Archive for the ‘Mark Jackson’ Category

Ipse Dixit

Tuesday, April 8th, 2014

This post last week highlighted the recent activity in SEC v. Mark Jackson & James Ruehlen (a Foreign Corrupt Practices Act enforcement action scheduled for trial this summer).  As noted in the post, among other things, the SEC is seeking to exclude various defense expert witnesses on a variety of issues including internal controls issues.

If you read the SEC’s motions (see here – condensed into one document) you will see that a primary basis for exclusion is the SEC’s argument that the experts are merely offering their own naked ipse dixit.

I must confess – arcane latin phrases not being in my strike zone – I had to look up the meaning of ipse dixit.

Ipse Dixit – Latin for He himself said it – an unsupported statement that rests solely on the authority of the individual who makes it.

The term ipse dixit appears approximately 30 times in the SEC’s motions – and related to it – is the SEC’s argument that the experts’ internal controls opinions should be excluded because the experts fail to define certain terms and/or there is no discernible methodology underlying their opinions.

For instance, in seeking to exclude Alan Bell (CPA – regarding, among other things, internal controls) the SEC states:

“Bell could not define what constitutes a “circumvention” of an internal control.”

“Bell concedes that there are no written standards to evaluate what constitutes, in his view, a “circumvention” of an internal control.”

“Bell’s opinions are not the product of a reliable methodology applied to the facts of this case. In fact, Bell employed no methodology at all; instead, his opinions are “based on [his] 40 years of experience.”

In seeking to exclude Gary Goolsby (CPA – regarding, among other things, internal controls issues) the SEC states:

“There is also no discernible methodology underlying his opinion on Jackson’s purported reliance [on Noble's internal controls], other than Goolsby’s own naked ipse dixit. Goolsby’s methodology reduces to the proposition that “I know what I’m looking at.” Yet, in deposition, he could not explain what his opinion means, as a practical matter, with reference to the conduct at issue in this case. Goolsby’s testimony thus confirms what is apparent from his report – his factual findings are based on nothing more than his subjective say-so.”

In seeking to exclude Lowell Brown (regarding various FCPA compliance issues) the SEC states:

“There is no discernible analysis or methodology underlying Brown’s opinion as to Jackson’s purported reliance, other than Brown’s own naked ipse dixit – a manifestly improper basis for expert testimony.”

In seeking to exclude Professor Ronald Gilson (regarding, among other things, internal controls issues) the SEC states:

“There is no genuine methodology here, other than Gilson’s own ipse dixit based on his subjective interpretation of the evidence

In the final analysis, Gilson is an advocate for the defense who proffers nothing but his ipse dixit in the place of rigorous analytical connection between his deficient methodology (reading deposition transcripts and exhibits) and his expert conclusion (the inference that if Ruehlen told others at Noble what he was doing, he lacked the corrupt intent to violate the FCPA, as opposed to simply colluding to bribe foreign officials).”

The irony of course is that while attacking the defendants’ experts for their own ipse dixit, many of the SEC’s FCPA internal controls enforcement theories are nothing more than ipse dixit.

For instance, as noted in this prior post, the SEC alleged that Oracle violated the FCPA’s internal control provisions. The only allegations against Oracle itself is that it failed to audit distributor margins against end user prices and that it failed to audit third party payments made by distributors.  The SEC did not allege any red flags to suggest why Oracle should have done this.  Thus, how did Oracle violate the FCPA’s internal controls provisions?  What was the methodology the SEC used?

Ipse dixit.

Indeed, in a pointed critique of the SEC’s Oracle enforcement theory, the former Assistant Chief of the DOJ’s FCPA unit stated:

“Oracle is the latest example of the SEC’s expansive enforcement of the FCPA’s internal controls provision, and it potentially paints a bleak picture—one in which the provision is essentially enforced as a strict liability statute that means whatever the SEC says it means (after the fact).”  (See here for the prior post).

In many SEC FCPA enforcement actions, the SEC merely makes conclusory statements for why the company allegedly violated the FCPA’s internal controls provisions.  For instance, in the Philips enforcement action (see here for the prior post) the SEC states:

“Philips failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were properly recorded by Philips in its books and records. Philips also failed to implement an FCPA compliance and training program commensurate with the extent of its international operations. Accordingly, Philips violated [the internal control provisions].”

Source?  Methodology?

Ipse dixit.

As noted in my recent article “Why You Should Be Alarmed by the ADM FCPA Enforcement Action” one reason, among others, why you should be alarmed by the action is because of the “failure to prevent” standard invoked by the SEC for why ADM violated the FCPA’s internal controls provisions.  As noted in the article, this standard  does not even exist in the FCPA and is inconsistent with actual legal authority.  (See here for the previous post regarding SEC v. World-Wide Coin – the only judicial decision to directly address the FCPA’s internal controls provisions).

Moreover, as noted in the article, the “failure to prevent standard” is inconsistent with SEC guidance relevant to the internal-controls provisions.  (See also this prior post).  The SEC’s most extensive guidance on the internal controls provisions states, in pertinent part, as follows:

“The Act does not mandate any particular kind of internal controls system. The test is whether a system, taken as a whole, reasonably meets the statute’s specified objectives. ‘‘Reasonableness,’’ a familiar legal concept, depends on an evaluation of all the facts and circumstances.

