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“Due Process” Limits on Criminal Enforcement of the FCPA Against Non-U.S. Nationals Based on Extraterritorial Conduct

Tuesday, May 14th, 2013

Today’s post is from Debevoise & Plimpton attorneys Sean Hecker, Steven Michaels, and Anna Domyancic.

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Earlier this year, two judges of the U.S. District Court for the Southern District of New York ruled on motions to dismiss SEC civil FCPA actions, invoking the International Shoe “minimum contacts” and “reasonableness” tests to determine whether the courts had personal jurisdiction over the foreign individual defendants in those cases. The decisions in the Straub and Steffen cases — one (Straub, arising out of the Magyar Telekom matter) rejecting the motion and the other (Steffen, arising out of the Siemens-Argentina matter) granting the motion and ordering dismissal — mark important boundaries regarding personal jurisdiction over foreign individual FCPA civil defendants.

But does the reasoning of the recent civil enforcement decisions carry over to the criminal enforcement context? Specifically, does “due process” mean the same thing in both criminal and civil FCPA actions brought against individual foreign defendants?

The answer is that, generally speaking, the civil and criminal “due process” minimum contacts tests overlap significantly, but not entirely. The argument that it violates due process to prosecute FCPA criminal charges based on the lack of connection of the underlying facts to the United States has rarely, if ever, been raised, let alone litigated to conclusion. But as the DOJ pursues more aggressive theories against foreign nationals who are not subject to the nationality principle of jurisdiction, and where the principal injured parties are foreign governments or marketplace competitors who may have no connection to the United States, the issue could gain traction. It is thus worth considering how precedent in the criminal law “minimum contacts” due process arena compares to International Shoe’s test, including how it might apply in the FCPA context.

I. Due Process “Nexus” Requirements in the U.S. Criminal Law Context

It is generally understood that, despite the limitations of the due process clause of the Fifth Amendment, U.S. federal criminal statutes may be applied to the extraterritorial conduct of foreign nationals when the law’s application would be neither “arbitrary [n]or fundamentally unfair.” United States v. Davis, 905 F.2d 245, 249 (9th Cir. 1990).

Most of the courts of appeals to have ruled on the issue have held that due process requires a “nexus” between the United States and the defendant. For non-U.S. citizens acting outside the United States, a “nexus” may exist when the aim of the defendant’s conduct is “to cause harm inside the United States or to U.S. citizens or interests,” including those outside the United States See United States v. Al Kassar, 660 F.3d 108, 118 (2d Cir. 2011). In Al Kassar, the defendants were foreign nationals, charged with conspiring to sell arms to a foreign terrorist organization knowing that the weapons would be used to kill U.S. citizens and destroy U.S. property, among other crimes. The court determined that the aim of the defendants’ conspiracy established a “nexus” with the United States even though the defendants acted entirely outside the territory of the United States.

Cases like Al-Kassar illustrate how courts look to the protective principle in international law to determine whether a U.S. nexus exists. The protective principle allows a nation to prosecute conduct occurring outside its territory if the conduct threatens the state’s security or similar interests. See United States v. Perlaza, 439 F.3d 1149, 1161-62 (9th Cir. 2006). Crimes like those in Al Kassar, as well as drug-smuggling, may support the exercise of jurisdiction under the protective principle, with some courts going so far as to hold no factual connection to the United States is required in drug cases if the acts at issue occur on “stateless” vessels on the high seas or those of nations that have consented to enforcement of U.S. law in their territories. See United States v. Cardales, 168 F.3d 548, 553 (1st Cir. 1999); United States v. Martinez-Hidalgo, 993 F.2d 1052, 1056 n.6 (3d Cir. 1993). Compare United States v. Perlaza, 439 F.3d 1149, 1169 (9th Cir. 2006) (requiring some U.S. connection); United States v. Angulo-Hernandez, 576 F.3d 59, 60 (1st Cir. 2009) (Torruella, J.) (dissenting from denial of en banc review) (noting conflicts among circuits as to the approach to narcotics cases).

In a decision in a non-FCPA foreign bribery context, the U.S. District Court for the District of Columbia in 2011 rejected a motion to dismiss criminal proceedings brought against an Australian national who, while employed as an advisor to the Afghan government, allegedly solicited $190,000 in bribes to be paid from U.S. funds supplied to a U.S. Agency for International Development (“USAID”) contractor. Charged with anti-kickback violations and federal program bribery under 41 U.S.C. § 53 and 18 U.S.C. § 666(a)(1)(B), the defendant moved to dismiss on due process grounds, based on the lack of any U.S. nexus. Rejecting the motion, the court invoked the protective principle as enabling the government to charge him for “conduct outside the nation’s territory [that] threatens the nation’s security or could potentially interfere with the operation of its governmental functions.” United States v. Campbell, 798 F. Supp. 2d 293, 306-08 (D.D.C. 2011) (internal citations omitted). The court held: “Not only might Mr. Campbell’s actions hold the United States up to opprobrium in Afghanistan, every instance of such connivance robs USAID money from its intended purpose, hinders the United States’ substantial efforts in Afghanistan, and also robs USAID of support for its efforts from the U.S. taxpayer.”

