Internal Investigation Issues

Archive for the ‘Internal Investigation Issues’ Category

Friday Roundup

Friday, February 1st, 2013

The SEC files an amended complaint, Judge Leon strikes again, a provocative press release, a focus on lobbying and for the reading stack. It’s all here in the Friday roundup.

SEC Files Amended Complaint in Jackson / Ruehlen Matter

As highlighted in this prior post, this past December Judge Keith Ellison (S.D. Tex.) issued a lengthy 61 page decision (here) in SEC v. Mark Jackson and James Ruehlen. In short, Judge Ellison granted Defendants’ motion to dismiss the SEC’s claims that seek monetary damages while denying the motion to dismiss as to claims seeking injunctive relief. Even though Judge Ellison 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 explained in the prior post, Judge Ellison’s decision was based on statute of limitations grounds (specifically that the SEC failed to plead any facts to support an inference that it acted diligently in bringing the complaint) as well as the SEC’s failure to adequately plead discretionary functions relevant to the FCPA’s facilitation payments exception.

Last week, the SEC filed its amended complaint (here). The most noticeable difference in the amended complaint, based on my brief review of the 58 page document, appears to be several allegations regarding Nigerian law, including the Customs & Excise Management Act.

Judge Leon Strikes Again

This prior post generally discussed Judge Richard Leon’s rejection of the SEC v. IBM FCPA settlement, a case that still lingers on the docket.

As noted in this Main Justice story and this Wall Street Journal story, Judge Leon has struck again. According to the reports, yesterday Judge Leon conducted a scheduled hearing in SEC – Tyco FCPA case in chambers, much to the dismay of media assembled in open court.

As noted in this prior post, in September 2012, the DOJ and SEC announced an FCPA enforcement against Tyco International Ltd. and a subsidiary company. Total fines and penalties in the enforcement action were approximately $26.8 million (approximately $13.7 million in the DOJ enforcement action and approximately $13.1 million in the SEC enforcement action). As noted in this SEC release, Tyco consented to a final judgment that orders the company to pay approximately $10.5 million in disgorgement and approximately $2.6 million in prejudgment interest. Tyco also agreed to be permanently enjoined from violating the FCPA.

Although both the IBM and Tyco enforcement actions involve the SEC’s neither admit nor deny settlement language, this would not seem to be the key thread between these two enforcement actions that is drawing the ire of Judge Leon. Rather as explained in this post summarizing the IBM enforcement action and this post highlighting various notable features of the Tyco action, both companies are repeat FCPA violators. In resolving the “original” FCPA enforcement actions – IBM in 2000 and Tyco in 2006 – both companies agreed to permanent injunctions prohibiting future FCPA violations.

This prior post titled “Meaningless Settlement Language” detailed Judge Jed Rakoff’s discussion of so-called ”obey the law” injunctions in SEC v. Citigroup and this prior guest post discussed an Eleventh Circuit decision last year vacating a SEC “obey the law” injunction.

A Provocative Press Release

The law firm Bienert, Miller & Katzman (“BMK”) represented Paul Cosgrove (a former executive of Control Components Inc.) in the so-called Carson enforcement actions. The Carson action involved a notable “foreign official” challenge and as highlighted in previous posts here, here, and here, after Judge Selna issued a pro-defendant jury instruction, the DOJ soon thereafter offered the remaining defendants (Stuart Carson, Hong Carson, David Edmonds, and Cosgrove) plea agreements which the defendants accepted. As to those plea agreements, I ended each post by saying – the conclusions are yours to reach. In Fall 2012, the defendants were sentenced as follows: S. Carson (four months in prison), H. Carson (three years probation), Edmonds (four months in prison) and Cosgrove (15 months of home detention). See this prior post regarding Carson sentencing issues.

In a January 17th press release (here), BMK stated as follows.

“BMK and counsel for three other defendants … conducted a worldwide investigation and developed evidence suggesting the government’s evidence was incomplete, the court documents indicate. Ultimately, most companies bought CCI valves because they were the best in the world (not because of bribes); most of the supposed “public officials” denied receiving any bribes; and, in most cases, the alleged improper payments were never actually made, according to court records.

Further, through an aggressive litigation and motion strategy, counsel were able to obtain jury instructions that highlighted the government’s heavy burden of proof at trial. For example, the trial court agreed with defense counsel that the government was obligated to prove defendants’ knew they were dealing with “foreign officials,” something that would have been extremely difficult for the government to prove. The supposed bribery recipients worked for companies that appeared to operate like private companies in the United States, making it very unlikely that the defendants realized they were dealing with “government officials.”

