October 17th, 2014

Friday Roundup

Strange definitions, asset recovery, through the revolving door, and proof.  It’s all here in the Friday roundup.

Strange Definitions

The Department of Justice and Securities and Exchange Commission sure do have some strange definitions.

For instance, in this Global Investigations Review Q&A, Marshall Miller (Principal Deputy Assistant Attorney General) states:

“[W]ith respect to declinations, if we have good reason to investigate potential criminal conduct then we’re going to follow that investigation to its end. At times, we do decline to prosecute, and we do so in an appropriate and expeditious way. One of the things we’ve been talking about is how to ensure that those under investigation understand why and when we decline to prosecute. But primarily these are cases where there were significant indicia of wrongdoing, but the wrongdoing doesn’t add up to a federal criminal case and [these] are not examples of the Justice Department just charging into corporations where there’s no wrongdoing in the first place.”

When the wrongdoing under investigation “doesn’t add up to a federal criminal case” that is not a declination, it is what the law commands.

Over at the SEC, yesterday the agency touted its FY 2014 enforcement actions (see here).  Andrew Ceresney (Director of the SEC’s Division of Enforcement) stated:  “I am proud of our excellent record of success and look forward to another year filled with high-impact enforcement actions.”

Included in the SEC’s release is the following:

“Combatting Foreign Corrupt Practices and Obtaining Highest-Ever Penalties Against Individuals

With the exception of Weatherford all of the corporate enforcement actions were resolved through the SEC’s own administrative process wherein it needs to convince only itself of the strength of its case.  In addition, see here for the article “Why You Should Be Alarmed by the ADM FCPA Enforcement Action” and see here for the post “HP Enforcement Action-Where to Begin.”

As to that “excellent record of success,” in the former Siemens executives action, see here for the previous guest post by a former Assistant Director of the SEC’s Enforcement 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.”).

Asset Recovery

Relevant to the DOJ’s Kleptocracy Asset Recovery Initiative under which prosecutors in the DOJ Asset Forfeiture and Money Laundering Section work in partnership with federal law enforcement agencies to forfeit the proceeds of foreign official corruption, the DOJ recently announced:

“[A] settlement of its civil forfeiture cases against assets in the United States owned by the Second Vice President of the Republic of Equatorial Guinea Teodoro Nguema Obiang Mangue that he purchased with the proceeds of corruption.”

“Through relentless embezzlement and extortion, Vice President Nguema Obiang shamelessly looted his government and shook down businesses in his country to support his lavish lifestyle, while many of his fellow citizens lived in extreme poverty,” said Assistant Attorney General Caldwell.  “After raking in millions in bribes and kickbacks, Nguema Obiang embarked on a corruption-fueled spending spree in the United States.  This settlement forces Nguema Obiang to relinquish assets worth an estimated $30 million, and prevents Nguema Obiang from hiding other stolen money in the United States, fulfilling the goals of our Kleptocracy Asset Recovery Initiative: to deny safe haven to the proceeds of large-scale foreign official corruption and recover those funds for the people harmed by the abuse of office.”

“While this settlement is certainly gratifying for the many investigators and prosecutors who worked tirelessly to bring it to fruition, it is undoubtedly even more rewarding for the people of Equatorial Guinea, knowing that at least some of the money plundered from their country’s coffers is being returned to them,” said Acting ICE Director Winkowski.  “ICE remains steadfast in its resolve to combat foreign corruption when the spoils of these crimes come to our shores and we are committed to seeking justice and compensation for the often impoverished victims.”

According to court documents, Nguema Obiang, the son of Equatorial Guinea’s President Teodoro Obiang Nguema Mbasogo, received an official government salary of less than $100,000 but used his position and influence as a government minister to amass more than $300 million worth of assets through corruption and money laundering, in violation of both Equatoguinean and U.S. law.  Through intermediaries and corporate entities, Nguema Obiang acquired numerous assets in the United States that he is agreeing to relinquish in a combination of forfeiture and divestment to a charity for the benefit of the people of Equatorial Guinea.

Under the terms of the settlement, Nguema Obiang must sell a $30 million mansion located in Malibu, California, a Ferrari automobile and various items of Michael Jackson memorabilia purchased with the proceeds of corruption.  Of those proceeds, $20 million will be given to a charitable organization to be used for the benefit of the people of Equatorial Guinea.  Another $10.3 million will be forfeited to the United States and will be used for the benefit of the people of Equatorial Guinea to the extent permitted by law.

