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In Depth On The Tyco Enforcement Action

Wednesday, September 26th, 2012

Earlier this week, the DOJ and SEC announced a Foreign Corrupt Practices Act enforcement action against Tyco International Ltd. (“Tyco”) 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).

This post goes long and deep as to the DOJ’s and SEC’s allegations and resolution documents (approximately 85 pages in total). Tomorrow’s post will discuss various items of note from the enforcement actions.

DOJ

The DOJ enforcement action involved a criminal information (here) against Tyco Valves & Controls Middle East Inc., (an indirect subsidiary of Tyco) resolved through a plea agreement (here) and a non-prosecution agreement (here) entered into between the DOJ and Tyco.

Criminal Information

The criminal information begins by identifying Tyco Valves & Controls Middle East Inc. (TVC ME) as a Delaware company headquartered in Dubai that “sells and markets valves and actuators manufactured by other entities throughout the Middle East for the oil, gas, petrochemical, commercial construction, water treatment,and desalination industries.”

According to the information, Tyco Flow Control Inc. (“TFC) was TVC ME’s direct parent company and TFC was a wholly-owned indirect subsidiary of Tyco. According to the information, “TVC ME’s financials were consolidated into the books and records of TFC for the purposes of preparing TFC’s year-end financial statements, and in turn, TFC’s financials were consolidated into the books and records of Tyco for the purposes of preparing Tyco’s year-end financial results.”

The information alleges a conspiracy as follows.

Between 2003 and 2006 TVC ME conspired with others to ”obtain and retain business from foreign government customers, including Aramco, ENOC, Vopak, NIGC, and other customers by paying bribes to foreign officials employed by such customers.”

The information alleges: that Saudi Aramco (“Aramco”) was a Saudi Arabian oil and gas company that was wholly-owned, controlled, and managed by the government, and an ”agency” and “instrumentality” of a foreign government; that Emirates National Oil Company (“ENOC”) was a state-owned entity in Dubai and an “agency” and “instrumentality” of a foreign government; that Vopak Horizon Fujairah (“Vopak”) was a subsidiary of ENOC based in the U.A.E. and an “agency” and “instrumentality” of a foreign government; and that the National Iranian Gas Company (“NIGC”) was a state-owned entity in Iran and an “agency” and “instrumentality” of a foreign government.

Under the heading “manner and means of the conspiracy” the information alleges in pertinent part as follows.

“TVC ME, together with others, decided to pay bribes to employees of end-customers in Saudi Arabia, the U.A.E., and Iran, including to employees at Aramco, ENOC, Vopak, and NIGC, in order to obtain or retain business. TVE ME, together with others, found ways to obtain cash in order to make the bribe payments. TVE ME, together with others, made payments through Local Sponsor [a company in Saudi Arabia that acted as a distributor for TVC ME in Saudi Arabia]. Local Sponsor provided TVC ME with false documentation, such as fictitious invoices for consultancy costs, bills for fictitious commissions, or ‘unanticipated costs for equipment,’ to justify the payments to Local Sponsor that were intended to be used for bribes. TVE ME, together with others, approved and made payments to Local Sponsor for the purpose of paying bribes. TVC ME, together with others, paid bribes to employees of foreign government customers in order to remove TVC manufacturing plans from various Aramco ‘blacklists’ or ‘holds’; win specific bids; and/or obtain specific product approval. TVC ME, together with others, improperly recorded the bribe payments in TVC ME’s books, records, and accounts, and instead falsely described the payments, including as consultancy costs, commissions, or equipment costs. TVC ME earned approximately $1.153,500 in gross margin as a result of the bribe payments.”

Based on the above conduct, the information charges conspiracy to violate the FCPA’s anti-bribery provisions.

Plea Agreement

The plea agreements sets forth a Sentencing Guidelines range of $2.1 million – $4.2 million. In the plea agreement, the parties agreed that $2.1 million was “appropriate.” Pursuant to the plea agreement, TVC ME agreed “to work with its parent company in fulfilling the obligations” described in Corporate Compliance Program attached to the plea agreement.

NPA

The DOJ also entered into an NPA with Tyco in which the DOJ agreed “not to criminally prosecute [Tyco] related to violations of the books and records provisions of the FCPA … arising from and related to the knowing and willful falsification of books, records, and accounts by a number of the Company’s subsidiaries and affiliates …”.

The NPA contains a Statement of Facts.

Under the heading, “details of the illegal conduct” the NPA states as follows.

“[From 1999 through 2009] certain Tyco subsidiaries falsified books, records, and accounts in connection with transactions involving customers of Tyco’s subsidiaries, including government customers, in order to secure business in various countries, including China, India, Thailand, Laos, Indonesia, Bosnia, Croatia, Serbia, Slovenia, Slovakia, Iran, Saudia Arabia, Libya, Syria, the United Arab Emirates, Mauritania, Congo, Niger, Madagascar, and Turkey. During that time period, certain Tyco subsidiaries made payments, both directly and indirectly, to government officials and falsely described the payments to government officials in Tyco’s corporate books, records, and accounts as legitimate charges, including as ‘consulting fees,’ ‘commissions,’ ‘unanticipated costs for equipment,’ ‘technical consultation and marketing promotion expenses,’ ‘conveyance expenses,’ ‘cost of goods sold,’ ‘promotional expenses,’ and ‘sales development’ expenses. As early as 2004, Tyco alerted the Securities and Exchange Commission to payments at certain of Tyco’s subsidiaries that could violate the FCPA. In 2006, Tyco acknowledged that ‘prior to 2003 Tyco did not have a uniform, company-wide FCPA compliance program in place or a system of internal controls sufficient to detect and prevent FCPA misconduct at is globally dispersed business units’ and that ‘employees at two Tyco subsidiaries in Brazil and South Korea did not receive adequate instruction regarding compliance with the FCPA, despite Tyco’s knowledge and awareness that illicit payments to government officials were a common practice in the Brazilian and South Korean construction and contracting industries.’ However, despite Tyco’s knowing of a high probability of the existence of improper payments and false books, records, and accounts, the improper payments and falsification of books, records, and accounts continued until 2009.”