Private sector decisions implementing these statutory objectives are business decisions. And, reasonable business decisions should be afforded deference. This means that the issuer need not always select the best or the most effective control measure. However, the one selected must be reasonable under all the circumstances.

Inherent in this concept [of reasonableness] is a toleration of deviations from the absolute. One measure of the reasonableness of a system relates to whether the expected benefits from improving it would be significantly greater than the anticipated costs of doing so. Thousands of dollars ordinarily should not be spent conserving hundreds. Further, not every procedure which may be individually cost-justifiable need be implemented; the Act allows a range of reasonable judgments.

The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company. But, an adequate system of internal controls means that, when such breaches do arise, they will be isolated rather than systemic, and they will be subject to a reasonable likelihood of being uncovered in a timely manner and then remedied promptly.”

What is the source for the “failure to prevent” standard in ADM?  What is the methodology?

Ipse dixit.

In short, while attacking the defendants’ experts for their lack of defined methodology regarding internal controls issues, the SEC itself has long recognized that the FCPA’s internal controls lack a defined methodology.

As noted in this post, in a 2013 speech SEC Chair Mary Jo White reminded us why trials are important.  Among other things, White stated that “trials allow for more thoughtful and nuanced interpretations of the law in a way that settlements and summary judgments cannot.”

The SEC’s enforcement action against Jackson and Ruehlen represents an extremely rare instance in which the SEC is being forced to articulate its FCPA positions in the context of an adversary proceeding.

The SEC’s motions seeking to exclude defendants’ experts – while primarily based on ipse dixit – reminds us that a large portion of the SEC’s (and DOJ’s) FCPA enforcement program is nothing more than ipse dixit – and subjective say so.

Much Activity In SEC Enforcement Action Against Jackson & Ruehlen

Monday, March 31st, 2014

If you enjoy reading pleadings in Foreign Corrupt Practices Act enforcement actions, then your week is already off to a great start as there is much to read.

In advance of a scheduled July 9th trial in SEC v. Mark Jackson & James Ruehlen (an enforcement action filed in the S.D. of Tex. in February 2012 and highlighted in last Friday’s post), both parties filed numerous motions last Friday.

The SEC filed: (1) a motion for partial summary judgment on the inapplicability of the facilitating payment exception, and (2) a motion for a determination of foreign law pursuant to Federal Rule of Civil Procedure 44.1.  The SEC also filed 5 motions seeking to exclude defendants’ expert witnesses.  Both Jackson and Ruehlen filed separate motions for summary judgment as well as 3 motions seeking to exclude the SEC’s expert witnesses.

This post provides an overview of the motions.

SEC Motion for a Determination of Foreign Law

In pertinent part, the SEC states as follows:

“Questions of Nigerian law pervade this bribery case for two reasons. First, findings on threshold questions of Nigerian law are necessary for the jury to determine whether Defendants induced foreign officials “to do or omit to do any act in violation of the lawful duty of such foreign official[s]” in violation of Section 30A of the Securities Exchange Act of 1934 (the “Exchange Act”), an element of the SEC’s bribery claims. 15 U.S.C. §78dd-1(a)(3)(A)(ii) (emphasis added).  Questions of Nigerian law are also necessary to determine whether the payments at issue in this case fit within the narrow “facilitating payment” exception under the
Foreign Corrupt Practices Act (the “FCPA”).

These questions of Nigerian law include: (i) whether the grant of a Temporary Import Permit (“TIP”) – a concession that allows an importer to avoid the payment of import duties – was discretionary; (ii) what was the permissible duration of a TIP and whether and to what extent a TIP may be extended; and (iii) whether Nigerian customs officials could lawfully accept payments to approve a TIP based on false paperwork showing that Noble’s rigs in Nigeria had been exported and re-imported, when the rigs in fact had never moved out of Nigerian waters. These questions of Nigerian law are, like questions of U.S. law, questions of law for the Court to decide, and each defines the scope of Nigerian customs officials’ “lawful duty” in connection with granting the TIPs and TIP extensions at issue in this case.

Second, rulings on these issues of Nigerian law are necessary in light of the Defendants’ purported expert evidence. Defendants intend to introduce expert evidence asserting that, among other things, the payment of bribes to civil servants in Nigeria “is common – and even expected”; the submission of falsified documents to Nigerian governmental agencies is “satisfactory” or “acceptable” from the Nigerian government’s perspective; that laws governing the issuance of temporary import permits are not laws but “internal rules or policies”; and that compliance with Nigerian law is unclear. Thus, the Defendants’ experts intend to opine directly or indirectly on what is allegedly “permissible” in Nigeria notwithstanding clear and undisputed provisions of Nigerian law to the contrary. Because foreign law is for the Court, not the jury, these issues of Nigerian law should be resolved by the Court.”

SEC Motion Regarding  Inapplicability of Facilitating Payment Exception

As noted in this prior post, in December 2012 Judge Ellison concluded, in what was believed to be an issue of first impression, that the SEC must bear the burden of negating the facilitation payments exception.

In its motion, the SEC states as follows.

“The SEC seeks partial summary judgment on the limited question of whether the payments to Nigerian government officials that Defendants authorized to secure Temporary Import Permits (“TIPs”) and TIP extensions fit within the narrow “facilitating payment” exception under the Foreign Corrupt Practices Act (the “FCPA”).