II. Comparison of Civil and Criminal Due Process Standards

The nexus requirement in criminal cases is in many respects similar to the “minimum contacts” test for personal jurisdiction in civil ones. The Straub court found that the SEC’s complaint alleged sufficient minimum contacts with the United States because the defendants’ alleged concealment of bribes, along with the company’s falsified SEC filings, were sufficient to demonstrate that the defendants’ intent was to cause injury to U.S. interests in the transparent operations of SEC-regulated companies. SEC v. Straub, 2013 WL 466600, at *7 (S.D.N.Y. Feb. 8, 2013). The Steffen court found that the defendant did not have “minimum contacts” with the United States when he did not authorize the bribes at issue or falsify any SEC filings. SEC v. Steffen, 2013 WL 603135, at *5 (S.D.N.Y. Feb. 19, 2013). Considering that the “nexus” element of due process may be met in the criminal context if the defendant intends to cause injury to the United States or its interests, it is possible that acts similar to those the Straub defendants undertook could be found sufficient to confer jurisdiction in a due process sense in criminal matters involving foreign nationals acting abroad. But the lack of clear precedent identifying which “U.S. interests” count for criminal law due process purposes in an anti-bribery context in which U.S. funds, property, or lives are not at issue raises possibly significant questions whether criminal jurisdiction might be more circumscribed.

At the same time, because the “reasonableness” due process test in civil matters focuses on several factors not strictly captured by the criminal law test, it is also possible that some defendants facing civil FCPA charges might have valid due process defenses where they might not if they were charged criminally for the same conduct. In Steffen, the court found that the reasonableness test was not met due to “Steffen’s lack of geographic ties to the United States, his age, his poor proficiency in English, and the forum’s diminished interest in adjudicating the matter” after certain corporate settlements occurred, including in other jurisdictions. How and whether any of these points would matter if they were raised as part of a due process challenge in the pending criminal case where Mr. Steffen has been charged remains to be seen. Given that Mr. Steffen has not voluntarily appeared in the United States, is currently not subject to extradition proceedings, and cannot be tried under Federal Rule of Criminal Procedure 43 until he does appear, the issue may never be litigated in his case and may be rarely ripe in the FCPA context.

III. Conclusion

The recent due process rulings in the civil FCPA matters in Straub and Steffen rightly raise the question of the jurisdictional limits that apply as a matter of due process in the criminal FCPA arena. These constitutional issues, apart from the threshold matter of how and whether the FCPA was intended by Congress to apply in an extraterritorial context, an issue on which the Supreme Court’s recent decision in Kiobel v. Royal Dutch Petroleum Co., No. 10-1491 (U.S. Apr. 13, 2013) puts a spotlight, may become of increasing importance as the DOJ pursues aggressive jurisdictional theories against individual foreign nationals. A lack of clear precedent will undoubtedly put pressure on litigants to settle and on the courts to resolve cases on non-constitutional grounds, but may ultimately lead to judicial pronouncements on the constitutional limits of the FCPA.

The Impact Of Kiobel On FCPA Enforcement

Thursday, April 18th, 2013

Yesterday, the Supreme Court released its long-awaited opinion in Kiobel v. Royal Dutch Shell Petroleum.

The precise issue before the court was “whether and under what circumstances courts may recognize a cause of action under the Alien Tort Statute (“ATS”), for violations of the law of nations occurring within the territory of a sovereign other than the United States.”

The opinion, authored by Chief Justice Roberts, holds that “the presumption against exterritoriality applies to claims under the ATS, and that nothing in the statute rebuts that presumption.”

Accordingly, the court in a unanimous opinion (several justices authored concurring opinions) affirmed the Second Circuit’s dismissal of a lawsuit brought by a group of Nigerian nationals residing in the United State who filed suit in federal court against certain Dutch, British, and Nigerian corporations, alleging that the corporations aided and abetted the Nigerian government in committing violations of the law of nations in Nigeria.

This post analyzes the impact of Kiobel on FCPA enforcement.

While the ATS and Foreign Corrupt Practices Act are separated by 188 years in terms of enactment, the statutes have often being viewed by some as siblings, or at least distant cousins within the same family.

However, it is important to grasp that the ATS and FCPA are very different statutes in very material ways.

The jurisdictional issue the Supreme Court addressed in Kiobel - whether the canon of statutory interpretation known as the presumption against extraterritorial application - was necessitated because the ATS was silent on the jurisdiction issue. Indeed, Chief Justice Roberts stated that the canon “provides that when a statute gives no clear indication of an extraterritorial application it has none” (emphasis added).