As to Thailand, the Statement of Facts states a follows.

“[Between 2004 and 2005] ET Thailand [Earth Tech (Thailand) Ltd. - a Thai corporation that was approximately 49% indirectly owned by Tyco] made payments in the amount of approximately $292,286 to a consultant and recorded those amounts as fictitious disbursements related to the NBIA project [New Bangkok International Airport]. In connection with these improper payments, ET Thailand earned approximately $879,258 in gross profit.”

“[Between 2000 to 2006] ADT Thailand [ADT Sensormatic Thailand an indirect wholly owned subsidiary of Tyco] recorded payments in the amount of approximately $78,000 to one of its subcontractors as payments for site surveys for a government traffic project in Laos, but the payments instead were channeled to other recipients in connection with ADT Thailand’s business in Laos. During the same time period, ADT Thailand made payments to one of its consultants related to a contract for the installation of a CCTV system in the Thai Parliament House, and ADT Thailand and the consultant created invoices that stated that the payments were for ‘renovation work’ when no renovation work was actually performed. During that same time period, ADT Thailand made three payments in connection with a design and traffic survey that ADT Thailand provided from the city of Pattaya, in Southern Thailand, but the payments were issued pursuant to falsified invoices without any evidence that work was ever performed. In connection with these improper transactions, ADT Thailand earned approximately $473,262 in gross profit.”

As to China, the Statement of Facts state as follows.

“[Between 2003 and 2005] TTC Huzhou [Tyco Thermal Controls (Shanghai) Co. Ltd. an indirect wholly owned subsidiary of Tyco] authorized approximately 112 payments in the amount of $196,267 to designers at design institutes owned or controlled by the Chinese government, and falsely described the payments in company books, records, and accounts as ‘technical consultation’ or ‘marketing promotion’ expenses. In 2005, in connection with a contract with China’s Ministry of Public Security, TTC Huzhou paid a commission to one of its sales agents that was used, in part, to pay the ‘site project team’ of a state-owned corporation, and that was improperly recorded in the company’s books and records. In connection with these improper transactions, TTC Huzhou earned approximately $3,470,180 in gross profit.”

“TFCT Shanghai [Tyco Flow Control Trading (Shanghai) Ltd. an indirect wholly owned subsidiary of Tyco] made approximately eleven payments in the amount of approximately $24,000 to employees of design institutes, engineering companies, subcontractors and distributors which were inaccurately described in its books and records. In connection with these improper transaction, TFCT Shanghai earned approximately $59,412 in gross profit.”

“[Between 2005 and 2006] TFC HK [Tyco Flow Control Hong Kong Limited] and Keystone [Beijing Valve Co. Ltd.] [both indirect wholly owned subsidiaries of Tyco] made payments in the amount of approximately $137,000 to agencies owned by approximately eight Keystone employees, who in turn gave cash or gifts to employees of design institutes or commercial customers, and then improperly recorded these payments. [From 2005 to 2006] Keystone made payments to one of its sales agents in connection with sales to Sinopec, for which no legitimate services were actually provided, and then improperly recorded the payments as ‘commissions.’ In connection with these improper transactions, Keystone earned approximately $378,088 in gross profits.”

“[Between 2001 to 2002] THC China [Tyco Healthcare International Trading (Shanghai) Co. Ltd. an indirect wholly owned subsidiary of Tyco] gave publicly-employed healthcare professionals (HCPs) approximately $250,00o in meals, entertainment, domestic travel, gifts and sponsorships. [Between 2004 to 2007] employees of THC China submitted expenses claims related to entertaining HCPs that were supported by fictitious receipts, including references to a non-existent company, in order to circumvent Tyco’s internal guidelines. In connection with medical conferences involving HCPs, THC China employees submitted false itineraries and other documentation that did not properly identify trip expenses in order to circumvent internal controls and policies. Approximately $353,800 in expenses was improperly recorded as a result of the false documentation relating to these improper expenditures.”

As to Slovakia, the Statement of Facts state as follows.

“[Between 2004 to 2006] Tatra [a Slovakian joint venture that was approximately 90 percent indirectly owned by Tyco] made payments in the amount of approximately $96,000 to one of its sales agents in exchange for the sale agent’s attempt to have Tatra products included in the specifications for tenders to a government customer, while at the same time the sales agent was getting paid by the government customer to draw up the technical specifications for the tenders. Tatra improperly recorded the payments to the sales agent as ‘commissions’ in Tatra’s books and records. In connection with these improper transactions, Tatra earned approximately $226,863 in gross profit.”

As to Indonesia, the Statement of Facts state as follows.

“[Between 2003 and 2005] Eurapipe [Tyco Eurapipe Indonesia Pt. an indirect wholly owned subsidiary of Tyco] made approximately eleven payments in the amount of approximately $358,000 to a former employee of Banjarmasin provincial level public water company (PDAM) and two payments to the project manager for PDAM Banjarmasin in connection with the Banjarmasin Project. During the same time period, Eurapipe made payments in the amount of approximately $23,000 to sales agents who then passed some or all of the payments on to employees of government entities in connection withe projects other than the Banjarmasin Project. Eurapipe improperly recorded the payments as ‘commissions payable’ in Eurapipe’s books and records. In connection with these improper transactions, Eurapipe earned approximately $1,298,453 in gross profit.”