The SEC alleges that the Defendants violated the anti-bribery and accounting provisions of the FCPA by authorizing the payment of bribes on behalf of their employer – Noble Corporation – to Nigerian government officials to influence or induce these officials to grant Noble TIPs and TIP extensions. These TIPs allowed Noble to avoid paying import duties on oil drilling rigs that it operated in Nigeria. Because TIPs provide only a temporary exemption from import duties, at the expiration of a TIP and its allowable extension, Noble had an obligation to either pay the import duties due on the drilling rigs or export them out of Nigeria. Using bribes and other means, Defendants secured serial TIPs and TIP extensions, which enabled Noble to keep its rigs operating continuously in Nigeria well beyond the time period allowed under Nigerian law.

The FCPA broadly prohibits corrupt payments to foreign officials to influence any official act or induce any official to violate a lawful duty. See 15 U.S.C. § 78dd-1(a). But there is a narrow exception to that broad prohibition: Under subsection 78dd-1(b), the FCPA permits certain “facilitating or expediting payments” made “to expedite or to secure the performance of a routine governmental action.” 15 U.S.C. § 78dd-1(b). This so-called facilitating payment exception does not apply in this case, as a matter of law.

Summary judgment is appropriate for three reasons:

First, the law of decision is clear and binding. This Court previously held that payments to government officials for discretionary or illegal TIPs and TIP extensions are not permissible facilitating payments.

Second, the applicable foreign law is clear and undisputed. As demonstrated in the SEC’s Motion for a Determination of Foreign Law Pursuant to Federal Rule of Civil Procedure 44.1 (“Rule 44.1 Motion”), the relevant provisions of Nigerian law are clear and undisputed. First, under Nigerian law, customs officials have discretion to grant or deny TIPs and TIP extensions; these TIPs and extensions are a discretionary exemption from import duties, not an entitlement. Second, Nigerian law prohibits both the use of false paperwork to secure TIPs and payments to government officials to secure TIPs and TIP extensions. Third, Nigerian law provides that an initial TIP may not exceed twelve months and may only be extended once for up to an additional twelve months. These provisions of Nigerian law are clear and undisputed, and must be determined as a matter of law by the Court.

Third, the material facts are not in genuine dispute. The payments to Nigerian government officials at issue in this case were themselves illegal in Nigeria and were authorized to obtain import duty exemptions that were (i) discretionary and (ii) in certain cases, illegal under Nigerian law. Specifically, each of the payments to Nigerian government officials at issue was authorized in connection with obtaining a valuable and discretionary government benefit – i.e., import duty exemptions for Noble’s rigs. Certain of the payments were made to obtain TIPs on false pretenses, in violation of Nigerian law. And, some of the payments were authorized to obtain TIP extensions that exceeded the number and duration of TIP extensions allowed under Nigerian law.

For these reasons, the SEC respectfully requests that the Court grant its motion for partial summary judgment that the facilitating payment exception is not applicable in this case.”

SEC Expert Motions

In addition to the above motions, the SEC also filed 5 motions seeking to exclude defendants’ experts:  (1) Alan Bell (CPA – regarding internal controls and books and records issues); (2) Gary Goolsby (CPA – regarding corporate governance and internal controls issues; (3) John Campbell (former U.S. ambassador to Nigeria – regarding Nigeria specific issues; (4) Professor Ronald Gilson (regarding various corporate governance and internal controls issues); and (5) H. Lowell Brown (regarding various FCPA compliance issues).

Jackson’s Motion for Summary Judgment

The motion, signed by David Krakoff (BuckeySandler) , states as follows.

“This case is entirely about Mr. Jackson’s state of mind: Did he act “corruptly” in violation of the FCPA when he approved certain payments to Nigerian customs officials? In denying the Defendants’ Motions to Dismiss, the Court held that an act is done corruptly when it is “done with an evil motive or wrongful purpose of influencing a foreign official to misuse his position.”  It is the SEC’s burden to prove that “Defendants acted corruptly.”

The SEC failed to come close to carrying that burden. Put simply, discovery revealed only one thing: Undisputed evidence that Mr. Jackson acted with the “good faith” belief that Noble’s payments facilitated getting temporary import permits and extensions to which Noble was entitled.  But as the Court observed regarding permit extensions, to establish corrupt intent the SEC must show “that Defendants knew they were not entitled to extensions as a matter of right upon satisfying certain basic threshold requirements.”

Mr. Jackson was repeatedly advised by Noble management that Noble was entitled to those permits and extensions. He was advised by management and PricewaterhouseCoopers that as long as the rigs had contracts to drill oil for the benefit of the Nigerian government, the rigs could stay in the country to perform those contracts. He was advised and observed that legal and audit experts were reviewing Noble’s FCPA compliance and, specifically, compliance in its Nigerian operations. And he was advised that Noble’s Nigerian lawyer had counseled that the use of the so-called “paper process,” where rigs obtained new permits without leaving the country, was legal in Nigeria.

