Archive for the ‘Statute of Limitations’ Category

Former Alstom Executive Lawrence Hoskins Files Motion To Dismiss

Monday, August 4th, 2014

Lawrence Hoskins is a United Kingdom citizen who lived and worked his entire life in the U.K. with the exception of a 35 month period between 2001 and 2004 during which he worked for Alstom in France.  In 2004, he resigned from his job at Alstom to resume his career in the U.K. and retired in 2010.  In April 2014 Hoskins and his wife disembarked from a ferry in the U.S. Virgin Islands en route to Dallas, Texas when he was arrested by U.S. authorities for an alleged bribery scheme dating back to his time at Alstom.

So began the Foreign Corrupt Practices Act journey of Lawrence Hoskins.

As highlighted in this previous post, Hoskins was criminally charged in connection with the same Indonesian power plant project that also resulted in criminal charges against other individuals associated with Alstom - Frederic Pierucci, David Rothschild, and William Pomponi.

Pierucci, Rothschild and Pomponi have all pleaded guilty.  However Hoskins is fighting the criminal charges filed against him and last week he filed a motion to dismiss.

The Memorandum in Support of the Motion to Dismiss states, in pertinent part, as follows.

“Resting as it does, upon an infirm foundation of aged allegations, overly expansive applications of law, and novel theories of criminal liability, the Indictment in this case suffers from numerous and fatal defects of law and logic. Among other things, it charges stale and time-barred conduct that occurred more than a decade ago; it asserts violations of U.S. law by a British citizen who never stepped foot on U.S. soil during the relevant time period; and, it distorts the definition of the time-worn legal concept of agency beyond recognition. In other words, the Indictment marks an excessive and improper exercise of executive authority. This is an Indictment that never should have been brought.

The Indictment seeks to hold Lawrence Hoskins, a retired 63-year-old British citizen, responsible for his alleged conduct that occurred—outside the United States more than ten years ago—while he was working in Paris at Alstom Holdings, SA (―Alstom‖), the parent company of the French conglomerate. The Indictment asserts that Mr. Hoskins, in his capacity as a Senior Vice-President of the Alstom parent company, approved and authorized the retention and compensation of two consultants, knowing that they would bribe Indonesian officials to help a consortium (including Alstom and one of its U.S. subsidiaries) obtain a contract to construct a power plant in Indonesia. According to the Indictment, Mr. Hoskins‘s limited, dated, and purely extraterritorial conduct subjects him to liability for two conspiracies and a total of ten substantive violations of the Foreign Corrupt Practices Act (―FCPA‖) and United States‘ money-laundering statutes. These charges all fail.

First, the Indictment is time-barred. Mr. Hoskins resigned from Alstom ten years ago, in August 2004, after 35 months of employment with the parent company and, when he did so, he withdrew from any alleged conspiracy operating therein. Second Circuit precedent makes clear that resignation from a business constitutes withdrawal from any criminal conduct operating within that entity if, following resignation, there is no promotion of or benefit received from the alleged illegal activity. Mr. Hoskins passes the Second Circuit‘s test with ease. After he resigned from Alstom, he immediately moved from Paris back to his home in England and started a new job, at a new company, in a new industry. He had no contact with, and received nothing from, any of his alleged co-conspirators. He also had no involvement with criminal conduct of any kind. To the point, the last act attributable to Mr. Hoskins in the Indictment occurred in March 2004, and the wire transfers that constitute the FCPA and money-laundering offenses all occurred long thereafter, between November 2005 and October 2009. Thus, Mr. Hoskins successfully withdrew from any alleged criminal conduct upon his resignation from Alstom. As such, all of the charges in the Indictment are time-barred and should be dismissed.

Second, the FCPA charges are facially defective. The Indictment alleges that Mr. Hoskins was an ―agent of a domestic concern,‖ to wit, an agent of Alstom‘s U.S. subsidiary. While it is black letter law that the fundamental characteristic of agency is control, the supporting factual allegations in the Indictment make plain that Mr. Hoskins was in no way under the control of the U.S. subsidiary. Indeed, much to the contrary, the Indictment demonstrates that Mr. Hoskins was ―approving‖ and ―authorizing‖ certain requests from employees of subsidiary companies ―in his capacity‖ as an executive of the Alstom parent company. Thus, because the allegations in the Indictment describe conduct bearing no semblance to an agency relationship, the FCPA-related charges are facially defective and should be dismissed.

Third, the Indictment‘s use of the term ―agent‖ is so counter-intuitive to the common understanding of that phrase that its application to Mr. Hoskins‘s relationship with the U.S. subsidiary renders the FCPA unconstitutionally vague as applied. Such a construction of the term ―agent‖ could not have provided Mr. Hoskins with fair warning that his alleged conduct—authorizing and approving matters at the request of employees of subsidiaries in his oversight capacity at the parent company—could expose him to criminal liability. As such, the FCPA charges are also constitutionally flawed and should be dismissed.

Fourth, the FCPA charges do not apply to Mr. Hoskins‘s purely extraterritorial conduct. Though Congress directed certain provisions of the FCPA to have extraterritorial effect, the subsection of the FCPA charged in the Indictment was not included in any such direction. Accordingly, the presumption against extraterritoriality applies. Thus, because all of Mr. Hoskins‘s alleged conduct occurred outside of the United States in the territory of a foreign sovereign, the substantive FCPA charges fail and should be dismissed.

Fifth, given the pronounced defects with the Indictment‘s FCPA charges, any theory of liability premised upon conspiracy and/or aiding and abetting also necessarily fail. Applicable Supreme Court precedent holds that when Congress affirmatively chooses to exclude a certain class of individuals from liability under a criminal statute, the government cannot circumvent that intent by alleging conspiracy. Moreover, federal courts have repeatedly held that ancillary offenses, including aiding and abetting and conspiracy, are only deemed to confer extraterritorial jurisdiction to the extent of the offenses underlying them. For these reasons, the conspiracy and aiding and abetting theories advanced in the Indictment cannot stand once the underlying FCPA charges fail.