“[Between 2002 and 2005] PT Dulmision Indonesia [an Indonesia corporation 99% indirectly owned by Tyco] made payments to third parties, a portion of which went to employees of PLN [a state-owned electricity company in Indonesia], including approximately seven payments one of PT Dulmison’s sales agents, who in turn passed money on to the PLN employees. PT Dulmison Indonesia improperly recorded the payments in PT Dulmison Indonesia’s books, records and accounts. In addition, PT Dulmison Indonesia improperly recorded travel expenses in company books and records, including payments for non-business entertainment in connection with visits by PLN employees to TE Dulmision Thailand’s factory and paid hotel costs incurred as part of a social trip to Paris for PLN employees following a factory visit to Germany, as ‘cost of goods sold’ in PT Dulmison Indonesia’s and TE Dulmison Thailand’s records. In connection with these improper transactions, PT Dulmision Indonesia and TE Dulmison Thailand earned approximately $109,259 in gross profit.”

As to Vietnam, the Statement of Facts state as follows.

“[Between 2001 and 2005] TE Dulmison Thailand [a Thai corporation approximately 66% indirectly owned by Tyco] made nine payments in the amount of approximately $68,426, either directly or through intermediaries, to employees of a public utility owned by the Government of Vietnam and recorded these payments in the books and records of the relevant subsidiaries as ‘cost of goods sold.’”

As to Mauritania, Congo, Niger and Madagascar, the Statement of Facts state as follows.

“[Between 2002 to 2007] Isogard [a branch of Tyco Fire & Integrated Solutions France (TFIS France0, an indrect wholly owned subsidiary of Tyco] made payments to a security officer employed by a government-owned mining company in Mauritania involved in the technical aspects of sales projects for the purpose of introducing Isogard to local buyers in Africa. Isogard made the payments to the security officer’s personal bank account in France without any written contract or invoice and improperly recorded the payments in Isogard’s books and records. Isogard paid sham ‘commissions’ to approximately twelve other intermediaries in Mauritania, Congo, Niger and Madagascar, half of which were to employees, or family members of employees, of Isogard customers. In total, TFIS France made paments in the amount of approximately $363,839 since 2005.”

As to Saudi Arabia, in addition to the conduct at issue in TVC ME’s criminal information, the Statement of Facts state as follows.

“[Between 2004 through 2006] Saudi Distributor maintained a ‘control account’ from which a number of payments were made at THC Saudi Arabia’s [an operational entity within Tyco Healthcare AG, a indirect wholly owned subsidiary of Tyco] direction to Saudi hospitals and doctors, some of whom were publicly employed HCPs. Several expenses from the control account were booked improperly as ‘promotional expenses’ and ‘sales development’ expenses. In connection with these improper transactions, THC Saudi earned approximately $1,960,000 in gross profit.”

As to Turkey, the Statement of Facts state as follows.

“[Between 2001 and 2006] SigInt [a division of M/A-Com, an indirect, wholly owned subsidiary of Tyco] products were sold through a sales representative to government entities in Turkey. The sales representatives sold the SigInt equipment in Turkey at an approximately twelve to forty percent mark-up over the price at which he purchased the equipment from M/A-Com and also received a commission on one of the sales. The sales representative transferred part of his commission and part of his mark-up to a government official in Turkey to obtain orders. In connection with these improper transactions, M/A-Com earned approximately $71,770 in gross proft.”

The Statement of Facts also states as follows.

“[Between 2004 and 2009] Erhard [a subsidiary of Tyco Waterworks Deutschland GmBH (TWW Germany), an indirect wholly owned subsidiary of Tyco] made payments in the amount of approximately $2,371,094 to at least thirteen of its sales agents in China, Croatia, India, Libya, Saudi Arabia, Serbia, Syria, and the United Arab Emirates for the purpose of making payments to employees of government customers, and improperly booked the payments as ‘commissions.’ In connection with these improper transactions, TWW Germany earned approximately $4,684,966 in gross profits.”

In the NPA, Tyco admitted, accepted and acknowledged responsiblity for the above conduct and agreed not to make any public statement contradicting the above conduct.

The NPA has a term of three years and states as follows.

“The Department enters into this Non-Prosecution Agreement based, in part, on the following factors: (a) the Company’s timely, voluntary, and complete disclosure of the conduct; (b) the Company’s global internal investigation concerning bribery and related misconduct; (c) the Company’s extensive remediation, including the implementation of an enhanced compliance program, the termination of employees responsible for the improper payments and falsification of books and records, severing contracts with the responsible third-party agents, the closing of subsidiaries due to compliance failures, and the agreement to undertake further compliance enhancements ….; and (d) the Company’s agreement to provide annual, written reports to the Department on its progress and experience in monitoring and enhancing its compliance policies and procedures …”.

Pursuant to the NPA, the company agreed to pay a penalty of $13.68 million (the $2.1 million TVC ME agreed to pay pursuant to the plea agreement is included in this figure). Pursuant to the NPA, Tyco also agreed to a host of compliance undertakings and agreed to report to the DOJ (at no less than 12 month intervals) during the three year term of the NPA regarding “remediation and implementation of the compliance program and internal controls, policies, and procedures” required pursuant to the NPA.

In this DOJ release, Assistant Attorney General Lanny Breuer stated as follows. “Together with the SEC, we are leading a fight against corruption around the globe.”

SEC

In a related enforcement action, the SEC brought a civil complaint (here) against Tyco.

The introductory paragraph of the complaint states as follows. “This matter concerns violations by Tyco of the books and records, internal controls, and anti-bribery provisions of the FCPA.”

The complaint then states as follows.