BMK and other defense counsel raised several other issues that brought the government’s ability to obtain a conviction, or defend an appeal, into serious doubt. These motions called into question whether the alleged bribe recipients were even “public officials” as intended by the FCPA; whether the Travel Act even applied to the case; and, whether defendants were entitled to millions of pages of documents that had been withheld from them by CCI, their former employer. Each of these issues likely would have been decided for the first time on an appeal in this case.”

[Full disclosure - I was an engaged expert in the Carson cases, filed a "foreign official" declaration in connection with the motion to dismiss, and was disclosed as a testifying expert for the trial]

Lobbying

In my double-standard series (here), I have highlighted various aspects of lobbying here in the U.S. The beginning of the recent opinion in U.S. v. Ring (D.C. Circuit) is an interesting read. In pertinent part, it states as follows (internal citations omitted).

“Lobbying has been integral to the American political system since its very inception. […] As some have put it more cynically, lobbyists have besieged the U.S. government for as long as it has had lobbies.” […] By 2008, the year Ring was indicted, corporations, unions, and other organizations employed more than 14,000 registered Washington lobbyists and spent more than $3 billion lobbying Congress and federal agencies. […]

The interaction between lobbyists and public officials produces important benefits for our representative form of government. Lobbyists serve as a line of communication between citizens and their representatives, safeguard minority interests, and help ensure that elected officials have the information necessary to evaluate proposed legislation. Indeed, Senator Robert Byrd once suggested that Congress “could not adequately consider [its] workload without them.” […]

In order to more effectively communicate their clients’ policy goals, lobbyists often seek to cultivate personal relationships with public officials. This involves not only making campaign contributions, but sometimes also hosting events or providing gifts of value such as drinks, meals, and tickets to sporting events and concerts. Such practices have a long and storied history of use—and misuse. During the very First Congress, Pennsylvania Senator William Maclay complained that “New York merchants employed ‘treats, dinners, attentions’ to delay passage of a tariff bill.” […] Sixty years later, lobbyists working to pass a bill that would benefit munitions magnate Samuel Colt “stage[d] lavish entertainments for wavering senators.” […] Then, in the 1870s, congressmen came to rely on railroad lobbyists for free travel. [...]. Indeed, one railroad tycoon complained that he was “averag[ing] six letters per day from Senators and Members of Congress asking for passes over the road.”

Reading Stack

Some dandy articles/essays to pass along regarding the FCPA books and records provisions, victim issues and criminal procedure.

FCPA Books and Records Provisions

Michael Schachter (Willkie Farr & Gallagher and a former Assistant United States Attorney in the Southern District of New York, where he focused on criminal prosecution of securities fraud and was a member of the Securities and Commodities Fraud Task Force) recently authored an article concerning the FCPA’s books and records provisions. Titled “Defending an FCPA Books and Records Violation” and published in the New York Law Journal, the article begins as follows.

“In recent years, the books and records provisions of the [FCPA] have taken on new life, as both the [DOJ and SEC] have announced their intention to bring more charges, especially against individuals, for violation of this section of the FCPA. A review of recent enforcement actions reveals that the Justice Department and the SEC consider the books and records requirement violated whenever corrupt payments are made to a foreign official and recorded in a corporation’s books as anything other than a ‘bribe,’ including, but not limited to, such things as commissions, social payments, or after sales service fees. This article proposes that the books and records provision is, in fact, narrower than the Justice Department and the SEC interpretations suggest, and argues that both agencies may be using the provision to punish behavior falling outside the FCPA’s reach.”

Spot on. See prior posts here and here. See here for a word cloud of the FCPA’s books and records and internal control provisions.

Corporate Employer’s As Victims

The title of Professor Peter Henning’s recent White Collar Crime Watch post in the New York Times DealBook was “How Can Companies Sue Defendants in Insider Trading Cases?” The post concerned the Mandatory Victims Restitution Act and Professor Henning writes that it ”has been interpreted to allow companies that incur costs in cooperating with the government to seek repayment of their expenses from defendants” and the “statute requires a court to order the reimbursement to victims of ‘other expenses incurred during participation in the investigation or prosecution of the offense.’”

The parallels to a company incurring expenses in connection with FCPA investigations based on employee conduct is obvious.

Yet, Professor Henning writes as follows.