The SEC has no evidence to prove Mr. Jackson’s state of mind was anything different. Despite many promises in the SEC’s pleadings, promises proved false by discovery, there was no evidence that Mr. Jackson believed Nigerian officials had discretion to deny Noble these permits and extensions. There was no evidence that he knew the “paper process” was illegal in Nigeria, so that any payments related to it had to be corrupt. And there was no evidence that he misled anyone – not the Audit Committee, not auditors, not anyone – about any of Noble’s facilitating payments. Instead, what he knew was that Noble’s legal counsel and internal auditors did not question the propriety of payments to Nigerian customs officials. No reasonable jury could conclude that Mark Jackson acted with the state of mind requisite for a violation of the FCPA. The SEC has not met its burden and the Court should grant summary judgment on all claims.”

Ruehlen’s Motion for Summary Judgment

The motion, signed by Nicola Hanna and Joseph Warin (Gibson Dunn), states as follows.

“The Complaint portrays Jim Ruehlen as a “rogue” employee who, shortly after being promoted to the first management-level position of his career, embarked on an intricate scheme to bribe Nigerian officials to obtain illegal temporary import permits for Noble’s rigs; routinely flouted company policy; ignored directions from Noble’s Audit Committee; and concealed illicit payments in Noble’s books and records. At the motion to dismiss stage, the Court was required to accept those allegations as true. Since then, 15 months of discovery have laid bare the utter falsity of the SEC’s narrative.

The undisputed evidence establishes that Mr. Ruehlen—a diligent and hardworking operations employee with an impeccable reputation for honesty and integrity—at all times acted  in good faith and under the close supervision of Noble’s most senior executives. At no point did he attempt to conceal any conduct or circumvent controls or company processes. To the contrary, it was Mr. Ruehlen who in 2004 first reported Noble’s use of the so-called “paper process”—the central focus of the SEC’s claims in this matter. And it was Mr. Ruehlen who received approval for every one of the payments at issue from Noble’s senior management, executives who had access to experts to assess the nature and propriety of those payments. It is undisputed that none of those executives or experts ever raised concerns to Mr. Ruehlen about the payments. The evidence also shows that Mr. Ruehlen, who had no accounting or legal training, had no role in determining how the payments—which were well known within Noble’s corporate hierarchy—were recorded in Noble’s books. And to compound the irony of the SEC’s charges against Mr. Ruehlen, it was Mr. Ruehlen who independently raised new concerns regarding the temporary import process in early 2007, prompting Noble’s internal investigation and voluntary disclosure to the U.S. government.

Notwithstanding this evidence—much of which was known to the SEC well before it filed this action—the SEC charged Mr. Ruehlen with violating the FCPA’s books and records and internal accounting control provisions (collectively, the “accounting provisions”) “under every stretched legal theory imaginable.” Purportedly to “streamline the presentation of evidence to the jury,” the SEC—on the eve of summary judgment—voluntarily dismissed two of those claims (that Mr. Ruehlen failed to “implement” a system of internal accounting controls and aided and abetted Noble’s alleged failure to “devise and maintain” such a system). But the SEC’s remaining FCPA accounting provision claims fail for the same reasons as the claims it now tacitly admits lacked merit—Mr. Ruehlen simply had no responsibility for or authority over the accounting function at Noble, and had no role in determining how the payments at issue were recorded. Moreover, the SEC failed to develop any evidence during discovery to support the numerous—and illogical—ways that Mr. Ruehlen allegedly “circumvented” Noble’s system of internal accounting controls. The Court should grant summary judgment on these claims in light of the undisputed evidence.

The Court should also grant summary judgment on the SEC’s claims for violations of the FCPA’s anti-bribery provisions. Whether the SEC can prove these claims turns entirely on Mr. Ruehlen’s state of mind—i.e., whether he acted “corruptly.” The undisputed evidence shows that Mr. Ruehlen, like many others within the company, believed in good faith that the payments were to secure or expedite temporary import permits to which Noble was entitled.”

In addition to the above motions, the defendants also jointly filed 3 motions seeking to exclude SEC experts:  (1) Jeffrey Harfenist (CPA – as to various internal controls issues); (2) Wayne Kelley (as to various customs and practices in the oil and gas industry); and (3) Kofo Olugbesan (a former official of the Nigerian Customs Service).

Friday Roundup

Friday, March 28th, 2014

Further trimmed, scrutiny alerts and updates, facts and figures, quotable, and for the reading stack.  It’s all here in the Friday roundup.

Further Trimmed

When the SEC announced its enforcement action against James Ruehlen and Mark Jackson  (a current and former executive of Noble Corp.) in February 2012, I said that this would be an interesting case to follow because the SEC is rarely put to its burden of proof in FCPA enforcement actions – and when it has been put to its ultimate burden of proof – the SEC has never prevailed in an FCPA enforcement action.

Over the past two years, the SEC’s case has been repeatedly trimmed.  (See this recent post containing a summary).  In the latest cut, the SEC filed an unopposed motion for partial voluntary dismissal with prejudice on March 25th.  In pertinent part, the motion states as follows.

“To narrow this case and streamline the presentation of evidence to the jury, the SEC hereby moves for leave to voluntarily dismiss with prejudice all portions of its claims … predicated upon Noble Corporation’s violation of [the FCPA's internal controls provisions".

For additional specifics, see the filing.

As highlighted in this previous post, in 2010 the SEC charged Noble Corporation with violating the FCPA's anti-bribery, books and records and internal controls provisions based on the same core conduct alleged in the Jackson/Ruehlen action. Without admitting or denying the SEC’s allegations, Noble agreed to agreed to an injunction and payment of disgorgement and prejudgment interest of $5,576,998.