“In April 2006, the Commission filed a settled accounting fraud, disclosure, and FCPA injunctive action against Tyco, pursuant to which the company consented to entry of a final judgment enjoining it from violations of the anti-fraud, periodic reporting, books and records, internal controls, proxy disclosure, and anti-bribery provisions of the federal securities laws and ordering it to pay $1 in disgorgement and a $50 million civil penalty. The U.S. District Court for the Southern District of New York entered the settled Final Judgment against Tyco on May 1, 2006. At the time of settlement, Tyco had already committed to and commenced a review of its FCPA compliance and a global, comprehensive internal investigation of possible additional FCPA violations. As a result of that review and investigation, certain FCPA violations have come to light for which the misconduct occurred, or the benefit to Tyco continued, after the 2006 injunction. Those are the violations that are alleged in this Complaint. [...] The FCPA misconduct reported by Tyco showed that Tyco’s books and records were misstated as a result of at least twelve different, post-injunction illicit payment schemes occurring at Tyco subsidiaries across the globe. The schemes frequently entailed illicit payments to foreign officials that were inaccurately recorded so as to conceal the nature of the payments. Those inaccurate entries were incorporated into Tyco’ s books and records. Tyco also failed to devise and maintain internal controls sufficient to provide reasonable assurances that all transactions were properly recorded in the company’s books, records, and accounts. [...] As reflected in this Complaint, numerous Tyco subsidiaries engaged in violative conduct, the conduct was carried out by several different methods, and the conduct occurred over a lengthy period of time and continued even after the 2006 injunction. Through one of the illicit payment schemes, Tyco violated the FCPA anti-bribery provisions. Specifically, through the acts of its then-subsidiary and agent, TE M/A-Com, Inc. Tyco violated [the FCPA's anti-bribery provisions] by corruptly making illicit payments to foreign government officials to obtain or retain business.”

As to the SEC’s anti-bribery charge based on the conduct of TE M/A-Com, Inc. the complaint alleges that M/A Com retained a New York sales agent who made illicit payments in connection with a 2006 sale of microwave equipment to an instrumentality of the Turkish government. The complaint alleges that “employees of M/A-Com were aware that the agent was paying foreign government customers to obtain orders” and cites an internal e-mail which states as follows – “hell, everyone knows you have to bribe somebody to do business in Turkey.” The complaint then alleges as follows. “Tyco exerted control over M/A-COM in part by utilizing dual roles for its officers. At the time of the September 2006 transaction, four high-level Tyco officers were also officers of M/A-COM, including one who was M/A-COM’s president. Additionally, one of those Tyco officers served as one of five members of M/A-COM’s board of directors. While there is no indication that any of these individuals knew of the illegal conduct described herein, through the corporate structure used to hold M/ A-COM and through the dual roles of these officers, Tyco controlled M/A-COM. As a result, M/A-COM was Tyco’s agent for purposes of the September 2006 transaction, and the transaction was squarely within the scope of M/ACOM’s agency. The benefit obtained by Tyco as a result of the September 2006 deal was $44,513.”

The SEC’s complaint contains substantially similar allegations compared to the NPA Statement of Facts. In addition, the SEC complaint alleges additional improper conduct in Malaysia, Egypt, and Poland.

As to Malaysia, the complaint alleges as follows.

“[Between 2000 to 2007] TFS Malaysia [an indirect wholly owned subsidiary of Tyco] used intermediaries to pay the employees of its customers when bidding on contracts. Payments were made to approximately twenty-six employees of customers, and one of those payees was an employee of a government-controlled entity. TFS Malaysia inaccurately described these expenses as ‘commissions’ and failed to maintain policies sufficient to prohibit such payments. As a result, Tyco’s books and records were misstated. Tyco’s benefit as a result of these illicit payments was $45,972.”

As to Egypt, the complaint alleges as follows.

“[Between 2004 to 2008] an Egyptian agent of TFIS UK [a indirect wholly owned subsidiary] wired approximately $282,022 to a former employee’s personal bank account with the understanding that the money would be used in connection with entertainment expenses for representatives of a company majority-owned by the Egyptian government. A portion of the funds was used to pay for lodging, meals, transportation, spending money, and entertainment expenses for that company’s officials on two trips to the United Kingdom and two trips to the U.S. TFIS UK made payments pursuant to inflated invoices submitted by the company’s Egyptian agent, who wired funds to the former employees to be used to entertain foreign officials. TFIS U.K. books and records did not accurately reflect TFIS’s U.K.’s understanding that the funds would be used for entertainment of government officials, and TFIS UK did not maintain sufficient internal controls over its payments to agents. As a result, Tyco’s books and records were misstated. Tyco’s benefits as a result of these illicit payments was $1,589,374.”

As to Poland, the complaint alleges as follows.

“[Between 2005 to 2007] THC Polska [an indirect wholly owned subsidiary] used ‘service contracts’ to hire public healthcare professionals in Poland for various purposes, including conducting training sessions, performing clinical studies, and distributing marketing materials. Approximately five such service contracts involved falsified records and approximately twenty-six other service contracts involved incomplete and inaccurate records, including some related expenses paid by THC Polska to family members of healthcare professionals. As a result, Tyco’s books and records were misstated. In connection with the transactions related to these inaccurate books and records, Tyco’s benefit was approximately $14,673.

As to the SEC’s internal controls charge, the complaint contains the following allegation. “Tyco failed to devise and maintain … a system of internal controls and was therefore unable to detect the violations … Numerous Tyco subsidiaries engaged in violative conduct, the conduct was carried out by several different methods, and the conduct occurred over a lengthy period of time, and it continued even after the 2006 injunction.”

The SEC complaint contains the following paragraph.

“As its global review and investigation progressed, Tyco voluntarily disclosed this conduct to the Commission and took significant, broad-spectrum remedial measures. Those remedial measures include: the initial FCPA review of every Tyco legal operating entity ultimately including 454 entities in 50 separate countries; active monitoring and evaluation of all of Tyco’s agents and other relevant third-party relationships; quarterly ethics and compliance training by over 4,000 middle-managers; FCPA-focused on-site reviews of higher risk entities; creation of a corporate Ombudsman’s office and numerous segment-specific compliance counsel positions; exit from several business operations in high-risk areas; and the termination of over 90 employees, including supervisors, because of FCPA compliance concerns.”

