Archive for the ‘Voluntary Disclosure’ Category

Issues To Consider From The Louis Berger Enforcement Action

Wednesday, July 22nd, 2015

IssuesThis recent post highlighted the DOJ FCPA enforcement action against Louis Berger International (LBI) and two former employees.

This post continues the analysis by highlighting various issues to consider from the enforcement action.

Not The First Time

Last week’s Foreign Corrupt Practices Act enforcement action against LBI was not the only recent enforcement action against the company or related entities.

As highlighted here, in November 2010 the company reached a global settlement with the DOJ related to an investigation of its cost allocating methodologies for overseas U.S. federal contracts. As part of the settlement, the company paid a total of $65 million and the settlement was composed of three separate agreements:

  • A two-year deferred prosecution agreement with the DOJ in which an independent monitor was appointed.
  • A related civil settlement agreement with the DOJ and the relator of a whistleblower lawsuit. In accordance with the agreement, the company accepted responsibility for the actions of former employees who violated the U.S. False Claims Act.
  • An Administrative Agreement with the company’s lead federal agency, the U.S. Agency for International Development.

As highlighted here, in December 2014 Derish Wolff (the former President, CEO and Chairman of the company) pleaded guilty to conspiring to defraud the U.S. Agency for International Development with respect to billions of dollars in contracts for reconstructive work in Iraq and Afghanistan.

As highlighted here, in November 2010 Salvatore Pepe (a former controller and the former CFO of the company) and Precy Pellettieri (a former controller of the company) also pleaded guilty to criminal informations charging them with conspiring to defraud the government with respect to the above conduct.

Government Contracts

Despite the prior enforcement action and the company’s FCPA scrutiny, Louis Berger has raked in numerous government contracts.

For instance, in just the past 9 months the company has been awarded the following government contracts.
  • A $14.8 million operations and maintenance fuels contract by the Defense Logistics Agency Energy for Fort Knox, Kentucky (see here).
  • A $21.6 million operations and maintenance fuels contract by the Defense Logistics Agency Energy at Fort Bliss, Texas (see here).
  • A $20 million contract with Florida’s Turnpike Enterprise to provide facility maintenance and repair services for toll plaza buildings along turnpike roadways in South Florida (see here).
  • A contract to provide air terminal and ground handling services at Kunsan Air base and Gimhae Republic of Korea air base in South Korea under a five-year contract with the United States Transportation Command (see here).
  • A contract from the U.S. Army, Europe to provide transient aircraft services at Stuttgart Army Airfield, Stuttgart Germany, a U.S. Army Airfield operated and maintained by the U.S. Army (see here).
  • A $95 million contract to assist the U.S. Army Corps of Engineers Pittsburgh District in responding to natural disasters and emergencies by providing temporary emergency power (see here).

World Bank Sanction

In February 2015, the company announced that it had accepted a World Bank Sanction based on the Vietnam conduct alleged in last week’s FCPA enforcement action. As noted in the company’s release:

“Louis Berger Group, the U.S.-based operating company within Louis Berger, has been barred from working on World Bank-funded projects for 12 months, subject to compliance with certain conditions. In addition, the Louis Berger parent has accepted terms of a conditional non-debarment for the same period. The sanctions are based on findings of misconduct under the World Bank standards by former employees on two 2007/08 World Bank-funded contracts in Vietnam that Louis Berger self-identified and self-reported to the U.S. government and World Bank.”

Rogue Employees?

Notwithstanding the above prior enforcement action, in relation to last week’s FCPA enforcement action it is fair to pose the question of whether the conduct at issue was engaged in by rogue employees (Richard Hirsch – an employed located in the Philippines, who at times oversaw the Company’s overseas operations in Indonesia and Vietnam and James McClung an employee located in India, who at times oversaw the Company’s overseas operations in Vietnam and India).

For instance, the DPA makes several references to the employees concealing conduct and otherwise creating false documents. Moreover, the DPA twice mentions the “nature and scope of the conduct” as a presumed mitigating factor, something not often found in FCPA resolution documents.

Moreover, compared to most corporate FCPA enforcement actions, there is little mention in the LBI action regarding the company’s control environment or compliance policies and procedures.

Was That Really a Voluntary Disclosure?

The DPA states that LBI voluntarily disclosed the conduct at issue and the Sentencing Guidelines calculation in the DPA credits the company for voluntarily disclosing.

Yet, is it really a voluntary disclosure when the company only took action after – in the words of the DPA – “the government had made LBI … aware of a False Claim Act investigation …”?

Did the Company Need a Compliance Monitor?

The DPA requires that LBI engage a compliance monitor for a three-year period.

Notwithstanding LBI’s prior troubles, query whether the compliance monitor was truly necessary or a government required transfer of shareholder wealth to FCPA Inc. (see here for the prior post).

For instance, in the DPA the DOJ stated that the company “has engaged in extensive remediation, including terminating the employment of officers and employees responsible for the corrupt payments, enhancing its due diligence protocol for third-party agents and consultants, and instituting heightened review of proposals and other transactional documents for all Company contracts.”

Moreover, LBI’s press release (which the company had to clear with the DOJ pursuant to the DPA) states:

“Since 2010, Louis Berger has undergone a massive $25+ million reform effort that resulted in new internal controls, new policies and procedures, and comprehensive systems investments, including a new global accounting system. The company has actively supported the government in its investigation of the culpable individuals and their activities. In addition to separating these former managers from the company, the firm also has added new managers to key positions, including chief financial officer and controller, and regional management teams throughout Asia and the Middle East. Additionally, the company implemented a new corporate operational model to ensure greater centralized oversight and control of overseas business activities. Moreover, the company has reformed its ownership structure by implementing an Employee Stock Ownership Program. The company established an independent compliance and ethics department under the oversight of an independent audit committee, introduced a global helpline through which employees can report potentially non-compliant activities, and implemented a global code of business conduct. Investments also have funded annual worldwide compliance, ethics and anti-corruption training for all employees.”