Finally, the money-laundering charges are improperly venued in the District of Connecticut. The venue provision of the money-laundering statute establishes that venue lies only where the predicate money laundering transaction was ―conducted. The Indictment makes clear that the allegedly offending transfers were initiated from Maryland. As such, the District of Maryland is the only proper venue for the money-laundering charges, and they should be dismissed.

For the reasons described above and explained below, all of the charges should be dismissed. Mr. Hoskins never should have been charged on such old, infirm, and overextended allegations and legal theories. He should be freed to resume his life in England.”

*****

Hoskins is represented by Christopher Morvillo (Clifford Chance) and Brian Spears (Brian Spears LLC).  Both were previously AUSAs at the DOJ.

Of Note From The Marubeni Enforcement Action

Tuesday, March 25th, 2014

This previous post highlighted specifics from the recent Marubeni Foreign Corrupt Practices Act enforcement action and this post continues the coverage by discussing various items of note.

Do Legal Principles Even Matter?

Forgive me for being the law guy, but in the aftermath of the Marubeni enforcement action, like so many others, one can legitimately ask – do legal principles even matter?

As highlighted in the previous post, the most recent alleged overt act in support of Marubeni’s conspiracy charge allegedly occurred in November 2008.  In other words, all of the alleged conduct supporting the conspiracy charge was beyond the five year statute of limitations applicable to FCPA offenses.

In addition, the information also charged 7 substantive FCPA anti-bribery violations.  One charge concerned a 2005 wire transfer, three charges concerned 2006 wire transfers, one charge concerned a 2007 wire transfer, and one charge concerned a 2008 wire transfer.  In other words, 6 of the 7 substantive FCPA anti-bribery charges concerned alleged conduct beyond the five year limitations period applicable to FCPA offenses.  (Note:  the final substantive FCPA charge was based on an October 2009 wire transfer made, not by any Marubeni employee, but Alstom employees).

In corporate FCPA enforcement actions, companies often enter into tolling agreements and statute of limitations can also otherwise be extended in other ways, but the DOJ’s criminal information and plea agreement are silent as to any of these issues relevant to statute of limitations.

Is Marubeni A Recidivist?

As noted in the original Marubeni post, last week’s $88 million FCPA enforcement action followed closely on the heels of Marubeni exiting a deferred prosecution agreement from its 2012 FCPA enforcement action based on conduct at Bonny Island, Nigeria.  (See here for the prior post).

Against this backdrop, it is tempting to call Marubeni an FCPA recidivist.

However, as noted in Marubeni’s release (a release that the DOJ needed to approve per the plea agreement) “the Tarahan conduct pre-dates the execution of Marubeni’s 2012 Deferred Prosecution Agreement with the DOJ.”

At the very least, Marubeni is a repeat FCPA offender and joins a category that also includes IBM, Tyco, Aibel Group, General Electric, Diebold (at least as to books and records and internal controls issues) and Ashland Oil (at least in theory given that the first enforcement action occurred prior to passage of the FCPA in 1977).

The distinction Marubeni has among the group though is the shortest gap between enforcement actions.

More Details Please As to Lack of Cooperation

As noted in the previous post, the $88 million Marubeni enforcement action was a relatively rare instance of a company paying a criminal fine within the advisory guidelines range.  The plea agreement includes the DOJ’s justification as to why, including Marubeni’s lack of cooperation.  However, the plea agreement merely states that Marubeni refused to cooperate with the Department’s investigation when given the opportunity to do so.

It sure would have been nice for the DOJ to provide some additional details regarding Marubeni’s apparent lack of cooperation.

For instance, in the Bonny Island, Nigeria enforcement action against JGC Corp. (also a Japanese company), the DOJ stated that the company declined “to cooperate with the Department based on jurisdictional arguments?”

The DOJ’s statement motivated this prior post, “Does the DOJ Except FCPA Counsel to Roll Over and Play Dead?

While the DOJ declined to provide specifics as to Marubeni’s lack of cooperation, it would be truly frightening if the DOJ’s position is that a company is not cooperating if it raises purely legal issues such as jurisdiction or statute of limitations.

FCPA Enforcement Statistics

FCPA enforcement statistics are literally all over the map given the creative and unique ways in which many FCPA Inc. participants keep such statistics.  (For instance, see this prior post for visual proof).

As I have long maintained, the most reliable and accurate way to keep FCPA enforcement statistics is by using the “core” approach, an approach to tracking FCPA enforcement endorsed by the DOJ and a commonly accepted method used in other areas.

Consider the stark difference in approaches using just the Marubeni enforcement action and the April 2013 FCPA enforcement action against current and former employees of Alstom.  The enforcement actions were virtual carbon copies of each other involving the same project in Indonesia, involving the same alleged “foreign officials,” the same consultants, Marubeni was a central actor in the Alstom related action and the Alstom employees were central actors in the Marubeni enforcement action.

In short, the Marubeni and Alstom related action were the same “core” action.

However, many in FCPA Inc. will no doubt count these actions as five enforcement actions:  Marubeni and Alstom employees Frederic Pierucci, David Rothschild, Lawrence Hoskins and William Pomponi.  Make that six enforcement actions when – in all likelihood – Alstom resolves an enforcement action based, in whole or in part, on the same conduct.   In short, by tracking FCPA enforcement statistics this way the statistics will be distorted.

Former SEC Enforcement Official Throws The Red Challenge Flag

Monday, February 10th, 2014

Today’s post is from Russ Ryan (Partner, King & Spalding).  Prior to joining King & Spalding,  Ryan spent ten years in the SEC’s Division of Enforcement, including his last  three years as Assistant Director of the Division.