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.

In this release, SEC Associate Director of Enforcement Scott Friestad stated as follows. “Tyco’s subsidiaries operating in Asia and the Middle East saw illicit payment schemes as a typical way of doing business in some countries, and the company illictly reaped substantial financial benefits as a result.”

Martin Weinstin (Willkie Farr & Gallagher - here) represented the Tyco entities.

Friday Roundup

Friday, July 6th, 2012

Out with the tide, a former DOJ Fraud Section Chief speaks on voluntary disclosure, guidance issues, will candy fall from the pinata, schooled in the FCPA, a Section 1504 development, and “Minegolia.”

Tidewater Derivative Complaint Dismissed

As highlighted in this previous post, in November 2010 Tidewater Inc. was one of several companies to resolve a ”CustomsGate” case. The conduct at issue focused on Azeri tax officials and Nigerian temporary import permits and the company resolved DOJ and SEC enforcement actions by agreeing to pay $15.7 million in fines and penalties.

As if on cue in this new era of FCPA enforcement, along came the private plaintiff firms representing shareholders who filed a derivative complaint alleging that officers and members of the Board of Directors of Tidewater breached their fiduciary duties “in that they: (1) knew or recklessly disregarded the fact that employees, representatives, agents and/or contractors were paying, had paid and/or had offered to pay bribes to Azerbaijani and Nigerian government officials to obtain favorable treatment for Tidewater; (2) caused Tidewater to pay bribes and to disguise the bribe payments as legitimate expenses in Tidewater’s books and financial disclosures; and (3) failed to maintain adequate internal controls to ensure compliance with the FCPA and Exchange Act.”

Earlier this week, the case was swept out with the tide as U.S. District Court Judge Jane Triche Milazzo dismissed the complaint – see here for the decision. In short, Judge Milazzo found that “Plaintiff did not adequately plead demand futility.” Judge Milazzo utilized various tests in reaching her decision such as director interest and independence and whether the board could impartially consider the merits of the demand without being influenced by improper considerations.

As to interest, Judge Milazzo stated as follows.

“This Court finds that the Complaint is completely devoid of any allegations of an interested director. There is no allegation that any director appeared on both sides of a transaction or expected to derive a personal financial benefit from it. Nowhere in the Complaint can it be found that any one of the directors, much the less a majority of them, benefitted from the bribes themselves, benefitted from failing to establish and maintain adequate internal controls, benefitted from enforcing policies and programs designed to prevent violations, benefitted from improperly recorded payment of bribes in Tidewater’s books and records or benefitted from inadequately training their employees, agents, representatives and/or contractors with respect to compliance with the FCPA.”

As to alleged director participation or knowledge , Judge Milazzo stated that the ”Complaint falls woefully short of pleading facts that are sufficient to show that there was any knowledge or conscious disregard on behalf of the directors.”

As to whether the directors exhibited bad faith sufficient to overcome business judgment rule presumptions, Judge Milazzo stated as follows. “While Plaintiff’s allegations are sufficient to show that Tidewater was evidently violating both the FCPA and the Exchange Act, nowhere in the Complaint do Plaintiff’s allegations meet the specificity to show that the Individual Defendants were acting with the intent to violate these laws. ‘[T]he mere fact that a violation occurred does not demonstrate that the board acted in bad faith. Alleging that ‘upon information and belief’ the ‘Headquarters’ made the decision to avoid tax assessments in violation of the FCPA falls woefully short of the pleading requirements. Nowhere can this Court find who made this decision, how this decision was made or that there was an intent to violate any law. Moreover, the Court finds it significant that Tidewater’s directors voted and voluntarily initiated an FCPA investigation and advised the federal government of their violations before the government even suspected any violations.”

Tyrell on Voluntary Disclosure

You know the talking points. The DOJ wants companies to voluntarily disclose, not ifs, ands or buts about it. It’s interesting though how this becomes less of a black and white issues when individuals leave the DOJ.

In this recent Q&A in The Metropolitan Corporate Counsel, Steven Tyrell (a former DOJ Fraud Section Chief and current partner at Weil Gotshal – here) was asked the following question – “what is the role of voluntary reporting in establishing a good relationship with the regulatory and enforcement authorities?”

He stated as follows.

“In the first instance, if a company has a legal obligation to disclose – for example, government contractors are obliged to disclose fraud – then the analysis begins and ends there. Assuming there is no legal obligation that compels disclosure or no imminent threat of disclosure by an outside party, such as a newspaper, then I typically advise clients to take credible allegations of wrongdoing seriously, look into those allegations in a manner that is appropriate under the circumstances, and assess the nature and extent of the company’s exposure and the pros and cons of disclosure. Then, and only then, should a disclosure be made if it is in the best interest of the company – or, for a public company, if the securities laws require it. Of course, it often will not be in a company’s best interest to disclose if, for example, the allegations prove not to be credible or if it is unclear whether the conduct even amounts to a violation of law. Under those circumstances, a disclosure could unnecessarily embroil the company in a lengthy and costly government investigation and result in other repercussions such as triggering civil litigation and harm to a company’s reputation that could otherwise be avoided. It’s a challenging calculus. I can tell you from past experience that there are companies that have strong reputations for compliance with regulators and others that do not. However, the fact that a company doesn’t disclose a problem that ultimately comes to DOJ’s attention is not necessarily going to damage the company’s credibility with DOJ. Regulators recognize that not every allegation should be of interest to them – and, frankly, having counsel that knows when they’ll be interested and when they won’t is really important.”

