on December 30, 2010 and the exclusive materials and repairs provision was estimated to be valued at $250,000,000 for the seven year agreement.)

Asaid asserted a claim for whistleblower retaliation under Dodd-Frank which created a private cause of action for whistleblowers subject to retaliatory discharge and permits relief including reinstatement and back pay for a whistleblower who prevails in federal court.

Recently, U.S. District Court Judge Nancy Atlas granted GE’s motion to dismiss Asadi’s amended complaint (see here for the memorandum and order).  In short, Judge Atlas noted that the definition of “whistleblower” under Dodd-Frank is an individual who provides information “to the SEC” and that because Asadi did not claim to report GE’s alleged FCPA violations to the SEC, but rather to his supervisor and to GE’s ombudsperson, Asadi ”does not fit within Dodd-Frank’s definition of a whistleblower.”

As to Asadi’s claim that he could still qualify as a whistleblower ”even if he did not make a report directly to the SEC … because his disclosures were ‘required’ or ‘protected’ under SOX and the FCPA,” Judge Atlas did not reach the issue of whether he could qualify as a whistleblower on these grounds because his “claims fails on other grounds.”  Specifically, Judge Atlas found, relying on the Supreme Court’s 2010 decision in Morrison v. National Australia Bank Ltd., that “the language of the Dodd-Frank Anti-Retaliation Provision is silent regarding whether it applies extraterritorially” and that therefore there is a “presumption that the Provision does not govern conduct outside the United States.”  Judge Atlas then concluded that Dodd-Frank’s Anti-Retaliation Provision does not extend to or protect Asadi’s extraterritorial whistleblowing activity.

In dicta, Judge Atlas noted that Asadi argued that because the FCPA ”is clearly intended to apply extraterritorially, the [Anti-Retaliation] Provision also must extraterritorially.”  However, Judge Atlas stated that “because the facts alleged by Asadi do not fit within the Anti-Retailation Provision, the Court need not, and does not, address Asadi’s argument that the FCPA extends the territorial reach of the Provision.”  Nevertheless, Judge Atlas did note that “although Asadi has alleged that his internal disclosures at GE pertained to bribery of foreign officials, he has cited the Court to no provision of the FCPA that ‘protects’ or ‘requires’ his internal report of the alleged bribery.”

For more on Judge Atlas’s decision, see here from Reuters.

Although not a case of precedent, if the reasoning of Asadi is followed by other courts, the odd result could be that Dodd-Frank’s Anti-Retailiation Provisions do not apply extraterritorially, even though foreign nationals can potentially be awarded whistleblower bounties under the law.  I guess this is what can happen when Congress passes provisions which apply generically to any securities law violations without thinking through, on a micro level, the intersection of such provisions.

*****

The Asadi decision is believed to be just the second judicial decision concerning the intersection between D0dd-Frank’s whistleblower provisions and the FCPA.  See this prior post for the decision in Nollner v. Southern Baptist Convention, Inc. (M.D. Tenn., April 3, 2012).

Friday Roundup

Friday, February 10th, 2012

From the dockets, an FCPA compliance defense – yes or no, hiring a woman closely associated with a foreign official, and a focus on the FCPA’s “red-haired stepchild” – it’s all here in the Friday Roundup.

From the Dockets

Last month when Judge Lynn Hughes dismissed, at the close of the DOJ’s case, the FCPA charges against John Joseph O’Shea (see here for the prior post), it was only a partial victory as O’Shea still faced non-FCPA charges.  Complete victory is imminent as yesterday the DOJ filed a motion to dismiss (here) the remaining charges (conspiracy, money laundering and obstruction) against O’Shea.