Timeline

Regardless of the merits of the voluntary disclosure, according to LBI’s press release the company self-reported the conduct at issue to the U.S. government starting in 2010.

Thus, LBI’s FCPA scrutiny lasted 5 years.

Another Week And More SEC Speeches

Wednesday, May 20th, 2015

Speaking8SEC enforcement officials sure do make a lot of speeches.

Last week, it was Andrew Ceresney (Director of the Division of Enforcement) who delivered speeches in Texas and New York.

In this speech, Ceresney focused on the SEC’s “cooperation program” (announced in 2010 see here for the prior post) and how the SEC uses “cooperation agreements and other cooperation tools.”

According to Ceresney:

“My bottom line is twofold:  first, the cooperation program has succeeded in making the Commission’s enforcement program more effective by obtaining significant results which protect investors and deter misconduct; and second, those who are willing and able to help us can thereby help themselves in significant ways.”

Ceresney continued as follows.

“In laying out the range of options for considering and rewarding self-reporting and cooperation, the Commission noted that such credit could range from the “extraordinary” step of declining an enforcement action, to narrowing charges, limiting sanctions, or including mitigating or similar language in charging documents.  The Commission has used each of these approaches in its cases over the years.

To take one example of how this plays out in practice, look at our recent announcement of settled Foreign Corrupt Practices Act (FCPA) charges against FLIR Systems Inc.  As the order in that case noted, the company self-reported, cooperated, and undertook significant remedial efforts.  The settlement required the company to pay around $7.5 million in disgorgement, plus prejudgment interest, but a penalty of only $1 million, whereas penalties in FCPA settlements often are set at an amount equal to the disgorgement amount.

Similarly, the Commission filed an FCPA action against Goodyear Tire & Rubber Company earlier this year. The order in that case notes the company’s prompt self-reporting, remedial acts, cooperation, and disciplinary actions against employees.  The settlement ordered disgorgement and prejudgment interest of over $16 million, but no penalty at all.  As you can see from those two examples, Seaboard continues to provide a framework under which entities can receive cooperation credit in settlements.”

Let’s pause for a moment to reflect on Ceresney’s suggestion that Goodyear uniquely benefited from receiving no civil penalty and FLIR Systems uniquely benefited because its civil penalty was “only $1 million” and his assertion that “penalties in FCPA settlements often are set at an amount equal to the disgorgement amount.”

For starters, between 2011 and 2014 the SEC resolved 36 corporate FCPA enforcement actions.  22 of the actions 61% did not involve any civil penalty in the settlement amount.  Of the 12 enforcement actions that involved disgorgement and a civil penalty amount (note Oracle and Ball Corp. involved only a civil penalty), in only the Allianz enforcement action did the civil penalty amount equal the disgorgement amount.  In every other situation (92%), the civil penalty amount did not equal (by a large margin) the disgorgement amount.

In short, Ceresney’s statement that “penalties in FCPA settlements often are set at an amount equal to the disgorgement amount” is simply false as evidenced in SEC FCPA enforcement actions between 2011-2014.

Ceresney next talked about self-reporting and cooperation and stated as follows.

“The discussion of whether and when to self-report is, I think, a bit more developed in the context of FCPA cases than in other types of cases.  As I have previously said, companies are gambling if they fail to self-report FCPA misconduct to us.  After all, given the success of the SEC’s whistleblower program, we may well hear about that conduct from another source.  But self-reporting is advisable not just in the FCPA context.  Firms need to be giving additional consideration to it in other contexts as well.  This includes self-reporting by registered firms of misconduct by associated persons, for example, and misconduct by issuer employees.  Where Enforcement staff uncovers such misconduct ourselves, a natural question for us to ask is why the firm didn’t tell us about it.  Was it because the firm didn’t know of the misconduct?  If so, what does that say about the firm’s supervisory systems, compliance program, and other controls?  On the other hand, if the firm did know about it, and the misconduct was significant, why didn’t the firm report it to us?  There will be significant consequences in that scenario from the failure to self-report.

As for the nature of cooperation, I think that the bar has been raised for what counts as good corporate citizenship in the last 15 years or so.  For example, internal investigations have now become common, a clear best practice for any company that discovers significant potential misconduct.  And sharing the results of those internal investigations with the government has become commonplace, as companies recognize the immense benefits that can accrue to them from doing so.  Some government officials have reemphasized recently the need for companies to share information on individual wrongdoers in order to receive credit for their cooperation.  I wholeheartedly agree, and this has long been a central tenet of cooperation with the SEC. When a company commits to cooperation and expects credit for that assistance, the Enforcement staff expects them to provide us with all relevant facts, including facts implicating senior officials and other individuals.  In short, when something goes wrong, we want to know who is responsible so that we can hold them accountable.  If a company helps us do that, they will benefit.”

Ceresney next spoke about the SEC’s use of NPAs and DPAs, part of the SEC’s cooperation program announced in 2010.

“Since the start of the cooperation program, the Commission has announced just five DPAs and five NPAs.  [Note: the SEC has used such agreements three times in the FCPA context:  Tenaris (DPA), Ralph Lauren (NPA) and PBSJ (DPA)]. While these types of agreements are a good option in some extraordinary cases, they have been a relatively limited part of our practice.  I think this is appropriate and should continue to be the case.