Guidance Issues

As highlighted in this previous post, soon after Assistant Attorney General Lanny Breuer announced in November 2011 that FCPA guidance would be forthcoming in 2012, Senator Grassley sought guidance on the guidance and asked Attorney General Holder several follow-up questions for the record. For a copy of Holder’s responses, see here.

In this previous post, among others, I commented that non-binding DOJ guidance is not the best way to accomplish real and meaningful FCPA reform.

Thus, I completely agree with former DOJ Deputy Attorney General George Terwilliger and former DOJ attorney and Senate counsel Matthew Miner (both currently at White & Case, see here and here) when they state as follows in this article.

“The fact that the Justice Department recognizes the need for such guidance underscores the existence of blurry lines and fuzzy standards surrounding the FCPA. US businesses trying to compete successfully in the international commercial arena deserve better. Justice Department ‘guidance’ is neither enough, nor is it properly the role of prosecutors to be definitive interpreters of ambiguities in criminal laws. Congress writes the laws and, as the US Supreme Court has firmly established, has a responsibility to set clear standards for what is permissible and what is not. It should not stand aside in deference to the Justice Department’s plan to craft guidance, especially when that guidance will have no effect in court.”

Yara Fertilizer

It has been said before that anytime a foreign company is the subject of a corruption probe, the U.S. enforcement agencies are like children at a birthday party waiting for some candy to fall from the pinata. Think what you will of the analogy.

The Wall Street Journal recently reported (here) that “Norwegian fertilizer producer Yara International ASA’s chief executive, Jorgen Ole Haslestad, apologized Friday to the company’s employees after an investigation uncovered millions of dollars in ‘unacceptable’ payments in India and Switzerland, as well as ‘unacceptable offers of payments’ in Libya.” According to the article, the “unacceptable offers of payments” in Libya involve “a consultant related to the establishment of the company Libyan Norwegian Fertilizer Co., or Lifeco, in Libya, a joint venture with the Libyan National Oil Corp. and the Libyan Investment Authority.”

As noted on the company’s website here, Yara ”has a sponsored Level 1 ADR program for American Depositary Receipts (ADRs), which represent ownership in shares of foreign (non-US) companies that trade on US financial markets.” Whether foreign companies, including those with Level 1 ADR’s can become subject to the FCPA, see this excellent piece “When Does an ADR Program Give U.S. Authorities FCPA Jurisdiction Over a Foreign Issuer?”

Time will tell if the candy falls.

Checking in on Wynn Resorts

Previous posts here, here and here focused on the Wynn-Okada dispute including Wynn’s $135 million charitable contribution to the University of Macau. On that topic, this recent Wall Street Journal article focused on the “web of political ties” between a Macau company paid by Wynn and government officials. Regarding Wynn’s FCPA compliance in expanding in Macau, company CEO Steve Wynn stated as follows. “This whole business of the Foreign Corrupt Practices Act—we were schooled in this.”

Final grade is pending.

Section 1504 Development

Several prior posts, see here for example, discussed Section 1504 of Dodd-Frank, the so-called Resource Extraction Disclosure Provisions and the long delay in SEC final rules. As noted in this Corruption Current post by Samuel Rubenfeld, the SEC recently announced here that on August 22nd, “the Commission will consider whether to adopt rules regarding disclosure and reporting obligations with respect to payments to governments made by resource extraction issuers to implement the requirements of Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“Minegolia”

There has been only one FCPA enforcement concerning, at least in part, business conduct in Mongolia (see here for the 2009 UTStarcom action). This is hardly surprising, as few companies subject to the FCPA have traditionally engaged in business in the country. However, as noted in this recent Al Jazerra article, Mongolia or “Minegolia” as the country is sometimes called, “is undergoing a rapid transformation, due to its incredible resource wealth in minerals such as coal, copper, and gold.” At the same time, the article notes that “Transparency International placed Mongolia 120th out of 183 nations on its corruption perception index” and that “90 percent of Mongolians believe politicians are benefitting from ‘special arrangements’ with foreign enterprises over mining rights.”

*****

A good weekend to all.

Friday Roundup

Friday, April 13th, 2012

A costly monitor, Daimler’s DPA debacle, meeting releases, and another addition to the list (in an unusual way), it’s all here in the Friday roundup.

Willbros Monitor Costs

Earlier this week, Willbros Group announced (here) “that in connection with the Company’s completion of the requirements of the DPA and expiration of the term of the monitorship, on March 30, 2012, the DOJ filed a motion to dismiss the criminal charges filed previously against the Company stemming from legacy issues in Nigeria and South America in 2005 and prior years, which led to the DPA.” In May 2008, Willbros resolved parallel DOJ (here) and SEC (here) FCPA enforcement actions and agreed to pay approximately $32 million in combined fines and penalties.

Pursuant to the May 2008 DOJ DPA, the monitor was supposed to be engaged by Willbros within 60 days. However the company disclosed that its monitor was not engaged until September 25, 2009 – an astounding year plus delay in engaging the monitor. Furthermore, although the monitor was supposed to serve a three year term per the DPA, the early termination provisions of the DPA apparently were triggered. Even though the monitor got a late start and its three year term was trimmed, the Willbros monitor had a nice assignment. Doing the math from figures disclosed in various SEC filings, the Willbros monitor cost has been approximately $10.2 million subject to increase for 1st quarter 2012 expenses ($3.6 million for the year ended Dec. 31, 2011; $4 million for the year ended Dec. 31, 2010; and $2.6 million for the year ended Dec. 31, 2009).

During a recent earnings conference call, Randy Harl (President and CEO of Willbros) stated as follows. “The DOJ monitorship brought great positive change to Willbros in the form of a stronger compliance culture. The cost of the monitor and the major spending to establish the required controls and processes are behind us. However, we will continue to invest in a compliance culture.”