In July 2011, Patrick Joseph (a former general director for telecommunications at Haiti Teleco and thus a “foreign official” according to the DOJ) was added to the extensive Haiti Teleco case.  (See here for the prior post).  Because the FCPA does not apply to bribe recipients, the DOJ charged Joseph with a non-FCPA offense: one count of conspiracy to commit money laundering.  Earlier this week, Joseph pleaded guilty to the charges (see here).  Pursuant to the plea agreement, Joseph agreed to forfeit approximately $956,000.  It is clear from the plea agreement that Joseph was likely an early cooperator in the Haiti Teleco case as the plea agreement refers to a June 2009 proffer agreement with the DOJ.  Many of the other individual defendants in the Haiti Teleco case were charged in December 2009 (see here).  The plea agreement requires Joseph’s continued cooperation and later this month a trial is to begin as to other defendants in the wide-ranging Haiti Teleco case.

FCPA Compliance Defense – Yes or No?

That is the title of a free webcast on February 21st to be hosted by Bruce Carton’s Securities Docket (see here to sign up and for more information).  I will be discussing my  paper “Revisiting a Foreign Corrupt Practices Act Compliance Defense”and will argue in favor of Congress creating an FCPA compliance defense.  On the other side of the issue, Howard Sklar (Senior Counsel, Recommind and a frequent commentator on FCPA issues at, among other places, his Open Air Blog) will argue that Congress should not include a compliance defense to violations of the FCPA.

Former Employee Alleges FCPA Issues at GE

As previously reported by Chris Matthews at Wall Street Journal Corruption Currents (see here) Khaled Asadi (a dual U.S. and Iraqi citizen) who was previously employed by G.E. Energy (USA) LLC (“GE Energy”) as its Country Executive for Iraq, located in Amman, Jordan, has filed a civil complaint (here) in the Southern District of Texas against G.E. Energy.   GE Energy is a wholly-owned subsidiary of General Electric Company (“GE”).

The complaint alleges that G.E. harassed, pressured Asadi to vacate his position, and ultimately terminated him after he informed his supervisor and G.E.’s Ombudsperson “regarding potential violations of the Foreign Corrupt Practices Act committed by G.E. during negotiations for a lucractive, multi-year deal with the Iraqi Ministry of Electricity.”  The substance of Asadi’s complaint is that “on or about June of 2010 Mr. Asadi was alerted by a source in the Iraqi Government that GE had hired a woman closely associated with the Senior Deputy Minister of Electricty (Iraq) to curry favor with the Ministry while in negotiation for a Sole Source Joint Venture Contract with the Ministry of Electricity. (According to the complaint, the Joint Venture Agreement between GE and the Ministry of Electricity was signed in Baghdad on December 30, 2010 and that the exclusive materials and repairs provision is estimated to be valued at $250,000,000 for the seven year agreement.)

Hiring friends, family members, etc. of a ”foreign official” at the request of the ‘foreign official” has been the basis, in part, for previous FCPA enforcement actions – particularly if the hired individual was not qualified for the position, did not engage in any meaningful work, or was paid an unreasonably high salary.  For instance, the 2011 FCPA enforcement action against Tyson Foods (see here for the prior post) involved, in part, allegations that a company subsidiary placed the wives of Mexican ”foreign officials” on its payroll and provided them with “a salary and benefits, knowing that the wives did not actually perform any
services” for the company.

In the WSJ Corruption Currents article, a GE spokesman stated as follows.  “Mr. Asadi’s termination had absolutely nothing to do with any allegations he is making.  Regarding our contracts in Iraq, GE followed all requirements and his allegations are false.”

Travel Act Readings

A few informative Travel Act readings to pass along.

In this article from Thomson Reuters News & Insight, Mike Emmick (Sheppard Mullin Richter & Hampton) calls the Travel Act the “FCPA’s red-haired stepchild” and says that in conducting an internal investigation “there are some additional rocks to flip over” before celebrating findings of no payments to “foreign officials.”

In this article from Bloomberg Law Reports, John Rupp and David Fink (Covington & Burling) note that a “move by U.S. authorities to target commercial bribery robustly is a distinct possibility.”  The piece discusses the laws that could be used by U.S. authorities to prosecute foreign commercial bribery.”