In contrast to the limited number of DPAs and NPAs, the Division of Enforcement has signed over 80 cooperation agreements over the last five years.  These cooperation agreements, and the benefits they have provided, are really at the heart of our cooperation program.

As I mentioned, cooperation agreements have long been a staple of criminal prosecutions.  The reason for this is simple:  to break open a case, you often need assistance from someone who participated in or knew of the misconduct.  These people can answer your questions, and they can lead you to ask the questions you hadn’t yet thought of.  They can also be strong witnesses in outlining the misconduct for a jury.  This is no less true in our civil cases than in criminal cases.  Given the complexity of so many cases in our docket, we have much to gain by enlisting those who can guide us during our investigation and who can then tell a fact finder what happened from an insider’s perspective or otherwise explain the contours of the misconduct with specificity.

Over the last five years, we have signed up cooperators in all manner of cases.”

Ceresney next turned to a question that he suspected was on the minds of many in the audience:

“[I]s cooperation worth it?  Does it provide significant enough benefits to make it worthwhile?  Particularly given some of the downsides, including the need to potentially testify against others, can it pay sufficient dividends to justify the sacrifice?  Of course, in the criminal realm, a reduction in sentence is a very significant benefit of cooperation and serves to incentivize cooperation.  Have we been able to offer benefits sufficient to incentivize cooperation on the civil side?

My answer to that is a simple yes.  Let me start by talking about the cooperation calculus for individuals.  Say that you represent someone who fits this profile:  they are caught up in an investigation where charges are likely, but there are others who are more culpable or are in a more senior role.  True, they can hunker down during the investigation and hope for the best.  But if they come forward and assist the investigative staff, they can be affirmatively helping themselves as well.  Our history over the last five years demonstrates that the benefits are real in terms of charging decisions, monetary relief, and bars.  Let me go through each of those categories of benefits.

First, charging decisions.  Usually if a defendant is at a certain level of seniority, has engaged in serious misconduct, and we have significant evidence, the staff is not going to be in a position to recommend against charges entirely.  But there are situations where an individual is on the bubble.  The person might be a somewhat peripheral or lower-level player, where charges are possible but where exercising prosecutorial discretion against bringing charges is also a valid option.  Or there may be situations where the evidence is less clear, and without cooperation we would have a hard time making a case against that individual or against others.  The staff may also consider whether the conduct is sufficient to justify an injunction or a cease-and-desist order – after all, if an individual’s conduct suggests they are not likely to break the law again, and if the individual accepts responsibility through cooperation, it weighs against that sort of relief.

The bottom line is that it is possible to convince the staff that forward-looking relief is not necessary based on your client’s conduct and risk profile, and this can happen when your client quickly and fully owns up to their conduct and tries to make it right by helping us in our investigation.  Or, if we believe a charge is necessary, in the right case we may reflect your client’s cooperation in making a recommendation about which violations to charge – for example, a cooperator might avoid scienter-based charges.

For obvious reasons, the Commission does not normally announce instances where, in the exercise of discretion, it determines that no charges are appropriate.  And unless that individual testifies, that exercise of discretion likely will not become public.  But I can tell you, based on an analysis of our cooperation agreements, that a significant percentage involved instances where the Division declined to recommend charges.

[...]

Second, a significant reduction in monetary relief is another potential benefit of cooperation.  In most cooperation cases, the Commission enters into bifurcated settlements.  This postpones the determination of any civil penalty until after the cooperation is complete, much like a deferred sentencing in the criminal realm.  What this means is that, if there is a trial or a hearing in which the cooperator takes the stand and testifies, that cooperation can be taken into account when setting any monetary penalty.  Again, the numbers bear out that cooperators receive significant benefits.  In cases where a cooperator has been charged and we have resolved the penalty question, two-thirds of the time the cooperator has paid no penalty at all.  For example, our bifurcated proceeding with our first testifying cooperator resulted in a termination with no civil penalty.

[...]

 

To be clear, this flexibility ordinarily does not extend to disgorgement, for reasons that I think should be obvious.  Where someone is in possession of what clearly are the proceeds of wrongdoing, the Commission typically seeks to disgorge it.  That said, in some cases there is flexibility as to how to calculate disgorgement, and the Enforcement staff might take a narrower view of what should be disgorged in recognition of cooperation.

[...]

Let me point out that the cooperation program also may have important implications not only for potential cooperators, but also for their attorneys.  The defense bar would benefit from heightened attention to the fact that our use of our cooperation tools has changed the calculus for individuals whose conduct is under investigation.  Among other things, counsel need to take seriously the challenges posed by representing multiple clients when one client is in a position to obtain significant benefits by cooperating.  This is especially true when one client’s cooperation might threaten another of a lawyer’s clients.  Additionally, counsel should keep in mind that, just as corporate cooperation credit is greatly enhanced by early self-reporting, the same is true with individuals.  The earlier that someone comes in to start a conversation about cooperation, the better it will be for the client, because early action allows us to achieve the efficiency, speed, and effectiveness that result in the highest amount of cooperation credit being given.  So, just as we have seen the bar raised in terms of corporate cooperation, I think we are seeing a similar evolution when it comes to individuals.”

*****

In this speech, also last week, Ceresney talked about the SEC’s litigation program.  Among other things, he stated:

“Litigation and trials are among the most important work of the Commission’s Enforcement staff and we have dedicated the necessary resources to ensure that we have and will continue to have a strong record of success.

[...]

The cases that litigate are typically those where the evidence is less clear cut, the law is unsettled, the defendants have determined to spare no expense in attempting to clear their names, or, in many cases, all of the above.”