“[T]he crucial word in the Mandatory Victims Restitution Act is “incurred,” and there isn’t a consensus among federal courts over what expenses are covered. Companies want it to include all costs related to any part of the case, including dealing with the S.E.C. even though it can only pursue a civil enforcement case. Defendants take a much narrower view, arguing that mandatory restitution covers only expenses arising as direct result of the criminal prosecution by the Justice Department.

Ham Sandwich Nation

Glenn Reynolds (University of Tennessee College of Law) recently published an essay titled “Ham Sandwich Nation: Due Process When Everything is a Crime” (see here to download). The essay does not mention the FCPA, yet it is very much applicable to the FCPA. In just the past year, approximately 25 individuals criminally indicted by the DOJ have put the DOJ to its burden of proof and ultimately prevailed. Ham Sandwich Nation would also seem applicable given the extensive use of NPAs and DPAs in the FCPA context. The thesis of the essay is spot on. Reynolds write as follows.

“Though people suspected of a crime have extensive due process rights in dealing with the police, and people charged with a crime have even more extensive due process rights in courts, the actual decision whether or not to charge a person with a crime is almost completely unconstrained. Yet, because of overcharging and plea bargains, that decision is probably the single most important event in the chain of criminal procedure.”

Year In Review

The Year in Review version of Debevoise & Plimpton’s always informative and comprehensive FCPA Update is here. Among the many topics discussed in the FCPA Update is the notion that many FCPA enforcement actions are based on very old conduct and the following observation. “Targets of enforcement actions also run the risk that regulators – whether consciously or not – apply current expectations of appropriate compliance measures and effective internal controls mechanisms when evaluating the adequacy of procedures that existed at times when less rigorous standards may have commonly been considered acceptable.” For my similar previous observation, see this prior post.

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A good weekend to all.

The Former CFO Of RAE Systems Speaks

Tuesday, August 14th, 2012

How often have you heard the former Chief Financial Officer of a company that recently resolved a Foreign Corrupt Practices Act enforcement action speak on camera regarding his experience and that of the company?

The answer is probably never.

That is what makes this recent video of Randall Gausman, the former CFO of RAE System, interesting and instructive. If I were a corporate board member, I would make it required viewing for the CFO to best demonstrate how FCPA scrutiny can be burdensome and distracting to the company.

First, a bit of background.

As discussed in this prior post, in December 2010 RAE System (a San-Jose, California publicly-traded company and “a leading global provider of rapidly deployable connected, intelligent gas detection systems” resolved parallel DOJ and SEC FCPA enforcement actions. The conduct at issue concerned “improper benefits corruptly paid by employees of two joint ventures majority owned and controlled by RAE Systems to foreign officials of departments, agencies, and instrumentalities” of the Chinese government. In connection with the SEC enforcement action, the then Chief of the SEC’s FCPA Unit stated as follows. “RAE Systems develops products to detect harmful emissions, yet it did not have adequate measures in place to detect and root out internal wrongdoing. Companies that fail to respond to red flags can be held liable for the acts of their joint venture partners.”

Back to the video which was recorded by the Markkula Center for Applied Ethics at Santa Clara University (here).

In the video, Gausman speaks of discovery of the problem giving rise to the enforcement action and the company’s internal investigation and voluntary disclosure. Gausman also tells how the company’s FCPA scrutiny came to derail his other jobs duties and, at approximately six minutes of the video, Gausman describes a falling out with the company’s CEO that raises a host of questions.

Of note, Gausman also explains how the company’s pre-enforcement action professional fees and expenses (approximately $4.2 million) exceeded the combined fine and penalty amount ($2.95 million) it paid to resolve the enforcement action. This has become common when a company is the subject of FCPA scrutiny.

[The above video, as well as several others, are included on the FCPA Profesor YouTube channel - here]

Summer Reading Spectacular

Friday, July 13th, 2012

Grab your beverage of choice, find some shade, and sit back and enjoy the recent work product of FCPA Inc – plus the recent annual report of the OECD Working Group on Bribery.

Gibson Dunn

Gibson Dunn recently released it 2012 mid-year FCPA update (see here). The update begins as follows. “As the Foreign Corrupt Practices Act turns 35 years old, the spike in enforcement activity that we first observed five years ago appears (at least for the moment) to be leveling off. Nevertheless, numerous developments this year bespeak a statute that is maturing rather than falling into obscurity: the first sustained pattern of trial activity; increasing “private attorney general” enforcement; and serious policy debates between industry, executive, and legislative interests leading up to much-anticipated statutory guidance from government regulators. The first half of 2012 was packed with important FCPA developments.” Thereafter, the update is a buffet of useful information and summaries including recent sentencing activity, a discussion of FCPA-related civil litigation, legislative and policy developments, U.K. developments, and a handy chart containing DOJ and SEC statements on corporate cooperation.