*****

Sometimes you see something in a Foreign Corrupt Practices Act case that’s so inexplicable you wish someone would throw the red challenge flag and have the play reviewed under the hood or up in the booth.  Unfortunately, in the largely-overlooked wind-down phase of the SEC’s FCPA case against several former Siemens executives, the last of the defendants defaulted, so nobody was around to throw the challenge flag – and as a result the SEC seems to have gotten away with a doozy of a blown call.

Recall that this is the same 7-defendant case in which only one – Herbert Steffen – actively contested the SEC’s charges.  Of the other six defendants, the SEC voluntarily dismissed one (Carlos Sergi), three others settled without admitting or denying any wrongdoing (Bernd Regendantz, Andres Truppel, and Uriel Sharef), and the last two defaulted (Ulrich Bock and Stephan Signer).  Steffen, a German citizen and the only defendant who actively contested the charges, was dismissed from the case in February 2013 in a widely-noted decision that found a lack of personal jurisdiction over him.  (See here for my prior guest post).  None of the other defendants in the case were U.S. citizens either, and few if any appear to have had any significant contacts with the United States; the SEC alleged the familiar sporadic touching of U.S. bank accounts, along with a single meeting in Miami during the decade-long alleged bribery scheme, but proffered little else to support personal jurisdiction over any of these foreign nationals.

You might think the court’s dismissal of the only defendant who actively contested personal jurisdiction might have led the SEC to tread carefully when seeking penalties and other sanctions against the defaulting defendants.  Think again.

To the contrary, the SEC took an astonishingly aggressive approach to sanctions against the defaulting defendants, and it got everything it asked for.  The overall case raises legal and policy issues too numerous to address here, but two warrant especially close scrutiny.  First, the SEC convinced the court to impose more than a half-million dollars in civil penalties against each of the two defaulting defendants, despite alleging only four alleged bribes and despite the FCPA’s statutory limit of $10,000 per violation (increased for the relevant period to $11,000 through the SEC’s periodic inflation adjustment as authorized by statute).

How did the SEC get away with a penalty demand more than ten times this apparent $44,000 statutory limit for each defendant?  First, by saying that each of the four alleged bribes should be triple-counted as three separate securities law violations – once as a bribe, again as a books-and-records violation, and yet again as an internal-controls violation – thus artificially multiplying four violations to create twelve.  And as the SEC wonks among us well know, books-and-records and internal-controls violations come with their own separate statutory penalty regime.  But even here the SEC was super aggressive, taking the position that these classically non-fraud violations involved “reckless disregard” of a regulatory requirement, thus allowing the SEC to demand the maximum $60,000  per violation in “second-tier” penalties rather than the $6,000 per violation in the “first-tier” penalties ordinarily associated with non-fraud violations.  (The statutory anomaly that permits dramatically higher civil penalties for books-and-records and internal-controls violations than for bribery violations is another topic beyond the scope of this guest post.)

By triple counting each bribe in this way, the SEC demanded $11,000 + $60,000 + $60,000 ($131,000 total) in penalties against each defaulting defendant, and then multiplied that amount yet again for each of the four alleged bribes in question, arriving at a staggering total penalty of $524,000 per defendant.  This penalty for each of the defaulting defendants was much higher than the total penalties paid by all three of the settling defendants combined (which were only $40,000, $80,000, and $275,000 respectively).

But that’s not even the most bizarre aspect of the SEC’s penalty demand.  Of the four bribes alleged by the SEC against the defaulting defendants, three unquestionably occurred – according to the SEC’s own complaint and penalty motion papers – more than five years before the lawsuit was filed in December 2011, thus raising the obvious question of how the SEC could lawfully request, and how the court could lawfully impose, any penalty at all for those bribes.  By now everyone knows that SEC penalty demands are subject to the 5-year statute of limitations codified at 28 U.S.C. § 2462.  Indeed, just last year the Supreme Court unanimously ruled against the SEC in a case that involved the same statute (Gabelli v. SEC), wherein the SEC conceded the statute’s applicability to penalty demands.  (See my prior guest posts here and here).

So how did the SEC overcome this seemingly insurmountable statute of limitations obstacle?  Essentially by ignoring the issue entirely.  Of course, it’s possible the SEC got a tolling agreement from these two foreign nationals who later decided to ignore the ensuing lawsuit altogether, but that seems improbable. In any event, neither the SEC’s complaint nor its penalty motion mentioned any tolling agreement.  Of the $524,000 in penalties demanded and imposed against each of the defaulting defendants, nearly $400,000 seems obviously barred by the statute of limitations, yet neither the SEC nor the court appears to have acknowledged this issue at all.

One final oddity in this case warrants a separate challenge flag.  On top of the $524,000 in penalties imposed against defaulting defendant Bock, the SEC was awarded another $316,000 against him in what the agency euphemistically styled as “disgorgement” of ill-gotten profits from the bribery scheme.  But as described by the SEC, this money bore no resemblance to profits derived from any of the alleged bribes.  The SEC described it as hush money allegedly paid to Bock (and his wife) to buy his silence and false testimony in two arbitration proceedings that occurred long after he had retired from the company and that, according to the SEC, helped prevent the bribery scheme from being uncovered.

In my recent article, The Equity Façade of SEC Disgorgement, I wrote at length about how disgorgement in SEC cases, as a general matter, is often stretched beyond its proper limits.  The default judgment against Bock reflects many of the concerns I raised in that article, but it also reflects an even more fundamental disconnect under settled disgorgement law.  Characterizing the kind of hush money allegedly paid to Bock as ill-gotten profits caused by his alleged securities law violations seems a stretch to say the least.  The SEC’s theory was that the money was paid to induce and reward Bock’s false testimony in two arbitration proceedings – not as his share of any alleged bribes, not as extra compensation he was paid for his securities law violations, and not as his share of profits earned by Siemens as a result of the bribes.  Here too, neither the SEC nor the court addressed the obvious causation issue, and the SEC got the full amount it demanded.