Daimler DPA Debacle

While Willbros’s DPA expired, Daimler’s DPA was extended. As noted by Christopher Matthews in this Wall Street Journal Corruption Currents report, the two year DPA was set to expire, but was extended until December 31st. As noted in this prior post, in April 2010, Daimler agreed to pay approximately $185 million to resolve parallel DOJ and SEC FCPA enforcement actions. The prior post, along with this post, noted that the prosecution was a joke from the start, among other things, U.S. District Court Judge Richard Leon approved settlement on April Fool’s Day. The DOJ’s release noted that Daimler (and three of its subsidiaries) “brazenly offered bribes in exchange for business around the world” and that Daimler “saw foreign bribery as a way of doing business.” The DOJ alleged improper conduct all the way up to senior levels of the company, yet Daimler was not required to plead guilty to anything.

Instead Daimler was offered a two-year DPA. The term of the DPA could be extended if Daimler “knowingly violated any provision of the Agreement.” This recently filed amendment to the DPA is silent as to the reason for the extension.

I intended, but forgot, to include the above Daimler development in yesterday’s post (here) regarding NPAs and DPAs. Needless to say, the Daimler DPA debacle furthers the rationale for abolishing such resolution vehicles.

Chamber Sponsored FCPA Roundtable

Earlier this week, the U.S. Chamber of Commerce Institute for Legal Reform hosted a roundtable discussion regarding the FCPA and upcoming FCPA guidance with Assistant Attorney General Lanny Breuer, SEC Enforcement Division chief Robert Kuzami and Commerce Department General Counsel Kameron Kerry.

In this release, Lisa Rickard (President of the U.S. Chamber Institute for Legal Reform) stated as follows. “The business community is pleased with today’s frank and productive discussion on the significant uncertainty that many U.S. businesses face when attempting to comply in good faith with the FCPA. We are encouraged by the thoughtful dialogue that helped us reach a mutual understanding on many of these important issues. We look forward to working with the administration as it prepares the forthcoming guidance.” As noted in the release, the roundtable was attended by the following business groups or trade associations: the Advanced Medical Technology Association, the American Insurance Association, the International Association of Drilling Contractors, the International Stability Operations Association, the National Association of Criminal Defense Lawyers, the National Association of Manufacturers, the National Foreign Trade Council, PhRMA, the Professional Services Council, the Retail Industry Leaders Association, and The Financial Services Roundtable.

In this release, Rosario Palmieri (Vice President for Infrastructure, Legal and Regulatory Policy of the National Association of Manufacturers) stated as follows. “Manufacturers are facing a great deal of uncertainty when it comes to complying with the Foreign Corrupt Practices Act. Today we had a very productive discussion and were able to share manufacturers’ concerns. We are hopeful that a continuing dialogue with the Administration will help us meet our mutual goals of increasing exports, stamping out corruption and providing clear rules of the road for international business.”

Another Addition to the List

In this recent release, Transparency International urges the DOJ to investigate the conduct of Walters Power International (an Oklahoma based company that supplies, develops, services and manages electrical generation power plants around the world see here) in connection with power plant projects in Pakistan. It is certainly not the traditional way in which companies become the subject of FCPA scrutiny, but even so it makes the list, and according to my tally, in the last seven weeks, eight companies have newly become the focus of FCPA scrutiny.

Also, last week’s post (here) discussed recent Libya related disclosures by Total S.A. and Eni S.p.A. It turns out that Marathon Oil Corp. can be added to that list. In its recent annual report, the company stated as follows. “On May 25, 2011, we received a subpoena issued by the SEC requiring production of documents related to payments made to the government of Libya, or to officials and persons affiliated with officials of the government of Libya. We have been and intend to continue cooperating with the SEC in its investigation.”

*****

A good weekend to all.

The Latest Disclosures

Friday, April 6th, 2012

A Friday focus on disclosures. The SEC asks Oracle – what about that FCPA issue, the SEC takes an interest in Libya, and yet another voluntary disclosure.

Oracle

As noted in this previous post, in September 2011 Joe Palazzolo and Samuel Rubenfeld broke the story in the Wall Street Journal, “U.S. Probes Oracle Dealings,” that “U.S. authorities are investigating whether Oracle Corp., one of the world’s largest software companies by sales, violated federal antibribery laws in its dealings abroad …”. According to the report, “agents in the FBI’s Washington field office and fraud prosecutors in the Justice Department’s Criminal Division are handling a criminal investigation, which has been underway for at least a year.” Palazzolo and Rubenfeld also report that the SEC is also investigating for possible civil violations. According to the report, “the agencies are examining whether Oracle employees or agents acting on the company’s behalf made improper payments in Africa in order to land sales of database and applications software.”

Since then, Oracle’s SEC filings have been silent as to any FCPA inquiry. The SEC wants to know why as demonstrated by this February Q&A between the SEC Division of Corporation Finance and Oracle filed by the company.

SEC: “We also note various news articles indicating that the company has been subject to investigations regarding possible Foreign Corrupt Practices Act violations for more than a year. Please tell us how you considered the guidance in paragraphs 50-3 through 50-5 of ASC 450-20-50 in evaluating the need to disclose these pending matters.”

Oracle Response: “We make a quarterly assessment of legal matters, including the matters referenced in the Staff’s inquiry above, to determine how those matters should be treated in the context of the accounting and disclosure requirements of paragraphs 50-3 through 50-5 of ASC 450-20-50. For those matters referenced above, we evaluated whether it was reasonably possible that a loss or a loss exceeding amounts already recognized may be incurred. We determined that the estimated ranges of additional losses for those matters referenced above, if any, either individually or in the aggregate, would not have a material effect on our consolidated financial position, results of operations or cash flows. Consequently, we believe our disclosures comply with the aforementioned guidance.”