Under the agreement, Nguema Obiang must also disclose and remove other assets he owns in the United States.  Nguema Obiang must also make a $1 million payment to the United States, representing the value of Michael Jackson memorabilia already removed from the United States for disbursement to the charitable organization.  The agreement also provides that if certain of Nguema Obiang’s other assets, including a Gulfstream Jet, are ever brought into the United States, they are subject to seizure and forfeiture.”

Related to the above action, the Wall Street Journal recently published this article titled “When U.S. Targets Foreign Leaders for Corruption, Recovering Loot Is a Challenge.”  The article notes:

“The [Obiang] settlement shows the ups and downs of the Justice Department’s Kleptocracy Asset Recovery Initiative, announced in 2010. So far, the agency has collected about $600 million out of the $1.2 billion pursued from 15 cases against current or former officials and businessmen in at least 14 different countries, according to a review of the cases by the Journal. Most of the cases involve alleged bribery, extortion or embezzlement. Justice Department officials said additional cases haven’t been made public yet because their court filings are sealed.

[...]

“I am pleased to be able to end this long and costly ordeal,” Mr. Obiang wrote in a statement on his Facebook page. “I agreed to settle this case despite the fact that the U.S. federal courts had consistently found that the Department of Justice lacked probable cause to seize my property.” Lawyers for Mr. Obiang have said the disputed property was bought with money earned legally through timber concessions and companies he owns. The Justice Department faced daunting obstacles in its fight against Mr. Obiang that are common in corruption cases against foreign leaders. To win in court, the government must prove that assets in the U.S. were bought with proceeds of illegal activity in the country where the alleged corruption occurred. The money trail is even harder to follow when the target has a large number of overseas shell companies and accounts, as Mr. Obiang did, according to court filings in the civil case. “These accounts are suspicious,” U.S. District Judge George Wu said in a ruling last year. But he threw out most of the Justice Department’s case, concluding there “is no evidence that the defendant assets were purchased with those funds.” In December, the Justice Department filed a new civil suit against Mr. Obiang. Before the settlement was reached, the two sides were sparring over whether a statute of limitations had lapsed.”

McInerney to Davis Polk

As Chief of the DOJ’s Fraud Section and Deputy Assistant Attorney General for the Criminal Division, Denis McInerney was involved in setting DOJ FCPA policy during this declared new era of enforcement and frequently advanced those policy positions on the FCPA conference circuit.  McInerney recently left the DOJ and Davis Polk recently announced:

“McInerney … is returning to the firm as a partner in its Litigation Department and member of its white collar criminal defense and investigations practice.  As Chief of the Fraud Section (from 2010 to 2013) and then Deputy Assistant Attorney General overseeing the Fraud, Appellate and Capital Case Sections of the Criminal Division (from 2013 to 2014), Mr. McInerney was responsible for supervising approximately 100 prosecutors in the Fraud Section, which has responsibility for all Foreign Corrupt Practices Act (FCPA) investigations conducted by DOJ, as well as a wide range of other complex white collar criminal investigations and prosecutions throughout the country, including corporate, securities, financial, health care and procurement fraud cases.

Among other matters, Mr. McInerney played a leadership role in DOJ’s investigations into the alleged manipulation of LIBOR and the foreign exchange market by various financial institutions around the world, and the preparation of A Resource Guide to the Foreign Corrupt Practices Act, which was published by DOJ and the SEC in 2012.  Mr. McInerney’s tenure leading the Fraud Section was marked by a substantial increase in the number of defendants charged and convicted on an annual basis, as well as the number of trials conducted by Fraud Section prosecutors each year.

[...]

“We are delighted to welcome Denis back. His integrity, judgment and experience, both as a high-level DOJ official overseeing some of the nation’s most important white collar cases and as a skilled defense attorney representing institutions and individuals in their most sensitive investigations and trials, will be a great asset to our world-class litigation and white collar criminal defense teams,” said Thomas J. Reid, Davis Polk’s Managing Partner. “Denis rejoins an extraordinary and growing team of former government officials in our New York and Washington offices, including litigators who have held senior positions with DOJ, the SEC, the White House and the CIA.”

Mr. McInerney said, “I’m very grateful that I was given the opportunity to return to the Department for these last four plus years to help lead a terrific group of prosecutors at Main Justice in Washington. At the same time, I’m very glad to be home, not only with my family in New York, but with Davis Polk, a firm that is all about excellence, where I was fortunate to have practiced for 18 years. Returning to Davis Polk will give me the opportunity to work on some of the most important and interesting enforcement and regulatory matters in the country with an expanded and extremely talented litigation group.”