In the speech, Ceresney also elaborated on the factors the SEC recently released in determining whether to bring an enforcement action internally through its administrative process or in federal court.  (See here for the prior post).

Friday Roundup

Friday, May 8th, 2015

Roundup2The anti-bribery business, quotable, scrutiny alerts and updates, and for the reading stack.  It’s all here in the Friday Roundup.

“The Anti-Bribery Business”

Several articles have been written about FCPA Inc., a term I coined in April 2010 (see here), as well as the “facade of FCPA enforcement” (see here for my 2010 article of the same name).

The articles have included: “Cashing in on Corruption” (Washington Post); “The Bribery Racket” (Forbes); and “FCPA Inc. and the Business of Bribery” (Wall Street Journal).

I talked at length with The Economist about the above topics and certain of my comments are included in this recent article “The Anti-Bribery Business.”

“The huge amount of work generated for internal and external lawyers and for compliance staff is the result of firms bending over backwards to be co-operative, in the hope of negotiating reduced penalties. Some are even prepared to waive the statute of limitations for the conclusion of their cases. They want to be sure they have answered the “Where else?” question: where in the world might the firm have been engaging in similar practices?

In doing so, businesses are egged on by what Mr Koehler calls “FCPA Inc”. This is “a very aggressively marketed area of the law,” he says, “with no shortage of advisers financially incentivised to tell you the sky is falling in.” Convinced that it is, the bosses of accused companies will then agree to any measure, however excessive, to demonstrate that they have comprehensively answered the “Where else?” question. So much so that even some law enforcers have started telling them to calm down. Last year Leslie Caldwell, head of the DOJ’s criminal division, said internal investigations were sometimes needlessly broad and costly, delaying resolution of matters. “We do not expect companies to aimlessly boil the ocean,” she said.

Her words have provided scant comfort: defence lawyers say that their clients feel that if they investigate problems less exhaustively, they risk giving the impression that they are withholding information. Some say the DOJ is maddeningly ambiguous, encouraging firms to overreact when allegations surface.”

Quotable

Assistant Attorney General Leslie Caldwell is spot-on in this recent Q&A in Fraud Magazine as to the importance of uniquely tailored compliance.

“I think companies have to tailor their compliance programs and their investigative mechanisms to their businesses. There’s no one-size-fits-all compliance program. Different businesses have different risks. And a company needs to do an assessment that’s very tailored to their risks and game out what could go wrong and figure out how to prevent that from happening.”

She is less than clear though when describing when the DOJ would like companies to voluntarily disclose:

“We don’t want a company to wait until they’ve completed their own investigation before they come to us. We’ll give them room to do that, but there may be investigative steps that we want to take that maybe the company is not even capable of taking. We definitely don’t want to send a message that the company should complete its own investigation and then come to us. However, we obviously don’t expect a company to report to us as soon as it receives a hotline report that it hasn’t even checked into yet.”

For your viewing pleasure, here is the video of a recent speech by Caldwell (previously highlighted here) along with Q&A.

Scrutiny Alerts and Updates

Bilfinger

Reuters reports:

“German engineering firm Bilfinger has become the first international company to disclose to Brazil that it may have paid bribes as it seeks leniency under a new anti-corruption law, Comptroller General Valdir Simão said on Thursday. By reporting potential graft to the comptroller, known by the acronym CGU, Bilfinger hopes to continue operating in Brazil, Simão said, though it may still pay damages. ”The company knows it will be punished in Brazil; it is not exempt from fines,” Simao said at a conference in Sao Paulo adding that in exchange the company could be guaranteed the right to keep operating in Brazil. Companies that are convicted for bribery could be banned from future contracts in Brazilunder the law, which took effect in January 2014. Bilfinger said in March that it may have paid 1 million euros to public officials in Brazil in connection with orders for large screens for security control centers during the 2014 soccer World Cup. It is conducting an internal investigation and collaborating with Brazilian authorities, Bilfinger said in a statement at the time. Five companies are pursuing leniency deals with the CGU, Simao said, adding that such deals are “quite new” for the country. Four are tied to a scandal at Brazil’s state-run oil firm Petroleo Brasileiro SA, he said.”

As highlighted in this previous post, in December 2013 German-based Bilfinger paid approximately $32 million to resolve an FCPA enforcement action concerning alleged conduct in Nigeria.  The enforcement action was resolved via a three-year deferred prosecution agreement.

Siemens

Reuters reports:

“A Chinese regulator investigated Siemens AG last year over whether the German group’s healthcare unit and its dealers bribed hospitals to buy expensive disposable products used in some of its medical devices, three people with knowledge of the probe told Reuters. The investigation, which has not previously been reported, follows a wide-reaching probe into the pharmaceutical industry in China that last year saw GlaxoSmithKline Plc fined nearly $500 million for bribing officials to push its medicine sales. China’s State Administration for Industry and Commerce (SAIC) accused Siemens and its dealers of having violated competition law by donating medical devices in return for agreements to exclusively buy the chemical reagents needed to run the machines from Siemens, the people said.”

In 2008, Siemens paid $800 million to resolve DOJ and SEC FCPA enforcement actions that were widespread in scope.  The enforcement action remains the largest of all-time in terms of overall settlement amount.

Dun & Bradstreet

The company recently disclosed the following update regarding its FCPA scrutiny.

“On March 18, 2012, we announced we had temporarily suspended our Shanghai Roadway D&B Marketing Services Co. Ltd. (“Roadway”) operations in China, pending an investigation into allegations that its data collection practices may have violated local Chinese consumer data privacy laws. Thereafter, the Company decided to permanently cease the operations of Roadway. In addition, we have been reviewing certain allegations that we may have violated the Foreign Corrupt Practices Act and certain other laws in our China operations. As previously reported, we have voluntarily contacted the Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) to advise both agencies of our investigation, and we are continuing to meet with representatives of both the SEC and DOJ in connection therewith. Our investigation remains ongoing and is being conducted at the direction of the Audit Committee.