Another Gibson Dunn update you should read concerns NPA and DPAs. The firm recently released (here) its mid-year update on corporate deferred prosecution and non-prosecution agreements. As noted in the update, once again among the most frequent use of such agreements is to resolve FCPA enforcement actions.

Speaking of NPAs and DPAs, Law36o carried an article yesterday titled “DOJ Develops a Taste for Deferred Prosecution Deals.” I liked what Skadden partner John Carroll (here) had to say – that such agreements are a “way for the government to outsource its work and harvest relatively easy settlements” because “the government only has to win the case in the government’s office; it doesn’t have to win in the courtroom.”

Miller Chevalier

Miller & Chevalier recently released its FCPA Summer Review 2012 (see here). The review begins as follows. “‘Expectant’ describes the mood of FCPA practitioners during the first half of 2012. With a slow first half of the year for enforcement releases, and expected developments such as the issuance of the new FCPA Guidance around the corner, the second half of 2012 should be eventful, if not historic, for the 35-year old statute.” Thereafter, the review contains several goodies such as a chart containing known declinations in FCPA investigations 2008 to the present, “comings” and “goings” in the DOJ’s FCPA team, and how a recent district court rulings(discussed in this previous post) appears to have impacted the deferred prosecution agreement in the recent Data Systems enforcement action (see here for the previous post).

Debevoise & Plimpton

Debevoise & Plimpton recently released its periodic FCPA Update (see here). Among other things, the update contains an article on the “current status of the ‘selective waiver’ doctrine, i.e., the notion that a waiver of attorney-client privilege or work-product protection in a submission to the government is not a ‘waiver to all others.’” As the article notes, this is often an issue for counsel to consider in FCPA investigatons when disclosing to the DOJ or SEC.

Sidley Austin

Sidley Austin recently released its anti-corruption quarterly (see here). Although the quarterly did not include a certain FCPA related development from the second quarter, it did contain an informative lead article concerning FCPA joint venture liability.

OECD Annual Report

The OECD Working Group on Bribery recently released its annual report (here). Spectacular it is not. For all the good the OECD does in raising awareness of bribery and its effects and seeking to reduce bribery and corruption around the world, its enforcement statistics remain misleading, incomplete and in some cases inaccurate.

For instance, as noted in this prior post, it is fairly obvious why OECD member countries have varying degrees of enforcement of bribery and corruption offenses. Among other reasons, in most OECD member countries, prosecuting authorities have two choices – to prosecute or not to prosecute – there is no such thing as non-prosecution or deferred prosecution agreements. Moreover, in many OECD member countries there is no such thing as corporate criminal liability – or even if there is – such corporate liability can only be based on the actions of high-ranking executives or officers. This of course is materially different than the U.S. respondeat superior standard in which a business organization can face legal liability based on the actions of any employee to the extent the employee was acting within the scope of his or her duties and to the extent the conduct was intended to benefit, at least in part, the organization.

The OECD’s statistics as to the U.S. are incomplete. Footnotes in the report state that DOJ and SEC enforcement actions “exclusively for violations of the books and records and internal control provisions of the FCPA” are not captured. This misses a meaningful chunk of FCPA enforcement actions as it is common for the DOJ and SEC to structure settlements (so as to avoid collateral consequences or to reward cooperation or both) without charging FCPA anti-bribery violations (such as in Siemens and Daimler).

Moreover, the OECD statistics as to the U.S. are inaccurate in some cases. In a table “Decisions on Foreign Bribery Cases from 1999 to December 2011,” in a column titled number of individuals and legal persons acquitted / found not liable, the report indicates that only 1 individual or legal person has been acquitted or found not liable in a U.S. foreign bribery case. Not true.

*****

A good weekend to all.

Judge Selna Rejects State Actor Theory

Wednesday, May 16th, 2012

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

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

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

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

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

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

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

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

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

Analyzing Wal-Mart

Monday, April 23rd, 2012

This prior post discussed the New York Times lengthy Wal-Mart investigative piece published over the weekend.

This post analyzes the likely issues and the road ahead.

The Times article is both unremarkable and remarkable at the same time.