*****

A good weekend to all.

General Electric Settles Iraqi Oil For Food Matter

Tuesday, July 27th, 2010

Just when you think Iraqi Oil for Food Program FCPA-related enforcement actions have run their course, along comes another.

The SEC announced this morning (see here) that General Electric Company (GE) agreed to resolve an FCPA books and records and internal controls enforcement action based on allegations that “two GE subsidiaries – along with two other subsidiaries of public companies that have seen been acquired by GE – made illegal kickback payments in the form of cash, computer equipment, medical supplies, and services to the Iraqi Health Ministry or the Iraqi Oil Ministry in order to obtain valuable contracts under the U.N. Oil for Food Program.”

As noted in the SEC release, “the SEC has now taken 15 FCPA enforcement actions against companies involved in the Oil for Food-related kickback schemes with Iraq, recovering more than $204 million.”

The GE enforcement action, like other Iraqi Oil for Food enforcement actions with a few exceptions, does not allege FCPA anti-bribery violations presumably because the alleged payments were made directly to the Iraqi government or government ministries – not to specific “foreign officials” as prohibited by the FCPA’s anti-bribery provisions.

The GE enforcement action is also an outlier of sorts in that it is merely a SEC enforcement action with no parallel DOJ enforcement action – a fact mentioned in GE’s press release detailed below.

For instance, the March 2010 enforcement action against Innospec (which was part Iraqi Oil For Food) involved a DOJ criminal information as to those allegations (see here); the September 2009 enforcement action against AGCO Corporation involved a DOJ criminal information and deferred prosecution agreement (see here); and the May 2009 enforcement action against Novo Nordisk A/S involved a DOJ criminal information and deferred prosecution agreement (see here).

So much for substantively similar conduct being resolved in a similar fashion.

Without admitting or denying the SEC’s allegations (detailed below), GE, GE Ionics Inc. and GE Healthcare Ltd. consented to a court order permanently enjoining future violations of the FCPA books and records and internal control provisions. GE agreed to pay $23.4 million to settle the matter – including approximately $18.4 million in disgorgement of profits on the alleged contracts at issue.

The SEC complaint (see here) alleges as follows:

“From approximately 2000 to 2003, two subsidiaries of the General Electric Company (“GE”) — Marquette-Hellige (“Marquette”) and OEC-Medical Systems (Europa) AG (“OEC-Medical”) — made approximately $2.04 million in kickback payments in the form of computer equipment, medical supplies, and services to the Iraqi Health Ministry under the Program. Prior to GE’s acquisition of their parent companies, two other current GE subsidiaries –Ionics Italba. S.r.L. (“Ionics Italba”), and Nycomed Imaging AS, currently GE Healthcare AS (”Nycomed”) – made approximately $1.55 million in cash kickback payments under the Program. Nycomed was a subsidiary of publicly-registered Amersham plc, which was acquired by GE after the conduct at issue in this Complaint and is currently known as GE Healthcare Ltd. Ionics Italba was a subsidiary of publicly-registered Ionics, Inc., which was acquired by GE after the conduct at issue in this Complaint and is currently known as GE Ionics, Inc.”

According to the complaint:

“Marquette, OEC-Medical, Ionics Italba, and Nycomed each authorized and paid kickbacks to Iraqi government ministries through agents in the form of ‘aftersales service fees’ (ASSF) on sales of products to Iraq. All four subsidiaries knew that such kickbacks were prohibited by the Oil for Food Program and U.S. and international trade sanctions on Iraq.”

According to the complaint, the above subsidaries, “only two of which were GE subsidiaries during the relevant time period,” “working through third-party agents, made ASSF kickback payments of approximately $3,584,842. The four subsidiaries earned profits of approximately $18,397,949 as a result oftheir illegal kickbacks.”