During the three months ended March 31, 2015 , we incurred $0.4 million of legal and other professional fees related to matters in China, as compared to $0.3 million of legal and other professional fees related to matters in China for the three months ended March 31, 2014.

As our investigation and our discussions with both the SEC and DOJ are ongoing, we cannot yet predict the ultimate outcome of the matter or its impact on our business, financial condition or results of operations. Based on our discussions with the SEC and DOJ, including an indication from the SEC in February and March 2015 of its initial estimate of the amount of net benefit potentially earned by the Company as a result of the challenged activities, we continue to believe that it is probable that the Company will incur a loss related to the government’s investigation. We will be meeting with the Staff of the SEC to obtain and to further understand the assumptions and methodologies underlying their current estimate of net benefit and will subsequently provide a responsive position. The DOJ also advised the Company in February 2015 that they will be proposing terms of a potential settlement, but we are unable to predict the timing or terms of any such proposal. Accordingly, we are unable at this time to reasonably estimate the amount or range of any loss, although it is possible that the amount of such loss could be material.”

Bio-Rad

The company disclosed as follows concerning civil litigation filed in the aftermath of its November 2014 FCPA enforcement action (see here for the prior post).

“On January 23, 2015, the City of Riviera Beach General Employees’ Retirement System filed a new shareholder derivative lawsuit in the Superior Court of Contra Costa County against three of our current directors and one former director. We are also named as a nominal defendant. In the complaint, the plaintiff alleges that our directors breached their fiduciary duty of loyalty by failing to ensure that we had sufficient internal controls and systems for compliance with the FCPA; that we failed to provide adequate training on the FCPA; and that based on these actions, the directors have been unjustly enriched. Purportedly seeking relief on our behalf, the plaintiff seeks an award of restitution and unspecified damages, costs and expenses (including attorneys’ fees). We and the individual defendants have filed a demurrer requesting dismissal of the complaint in this case.

On January 30, 2015, we received a demand pursuant to Section 220 of the Delaware General Corporation Law from the law firm of Scott + Scott LLP on behalf of International Brotherhood of Electrical Workers Local 38 Pension Fund to inspect certain of our books and records. The alleged purpose of the demand is to investigate potential wrongdoing, mismanagement, and breach of fiduciary duties by our directors and executive officers in connection with the matters relating to our FCPA settlement with the SEC and DOJ, and alleged lack of internal controls. We objected to the demand on procedural grounds by letter. On May 1, 2015, International Brotherhood of Electrical Workers Local 38 Pension Fund filed an action against us in the Delaware Court of Chancery to compel the inspection of the requested books and records.

On March 13, 2015, we received a demand pursuant to Section 220 of the Delaware General Corporation Law from the law firm of Kirby McInerney LLP on behalf of Wayne County Employees’ Retirement System to inspect certain of our books and records. The alleged purpose of the demand is to investigate potential wrongdoing, mismanagement, and breach of fiduciary duties by our directors and executive officers in connection with the matters relating to our FCPA settlement with the SEC and DOJ, and alleged lack of internal controls. We objected to the demand on procedural grounds by letter. On April 21, 2015, Wayne County Employees’ Retirement System filed an action against us in the Delaware Court of Chancery to compel the inspection of the requested books and records.”

Nortek

The company disclosed its FCPA scrutiny earlier this year and stated as follows in its recent quarterly filing:

“For the first quarter of 2015 approximately $1 million was recorded for legal and other professional services incurred related to the internal investigation of this matter. The Company expects to incur additional costs relating to the investigation of this matter throughout 2015.”

For the Reading Stack

From Global Compliance News by Baker & McKenzie titled “When a DPA is DOA:  What The Increasing Judicial Disapproval of Corporate DPAs Means for Corporate Resolutions With the U.S. Government.”

“The legal setting in which corporations are negotiating with U.S. regulators is always evolving. Federal judges’ increasing willingness to second-guess negotiated settlements between the government and corporations is likely to encourage government attorneys to seek even more onerous settlements to ensure that judges do not reject them or criticize the agency in open court. Companies and their counsel should be ready to push back, using the judicial scrutiny to their advantage where possible.”

*****

A good weekend to all.

Friday Roundup

Friday, March 27th, 2015

Roundup2Is this appropriate, sentenced, scrutiny alerts and updates, quotable, a future foreign official teaser?, Brazil update, and for the reading stack.

It’s all here in the Friday roundup.

Is This Appropriate?

If this truly is an event, “Drinks With an FBI Agent – Inside Stories From the Foreign Corrupt Practices Act,” is it appropriate?

Sentenced

Chinea and DeMeneses Sentences

The DOJ announced

“Benito Chinea and Joseph DeMeneses, the former chief executive officer and former managing director of a broker-dealer Direct Access Partner “were sentenced to prison … for their roles in a scheme to pay bribes to a senior official in Venezuela’s state economic development bank, Banco de Desarrollo Económico y Social de Venezuela (Bandes), in return for trading business that generated more than $60 million in commissions.”

Chinea and DeMeneses were each sentenced to four years in prison.  They were also ordered to pay $3,636,432 and $2,670,612 in forfeiture, respectively, which amounts represent their earnings from the bribery scheme.  On Dec. 17, 2014, both defendants pleaded guilty to one count of conspiracy to violate the Foreign Corrupt Practices Act and the Travel Act.”