One can only hope that neither the SEC nor the courts will view these default judgments as models for similar treatment of individuals in future FCPA cases.  This case illustrates the oft-lamented perils presented by the multitude of SEC cases that are decided each year without any effective advocacy on behalf of the defendant – typically due to the defendant’s default, pro se status, lack of adequate financial resources, or counsel possessing little or no expertise in securities law.  The perils run not only to the hapless defendants who invariably get steamrolled in such cases, but sometimes also to the credibility and ultimate enforceability of the resulting judgments.

*****

See here for original source documents relevant to the above issues.

Alcoa Resolves A “Legacy Legal Matter” By Agreeing To Pay $384 Million In An FCPA Enforcement Action

Friday, January 10th, 2014

Given the importance statute of limitations have in our legal system (see here for a recent Supreme Court decision), there is something odd in reading a Foreign Corrupt Practices Act enforcement action concerning allegations from a time when I was in 8th grade.  It is even more odd reading of an FCPA enforcement (not to mention the fourth largest FCPA enforcement action of all-time in terms of a settlement amount) when the alleged consultant at the center of the alleged bribery scheme was criminally charged by another law enforcement agency, put the law enforcement agency to its burden of proof at trial, and the law enforcement agency dismissed the case because there was no ”realistic prospect of conviction” (see here for the prior post concerning the U.K. enforcement action of Victor Dahdaleh).

So begins this post concerning the Alcoa FCPA enforcement action announced yesterday by the DOJ and SEC (see here and here).

The enforcement action involved a DOJ criminal information against Alcoa World Alumina LLC resolved via a plea agreement and an SEC cease and desist order against Alcoa Inc.

Alcoa entities agreed to pay approximately $384 million to resolve alleged FCPA scrutiny (a criminal fine of $209 million and an administrative forfeiture of $14 million to resolve the DOJ enforcement action and $175 million in disgorgement to resolve the SEC enforcement action – of which $14 million will be satisfied by the payment of the forfeiture in the criminal action).

The $384 million settlement amount is the fourth largest in FCPA history.

This post summarizes both the DOJ and SEC enforcement actions.

DOJ

Criminal Information Against Alcoa World Alumina LLC

The enforcement action centers on Consultant A (no doubt Victor Dahdaleh) and his alleged interactions on behalf of Alcoa entities with Aluminium Bahrain B.S.C. (Alba), an aluminium smelter operating in Bahrain.”  (See this 2010 post “What is Alba”).

The Alcoa entity charged is Alcoa World Alumina LLC, an entity that beginning in 2000 “assumed primary responsibility for all of Alcoa World Alumina and Chemicals (AWAC’s) relationships with global alumina customers, including Alba.”  According to the information, Alcoa World Alumina LLC “personnel responsible for these functions reported indirectly to Alcoa personnel in New York.”

Alba is described in the information as follows.

“The state holding company of the Kingdom of Bahrain, the Mumtalakat, which was controlled by the Ministry of Finance, held 77% of the shares of Alba.  The Saudi Basic Industries Corp. (SABIC), which was majority-owned and controlled by the government of the Kingdom of Saudi Arabia, held a 20 percent minority stake in Alba, and three percent of Alba’s shares were held by a German investment group.  The majority of profits earned by Alba belonged to the Mumtalakat, through part of the profit was permitted to be used by Alba for its operations.  The Ministry of Finance had to approve any change in Alba’s capital structure and had to be consulted on any major capital projects or contracts material to Alba’s operations.  Members of the Royal Family of Bahrain and representatives of the government sat on the Board of Directors of Alba, controlled its board, and had primary authority in selecting its chief executive and chief financial officer.”

The alleged “foreign officials” are described as follows.

“Official A was a member of Bahrain’s Royal Family and served as a member of the board of directors of Alba from 1982 to 1997.  From 1988 to 1990, Official A was also a member of Alba’s tender committee, which was responsible in part for awarding major contracts to Alba’s suppliers, such as Alcoa entities supplying alumina to Alba.”

“Official B served on Alba’s board from at least 1986 to 2000 as a representative of SABIC.  From 1988 to 1990, Official B also served on Alba’s tender committee with Official A.”

“Official C was a senior member of Bahrain’s Royal Family, a senior government official of Bahrain from at least 1995 to 2005, and served as a high-ranking officer of Alba from 1995 to 2005.  As a high-ranking officer of Alba, Official C was extremely influential over the assignment of contracts to Alba’s suppliers.  Official C relied on Consultant A to assist him in opening international bank accounts using various aliases or shell entities for the purpose of receiving corrupt funds from kickbacks from Alba’s suppliers.”

“Official D was a senior member of Bahrain’s Royal Family and a senior government official of Bahrain for many decades.  Official C was a close associate of Official D.  Official D’s office was required to be consulted before Alba could commit to a long term alumina supply contract with Alcoa.”

According to the information, ”beginning in or around 1989, at the request of certain Bahraini government officials who controlled Alba’s tender process, Alcoa of Australia retained Consultant A’s shell companies as purported sales agents and paid them purported sales commissions.”

The information alleges as follows.

“In or around 1988, an Alcoa of Australia sales manager for the Alba account received a request from certain Alba officials to retain Consultant A as ‘Alcoa’s agent’ and pay him a ‘commission.’  The request was made in part at the behest of Official A, a member of Alba’s board and tender committee.  The sales manager subsequently told his supervisor that Alcoa of Australia would lose the supply contract if Consultant A was not retained as its agent, and that supervisor, in turn, conveyed that information to an individual who was both an Alcoa of Australia Board member and an Alcoa employee based in Pittsburgh.  The individual approved the retention of Consultant A as a agent.”