In contrast, the FCPA is explicit as to its jurisdictional scope and provides as follows depending on the category of person (legal or natural) subject to the law’s anti-bribery provisions.

As to U.S. persons (legal or natural) the FCPA provides for two types of jurisdictional. The original statutory standard was (and is still part of the law) “use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance” of a bribery scheme. However, in 1998 Congress amended the FCPA to also provide for so-called nationality jurisdiction as to U.S. persons. 15 USC 78dd-1(g) and 78dd-2(i) specifically state, in pertinent part, as follows: “It shall also be unlawful for [any issuer organized under the laws of the United States or for any United States person] to corruptly do any act outside the United States in furtherance [of a bribery scheme] irrespective of whether such [U.S. person] makes uses of the mails or any means or instrumentality of interstate commerce in furtherance [of the bribery scheme]. In short, as to U.S. persons, in 1998 Congress explicitly amended the FCPA to provide for extraterritorial jurisdiction thus negating the need for reference to the canon of statutory interpretation at issue in Kiobel.

As to foreign issuers subject to 78dd-1 of the FCPA (i.e. foreign companies with shares registered on U.S. exchanges or otherwise required to file periodic reports with the SEC), the 1998 amendment found in 78dd-1(g) did not apply to such companies. It can thus be inferred that Congress did not intend for the extraterritorial provisions of the 1998 amendments to apply to such entities. Here again, the need for the canon of statutory interpretation at issue in Kiobel is negated. For such foreign issuers, the FCPA explicitly provides only territorial jurisdiction as stated above.

As to persons other than U.S. persons (legal or natural) or foreign issuers, the FCPA was also amended in 1998 to create an entire new category of “person” subject to the FCPA’s anti-bribery provisions. See 78dd-3. This category applies to non-U.S. actors and non-foreign issuers such as foreign private companies and foreign nationals. This FCPA prong has explicit jurisdictional provisions. 78dd-3(a) states, in pertinent part, that it shall be unlawful for “any person” other than an issuer or domestic concern (that is a U.S. “person”) ”while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance [of a bribery scheme." Here again, because the FCPA is explicit, the need for the canon of statutory interpretation at issue in Kiobel is negated.

Just because the canon of statutory interpretation at issue in Kiobel is not directly applicable to the FCPA, it does not follow that Kiobel will not have an impact on FCPA enforcement. To the contrary, the logic and rationale of many justices in Kiobel has direct bearing on certain aspects of FCPA enforcement, and indeed can be viewed as Supreme Court disapproval of certain aspects of FCPA enforcement.

Despite the above jurisdictional provisions clearly set forth in the FCPA, in recent years the DOJ has advanced broad jurisdictional theories in enforcement actions against foreign entities and foreign nationals.

For instance in 2006, the DOJ brought its first criminal FCPA enforcement action a foreign company, Norway-based Statoil (see here for the information), for engaging in a bribery scheme in Iran. The sole jurisdictional allegation the DOJ hung its hat on was the notion that Statoil received an invoice from a U.K. consulting company instructing that money "be routed through a U.S. bank account in New York to a bank account in Switzerland" which the company paid.

In announcing this action, which resulted in $21 million flowing into the U.S. Treasury, the DOJ stated (here) as follows.

"Although Statoil is a foreign issuer, the FCPA applies to foreign and domestic public companies alike, where the companies stock trades on American exchanges. This prosecution demonstrates the [DOJ's] commitment vigorously to enforce the FCPA against all international businesses whose conduct falls within its scope.”

Many similar DOJ enforcement actions against foreign companies have been brought since. In fact, the majority of cases in the FCPA’s “Top Ten” in terms of fine and penalty amounts are against foreign companies including the Bonny Island, Nigeria enforcement actions in which the DOJ (and SEC) alleged that Dutch, French, and Japanese companies bribed Nigerian foreign officials. The jurisdictional allegations in these cases, which resulted in approximately $1.1 billion flowing into the U.S. Treasury, all hinged on wire transfers through New York based accounts and faxes and e-mails to the U.S. FCPA enforcement against foreign companies has been so prominent as to gain the attention of main-stream media such as the New York Times in this story.

In short, while the above FCPA enforcement actions against foreign actors (and several other examples could also be cited) did not rely on extraterritorial jurisdiction – because indeed there is none under the FCPA as to foreign actors – they did rely on what I’ve called de facto extraterritorial jurisdiction given the scant connection the bribery schemes had to the U.S.

It is here where the logic and rationale of many justices in Kiobel has direct bearing on this aspect of FCPA enforcement, and indeed can be viewed as Supreme Court disapproval of this aspect of FCPA enforcement.

For starters, Chief Justice Roberts recognized the delicate foreign policy consequences of the issue before the court – an issue that is present when the U.S. government alleges that foreign companies are bribing foreign officials on foreign lands.