In the release, Assistant Attorney General Leslie Caldwell stated:

“These Wall Street executives orchestrated a massive bribery scheme with a corrupt official in Venezuela to illegally secure tens of millions of dollars in business for their firm. The convictions and prison sentences of the CEO and Managing Director of a sophisticated Wall Street broker-dealer demonstrate that the Department of Justice will hold individuals accountable for violations of the FCPA and will pursue executives no matter where they are on the corporate ladder.”

U.S. Attorney Preet Bharara of the Southern District of New York stated:

“Benito Chinea and Joseph DeMeneses paid bribes to an officer of a state-run development bank in exchange for lucrative business she steered to their firm. Chinea and DeMeneses profited for a time from the corrupt arrangement, but that profit has turned into prison and now they must forfeit their millions of dollars in ill-gotten gains as well as their liberty.”

Elgawhary Sentence

This previous post highlighted the DOJ enforcement action against Asem Elgawhary, a former principal vice president of Bechtel Corporation and general manager of a joint venture operated by Bechtel and an Egyptian utility company, for allegedly accepting $5.2 million in kickbacks to manipulate the competitive bidding process for state-run power contracts in Egypt.

The DOJ recently announced that Elgawhary was sentenced to 42 months in federal prison.

When the Alstom enforcement action was announced in December 2014 (see here and here for prior posts), Elgawhary was described as an Egyptian “foreign official.”

So what was Elgawhary?

A former principal vice president of Bechtel Corporation and general manager of a joint venture operated by Bechtel and an Egyptian utility company or a Egyptian “foreign official?”

Can the DOJ have it both ways?

Scrutiny Alerts and Updates

Anheuser-Busch InBev

Anheuser-Busch InBev recently disclosed in its annual report:

“We have been informed by the U.S. Securities and Exchange Commission and the U.S. Department of Justice that they are conducting investigations into our affiliates in India, including a non-consolidated Indian joint venture that we previously owned, ABInBev India Private Limited, and whether certain relationships of agents and employees were compliant with the FCPA. We are investigating the conduct in question and are cooperating with the U.S. Securities and Exchange Commission and the U.S. Department of Justice.”

Bilfinger

As highlighted in this previous post, in December 2013 German-based Bilfinger paid approximately $32 million to resolve an FCPA enforcement action concerning alleged conduct in Nigeria.  The enforcement action was resolved via a three-year deferred prosecution agreement.

As noted in the previous post, Bilfinger’s CEO described the conduct at issue as “events from the distant past.”

From the not-so distant past, Bilfinger recently announced:

“Bilfinger received internal information last year indicating that there may have been violations of the Group’s compliance regulations in connection with orders for the supply of monitor walls for security control centres in several large municipalities in Brazil. The company immediately launched a comprehensive investigation. The allegation relates to suspected bribery payments from employees of a Bilfinger company in Brazil to public officials and employees of state companies.”

See here for a follow-up announcement from the company.

As a foreign company, Bilfinger is only subject to the FCPA’s anti-bribery violations to the extent the payment scheme involves a U.S. nexus (as was alleged in the prior Bilfinger FCPA enforcement action).

IBM

Canadian media reports:

“Seven people, including Revenue Quebec employees and officials with computer companies IBM and EBR, were [recently] arrested … in connection with an alleged corruption scheme aimed at obtaining a government IT contract worth $24 million.Two Revenue Quebec employees, Hamid Iatmanene and Jamal El Khaiat, stand accused of providing privileged information about an upcoming government contract to a consortium made up of IBM and Quebec company Informatique EBR Inc.”

As highlighted here, in 2000 IBM resolved an FCPA enforcement action.

As highlighted here, in 2011 IBM resolved another FCPA enforcement action.  This enforcement action was filed in federal court (back in the day when the SEC actually filed FCPA enforcement actions in federal court vs. its preferred in-house method now) and Judge Richard Leon was concerned about the settlement process.  As highlighted here, Judge Leon approved the settlement, but his July 2013 final order states, among other things:

“[For a two year period IBM is required to submit annual reports] to the Commission and this Court describing its efforts to comply with the Foreign Corrupt Practices Act (“FCPA”), and to report to the Commission and this Court immediately upon learning it is reasonably likely that IBM has violated the FCPA in connection with either improper payments to foreign officials to obtain or retain business or any fraudulent books and records entries …””

According to media reports, Judge Leon stated: “if there’s another violation over the next two years, it won’t be a happy day.”

Quotable

In this Law360 article, Richard Grime (former Assistant Director of Enforcement at the SEC and current partner at Gibson Dunn) states regarding recent alleged FCPA violations.

“It’s not that you couldn’t intellectually [conceive of] the violation. It’s that the government is sort of probing every area where there is an interaction with government officials and then working backwards from there to see if there is a violation, as opposed to starting out with the statute … and what it prohibits.”

Given that most SEC FCPA enforcement actions are the result of voluntary disclosures, it is a curious statement.  Perhaps its companies, at the urging of FCPA Inc., that are probing every area where there is an interaction with government officials and then working backwards?

*****

As reported here:

“Greek authorities [recently] indicted 64 people to stand trial over years-old allegations of bribery involving Siemens AG, the German engineering giant … A probe of corporate dealings from 1992 to 2006 allegedly found that Greece had lost about 70 million euros in the sale of equipment from Siemens to Greek telephone operator Hellenic Telecommunications also known as OTE, which was still owned by the state at the beginning of that period … A panel of judges decided that those indicted, including both Greek and German nationals, should stand trial for bribery or money laundering. The list of suspects includes former Siemens and OTE officials.”