Under the heading “Consultant A Channeled Millions in Corrupt Payments to Government Officials From 1991 Through 1996,” the information alleges:

“From 1993 through 1996, Consultant A made over $1 million in corrupt payments to Official A …”.

“From 1993 through 1996, Consultant A made over $2 million in corrupt payments to Official B …”.

Under the heading “Consultant A Channeled Million in Corrupt Payments to Government Officials From 1997 Through 2001,” the information alleges:

“From 1997 through 2001, Consultant A made over $5 million in corrupt payments to Official A …”.

“From 1997 through 2001, Consultant A made approximately $2.2 million in corrupt payments to Official B …”.

“From 1999 through 2001, Consultant A made over $19 million in corrupt payments to Official C …”.

Under the heading “Consultant A Channeled Millions in Corrupt Payments to Government Officials From 2002 Through 2004,” the information alleges:

“In 2002, Consultant A made over $1 million in corrupt payments to Official B …”.

“From 2002 through 2004, Consultant A made approximately $29 million in corrupt payments to Official C …”.

Under the heading “Additional Corrupt Payments to Government Officials,” the information alleges:

“From 2005 through 2006, Consultant A made almost $13 million in corrupt payments … to accounts that were beneficially owned by Official C under client code names …”.

“On or about April 3, 2006, Consultant A transferred $17 million … to an account owned by Official D …”.

Based on the above allegations, the information charges Alcoa World Alumina LLC with one count of violating the FCPA’s anti-bribery provisions and states:

“Alcoa World Alumina LLC caused Alcoa of Australia to enter into a sham distributorship agreement with Alumet and AAAC that facilitated the funneling of millions of dollars of bribes indirectly through Consultant A to senior officials of the Kingdom of Bahrain in order to obtain and retain a long-term alumina supply agreement between Alcoa of Australia and Alba.”

Plea Agreement

The above charge was resolved via a plea agreement in which Alcoa agreed to “guarantee, secure and ensure delivery” by Alcoa World Alumina LLC “of all payments due from the Defendant under the Agremenet.”  The advisory Sentencing Guidelines calculation set forth in the plea agreement based on the alleged conduct was $446 million to $892 million.

The plea agreement states that a $209 million criminal fine was an “appropriate disposition” of the case “because immediate payment of the entire fine would pose an undue burden” on Alcoa and the agreement lists the following factors:

the impact of a penalty within the guidelines range on the financial condition of Alcoa and its potential to substatially jeopardize Alcoa’s ability to compete, including, but not limited to, its ability to fund its sustaining and improving capital expenditures, its ability to invest in research and development, its ability to fund its pension obligations, and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.

The plea agreement also references:

“(b) the significant remedy being imposed on the Defendant’s majority shareholder, Alcoa, by the U.S. Securities and Exchange Commission for Alcoa’s conduct in this matter; (c) after learning allegations of FCPA violations, Alcoa’s Board of Directors appointed a Special Committee of the Board of Directors to oversee an internal investigation by independent counsel; (d) the substantial cooperation provided to the Department by the Defendant’s majority shareholder, Alcoa, including conducting an extensive internal investigation, voluntarily making employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department; (e) the remedial efforts already undertaken and to be undertaken by the Defendant’s majority shareholder, Alcoa, which affect both the Defendant’s operations and those of Alcoa, including the hiring of new senior legal and ethics and compliance officers and the implementation of enhanced due diligence reviews of the retention of third-party agents and consultants; and (f) Alcoa’s separate commitment to ensuring that its anti-corruption compliance program will be maintained to continue to satisfy the minimum elements” set forth in an attachment to the agreement.

In this “Agreed Motion to Waive the Presentence Report,” the DOJ condenses the extensive allegations in the information as follws under the heading “Charged Conduct.”

“The charge is based on the Defendant’s role in 2004 in procuring a ten-year agreement to sell approximately 1.7 million metric tons of alumina to Alba from AWAC’s Australian refineries. The Defendant caused Alcoa of Australia to enter into a purported distributorship with a shell company owned by Consultant A, an international middleman who had close contacts with certain members of Bahrain’s Royal Family, rather than contract directly with Alba. The Defendant consciously disregarded that the mark-up imposed by Consultant A on sales of alumina to Alba was facilitating corrupt payments to certain Bahraini government officials who controlled Alba’s tender process.”

In the DOJ’s release, Acting Assistant Attorney General Mythili Raman stated:

“Alcoa World Alumina today admits to its involvement in a corrupt international underworld in which a middleman, secretly held offshore bank accounts, and shell companies were used to funnel bribes to government officials in order to secure business.  The law does not permit companies to avoid responsibility for foreign corruption by outsourcing bribery to their agents, and, as today’s prosecution demonstrates, neither will the Department of Justice.”

David Hickton (U.S. Attorney for the W.D. of Pa) stated:

“Today’s case shows that multinational corporations cannot get away with using middlemen to structure sham business arrangements that funnel kickbacks to government officials.”

Richard Weber (Chair of the IRS Criminal Division) stated:

“This case is the result of unraveling complex financial transactions used by Alcoa World Alumina LLC’s agent to facilitate kickbacks to foreign government officials.  IRS-CI will not be deterred by the use of sophisticated international financial transactions as we continue our ongoing efforts to pursue corporations and executives who use hidden offshore assets and shell companies to circumvent the law.”

Valerie Parlave (Assistant Director in Charge of the FBI’s Washington Field Office) stated:

“Corrupt kickback payments to foreign government officials to obtain business diminish public confidence in global commerce.  There is no place for bribery in any business model or corporate culture.   Today’s plea demonstrates the FBI and our law enforcement partners are committed to curbing corruption and will pursue all those who try to advance their businesses through bribery.”