As to the acquired subsidiaries, the SEC simply alleges, without any elaboration, that GE acquired the liabilities of Amersham and Ionic, along with assets, in the acquisitions and that “GE Ionics, Inc. and GE Healthcare Ltd., both subsidiaries of GE, are the respective successors to the liability of Ionics and Amersham.”

Cheryl Scarboro, the Chief of the SEC’s newly formed FCPA Unit, stated as follows:

“GE failed to maintain adequate internal controls to detect and prevent these illicit payments by its two subsidiaries to win Oil for Food contracts, and it failed to properly record the true nature of the payments in its accounting records. Furthermore, corporate acquisitions do not provide GE immunity from FCPA enforcement of the other two subsidiaries involved.”

In a press release (see here) GE stated that the enforcement action “concludes the SEC’s investigation and related Department of Justice review of GE regarding the Oil-for-Food Program.” The release notes that the company “has received confirmation from the U.S. Department of Justice that the Department has closed its investigation and will take no action relating to these matters.”

As to the merits of the SEC’s allegations, the company stated as follows:

“In this case, the SEC has identified 18 contracts under the Oil-for-Food Program that it alleges were not accounted for or controlled properly. Fourteen of these transactions involve businesses that were not owned by GE at the time of the transactions. The SEC alleges that, in acquiring these companies, GE acquired their liabilities as well as their assets. The other four transactions relate to GE Healthcare units in Europe. These units declined to make cash payments to the Iraqi Ministry of Health, but they acquiesced when their agent offered instead to make in-kind payments of computer equipment, medical supplies, and services to the Iraqi Health Ministry, and then failed to reflect the transactions accurately in their books and records. This conduct did not meet our standards, and we believe that it is in the best interests of GE and its shareholders to resolve this matter now, without admitting or denying the allegations, and put the matter behind us.”

No matter how flimsy the SEC’s legal theory of liability, the agency continues to extract multi-million dollar FCPA settlements from the companies it oversees. These companies view settlement as easier and more cost efficient than engaging in a protracted legal dispute with a principal government regulator.

The end result, in such cases, is a continuation of the facade of FCPA enforcement.

General Electric Settles Iraqi Oil For Food Matter

Tuesday, July 27th, 2010

Just when you think Iraqi Oil for Food Program FCPA-related enforcement actions have run their course, along comes another.

The SEC announced this morning (see here) that General Electric Company (GE) agreed to resolve an FCPA books and records and internal controls enforcement action based on allegations that “two GE subsidiaries – along with two other subsidiaries of public companies that have seen been acquired by GE – made illegal kickback payments in the form of cash, computer equipment, medical supplies, and services to the Iraqi Health Ministry or the Iraqi Oil Ministry in order to obtain valuable contracts under the U.N. Oil for Food Program.”

As noted in the SEC release, “the SEC has now taken 15 FCPA enforcement actions against companies involved in the Oil for Food-related kickback schemes with Iraq, recovering more than $204 million.”

The GE enforcement action, like other Iraqi Oil for Food enforcement actions with a few exceptions, does not allege FCPA anti-bribery violations presumably because the alleged payments were made directly to the Iraqi government or government ministries – not to specific “foreign officials” as prohibited by the FCPA’s anti-bribery provisions.

The GE enforcement action is also an outlier of sorts in that it is merely a SEC enforcement action with no parallel DOJ enforcement action – a fact mentioned in GE’s press release detailed below.

For instance, the March 2010 enforcement action against Innospec (which was part Iraqi Oil For Food) involved a DOJ criminal information as to those allegations (see here); the September 2009 enforcement action against AGCO Corporation involved a DOJ criminal information and deferred prosecution agreement (see here); and the May 2009 enforcement action against Novo Nordisk A/S involved a DOJ criminal information and deferred prosecution agreement (see here).

So much for substantively similar conduct being resolved in a similar fashion.

Without admitting or denying the SEC’s allegations (detailed below), GE, GE Ionics Inc. and GE Healthcare Ltd. consented to a court order permanently enjoining future violations of the FCPA books and records and internal control provisions. GE agreed to pay $23.4 million to settle the matter – including approximately $18.4 million in disgorgement of profits on the alleged contracts at issue.