As noted here, Joe Kaeser (President and CEO of Siemens) reportedly stated:

“I really believe the country (Greece) can move to the future, rather than trying to find the solutions in the past.” He added that his company had a “dark history,” mentioning compliance issues. But he said it was not a “black and white story” when asked whether the indictments had been politically motivated by the current friction between the German and Greek governments. ”Looking at the past doesn’t help the future because the past is the past.”

If the U.S. brings FCPA enforcement actions based on conduct that in some instances is 10 – 15 years old, it is not surprising that Greece is doing the same.  Yet is this right?

As the U.S. Supreme Court recently stated in Gabelli:

“Statute of limitations are intended to ‘promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.  They provide ‘security and stability to human affairs.  [They] are ‘vital to the welfare of society [and] ‘even wrongdoers are entitled to assume that their sins may be forgotten.’ […] It ‘would be utterly repugnant to the genius of our laws if actions for penalties could ‘be brought at any distance of time.’”

****

Since day one, I called Morgan-Stanley’s so-called declination politically motivated.  (See here and here).

I am glad to see that FCPA commentator Michael Volkov recently joined the club.  Writing on the Garth Peterson / Morgan Stanley so-called declination, Volkov states:  ”my intelligence on the case indicated that … [the] DOJ apparently wanted to demonstrate for political reasons that it could recognize a company’s compliance program to decline a case against a company.

A Future Foreign Official Teaser?

As recently reported by the Wall Street,

“China’s leadership is preparing to radically consolidate the country’s bloated state-owned sector, telling thousands of enterprises they need to rely less on state life support and get ready to list on public markets. [...] Communist Party leaders plan to release broad guidelines in the next months for restructuring the country’s more than 100,000 state-owned enterprises, according to government officials and advisers with knowledge of the deliberations. [...]  Strategically important industries such as energy, resources and telecommunications are marked for consolidation, the officials and advisers say. The merged entities would then be reorganized as asset-investment firms, with a mandate to make sure they run more like commercial operations than arms of the government. Upper management will be under orders to maximize returns and prepare many of the companies for eventual listing on stock markets, these people say.”

In U.S. v. Esquenazi, the 11th Circuit concluded that  an “instrumentality” under the FCPA is an “entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” The Court recognized that what “constitutes control and what constitutes a function the government treats as its own are fact-bound questions” and, without seeking to list all “factors that might prove relevant,” the court did list “some factors that may be relevant” in deciding issues of control and function.

As to control, the 11th Circuit listed the following factors:

“[whether] the foreign government’s formal designation of that entity; whether the government has a majority interest in the entity; the government’s ability to hire and fire the entity’s principals; the extent to which the entity’s profits, if any, go directly into the governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.”

As to function, the 11th Circuit listed the following factors:

“whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.”

Have fun applying this test should China’s proposed changes go forward.

Brazil Update

My own cents regarding Brazil’s recent implementation of regulations regarding certain features of its Clean Companies Act (a law which provides for only civil and administrative liability of corporate entities for alleged acts of bribery) is that the regulations are a yawner for any company that is already acting consistent with FCPA best practices.

Yet, if you feel the urge to read up on Brazil’s recent regulations, comprehensive coverage can be found here from Debevoise & Plimpton and here from FCPAmericas.

For the Reading Stack

A thoughtful article here from Alexandra Wrage (President of Trace) regarding the “cult of the imperfect.”  It states:

“Sir Robert Alexander Watson-Watt is credited with saving thousands of lives in Britain during the worst days of World War II after developing Chain Home, a low-frequency radar system able to detect aircraft from about 90 miles away. He openly encouraged what he called the “cult of the imperfect” among his team. He knew that Britain didn’t need the best possible radar system in five years; the country needed a viable radar system urgently. Immediately. Watson-Watt, who was knighted shortly after the Battle of Britain, is said to have instructed his team to strive for the third-best option, because “the second-best comes too late . . . the best never comes.

[...]

Perfect due diligence risk assessments never come. And even second-best may come too late. Just get started. You’ll see more protections and benefits from good (for now) than perfect (some day, maybe . . .).”

Sound advice that I agree with and completely consistent with Congressional intent in enacting the FCPA’s internal controls provisions and even prior enforcement agency guidance.

Problem is, the DOJ and SEC wear rose-colored glasses, including as to conduct years ago, and if a company is acting consistent with FCPA best practices 99% of the time, that means 1% of the time they are not.

*****

A good weekend to all. On Wisconsin!

Time Out Regarding Certain Goodyear Commentary

Wednesday, March 18th, 2015

TIme OutPardon me for being that guy, but in the Foreign Corrupt Practices Act space someone needs to put on the stripes because the information gatekeepers of much FCPA content tend to be non-lawyer journalists writing stories by cobbling together the views of experts who use the opportunity to comment as free marketing for FCPA compliance and investigative services.

And let’s call a spade a spade, FCPA practitioners often have a self-interest in more FCPA investigations, more voluntary disclosures, more enforcement actions and more post-enforcement action compliance obligations.

Much to my surprise, the recent SEC administrative action against Goodyear (see here for the prior post) has generated an unusual amount of commentary.  Indeed, in the days that followed I was contacted by numerous media outlets but my consistent response was along the following lines: ”There is nothing noteworthy or special about the Goodyear FCPA enforcement action.  The media and law firm coverage of this otherwise ordinary settlement is just the latest example of FCPA Inc. using enforcement actions as opportunities to market FCPA compliance services.”

So in the spirit of March Madness, I call a time out regarding certain Goodyear commentary.

A Law360 article titled “Attorneys React to SEC’s FCPA Action Against Goodyear” contained a roundup of sorts of attorney comments.