The DOJ release further states:

“The plea agreement and related court filings acknowledge Alcoa’s current financial condition as a factor relevant to the size of the criminal fine, as well as Alcoa’s and Alcoa World Alumina’s extensive cooperation with the department, including conducting an extensive internal investigation, making proffers to the government, voluntarily making current and former employees available for interviews, and providing relevant documents to the department.   Court filings also acknowledge subsequent anti-corruption remedial efforts undertaken by Alcoa.   The department acknowledges and expresses its appreciation for the cooperation and assistance of the Office of the Attorney General of Switzerland, the Guernsey Financial Intelligence Service and Guernsey Police, the Australian Federal Police, the U.K.’s Serious Fraud Office, and other law enforcement authorities in the department’s investigation of this matter.”

 SEC

The SEC enforcement action is based on the same core set of facts alleged in the DOJ enforcement action and the cease and desist order states in summary fashion as follows.

“These proceedings arise from violations of the Foreign Corrupt Practices Act by Alcoa concerning alumina sales to Aluminium Bahrain B.S.C. (“Alba”), an aluminum manufacturer owned primarily by the Kingdom of Bahrain.

Between 1989 and 2009, Alcoa of Australia (“AofA”) and Alcoa World Alumina LLC (“AWA”) (collectively, the “AWAC Subsidiaries”) retained a consultant to act as their middleman in connection with sales of alumina to Alba and knew or consciously disregarded the fact that the relationship with the consultant was designed to generate funds that facilitated corrupt payments to Bahraini officials. The consultant was paid a commission on sales where he acted as an agent and received a markup on sales where he acted as a purported distributor. On sales where the consultant acted as a purported distributor, no legitimate services were provided to justify the role of the consultant as a distributor. The consultant used these funds to enrich himself and pay bribes to senior government officials of Bahrain.

The commission payments to the consultant and the alumina sales to the consultant made pursuant to the distribution agreements were improperly recorded in Alcoa’s books and records as legitimate commissions or sales to a distributor and did not accurately reflect the transactions. The false entries were initially recorded by the AWAC Subsidiaries which were then consolidated into Alcoa’s books and records. During the relevant period, Alcoa also lacked sufficient internal controls to prevent and detect the improper payments.”

In pertinent part, the order states as follows.

“Despite the red flags inherent in this arrangement [between the AWAC Subsidiaries and Consultant A], AofA’s in-house counsel approved the arrangement without conducting any due diligence or otherwise determining whether there was a legitimate business purpose for the use of a third party intermediary.”

[...]

“Employees at AWA and AofA either knew or were willfully blind to the high probability that Consultant A would use his commissions and markup to pay bribes.”

[...]

“The AWAC Subsidiaries knew or consciously disregarded the fact that Consultant A was inserted into the Alba sales supply chain to generate funds to pay bribes to Bahraini officials. Ultimately, these funds facilitated at least $110 million in corrupt payments to Bahraini officials. The vast majority of those funds were generated from the markup between the price Consultant A sold to Alba and the price that AofA sold to Consultant A. Those funds were also generated from the commissions that AofA paid to Consultant A.

The recipients of the corrupt payments included a senior Bahraini official, members of the board of directors of Alba, and senior management of Alba. Examples of the corrupt payments include:  In August 2003, Consultant A’s shell companies made 2 payments totaling $7 million to accounts for the benefit of a Bahraini government official who Consultant A had been retained to lobby. Two weeks later, Alcoa and Alba signed an agreement in principle to have Alcoa participate in Alba’s plant expansion.  In October 2004, Consultant A’s shell company paid $1 million to an account for the benefit of that same government official. Shortly thereafter, Alba agreed in principle to Alcoa’s offer for the 2005 Alba Supply Agreement. In or around the time of the execution of the final 2005 Alba Supply Agreement, Consultant A-controlled companies paid another Bahraini government official and/or his beneficiaries $41 million in three payments.”

The order then states as follows.

“This Order contains no findings that an officer, director or employee of Alcoa knowingly engaged in the bribe scheme. As described above, Alcoa violated [the FCPA's anti-bribery provisions] by reason of its agents, including subsidiaries AWA and AofA, indirectly paying bribes to foreign officials in Bahrain in order to obtain or retain business. AWA, AofA, and their employees all acted as “agents” of Alcoa during the relevant time, and were acting within the scope of their authority when participating in the bribe scheme. As described above, Alcoa exercised control over the Alumina Segment, including the AWAC Subsidiaries. Alcoa appointed the majority of seats on the AWAC Strategic Council, and the head of the Global Primary Products group served as its chair. Alcoa and AofA transferred personnel between them, including alumina sales staff; Alcoa set the business and financial goals for AWAC and coordinated the leg al, audit, and compliance functions of AWAC; and the AWAC Subsidiaries’ employees managing the Alba alumina business reported functionally to the global head of the Alumina Segment. Alba was a significant alumina customer for Alcoa’s Alumina Segment and during the relevant period, members of Alcoa senior management met both with Alba officials and Consultant A to discuss matters related to the Alba relationship, including a proposed joint venture between Alcoa and Alba. During this time, Alcoa was aware that Consultant A was an agent and distributor with respect to AofA’s sales of alumina to Alba and that terms of related contracts were reviewed and approved by senior managers of Alcoa’s Alumina Segment in the United States.”

[...]

“Alcoa violated [the books and records provisions] by improperly recording the payments, to Consultant A, as agent commissions when the true purpose of these payments was to make corrupt payments to Bahraini officials. Alcoa violated [the books and records provisions] when Alcoa recorded the sales to Consultant A as a distributor. The false entries were initially recorded by the AWAC Subsidiaries which were then consolidated and reported by Alcoa in its consolidated financial statements. Alcoa also violated [the internal controls provisions] by failing to devise and maintain sufficient accounting controls to detect and prevent the making of improper payments to foreign officials.”