It was also refreshing to see Chief Justice Roberts reference the “historical background against which the ATS was enacted” in giving meaning to the statute and how these historical events provided no support to the petitioner’s position. I have long argued (see here for “The Facade of FCPA Enforcement“) that certain aspects of FCPA enforcement are inconsistent with Congressional intent – a notion that becomes all the more apparent when reading “The Story of the FCPA” – the most extensive piece ever written on the FCPA’s history that I published this past December upon the FCPA’s 35th anniversary.

The concurring opinion of Justice Alito, joined by Justice Thomas, is also instructive in that it states when the ATS “claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritoriality.” Applying this to the FCPA context, can it truly be said that the above FCPA enforcement actions against foreign actors touched and concerned the territory of the U.S. with “sufficient force”?

Even the concurring opinion of Justice Breyer, joined by Justices Ginsburg, Sotomayor and Kagan, is instructive. This opinion did not invoke the presumption against exterritoriality in concluding that the claims should be dismissed, but rather found that jurisdiction was lacking for another reason. Namely that the foreign corporations, while having shares traded on U.S. exchanges, had an insufficient presence in the U.S. such that it would be “farfetched to believe, based solely upon the defendants’ minimal and indirect American presence, that this legal action helps to vindicate a distinct American interest.” The parallels to FCPA enforcement actions against foreign actors for alleging bribing foreign officials in foreign lands are obvious.

If FCPA enforcement actions against foreign actors are based on aggressive and dubious territorial jurisdictional theories – why don’t the companies aggressively litigate?

This highlights the second key difference between the ATS and the FCPA. The only reason the Kiobel case made it to the Supreme Court is because the plaintiffs in ATS cases have little leverage against the corporate defendants. ATS actions are civil actions brought by private plaintiffs and are thus actually litigated. I know, it seems a bit old-fashioned doesn’t it.

In contrast, certain courts have held (although by no means is the argument that the FCPA ought to have a private right of action a fait accompli) that the FCPA does not have a private right. The FCPA is thus only enforced by the DOJ (or the SEC as to issuers). These government enforcement agencies, unlike ATS plaintiffs, have big and sharp sticks that corporate defendants (and individuals as well) are mindful of in deciding how to proceed when subject to FCPA scrutiny.

Indeed, as explained in this prior post, when the above referenced Japanese company charged for making bribe payments to Nigerian officials raised jurisdictional issues, the DOJ stated that the company was not cooperating. Specifically the resolution document states as follows. “After initially declining to cooperate with the Department based on jurisdictional arguments, [the company] began to cooperate.” A company doesn’t cooperate with the DOJ in an FCPA enforcement, the chances are higher that the company will be indicted as opposed to being offered one of the resolution vehicles discussed below.

In short, to challenge a “plaintiff” in an FCPA enforcement action first requires a company to be criminally indicted by the DOJ or in the SEC context to be charged by the company’s primary government regulator. The impact on the company’s market capitalization upon indictment or civil charging is likely to be much greater than the FCPA fines or penalties the DOJ and/or SEC are seeking.

Indeed, in the FCPA’s 35 year history only two companies have put the DOJ to its burden of proof at trial and both companies ultimately prevailed. The first instance, involving an issuer occurred in 1991, and the second instance, involving a private company, occurred in 2011.

To make matters worse, per DOJ policy, all FCPA enforcement shall originate from Main Justice in Washington, D.C. This means from a discretion and supervision standpoint that a very small group of individuals are in the charge of an entire area of law. Contrast this with DOJ insider trading cases, financial fraud cases, etc. that can originate from any U.S. Attorneys office in the country

To make matters even worse, in 2004 the DOJ introduced non-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs) to the FCPA context. These agreements have the practical effect of insulating DOJ FCPA enforcement theories in corporate enforcement actions from any judicial scrutiny.

These dynamics of FCPA enforcement are simply not present in ATS cases and for this very simple reason the ATS, unlike the FCPA, has been the subject of much litigation over the past decade. Imagine if the ATS was only enforced by the government, consolidated entirely in one office in Washington D.C., and that the government used NPAs and DPAs to resolve the cases.

The Supreme Court would have never heard the Kiobel case, nor would the Supreme Court have heard the Sosa ATS case in 2004, nor would various appellate courts have heard ATS cases over the past decade or so.

Returning to the original question – will Kiobel have an impact on FCPA enforcement? The logic and rationale of many justices in Kiobel would sure seem to have direct bearing on certain aspects of FCPA enforcement, and indeed can be viewed as Supreme Court disapproval of certain aspects of FCPA enforcement.

However, in order for judicial logic and rationale to be triggered, the judiciary needs to play a role, and in the FCPA context the judiciary rarely gets to play a role because of government enforcement policies.