In short, the SEC's enforcement action against Ruehlen and Jackson is a shell of its former self.   Interesting, isn't it, what happens when the government is put to its burden of proof in FCPA enforcement actions.

Scrutiny Alerts and Updates

Alstom

Bloomberg reports speculation that a future FCPA enforcement action against Alstom could top the charts in terms of overall fine and penalty amounts.  (See here for the current Top 10).

The article states:

"The Justice Department is building a bribery case against Alstom SA , the French maker of trains and power equipment, that is likely to result in one of the largest U.S. anticorruption enforcement actions, according to two people with knowledge of the probe. Alstom, which has a history checkered with corruption allegations, has hindered the U.S. investigation of possible bribery in Indonesia and now faces an expanded probe including power projects in China and India, according to court documents in a related case. Settlement talks haven’t begun, the company said."

In response to the Bloomberg article, Alston released this statement.

"Robert Luskin of Patton Boggs, Alstom’s principal outside legal advisor in the USA, states that the Bloomberg article published on 27 March 2014, regarding the investigation of Alstom by the US Department of Justice, does not accurately reflect the current situation: “Alstom is cooperating closely, actively, and in good faith with the DOJ investigation. In the course of our regular consultations, the DOJ has not identified any on-going shortcomings with the scope, level, or sincerity of the company’s effort”.

“The discussions with the DOJ have not evolved to the point of negotiating a potential resolution of any claims. Any effort to estimate the size of any possible fine is sheer speculation, as would be any comparison with other cases that have recently been resolved. Alstom has agreed to focus its efforts on investigating a limited number of projects that we and the DOJ have identified in our discussions. We are working diligently with the DOJ to answer questions and produce documents associated with these specific projects so that we can address any possible improper conduct”.

VimpelCom

Netherlands-based and NASDAQ traded telecommunications company VimpelCom recently disclosed:

"[T]hat in addition to the previously disclosed investigations by the U.S. Securities and Exchange Commission and Dutch public prosecutor office, the Company has been notified that it is also the focus of an investigation by the United States Department of Justice. This investigation also appears to be concerned with the Company’s operations in Uzbekistan. The Company intends to continue to fully cooperate with these investigations.”

On March 12, 2014, VimpelCom disclosed:

“The Company received from the staff of the United States Securities and Exchange Commission a letter stating that they are conducting an investigation related to VimpelCom and requesting documents. Also, on March 11, 2014, the Company’s headquarter in Amsterdam was visited by representatives of the Dutch authorities, including the Dutch public prosecutor office, who obtained documents and informed the Company that it was the focus of a criminal investigation in the Netherlands. The investigations appear to be concerned with the Company’s operations in Uzbekistan. The Company intends to fully cooperate with these investigations.”

Orthofix International

As noted in this Wall Street Journal Risk & Compliance post, Orthofix International recently disclosed:

“We are investigating allegations involving potential improper payments with respect to our subsidiary in Brazil.

In August 2013, the Company’s internal legal department was notified of certain allegations involving potential improper payments with respect to our Brazilian subsidiary, Orthofix do Brasil. The Company engaged outside counsel to assist in the review of these matters, focusing on compliance with applicable anti-bribery laws, including the Foreign Corrupt Practices Act (the “FCPA”). This review remains ongoing.”

As noted in this previous post, in July 2012 Orthofix International resolved a DOJ/SEC FCPA enforcement action concerning alleged conduct by a Mexican subsidiary.  In resolving that action, the company agreed to a three year deferred prosecution agreement.  As is typical in FCPA DPAs, in the Orthofix DPA the DOJ agreed not continue the criminal prosecution of Orthofix for the Mexican conduct so long as the company complied with all of its obligations under the DPA, including not committing any felony under U.S. federal law subsequent to the signing of the agreement.

See this prior post for a similar situation involving Willbros Group (i.e. while the company while under a DPA it was investigating potential additional improper conduct).  As noted here, Willbros was released from its DPA in April 2012, the original criminal charges were dismissed and no additional action was taken.

Besso Limited

Across the pond, the U.K. Financial Conduct Authority (“FCA”) recently issued this final notice to Besso Limited imposing a financial penalty of £315,000 for failing “to take reasonable care to establish and maintain effective systems and controls for countering the risks of bribery and corruption associated with making payments to parties who entered into commission sharing agreements with Besso or assisted Besso in winning and retaining business (“Third Parties”).”

Specifically, the FCA stated:

“The failings at Besso continued throughout the Relevant Period [2005-2011] and contributed to a weak control environment surrounding the making of payments to Third Parties. This gave rise to an unacceptable risk that payments made by Besso to Third Parties could be used for corrupt purposes, including paying bribes to persons connected with the insured or public officials. In particular Besso:  (1) had limited bribery and corruption policies and procedures in place between January 2005 and October 2009. It introduced written bribery and corruption policies and procedures in November 2009, but these were not adequate in their content or implementation; (2) failed to conduct an adequate risk assessment of Third Parties before entering into business relationships; (3) did not carry out adequate due diligence on Third Parties to evaluate the risks involved in doing business with them; (4) failed to establish and record an adequate commercial rationale to support payments to Third Parties; (5) failed to review its relationships with Third Parties, in sufficient detail and on a regular basis, to confirm that it was still appropriate to continue with the business relationship; (6) did not adequately monitor its staff to ensure that each time it engaged a Third Party an adequate commercial rationale had been recorded and that sufficient due diligence had been carried out; and (7) failed to maintain adequate records of the anti-bribery and corruption measures taken on its Third Party account files.”