ASC 450-20-50 you ask? ASC 450 is the former FASB 5 standard regarding gain and loss contingencies (i.e. when a company should record, disclose or not disclose certain contingencies).

Libya

Two foreign oil companies with ADRs traded on U.S. exchanges recently disclosed SEC scrutiny concerning conduct in Libya.

In this recent SEC filing, French oil company Total S.A. stated as follows.

“In June 2011, the SEC issued to certain oil companies – including, among others, TOTAL – a formal request for information related to their operations in Libya. TOTAL is cooperating with this non-public investigation.”

See here for a recent prior post concerning Total’s FCPA scrutiny in Iran.

In this recent SEC filing, Italian oil company Eni SpA stated as follows.

“On June 10, 2011 Eni received by the US SEC a formal judicial request of collection and presentation of documents (subpoena) related to Eni’ s activity in Libya from 2008 to 2011. The subpoena is related to an ongoing investigation without further clarifications nor specific alleged violations in connection to “certain illicit payments to Libyan officials” possibly violating the US Foreign Corruption Practice Act. At the end of December 2011, Eni received a request for the collection of further documentation aiming at integrating the subpoena previously received. Eni is fully collaborating with the US SEC.”

For more on the recent Libya disclosures, see here from Samuel Rubenfeld at Wall Street Journal Corruption Currents.

As highlighted in this prior post, in July 2010, Eni was a party in the DOJ/SEC’s Bonny Island Nigeria focused FCPA enforcement action which resulted in $365 million in combined fines and penalties.

Another Voluntary Disclosure

SL Industries (here – a New Jersey based designer, manufacturer and marketer of power electronics, motion control, power protection, and other related products) recently disclosed (here) as follows.

“The Company is conducting an investigation to determine whether certain employees of SL Xianghe Power Electronics Corporation, SL Shanghai Power Electronics Corporation and SL Shanghai International Trading Corporation, three of the Company’s indirect wholly-owned subsidiaries incorporated and operating exclusively in China, may have improperly provided gifts and entertainment to government officials. Based upon the initial investigation, which is ongoing, the preliminary estimate of the amounts of such gifts and entertainment does not appear to be material to the Company’s financial statements. There can be no assurance, however, that after further inquiry the actual amounts will not be in excess of what is currently estimated. Such estimate does not take into account the costs to the Company of the investigation or any other additional costs. The Company’s investigation includes determining whether there were any violations of laws, including the U.S. Foreign Corrupt Practices Act. Consequently, on March 29, 2012, the Company’s outside counsel contacted the DOJ and the SEC voluntarily to disclose that the Company was conducting an internal investigation, and agreed to cooperate fully and update the DOJ and SEC periodically on further developments. The Company has retained outside counsel and forensic accountants to assist in its investigation of this matter. Because the investigation is ongoing, the Company cannot predict at this time whether any regulatory action may be taken or any other adverse consequences may result from this matter.”

According to my tally, the new disclosures discussed above means that in the last six weeks, seven companies have newly disclosed FCPA scrutiny. See here for the prior post “The Sun Rose, a Dog Barked, and a Company Disclosed FCPA Scrutiny.” If SEC filings are your ideal form of pleasure reading, you can hardly wait to see what next week holds.

A good weekend to all.

Friday Roundup

Friday, December 9th, 2011

ConocoPhillips is hit with an FCPA related shareholder proposal, add Wal-Mart to the list, and more on Embraer … it’s all here in the Friday Roundup.

ConocoPhillips Shareholder Proposal

Last week ConocoPhillips was hit with an FCPA shareholder proposal – see here. In the letter, titled “Shareholder Proposal and Statement for Publication in 2012 Proxy Materials Recommending an Audit of Controls on U.S. Foreign Corrupt Practices Act Violations,” the shareholder – Roger Parsons, a former Conoco employee who runs a website “The Iran-Conoco Affair” (here) – recommends “that the Board commission a forensic audit of ConocoPhillips compliance controls that failed to identify violations of the United States Foreign Corrupt Practices Act of 1977 (“FCPA”) arising from James J. Mulva ’s peddling influence with the Bush Administration to obtain Executive Order 13477 on behalf of Muammar al-Qadhafi.” Mulva is currently ConocoPhillips Chairman and Chief Executive Officer.

Wal-Mart

Add Wal-Mart to the list of company’s under FCPA scrutiny. In a 10-K filing yesterday, the company disclosed as follows. “During fiscal 2012, the Company began conducting a voluntary internal review of its policies, procedures and internal controls pertaining to its global anti-corruption compliance program. As a result of information obtained during that review and from other sources, the Company has begun an internal investigation into whether certain matters, including permitting, licensing and inspections, were in compliance with the U.S. Foreign Corrupt Practices Act. The Company has engaged outside counsel and other advisors to assist in the review of these matters and has implemented, and is continuing to implement, appropriate remedial measures. The Company has voluntarily disclosed its internal investigation to the U.S. Department of Justice and the Securities and Exchange Commission. We cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known,
we do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flows.”

Given the reference to permits, licenses and inspections in the disclosure, it is useful to review the holding of U.S. v. Kay, the only appellate court decision to directly address payments outside the context of directly securing a foreign government contract. In Kay, the 5th Circuit said that such payments “could” violate the FCPA, but that “there are bound to be circumstances” in which such payments merely increase the profitability of an existing profitable company and thus, presumably does not assist the payer in obtaining or retaining business. The court specifically stated as follows. “If the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in betting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

Embraer

Bloomberg has additional information (here) regarding Embraer’s FCPA scrutiny (discussed in this previous post). The article suggests that the “probe started more than a year ago in Argentina with government-controlled Aerolineas Argentinas SA’s $700 million purchase of 20 E-190 jets in 2009.” The airline has switched between private ownership and government ownership a number of times over the years.

*****

A good weekend to all.