Puzzled By Straub And Steffen

Wednesday, March 13th, 2013

Prior posts here and here summarized the recent judicial decisions in SEC v. Straub and SEC v. Steffen.

Today’s post is from Russ Ryan (Partner, King & Spalding). Prior to joining King & Spalding, Ryan spent ten years in the SEC’s Division of Enforcement, including his last three years as Assistant Director of the Division. Ryan, along with his colleagues at King & Spalding (Gary Grindler – former DOJ Acting Deputy Attorney General - and Ehren Halse-Stumberg), recently published this client alert on the cases. Ryan contributes this guest post admitting to some confusion regarding the common thread between Straub and Steffen on the issue of personal jurisdiction.

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Am I the only one puzzled that the courts in both Straub and Steffen considered largely dispositive whether or not the respective defendants participated in the deception of U.S. shareholders by signing false accounting certifications or falsifying financial statements?

The irony of the courts’ focus on misleading financial statements is that in neither case – nor in most other Foreign Corrupt Practices Act cases, for that matter – did the SEC even allege that the relevant company’s financial statements were materially misstated. Likewise, nobody was charged with securities fraud under Securities Exchange Act Section 10(b) and Rule 10b-5, presumably because none of the bribes or falsified records were material to the companies involved, which is typical in an FCPA case. Indeed, neither Magyar nor Siemens was charged even with violating the periodic reporting requirements of Exchange Act section 13(a) and the rules thereunder for Form 10-K and 10-Q filings, which don’t require proof of scienter, but do require proof of materiality.

In short, in neither case did the SEC ever allege that financial statements were materially misstated, much less that U.S. shareholders were misled by them. Of course, mere acknowledgment of this point invites the question of to what extent the fight against foreign bribery has to do with the SEC’s core mission of protecting U.S. investors. Indeed, as Professor Koehler’s article “The Story of the Foreign Corrupt Practices Act” highlights, the SEC did not want any role in enforcing what would become the FCPA’s anti-bribery provisions.

Let’s face it: Most foreign bribery by employees of U.S. issuers and domestic concerns, although perhaps reprehensible, does not materially mislead or harm the shareholders of these companies, nor is it intended to do so. To the contrary, even if misguided and short-sighted, most foreign bribery is intended by the bribing employees to enrich their companies, and by extension their shareholders, by boosting real sales and increasing actual revenue. The primary victims are the company’s competitors and the foreign agency or department whose official was corrupted by the company’s bribe – not shareholders.

It’s true, of course, that if and when a company is caught engaging in bribery, the resulting publicity, investigations, and penalties can hurt the company and its shareholders. But this harm is no different from that which flows from the exposure of any kind of corporate criminal misconduct, little of which falls within the SEC’s jurisdiction.

It’s also true that most foreign bribery involves some evasion of a company’s internal accounting controls and/or some degree of falsification of a company’s books and records, conduct well within the SEC’s core area of interest whenever an issuer is involved. But these transgressions typically occur entirely or substantially at a remote subsidiary of the issuer and, even in the aggregate, rarely come close to being material to the issuer itself.

The SEC’s theory is usually that the remote subsidiary’s books and records “roll up” into the issuer’s, and thus are part of the issuer’s own books and records, so they are fair game. As this prior FCPA Professor post highlighted, the SEC has also argued that payments that violate the FCPA are qualitatively material even if quantitatively immaterial. For present purposes we can stipulate to the reasonableness of these positions.

But it brings us back to the issue of personal jurisdiction over foreign employees of issuers who lack any meaningful connection with the United States other than working for a company that happens to have SEC-registered securities and SEC filing obligations. Whether the foreign employee participates in a bribe or a falsification of books and records outside the United States, it is hard to see how that conduct could ever be viewed as a deliberate effort to mislead U.S. shareholders, much less suffice to subject the employee to personal jurisdiction in a law enforcement case being prosecuted in a U.S. court. And why courts would consider this the lynchpin of their personal jurisdiction analysis is likewise far from clear.

Friday Roundup

Friday, March 1st, 2013

Hits and misses, does it really need to cost this much, the Wal-Mart effect, survey says, Senate hearing quotable, while they’re at it, checking in on Hollywood and Goldman too, spot on, and some refreshing words. It’s all here in the Friday roundup.

Hits and Misses

I read pretty much everything churned out by FCPA Inc., including the flood of recent client alerts concerning the Straub and Steffen decisions. (See here and here for previous posts summarizing the decisions). Many of these alerts are good and informative (for instance, see here from Debevoise & Plimpton). However, some of these alerts are just plain wrong.

The headline of one alert was “District Court Decision Limits the Extraterritorial Reach of the FCPA.” The headline of another alert was “Court Sets Limits on Extraterritorial FCPA Reach; Dismisses Case Against Foreign Siemens Executive.”