The FCA has previously brought similar enforcement actions against Aon Limited (see here), Willis Limited (see here), and JLT Speciality Limited (see here).    For more on the U.K. FCA and its focus on adequate procedures to prevent bribery , see this guest post.

Facts and Figures

Trace International recently released its Global Enforcement Report (GER) 2013 – see here to download.  Given my own focus on FCPA enforcement statistics and the various counting methods used by others (see here for a recent post), I particularly like the Introduction of the GER in which Trace articulates a similar “core” approach that I use in keeping my enforcement statistics.  The GER states:

“[W]hen a company and its employees or representatives face multiple investigations or cases in one country involving substantially the same conduct, only one enforcement action is counted in the GER 2013.  An enforcement action in a country with multiple investigating authorities, such as the U.S., is also counted as one enforcement action in the GER 2013.”

The Conference Board recently released summary statistics regarding anti-bribery policies.  It found as follows.

39% of companies in the S&P Global 1200; 23% of companies in the S&P 500; and 14% of companies in the Russell 1000 reported having a policy specifically against bribery.

Given the results of other prior surveys which reported materially higher numbers, these results are very surprising.

Quotable

This recent Wall Street Journal article “Global Bribery Crackdown Gains Steam” notes as follows.

“Cash-strapped countries are seeing the financial appeal of passing antibribery laws because of the large settlements collected by the U.S., according to Nathaniel Edmonds, a former assistant chief at the U.S. Department of Justice’s FCPA division.  ”Countries as a whole are recognizing that being on the anticorruption train is a very good train to be on,” said Mr. Edmonds, a partner at Paul Hastings law firm.”

The train analogy is similar to the horse comment former DOJ FCPA enforcement attorney William Jacobson made in 2010 in an American Lawyer article that “[t]he government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.”  For additional comments related to the general topic, see this prior post.

Reading Stack

This recent Wall Street Journal Risk & Compliance Journal post contains a Q&A with former DOJ FCPA Unit Chief Chuck Duross.  Contrary to the inference / suggestion in the post, Duross did not bring “tougher tactics” such as wires and sting operations to the FCPA Unit.  As detailed in prior posts here and here, undercover tactics and even sting operations had been used in FCPA enforcement actions prior to the Africa Sting case.

Speaking of the Africa Sting case, the Q&A mentions reasons for why the Africa Sting case was dropped.  Not mentioned, and perhaps relevant, is that the jury foreman of the second Africa Sting trial published this guest post on FCPA Professor after the DOJ failed in the second trial.  Two weeks later, the DOJ dismissed all charges against all Africa Sting defendants.

Further relevant to the Africa Sting case, the Wall Street Journal recently ran this article highlighting the role of Richard Bistrong, the “undercover cooperator” in the case.  Bistrong has recently launched an FCPA Blog – see here.

*****

A good weekend to all.

The SEC Has Never Prevailed In An FCPA Enforcement Action When Put To Its Ultimate Burden Of Proof

Wednesday, March 5th, 2014

This recent Wall Street Journal article highlighted how the SEC’s win rate at trials has slipped.  According to the article:

“[The SEC has] won 55% of its trials since October [2013], a sharp drop after three consecutive years when it prevailed more than 75% of the time.”

There has never been an SEC Foreign Corrupt Practices Act trial, but the above percentages are downright stellar when one considers that the SEC has never prevailed in an FCPA enforcement action when put to its ultimate burden of proof.

As highlighted in this previous post, in 2002 the S.D. of Texas dismissed an SEC complaint against Eric Mattson and James Harris.  The enforcement action involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment.  The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the Court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment.  When Mattson and Harris was decided, the S.D. of Texas in U.S. v. Kay case had already dismissed that case finding that the plain language of the FCPA does not prohibit goodwill payments to foreign government officials to reduce a tax obligation.  The SEC attempted to distinguish the trial court’s Kay ruling by arguing that in the civil enforcement context, the Court should interpret the FCPA’s language more liberally than in criminal cases.  The Court rejected the SEC’s arguments and followed the trial court’s analysis in Kay that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.”  See here for the court’s Memorandum and Order.

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

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

The other two instances in FCPA history in which the SEC is being put its burden of proof are in the pending Straub and Jackson cases.  To state the obvious, when an SEC complaint is allowed to proceed past the motion to dismiss stage, the SEC has not prevailed when put to its ultimate burden of proof.  Rather the standard at the motion to dismiss stage is whether the complaint pleads enough facts to state a claim that is plausible on its face.

As highlighted in this previous post, in February 2013 the S.D. of New York denied the motion to dismiss of Elek Straub and other foreign national defendants (formerly associated with Magyar Telekom) in an SEC FCPA case concerning an alleged bribery scheme in Macedonia.  A trial date has not been set in the case, the current discovery deadline is May 2015.