The unremarkable portion of the Times article is that a foreign subsidiary of a multi-national company operating in a FCPA high-risk jurisdiction allegedly made payments to “foreign officials” to facilitate or grease the issuance of certain licenses or permits. According to the Times, Wal-Mart’s subsidiary in Mexico “had taken steps to conceal [the payments] from Wal-Mart’s headquarters in Bentonville, Ark.” and Wal-Mart Mexico’s chief auditor altered reports sent to Bentonville discussing various problematic payments. In short, there is nothing in the Times report to suggest that Wal-Mart’s board or top executives (with the exception of Eduardo Castro-Wright – discussed below in more detail) knew of or authorized the problematic payments.

By unremarkable I do not mean to suggest that such payments will not attract DOJ and SEC scrutiny under the FCPA’s anti-bribery provisions. They surely will, even if Congress likely intended to exclude such payments from the FCPA’s reach and even if the only case law of precedent on the issue is muddled. (Both issues were discussed in the prior post).

Even if the Mexican payments do not meet the elements of an FCPA anti-bribery violation, the enforcement agencies are likely to assert that such payments violate of the FCPA books and records and internal control provisions. For instance, the Times article suggests that the Mexican payments were routed through Mexican gestores who were told to submit invoices full of secret code words. The enforcement agencies frequently take the position that payments recorded on a subsidiary’s books and records become the parent company issuer’s problem on the theory that such subsidiary books and records are consolidated with the issuers for purposes of financial reporting.

The enforcement agencies also expect that a parent company implement effective internal controls throughout its organization, including foreign subsidiaries. On this issue, one of the most significant issues is likely to be, as the Times article details, that in 2003 Wal-Mart engaged Kroll Inc. on an apparent unrelated issue in which Kroll concluded that Wal-Mart Mexico “executives had failed to enforce their own anticorruption policies, [and] ignored certain internal audits that raised red flags.” According to the Times article, “Wal-Mart then asked Kroll to evaluate Wal-Mart de Mexico’s internal audit and antifraud units” and that “Kroll wrote another report that branded the units ‘ineffective.’”

An issue the enforcement agencies are likely to explore is how Wal-Mart reacted to the 2003 Kroll audit and if it didn’t react why not? The same general issue is present in Avon’s current FCPA scrutiny. As noted in this February Wall Street Journal article, a grand jury is probing how certain U.S. executives reacted to a 2005 internal audit by the company that concluded Avon employees in China may have been bribing officials in violation of the FCPA. As in Avon, an issue in the Wal-Mart matter, including as to individual executives who may not have participated in or authorized any Mexican payments, will likely be willful blindness as to the Mexican audit.

The remarkable aspects of the Times investigation include the conduct (or lack thereof) of Wal-Mart and its top executives upon learning of problematic conduct in its Mexican subsidiary. Even in 2005 and continuing today, most business leaders, audit committees, and boards tend to overreact to FCPA issues and often reflexibly launch broad internal investigations.

However, the payment issues at Wal-Mart Mexico apparently resulted in exactly the opposite at Wal-Mart’s corporate headquarters. Wal-Mart’s conduct will not be viewed favorably by the enforcement agencies.

For instance, under the DOJ’s Principles of Federal Prosecution of Business Organizations (here) a factor the DOJ will consider in arriving at its enforcement decision include ”the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.” While the FCPA does not contain any affirmative disclosure obligation, most companies the size and stature of Wal-Mart tend to disclose conduct that could implicate the FCPA, particularly given the SEC’s position that all payments in violation of the FCPA are qualitatively material, even if not quantitatively material.

Lacking such a voluntarly disclosure, a company should, at the very least, thoroughly investigate the alleged wrongdoing and implement effective remedial measures, including by disciplining and terminating culpable employees. Once again, the Principles of Prosecution state that ”the corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies” is a factor the DOJ will consider in arriving at its enforcement decision. As to this factor, the relevant comment in the Principles of Prosecution states as follows. “In determining whether or not to prosecute a corporation, the government may consider whether the corporation has taken meaningful remedial measures. A corporation’s response to misconduct says much about its willingness to ensure that such misconduct does not recur. Thus, corporations that fully recognize the seriousness of their misconduct and accept responsibility for it should be taking steps to implement the personnel, operational, and organizational changes necessary to establish an awareness among employees that criminal conduct will not be tolerated. Among the factors prosecutors should consider and weigh are whether the corporation appropriately disciplined wrongdoers, once those employees are identified by the corporation as culpable for the misconduct.”