The SEC complaint (see here) alleges as follows:

“From approximately 2000 to 2003, two subsidiaries of the General Electric Company (“GE”) — Marquette-Hellige (“Marquette”) and OEC-Medical Systems (Europa) AG (“OEC-Medical”) — made approximately $2.04 million in kickback payments in the form of computer equipment, medical supplies, and services to the Iraqi Health Ministry under the Program. Prior to GE’s acquisition of their parent companies, two other current GE subsidiaries –Ionics Italba. S.r.L. (“Ionics Italba”), and Nycomed Imaging AS, currently GE Healthcare AS (”Nycomed”) – made approximately $1.55 million in cash kickback payments under the Program. Nycomed was a subsidiary of publicly-registered Amersham plc, which was acquired by GE after the conduct at issue in this Complaint and is currently known as GE Healthcare Ltd. Ionics Italba was a subsidiary of publicly-registered Ionics, Inc., which was acquired by GE after the conduct at issue in this Complaint and is currently known as GE Ionics, Inc.”

According to the complaint:

“Marquette, OEC-Medical, Ionics Italba, and Nycomed each authorized and paid kickbacks to Iraqi government ministries through agents in the form of ‘aftersales service fees’ (ASSF) on sales of products to Iraq. All four subsidiaries knew that such kickbacks were prohibited by the Oil for Food Program and U.S. and international trade sanctions on Iraq.”

According to the complaint, the above subsidaries, “only two of which were GE subsidiaries during the relevant time period,” “working through third-party agents, made ASSF kickback payments of approximately $3,584,842. The four subsidiaries earned profits of approximately $18,397,949 as a result oftheir illegal kickbacks.”

As to the acquired subsidiaries, the SEC simply alleges, without any elaboration, that GE acquired the liabilities of Amersham and Ionic, along with assets, in the acquisitions and that “GE Ionics, Inc. and GE Healthcare Ltd., both subsidiaries of GE, are the respective successors to the liability of Ionics and Amersham.”

Cheryl Scarboro, the Chief of the SEC’s newly formed FCPA Unit, stated as follows:

“GE failed to maintain adequate internal controls to detect and prevent these illicit payments by its two subsidiaries to win Oil for Food contracts, and it failed to properly record the true nature of the payments in its accounting records. Furthermore, corporate acquisitions do not provide GE immunity from FCPA enforcement of the other two subsidiaries involved.”

In a press release (see here) GE stated that the enforcement action “concludes the SEC’s investigation and related Department of Justice review of GE regarding the Oil-for-Food Program.” The release notes that the company “has received confirmation from the U.S. Department of Justice that the Department has closed its investigation and will take no action relating to these matters.”

As to the merits of the SEC’s allegations, the company stated as follows:

“In this case, the SEC has identified 18 contracts under the Oil-for-Food Program that it alleges were not accounted for or controlled properly. Fourteen of these transactions involve businesses that were not owned by GE at the time of the transactions. The SEC alleges that, in acquiring these companies, GE acquired their liabilities as well as their assets. The other four transactions relate to GE Healthcare units in Europe. These units declined to make cash payments to the Iraqi Ministry of Health, but they acquiesced when their agent offered instead to make in-kind payments of computer equipment, medical supplies, and services to the Iraqi Health Ministry, and then failed to reflect the transactions accurately in their books and records. This conduct did not meet our standards, and we believe that it is in the best interests of GE and its shareholders to resolve this matter now, without admitting or denying the allegations, and put the matter behind us.”

No matter how flimsy the SEC’s legal theory of liability, the agency continues to extract multi-million dollar FCPA settlements from the companies it oversees. These companies view settlement as easier and more cost efficient than engaging in a protracted legal dispute with a principal government regulator.

The end result, in such cases, is a continuation of the facade of FCPA enforcement.