As highlighted in this previous post, in December 2012 the S.D. of Texas granted – in an SEC FCPA enforcement action involving alleged conduct in Nigeria –  Mark Jackson and James Ruehlen’s motion to dismiss the SEC’s claims that sought monetary damages while denying the motion  to dismiss as to claims seeking injunctive relief.  Even though court granted the motion as to SEC monetary damage claims, the dismissal was without prejudice meaning that the SEC was allowed to file an amended complaint.  As noted in this prior post, that is indeed what happened next, and as noted here a second round of briefing began anew.  As noted in this previous post, in the Defendant’s renewed motion to dismiss they argued that the SEC could not rely on the fraudulent concealment or continuing violations doctrine to extend the limitations period to cover certain claims.  A week later the Supreme Court issued its unanimous decision in SEC v. Gabelli (see here for the prior post) and soon thereafter the Defendants filed a notice of supplemental authority with the court arguing that Gabelli “bolstered” their position.  On the same day the SEC’s opposition brief was due, the parties jointly notified the court “that in lieu of opposing the [motion to dismiss] the SEC intends to file a Second Amended Complaint.”  The filing noted that the then proposed Second Amended Complaint “moots the relief sought in the [the motion to dismiss] because it clarifies that, among the violations alleged, the SEC seeks civil penalties … only to the extent such violations accrued on or before [a certain date].  In short, after being put to its initial burden of proof, the SEC’s case against Jackson and Ruehlen remains a shell of its former self.  The SEC’s case against Jackson and Ruehlen is currently scheduled for trial to begin on July 9, 2014.

Friday Roundup

Friday, April 19th, 2013

Docket exploration in this Friday roundup.

SEC v. Jackson & Ruehlen

My first post concerning the SEC’s enforcement action against Mark Jackson and James Ruehlen asked – will the SEC be put to its burden of proof?   I noted that the case would be most interesting to follow as the SEC is rarely put to its burden of proof in Foreign Corrupt Practices Act enforcement actions and I highlighted, at the time, how the last time that happened (in 2002) the SEC lost.

As time would demonstrate, Jackson and Ruehlen indeed did put the SEC to its burden of proof and in December 2012 Judge Keith Ellison (S.D. of Tex.) granted Defendants’ motion to dismiss the SEC’s claims that sought monetary damages while denying the motion to dismiss as to claims seeking injunctive relief.  (See here for the prior post).  Even though Judge Ellison granted the motion as to SEC monetary damage claims, the dismissal was without prejudice meaning that the SEC was allowed to file an amended complaint.  As noted in this prior post, that is indeed what happened next, and as noted here a second round of briefing began anew.

In the Defendant’s renewed motion to dismiss (filed Feb. 22nd) they argued that the SEC could not rely on the fraudulent concealment or continuing violations doctrine to extend the limitations period to cover certain claims that accrued before May 12, 2006.  A week later the Supreme Court issued its unanimous decision in SEC v. Gabelli (see here for the prior post) and soon thereafter on March 11th the Defendants filed a notice of supplemental authority with the court arguing that Gabelli “bolstered” their position.

On March 22nd, the same day the SEC’s opposition brief was due, the parties jointly notified the court “that in lieu of opposing the [motion to dismiss] the SEC intends to file a Second Amended Complaint.”  The filing noted that the then proposed Second Amended Complaint “moots the relief sought in the [the motion to dismiss] because it clarifies that, among the violations alleged, the SEC seeks civil penalties … only to the extent such violations accrued on or before May 12, 2006.

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Speaking of statute of limitations, a recent article highlights how the DOJ is “testing a novel argument” to extend statute of limitations in certain cases.  The theory.  We are at war … in Afghanistan … and regardless of whether the conduct at issue has anything to do with that war in Afghanistan, the 1948 Wartime Suspension of Limitations Act gives prosecutors unlimited time to go after alleged fraud during times of war.

No this article was not in the Onion, it was in the Wall Street Journal (see here).

Former Siemens Executive Sharef Settles 2011 SEC Enforcement Action

The SEC announced earlier this week (here) that Uriel Sharef, ”a former officer and board member of Siemens” agreed to settle – as had long been expected – the SEC’s action against him.  As noted in this previous post, Sharef, along with others was charged (both by the DOJ and SEC) in December 2011 in connection with an Argentine bribery scheme that was also the focus, in part, of the 2008 Siemens corporate enforcement action.

As noted in the SEC’s release, without admitting or denying the SEC’s allegations, Sharef consented to entry of a final judgment prohibiting future FCPA violations and he agreed to pay a $275,000 civil penalty – a penalty the SEC called “the second highest penalty assessed against an individual in an FCPA case.”

[In connection with the Innospec FCPA enforcement action, in August 2010, Ousama Naaman resolved an SEC enforcement action by agreeing to disgorge $810,076, pay prejudgment interest of $67,020 and pay a civil penalty of $438,038.  See here for the prior post].

The burning question of course is whether the SEC would have prevailed against Sharef if he put the SEC to its burden of proof.  As highlighted in this previous post, Sharef’s co-defendant, Herbert Steffen, did just that and in February Judge Shira Scheindlin dismissed the SEC’s complaint against Steffen finding that personal jurisdiction over Steffen exceeded the limits of due process.