On this issue, another remarkable aspect of the Times investigation is how Eduardo Castro-Wright (at the critical time period the CEO of Wal-Mart Mexico) was known by others at Wal-Mart to be involved in the Mexican payments, but was nevertheless continuously thereafter promoted by Wal-Mart. For instance, as noted in this January 7, 2005 release, Wal-Mart announced that “Eduardo Castro-Wright, currently president and chief executive officer of Wal-Mart Mexico, will become executive vice president and chief operating officer of the Wal-Mart Stores Division in the United States.” In the release, Wal-Mart President and CEO Mike Duke stated as follows. “Eduardo is a proven leader who has helped Wal-Mart Mexico achieve outstanding results. His experience, perspective and management skills will be a valuable addition to our division here in the United States.” In this June 2010 release, the company announced that “Vice Chairman Eduardo Castro-Wright has been appointed President and CEO of Global.com and Global Sourcing.” Wal-Mart President and CEO Mike Duke stated as follows. “Eduardo has made extraordinary contributions to Walmart U.S. over the past five years, and many contributions are still to come. He is a visionary thinker who has strengthened our overall business and built a foundation that positions us well for the future.”

As to other Wal-Mart executives, while there is no suggestion at this point that they knew of or authorized the Mexican conduct while it was occurring, their conduct since learning of the misconduct is likely to attract regulatory scrutiny. Such scrutiny is likely to include certification issues under Sarbanes-Oxley (SOX) as well as other executive statements to the market since 2005 when they became aware of the payments at issue. You can bet that the SEC in particular will be analyzing every SEC filing, specifically the Management Discussion & Analysis section, and all other statements to the market since 2005 by executives regarding Wal-Mart Mexico.

As to SOX certification issues, as noted in this prior post, in 2011 the SEC charged Paul Jennings, the former CEO and CFO of Innospec. Jennings was charged in connection with the payments, but also charged with violating Exchange Act Rule 13b2-2 by making false statements to accountants and violating Exchange Act Rule 13a-14 by signing false personal certifications required by SOX that were attached to annual and quarterly Innospec public filings. As to these charges, the SEC alleged as follows. “From 2004 to February 2009, Jennings signed annual certifications that were provided to auditors where he falsely stated that he complied with Innospec’s Code of Ethics incorporating the company’s Foreign Corrupt Practices Act policy, and that he was unaware of any violations of the Code of Ethics by anyone else. [...] Jennings also signed annual and quarterly personal certifications pursuant to SOX in which Jennings made false certifications concerning the company’s books and records and internal controls. Jennings also signed false management certifications to Innospec’s auditors indicating that the books and records were accurate and that Innospec had appropriate internal controls.” Then SEC FCPA Unit Chief, Cheryl Scarboro stated as follows: “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.”

Also perhaps relevant is the 2009 SEC FCPA enforcement action against Nature’s Sunshine Products (“NSP”) including its executives Douglas Faggioli (President and Chief Executive Officer of NSP and a member of its board of directors during the relevant time period) and Craig Huff (the company’s CFO). The SEC complaint did not allege that these executives knew of or participated in the improper payments at issue, but the SEC nevertheless charged the executives on a control person theory of liability. The complaint charged that Faggioli and Huff, as “control persons” of NSP, violated the FCPA’s books and records and internal control provisions and generally alleged that both Faggioli and Huff had “supervisory responsibilities” over NSP’s senior management and policies, yet as “control persons,” “failed to make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflected the transactions of NSP” and failed to devise and maintain an adequate system of internal accounting controls.

Not only will the DOJ and SEC likely be examining the conduct of Wal-Mart executives, but so too will plaintiff law firms representing shareholders who will likely scour Wal-Mart’s SEC filings and other statements to the market in bringing derivative claims alleging breach of fiduciary duty and potential Section 10(b) claims based on material omissions concerning Wal-Mart Mexico. On this score, shareholders are likely to allege, among other things, that Wal-Mart’s officers and directors demonstrated conscious disregard for fiduciary duties by failing to act diligently in the face of known facts suggesting a duty to act.

Whether remarkable or unremarkable, the information revealed in the Times article is likely to be a long and costly exercise for Wal-Mart and certain of its executives. Wal-Mart’s statement over the weekend indicated that it already is conducting a world-wide review of its operations and such “where else” investigations frequently uncover additional problematic conduct. Among other things, the enforcement agencies are likely to take a keen interest in how Wal-Mart obtained foreign licenses or permits in other FCPA high-risk jurisdictions around the world. This world-wide review will take time and for this reason FCPA scrutiny of the type that Wal-Mart is currently under is likely to last 2-4 years.