Under the heading “Alcoa’s Remedial Measures,” the order states:

“Alcoa made an initial voluntary disclosure of certain of these issues to the Commission and Department of Justice in February 2008, and thereafter Alcoa’s Board of Directors appointed a Special Committee of the Board of Directors to oversee an internal investigation by independent counsel. Alcoa’s counsel regularly reported on the results of the investigation and fully cooperated with the staff of the Commission.  Alcoa also undertook extensive remedial actions including: a comprehensive compliance review of anti-corruption policies and procedures, including its relationship with intermediaries; enhancing its internal controls and compliance functions; developing and implementing enhanced FCPA compliance procedures, including the development and implementation of policies and procedures such as the due diligence and contracting procedure for intermediaries; and conducting comprehensive anti-corruption training throughout the organization.”

In the SEC’s release, George Canellos (Co-Director of the SEC Enforcement Division) stated:

“As the beneficiary of a long-running bribery scheme perpetrated by a closely controlled subsidiary, Alcoa is liable and must be held responsible.  It is critical that companies assess their supply chains and determine that their business relationships have legitimate purposes.”

Kara N. Brockmeyer (Chief of the SEC Enforcement Division’s FCPA Unit) stated:

“The extractive industries have historically been exposed to a high risk of corruption, and those risks are as real today as when the FCPA was first enacted.”

The SEC release further states:

“The SEC appreciates the assistance of the Fraud Section of the Criminal Division at the Department of Justice as well as the Federal Bureau of Investigation, Internal Revenue Service, Australian Federal Police, Ontario Securities Commission, Guernsey Financial Services Commission, Liechtenstein Financial Market Authority, Norwegian ØKOKRIM, United Kingdom Financial Control Authority, and Office of the Attorney General of Switzerland.”

In this release (which per the plea agreement, the company needed to consult with the DOJ before issuing), Alcoa stated as follows.

“Alcoa Inc. [has] announced the resolution of the investigations by the U.S. Department of Justice (DOJ) and U.S. Securities and Exchange Commission (SEC) regarding certain legacy alumina contracts with Aluminium Bahrain B.S.C. (Alba).  The settlement with the DOJ was reached with Alcoa World Alumina LLC (AWA). AWA is a company within Alcoa World Alumina and Chemicals (AWAC), the unincorporated bauxite mining and alumina refining  venture between Alcoa Inc. and Alumina Limited.   [...]  There is no allegation in the filings by the DOJ and there is no finding by the SEC that anyone at Alcoa Inc. knowingly engaged in the conduct at issue.  [...]  Alcoa welcomes the resolution of this legacy legal matter with the U.S. Government.”

The Alcoa release also details the drawn out nature of the settlement payments (an unusual feature in an FCPA enforcement action).  The release states:

“As part of the DOJ resolution [...] AWA will pay a total of $223 million, including a fine of $209 million payable in five equal installments over four years. The first installment of $41.8 million, plus a one-time administrative forfeiture of $14 million, will be paid in the first quarter of 2014, and the remaining installments of $41.8 million each will be paid in the first quarters of 2015-2018.”

“Under the terms of the settlement with the SEC, Alcoa Inc. agreed to a settlement amount of $175 million, but will be given credit for the $14 million one-time forfeiture payment, which is part of the DOJ resolution, resulting in a total cash payment to the SEC of $161 million payable in five equal installments over four years. The first installment of $32.2 million will be paid to the SEC in the first quarter of 2014, and the remaining installments of $32.2 million each will be paid in the first quarters of 2015-2018.”

As to the reason for the drawn-out settlement amounts, the SEC release states:

“In light of the impact of the disgorgement payment upon Respondent’s financial condition and its potential to substantially jeopardize Alcoa’s ability to fund its sustaining and improving capital expenditures, its ability to invest in research and development, its ability to fund its pension obligations, and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities, Alcoa shall pay the disgorgement in five equal payments …”.

Alcoa World Alumina was represented in the criminal matter by Jonathan R. Streeter, Robert J. Jossen and Diane Nicole Princ of Dechert LLP and Alcoa was represented in the SEC matter by Evan Chesler of Cravath Swaine & Moore LLP.

Yesterday, Alcoa’s stock price closed down approximately 1.3%.

As highlighted in this post, in October 2012 Alcoa announced (here) that it entered into a settlement agreement with Alba resolving a civil lawsuit that had been pending since 2008 concerning the same alleged core facts in the DOJ and SEC enforcement action.Alcoa agreed to make a cash payment to Alba of $85  million payable in two installments.

Friday Roundup

Friday, December 13th, 2013

Ask yourself, the true measure of success is, statute of limitations decision of note, and more on JPMorgan.  It’s all here in the Friday roundup.

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The True Measure of Success Is …

As numerous sources have reported (for instance see here from Reuters and here from the Telegraph), the U.K. Serious Fraud Office’s prosecution of Victor Dahdaleh for allegedly paying millions in bribes to former managers of Aluminium Bahrain has collapsed.

The SFO provided the following statement to the court.