The SEC’s allegations against Sharef mention the phone call Sharef placed in the U.S. to Steffen.  As to this call, Judge Scheindlin stated as follows in the Steffen decision.

“Neither Sharef’s call to Steffen from the United States nor the fact that a portion of the bribery payments were deposited in a New York bank provide sufficient evidence of conduct directed towards the United States to establish minimum contacts.  First, Steffen did not place the calls to Sharef.  Further, Steffen did not direct that the funds be routed through a New York bank.  [...]  His conduct was focused solely on ensuring the continuation of the Siemens contract in Argentina.”

The SEC complaint did however state the following additional as to Sharef.

“Sharef met in New York, NY [in January 2003] with payment intermediaries and agreed to pay $27 million in bribes to Argentine officials in connection with the [contract at issue].

Obstruction Charges Filed Against French Citizen in Connection With FCPA Investigation

The DOJ announced (here) earlier this week that “Frederic Cilins a French citizen, has been arrested and accused of attempting to obstruct an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.”

The Criminal Complaint charges Cilins with one count of tampering with a witness, victim, or informant; one count of obstruction of a criminal investigation; and one count of destruction, alteration, and falsification of records in a federal investigation.

Under the heading “Overview of the Defendant’s Crimes” the complaint states, in pertinent part, as follows.

“Cilins … has made repeated efforts to obstruct an ongoing federal grand jury investigation … concerning potential money laundering violations and potential violations of the Foreign Corrupt Practices Act, including such violations by a domestic concern as defined by the FCPA, relating to bribes to officials of a former government of the country of Guinea for the purpose of obtaining valuable mining concessions in Guinea.  During monitored and recorded phone calls and face-to-face meetings with a cooperating witness “CW” [identified as the former wife of a now deceased high-ranking official in the Government of Guinea who is cooperating with the government "in the hopes of obtaining immunity for her own potential criminal conduct"] assisting in this investigation, Cilins, among other things, agreed to pay large sums of money to the cooperating witness to induce the cooperating witness to: (1) provide to Cilins, for destruction, documents Cilins knew had been requested from the cooperating witness by special agents of the FBI and which were to be produced before a federal grand jury; and (2) sign an affidavit containing numerous false statements regarding matters within the scope of the grand jury investigation.  Cilins repeatedly told the cooperating witness that the documents needed to be destroyed ‘urgently’ and that Cilins needed to be present to personally witness the documents being burned.”

Various reports (see here for instance) have linked Cilins to Guernsey-based BSG Resources Ltd and the Criminal Complaint would seem to reference this company as a “particular business entity not based in the United States engaged in the mining industry” (the “Entity”).  The Criminal Complaint sketches a bribery scheme and states, in pertinent part, as follows.

“CW was visited by several individuals including Cilins who identified themselves as representatives of the Entity.  According to the CW, these individuals told the CW, on behalf of the Entity, that they wished to invest in mines in Guinea and asked the CW for help with the Guinean Official, who was then CW’s spouse.  Cilins offered the CW $12 million, to be distributed to the CW and ministers or officials within the Government of Guinea who might be needed to secure the mining rights if all went well after their introduction to the Guinean Official.”

The Criminal Complaint further states that “some of the money paid to the CW by the Entity and its affiliates or agents was wired to a bank account in Florida controlled by the CW.”

It would appear from the Criminal Complaint that BSG Resources is not the sole focus of the U.S. investigation.   Indeed, BSG Resources does not fit the description of a “domestic concern” as referenced in the Criminal Complaint which further states that “subjects of the grand jury investigation include one or more “domestic concerns” within the meaning of the FCPA …”.

Contrary to this assertion, obstruction charges were not first used in the FCPA enforcement against Hong Carson.  Prior to Carson (in which the charge was ultimately dropped) obstruction charges have been used in several FCPA enforcement actions since the FCPA’s first-mega case in 1982 (see here for the prior post).  Although not always successful prosecuted, the following FCPA defendants were nevertheless also charged with various obstruction charges:  Gerald Green, David Kay and Douglas Murphy, Leo Winston Smith and John O’Shea

TJGEM, LLC Complaint

In another example of the noticeable trend of increasing “offensive” use of the FCPA, in late March, Missouri-based TJGEM, LLC filed this civil complaint in U.S. District Court for the District of Columbia alleging a variety of claims, including RICO, against various Ghana officials and New Jersey-based Conti Construction Co. Inc. in connection with a sewer project.  AllAfrica reports here as follows.

 ”TJGEM is claiming that [a Ghanian official] inflated the contract sum for the construction of the sewer system, which has now been awarded to Conti Construction, also an American company, by $10 million …  According to [the complaint] because TJGEM’s representatives, who were negotiating with [the official] for the contract, were totally non-receptive and unresponsive to the [official's] corrupt practices and solicitations, and refused to neither entertain  nor accede to same, but instead, rejected said corrupt practices, the contract  was taken away from them. [TJGEM] argues that the selection of a company whose price for the reconstruction of the sewer  project was some $10,000,000 in excess of the price fixed by TJGEM, leads to a reasonable inference that the [official] inflated the price of the sewer project, in order to receive said $10,000,000 as a bribe and kickback in the award of the  sewer project contract to his own use and benefit, and to the use and benefit of other Ghanaian public officials with whom he is acting in concert in the said criminal enterprise.”

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A good weekend to all.