One practitioner stated:

“Today’s settlement demonstrates that the SEC and the DOJ are continuing to investigate and bring high-profile FCPA cases against large U.S. companies with multinational operations.”

Whoops, wrong talking point as the Goodyear enforcement action was SEC only with no DOJ component.

Another practitioner stated:

“In recent years … the SEC adopted an increasingly broad view of parent-subsidiary liability, now charging parent corporations with anti-bribery violations based on the acts of their subsidiaries without pleading any direct involvement by the parent in those violations. Goodyear is the latest example of this trend.”

Whoops, again the wrong talking point as Goodyear: (i) was not “charged” with anything (the enforcement action was an SEC cease and desist proceeding); and (ii) the SEC merely “found” violations of the books and records and internal controls provisions – not the anti-bribery provisions.

Another frequent observation from commentators was that the Goodyear action evidences how the SEC is “pursuing” commercial bribery cases given that the SEC enforcement action made generic references to alleged payments to private customers in connection with tire sales.

Let’s go to the monitor for this one.  The Goodyear enforcement action, like most corporate FCPA enforcement actions, was based on a voluntary disclosure.”  Can the word “pursue” really be used to describe enforcement actions that originate from voluntary disclosures?  Or would it be more accurate to say that the SEC “processed” the company’s voluntary disclosure?

Another frequent observation from commentators was how Goodyear “staved off criminal prosecution and fines” through its voluntary disclosure and cooperation.

Time out on this one, and not just a 30-second time out, but a full one.

There is no allegation or suggestion in the SEC enforcement action that Goodyear was involved in or had knowledge of the alleged improper conduct at its subsidiaries.  A parent company like Goodyear is a separate and distinct entity from its foreign subsidiaries and is not automatically liable for foreign subsidiary conduct – including potential anti-bribery violations – absent knowledge, approval, or participation in the bribery scheme.  In other words, criminal legal liability does not ordinary hop, skip and jump around a multinational corporation absent an alter ego analysis or control / participation in the underlying conduct.

On the other hand, the SEC takes the position that because foreign subsidiary books and records are consolidated with the parent company’s for purposes of financial reporting that subsidiary books and records issues are parent company issues.  As to internal controls, the SEC takes the seemingly simplistic position that because certain alleged payments were made by foreign subsidiaries, the parent company issuer must not have had effective internal controls.

In other words, based on the SEC’s allegations – or lack thereof – what criminal prosecution did Goodyear stave off?

And then there were the comments seeking to invoke fear – a common FCPA Inc. marketing device.  One practitioner stated:

“[The Goodyear action] could presage an uptick in enforcement activity in Africa, which has attracted increased global investment and, in certain countries, posted impressive recent economic growth. Despite these advancements, several African countries remain high on Transparency International’s Corruption Perceptions Index. As such, the [enforcement action] provides a clear reminder of the need to conduct appropriate pre- and post-acquisition due diligence on businesses operating in regions and industries that pose a high corruption risk.”

Another frequent comment, sure to induce March “madness” in informed readers, was the comparison to the settlement amount in Goodyear compared to say, Avon or Alcoa.

This article asserted as follows. ”For Goodyear … coming clean seems to have paid off—at least compared to the penalty imposed on Avon Products Inc. in December.”

For starters, the Avon enforcement action – like the Goodyear enforcement action – was the result of a voluntary disclosure.

Second, and most importantly, FCPA settlement amounts are largely a function of the net financial benefit obtained through the alleged improper payments.  Thus comparing one settlement to another is of little value.

A full time-out is also needed to comment on this Wall Street Journal Risk & Compliance Journal which carried the headline “Lawyers Point to Goodyear As a Model In Its Handling of Bribery Probe.”  Based on the views of two FCPA practitioners, the article asserts that the Goodyear enforcement action provides a ”model for companies to emulate when they discover misconduct in their own firms.”

I beg to differ.

The conduct at issue in the SEC’s enforcement action was very limited in scope (compared to Goodyear’s overall business operations) and the company learned of the alleged improper conduct through an effective internal control  - a report through the company’s confidential ethics hotline.

Given these circumstances, a perfectly acceptable, legitimate and legal response would have been for Goodyear to thoroughly investigate the issues, promptly implement remedial measures, and effectively revise and enhance compliance policies and procedures – all internally and without disclosing to the enforcement agencies.

Indeed, as recently noted in this Global Investigations Review article, James Koukios (Senior Deputy Chief of DOJ’s Fraud Section) recently stated: “We understand that sometimes companies choose not to self-report, and it is not always the wrong thing to do. I think a lot of it depends on how serious the issue is and whether it is an issue that can be investigated, addressed, remediated internally, and is more of a one-off versus systemic problem.”

Likewise, as former DOJ FCPA enforcement attorney Billy Jacobson notes in this recent WSJ Risk & Compliance Journal article “more and more companies are making the decision not to disclose instead they remediate controls, get rid of culpable individuals and clean up compliance internally.”

In short, Goodyear’s decision to voluntarily disclose was not necessarily a model for other companies to emulate.  Indeed a credible argument can be made that Goodyear’s decision was a poor decision that caused needless expenditure of shareholder money. Although, to my knowledge Goodyear did not disclose it pre-enforcement action professional fees and expenses, in a typical FCPA enforcement action, such professional fees and expenses exceed (often by ratios of 3, 5, or more) the enforcement action settlement amount – which in the case of Goodyear was $16 million.

Moreover, as a condition of settlement, Goodyear was required to report to the SEC, “at no less than 12 month intervals during a three year term” on the status of its remediation and implementation of compliance measures.”  As highlighted in this prior post, this is little more than a government required transfer of shareholder wealth to FCPA Inc.