“At the commencement of this trial, the Serious Fraud Office was of the view that there was a realistic prospect of conviction in this case and that furthermore, the evidence in this case was strong.  Two things, in particular, have happened which have led to the prospect of conviction deteriorating in this case.  The first of those is that Bruce Hall, a conspirator and significant witness for the SFO significantly changed his evidence from that contained in his witness statement. Secondly, we have the unwillingness of two witnesses to face cross-examination. That impacts both on the fairness of the trial as well as the prospects of conviction.  Since last Thursday, yet further contact has taken place with Akin Gump, the lawyers for Aluminium Bahrain, or “Alba”, to secure the attendance of these two American witnesses, Mark MacDougall and Randy Teslik who are both partners in that firm. As you will see from the correspondence, they have attempted to place limits on the extent to which they can be cross-examined.  The Serious Fraud Office does not believe it would be appropriate to attempt to persuade the court to agree to such limits nor, given your comments last week, that they should appear via video-link.  The Defence have raised issues questioning Akins Gump’s role in the provision of assistance to the Serious Fraud Office both as to what their motives may have been in the dissemination of material and assistance as to witnesses who could provide relevant information, this in the context, as accepted by the defence, of the Serious Fraud Office acting in good faith. The attendance of the two American witnesses would have allowed this aspect of the case to be ventilated before the jury. Their refusal to attend creates a situation where it is clear that the trial process cannot remedy the position and we accept unfairness now exists for the Defence.  In seeking to secure the attendance of these two witnesses – who have previously attended court on every other occasion when their attendance has been required – the Serious Fraud Office has taken every available step, including a direct telephone conversation between the Director of the Serious Fraud Office and the chair of Akin Gump.  Not every unfairness necessarily leads to trials being discontinued, particularly where there is other evidence and taking into account the public interest in pursuing serious crime. After careful consideration of all of the circumstances of the case the Serious Fraud Office has concluded that there is no longer a realistic prospect of conviction in this case and accordingly we offer no evidence.”

For an additional SFO statement, see here.

While I have no unique insight into the facts and circumstances relevant to the Dahdaleh case and the SFO’s decision to abandon it, this much I know.

Success in enforcing a law, whether in the corporate context or individual context, is best measured – not by instances in which an enforcement agency in position of various “carrots” and “sticks” is able to procure a settlement – but by instances in which an enforcement agency is actually put to its burden of proof in an adversarial proceeding.

Statute of Limitations Decision of Note

Speaking of that measure of success, earlier this week the Second Circuit Court of Appeals rejected the DOJ’s statute of limitations theory in U.S. v. Grimm.

The case – outside the FCPA context – involved employees of General Electric Company who allegedly engaged in a multi-year scheme to fix below-market rates on interest paid by GE to municipalities.  The defendants were tried and convicted of violating the general federal conspiracy statute (18 USC 371).  The defendants appealed their convictions on the ground that the indictment was barred by the statute of limitations.  The trial court held that the statute of limitations continued to run during the period when GE paid the (depressed) interest to municipalities, and that the interest payments could constitute overt acts.

On appeal, the defendants argued that such interest payments cannot serve as overt acts because the routine payments were scheduled to continue for years (if not decades) after the contract was awarded and after all concerted conduct had ended.

The Second Circuit concluded that those payments do not constitute overt acts in furtherance of the conspiracy.  In so holding, the court rejected the DOJ’s position that a conspiracy continues so long as a stream of anticipated payments contains an element of profit.  The court stated, “but that proves too much” – “a conspiracy to corrupt the rent payable on a 99-year ground lease would, under the government’s theory, prolong the overt acts until long after any conspirator or co-conspirator was left to profit, or to plot.”

Not that statute of limitations have much practical impact on corporate FCPA enforcement actions given the “carrots” and “sticks” relevant to resolving an action, but if they did, it is easy to see relevance to the FCPA context as certain alleged bribe payments could be made to secure a contract – such as a production sharing agreement or similar – that has a revenue stream of serial payments over a number of years.

More on JPMorgan

The NY Times returned (here) to the JPMorgan story it first reported in August (see here and here for prior posts) regarding the company’s hiring practices in China.  The article states:

“Federal authorities have obtained confidential documents that shed new light on JPMorgan Chase’s decision to hire the children of China’s ruling elite, securing emails that show how the bank linked one prominent hire to “existing and potential business opportunities” from a Chinese government-run company.  The documents, which also include spreadsheets that list the bank’s “track record” for converting hires into business deals, offer the most detailed account yet of JPMorgan’s “Sons and Daughters” hiring program, which has been at the center of a federal bribery investigation for months. The spreadsheets and emails — recently submitted by JPMorgan to authorities — illuminate how the bank created the program to prevent questionable hiring practices but ultimately viewed it as a gateway to doing business with state-owned companies in China, which commonly issue stock with the help of Wall Street banks.

[...]

“There is no indication that executives at JPMorgan’s headquarters in New York were aware of the hiring practices described in the documents. And authorities might ultimately conclude that the bank’s hiring, while aggressive, did not cross a legal line.”

Once again (see here and here for prior posts), the latest JPMorgan article spawned much commentary touching upon double standard issues.  For multimedia content, see here from the Daily Ticker.

In this Huffington Post column, former Labor Secretary Robert Reich states:

“But let’s get real. How different is bribing China’s “princelings,” as they’re called there, from Wall Street’s ongoing program of hiring departing U.S. Treasury officials, presumably in order to grease the wheels of official Washington?

[...]

Or, for that matter, how different is what JP Morgan did in China from Wall Street’s habit of hiring the children of powerful American politicians?

[...]

And how much worse is JP Morgan’s putative offense in China than the torrent of money JP Morgan and every other major Wall Street bank is pouring into the campaign coffers of American politicians — making the Street one of the major backers of Democrats as well as Republicans?”

Reich concludes by asking:

“The Foreign Corrupt Practices Act is important, and JP Morgan should be nailed for bribing Chinese officials. But, if you’ll pardon me for asking, why isn’t there a Domestic Corrupt Practices Act?”

Well, Mr. Reich, there is a domestic corrupt practices act – it is called 18 U.S.C. 201, but as I’ve highlighted for years there is a double standard (see the 25 separate posts under the subject matter heading double standard).

But why should corporate interaction with a “foreign official” be subject to greater scrutiny and different standards of enforcement than corporate interaction with a U.S. official? After all, 18 U.S.C. 201 has elements very similar to the FCPA.  Why do we reflexively label a “foreign official” who receives “things of value” from private business interests as corrupt, yet generally turn a blind eye when it happens here at home?

*****

A good weekend to all.