Neither the Straub nor Steffen decisions concerned extraterritorial application of the FCPA. In fact, there is no extraterritorial reach of the FCPA as to foreign actors. Yes, the FCPA was amended in 1998 to provide for alternative “nationality” jurisdiction (i.e. extraterritorial jurisdiction) over U.S. persons (both legal and natural), however, 78dd-1(g) and 78dd-2(i) are strictly limited to U.S. persons.

Rather, the Straub decision concerned the scope of territorial jurisdiction under 78dd-1(a), specifically the meaning of “use of the mails or any means or instrumentality of interstate commerce …”.

The Steffen decision did not even reach this issue as the judge found the initial threshold issue of personal jurisdiction lacking.

Wal-Mart’s FCPA Scrutiny Expenses Mount

During the media feeding frenzy after the New York Times April 2012 Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV. At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.

Spitzer of course was right.

Wal-Mart recently stated (here) that it has incurred “$157 million of professional fees and expenses related to the ongoing” FCPA matter during its last fiscal year and that it expect to incur an additional ”$40 to $45 million for the first quarter of fiscal 2014.” During Wal-Mart’s recent earnings conference call, a company executive stated as follows. “On FCPA, we continue to work closely with anticorruption compliance experts to review and to assess our programs and help us implement concrete steps for each particular market. In the various markets, these experts have spent tens of thousands of hours on anti-corruption support and training. We remain committed to follow all laws and regulations in the markets where we operate.”

The $157 million Wal-Mart spent in the last FY equates to approximately $604,000 in professional fees and expenses per working day.

I observed in this March 2011 articles as follows.

“This new era of enforcement has resulted in wasteful overcompliance, companies viewing every foreign business partner with irrational suspicion, and companies deploying teams of lawyers and specialists around the world spending millions to uncover every potential questionable or unethical $100 corporate payment. This new era of enforcement has proven lucrative to many segments of the legal, accounting, and compliance industries and the status quo would, from their perspective, seem desirable.”

The question again ought to be asked – does it really need to cost this much or has FCPA scrutiny turned into a boondoggle for many involved? For more on this issue, see my article “Big, Bold, and Bizarre: The Foreign Corrupt Practices Act Enters a New Era.”

While minor compared to Wal-Mart’s FCPA professional fees and expenses, Beam Inc. recently disclosed here that in 2012 the company spent approximately $4.2 million for “legal, forensic accounting, and other fees related to our internal investigation into Foreign Corrupt Practices Act compliance in our India operations.”

Wal-Mart Effect

Switching gears, but sticking with Wal-Mart related issues, this May 2012 post highlighted a potential “Wal-Mart effect.” In short, the point was that Wal-Mart is clearly not the only company subject to the FCPA that needs licenses, permits and the like when doing business in Mexico. I predicted that Wal-Mart’s potential FCPA exposure would cause sleepless nights for many company executives doing business in Mexico and the general region. The post then discussed statements made during a Kimco Realty Corporation earnings call in May 2012 concerning its properties in Mexico.

Earlier this week, Kimco Realty stated in an SEC filing as follows.

“On January 28, 2013, the Company received a subpoena from the Enforcement Division of the SEC in connection with an investigation, In the Matter of Wal-Mart Stores, Inc. (FW-3678), that the SEC Staff is currently conducting with respect to possible violations of the Foreign Corrupt Practices Act. The Company is responding to the subpoena and intends to cooperate fully with the SEC in this matter. The Company has also been notified that the U.S. Department of Justice (“DOJ”) is conducting a parallel investigation, and the Company expects that it will cooperate with the DOJ investigation. At this point, we are unable to predict the duration, scope or result of the SEC or DOJ investigation.”

Survey Says

The annual Litigation Trends and Survey report by Fulbright & Jaworski is always a good read. This year’s report (see here to download) surveyed 392 “senior corporate counsel” (275 in the U.S., 100 in the U.K. and 17 in other jurisdictions) on a wide-range of litigation and related matters. The following were FCPA or related survey results.

“Companies that have retained outside counsel to assist with a corruption or bribery investigation in the past 12 months (including, but not limited to, FCPA in U.S. and equivalent in U.K.”

9% of U.S. respondents answered “yes”; 18% of U.K. respondents answered “yes.” As noted, “U.S. figures [2010-2012] have remained relatively stable.”

“Companies that have engaged in due diligence for bribery or corruption (including FCPA matters) relating to a merger, acquisition or other business transactions with a foreign country in the past 12 months.”

18% of U.S. respondents answered “yes”; 26% of U.K. respondents answered “yes.” As noted, “more companies this year have engaged outside counsel in due diligence for corruption or bribery investigations due to business transactions with entities based in a foreign country.”

As to the due diligence figures, in the abstract these figures do not mean much, unless one knows how many responding companies actually engaged in foreign acquisitions or other business combinations.

The last survey result in the report perhaps speaks best to the over-hyped nature of the U.K. Bribery Act.

“Has your company changed the way it operates due to the emergence of anti-bribery legislation outside the U.S., such as U.K. Bribery Act 2010?”

78% of U.S. respondents answered “no” and 63% of U.K. respondents answered “no.”

Senate Hearing Quotable

Senator Elizabeth Warren (D-MA) had some quotable moments (here) during a recent Senate Banking hearing. The hearing concerned financial regulation, not the FCPA. Nevertheless, some of the issues have some overlap to FCPA enforcement - including how settlement policies in regulatory enforcement actions create conditions in which there is “not much incentive to follow the law” and how “too big to fail” perhaps means “too big for trial.”

Disclosure Issues

This recent Wall Street Journal CFO Journal post notes as follows.

“Securities and Exchange Commissioner Troy Paredes called for a complete review of the information companies disclose to investors, amid concerns that investors suffer from “disclosure overload” that could hamper their ability to gauge the importance of the data. “What we need is a top-to-bottom review of our disclosure regime,” Mr. Paredes said at the Practising Law Institute’s annual “SEC Speaks” conference in Washington, D.C. on Friday.”

While they’re at it, the SEC should take a look at its absurd position that all payments in violation of the FCPA, no matter how small the payment and no matter how large the company, are “qualitatively material.” For instance, as noted in this previous post concerning comments made by enforcement officials at a conference I chaired, an SEC official suggested that the concept of materiality itself has two “sub-concepts”: (i) quantitative materiality (something that impacts a company’s financial statements) and (ii) qualitative materiality. While conceding that very few improper payments are “quantitatively material” and while recognizing that “qualitative materiality” is a “complicated gray area,” the SEC officials nevertheless said that all bribes can be considered qualitatively material because they may “automatically trigger a books and records violation.” For formal SEC guidance on this issue, see here.

Checking In

Hollywood Industry Sweep

From the New York Times regarding the on-going scrutiny of Hollywood movie studios in China.

“Last March, word reached several studios of a confidential inquiry by the Securities and Exchange Commissionand the Justice Department into possible violations of the Foreign Corrupt Practices Act by people or companies involved in the China film trade. Since then, executives and their advisers have been waiting for some public sign of the scope or focus of the government’s interest. So far, there has been none. But official silence has not kept the investigation from casting a chill over dealings between Hollywood and China.”

Goldman

From the Wall Street Journal regarding the on-going scrutiny of Goldman’s dealings with Libya’s sovereign wealth fund.

“Libya’s sovereign-wealth fund said it is cooperating with the U.S. Securities and Exchange Commission in its ongoing investigation into Goldman Sachs Group Inc. over the securities firm’s dealings with the fund when Col. Moammar Gadhafi was in power. [...] People close to the Libyan investment fund said officials have authorized some former fund executives to give testimony to the SEC. The officials also agreed to provide documents and other data to U.S. regulators about the fund’s ties to Goldman, these people said.”

Spot On

Two recent Q&A’s on Law360 caught my eye. The question was “what is an important issue or case relevant to your practice area and why.”

Neil Eggleston (Kirkland & Ellis) stated as follows.

“We are beginning to see the development of case law in the FCPA area, which I believe is good for the process. Most of these cases have been settled. When that occurs, defendants have little incentive to refuse to agree to novel Department of Justice theories of prosecution or jurisdiction, so long as the penalty is acceptable. The department then cites its prior settlement as precedent when settling later ones. But no court approved the earlier settlement, and the prior settlement should have no precedential value in favor of the DOJ in later settlements. As the DOJ increases its prosecution of individuals, we will see many more trials, which will give rise to courts, not the DOJ, interpreting the statute.”

For more on these issues, see my article “The Facade of FCPA Enforcement” and this previous guest post on ”prosecutorial common law.”

Richard Marmaro (Skadden) answered the same question as follows.

“An issue of importance in the white collar area is the issue of prosecutorial misconduct, and appropriate remedies for prosecutors who intentionally conceal evidence, intimidate witnesses, or otherwise compromise or impact a defendant’s right to a fair trial. I have seen firsthand in several of my cases shocking misconduct, which has gone undisciplined by the U.S. Department of Justice. I have been fortunate enough to expose this misconduct, and have had cases dismissed as a result. Indeed, over the last decade, there have been several dismissals nationwide at trial or reversals on appeal based on willful misconduct by government lawyers. Despite these judicial findings, however, the Justice Department’s record of disciplining misbehaving prosecutors is shockingly inadequate. I don’t know of any prosecutor that has been terminated based on a judicial finding of intentional misconduct. In addition, I believe that only two prosecutors have received any discipline at all (both in the Stevens case). In my view, the failure to sanction prosecutors who have been found by judges to have committed misconduct sends the wrong signal to defendants, the public and the vast majority of prosecutors who do their jobs honestly every day.”

For more, see this previous post titled ”Should There Be A Difference?”

Refreshing Words

Every now and then it is refreshing to read some common sense words about FCPA compliance and risk assessment. Such as this recent post from the Trace blog.

“Remember, perfection is neither possible nor necessary. When devising a compliance plan, it’s important to remind oneself of the big picture. A company need not break the bank to have a compliance program that follows accepted best practices. As discussed below, there are various ways that good compliance can be affordable. And companies are not responsible for developing full-proof compliance programs; they only need to develop programs proportionate to the risk they face, with the understanding that no program will completely eliminate all risk from the equation. Unlike in other areas of business, when it comes to compliance, being in the middle of the pack is okay.”

*****

A good weekend to all.

Former Magyar Telekom Executives Seek Second Circuit Review Of Recent Ruling

Wednesday, February 27th, 2013

On the heels of Judge Richard Sullivan’s February 8th pre-trial order denying their motion to dismiss (see here for the prior post), former Magyar Telekom executives Elek Straub, Andras Balogh and Tamas Morvai have moved to certify Judge Sullivan’s order for interlocutory appeal to the Second Circuit.

Last week’s filing (here) states, in pertinent part, as follows (internal citations omitted).

“To satisfy the statutory prerequisites to certification [... the defendants] must show that there is substantial ground for difference of opinion on the issues presented.

“The defendants respectfully submit that there is substantial ground for difference of opinion regarding the following three questions that lie at the heart of the Order: (i) whether the Court may exercise personal jurisdiction over the defendants; (ii) whether the SEC’s actions is barred by the applicable statute of limitations; and (iii) whether the SEC has adequately pled the use of an instrumentality of interstate commerce. As explained more fully below, immediate appellate consideration of these questions is warranted in view of the overwhelming cost in time and money of proceeding to full-blown merits discovery and trial in this case. As the parties have already informed the Court by letter and proposed scheduling order dated October 3, 2012, merits discovery is expected to last approximately thirty months and will require teams of lawyers to traverse thousands of miles, review millions of documents in foreign languages, depose scores of foreign witnesses in foreign languages and in multiple countries, and negotiate the complexities of foreign law – all with the Court’s frequent oversight and assistance with regard to the Hague Convention process for gathering evidence abroad and related matters. The extraordinary resources needed to develop a complete factual record and bring this case to trial, which would include many millions of dollars to finance the defense of the case and the SEC’s prosecution of it, will be wasted if the Second Circuit reverses any part of the Order after trial, and would thus render unreasonable requiring these Hungarian defendants to travel thousands of miles from their homes to defend themselves. The defendants respectfully submit that the questions presented here for certification, coupled with the huge resource outlay contemplated already by both sides if merits discovery should proceed, make this case ripe for early albeit limited appellate review. This case is simply not a run-of-the-mill piece of litigation.

With regard to the first question presented of personal jurisdiction, prior to the Order no court had ever held that personal jurisdiction may be asserted in an FCPA action over foreign defendants whose sole contact with the United States involved signing allegedly false management certifications and sub-certifications, which the complaint fails to allege even reached or had any impact in the United States. Absent a clear directive from Second Circuit or Supreme Court precedent, the caution that attends application of the Constitutional ‘minimum contacts’ standard in the international context in evaluating a foreign national defendant’s motion to dismiss on jurisdictional grounds - acknowledged most recently by another judge of this Court in SEC v. Sharef - should militate against an unprecedented broadening of the reach of United States courts. Furthermore, relying on the defendants’ alleged preparation of either non-alleged or unfiled SEC filings to anchor the assertion of jurisdiction over them specifically as to the bribery counts in the complaint – which the SEC conceded at oral argument have ‘little, if any, connection to the United States,’ strayed from the obligation to evaluate personal jurisdiction on a per-claim basis. Second, turning to the timeliness question, the Order represents the first modern interpretation and application of 28 USC 2462 to foreign defendants who are not found within the United States during the pertinent five-year period but who are nevertheless readily served. Despite the Order’s ‘plain language’ analysis, the text and legislative history of the statute are ambiguous and there is a dearth of controlling authority on point, causing reasonable minds to disagree about the statute’s meaning. It seems doubtful that Congress intended to toll the statute indefinitely for defendants residing outside the United States who can be readily served, as the SEC contends, and comparable authority suggests an outcome different from that reached in the Order. Third, as the Court itself recognized, whether the use of an instrumentality of interstate commerce includes an intent or even some knowledge element is an issue of first impression in the FCPA context for which the text of the statute offers inadequate guidance.”

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A footnote in the above brief indicates that the SEC intends to oppose the motion for interlocutory appeal.

The case cite, SEC v. Sharef, refers to Judge Shira Scheindlin’s February 19th decision in the SEC’s enforcement against Herbert Steffen (a former Siemens executive). See here for the prior post.