 Proof

Need further proof that it is indeed an FCPA world.  See here.

*****

A good weekend to all.

Posted by Mike Koehler at 12:03 am. Post Categories: Asset RecoveryDeclination DecisionsFCPA Inc.SEC




October 16th, 2014

Look In The Mirror Moments?

Looking in the MirrorFor some time, I have used the picture to the left in various public presentations when discussing certain public policy aspects of this new era of Foreign Corrupt Practices Act enforcement.

Two developments related to China caused me to ponder the picture once again.

The first concerns a letter recently sent by U.S. Treasury Secretary Jacob Lew to Chinese Vice Premier Wang Yang. The second concerns the general thrust of much “western” commentary concerning China’s recent enforcement action against GlaxoSmithKline.

Lew Letter

As highlighted in this recent Wall Street Journal article, Treasury Secretary Lew “warned his Chinese counterpart in a recent letter that a spate of antimonopoly investigations against foreign companies could have serious implications for relations between the two countries.”  As noted in the article, “the warning comes after international business lobbies have raised complaints over a string of monopoly and pricing probes that they say unfairly focus on foreign companies.”

Predictably, China reportedly responded to the letter and concerns by stating – as noted in the article – that foreign and domestic Chinese companies are treated equally, that foreign companies are “welcome to hire the most famous lawyers in the world” to dispute Chinese allegations, and that if foreign companies disagree with Chinese law enforcement interpretations any company is free to “take the discrepancies to court.”

Although outside the FCPA context, the trading of barbs between the U.S. and China has FCPA parallels as concerns have been raised about U.S. enforcement of the FCPA against foreign companies and similar “see you in court” type statements have been made by the DOJ in response.

It is a fact that the clear majority of the largest FCPA enforcement actions of all-time (based on settlement amounts) are against foreign companies.

It is also a fact that many of these enforcement actions have been based on spare jurisdictional allegations.  For instance and as highlighted in this prior post, the 2013 FCPA enforcement action against Total (the $398 million settlement amount was the third largest in FCPA history) was based on the following salient points:

  • The enforcement action was against a French oil and gas company for making improper payments to an Iranian Official through use of an employee of a Swiss private bank and a British Virgin Islands company.
  • The vast majority of the alleged improper conduct took place between 1995 and 1997 (that is 16 to 18 years ago prior to the enforcement action).
  • The sole U.S. jurisdictional nexus (a required legal element for an anti-bribery violation since Total is a foreign issuer) is a 1995 wire transfer of $500,000 (representing less than 1% of the alleged bribe payments at issue) from a New York based account.

Expansive FCPA enforcement theories against foreign actors made its way into the Senate’s 2010 FCPA hearing when Senator Christopher Coons stated:  ”Today we the only nation that is extending extraterritorial reach and going after the citizens of other countries, we may someday find ourselves on the receiving end of such transnational actions.”

As a matter of law, Senator Coon’s statement was technically inaccurate, there is no extraterritorial jurisdiction over foreign actors under the FCPA’s anti-bribery provisions, but the expansive jurisdictional theories are what I have called “de facto extraterritoriality.”

In any event, the concluding point is this:  aggressive enforcement of domestic laws against foreign companies raise various policy issues and can lead to “lawfare.”  At the very least, when the tables are turned it ought to cause U.S. law enforcement agencies and policy makers to look in the mirror because Secretary Lew’s recent warning letter may be viewed by some as the “pot calling the kettle black.”

China GSK Enforcement Action

As previously highlighted here, in September GSK announced that it had agreed to pay approximately $490 million to resolve a Chinese law enforcement investigation after a Chinese court ruled “that GSK China Investment Co. Ltd (GSKCI) has, according to Chinese law, offered money or property to non-government personnel in order to obtain improper commercial gains, and been found guilty of bribing non-government personnel.”

The general thrust of certain “western” reporting of the China action was critical in various respects as highlighted below.

  • “an opaque justice system ultimately controlled by the Communist Party” (here)
  • “after a one day closed hearing” (here)
  • “The bribery conviction of a GSK unit took all of one day in Chinese court” “Unlike the U.S. Department of Justice, which often allows the companies accused of bribery to spend years conducting their own internal investigations–often followed with non-prosecution agreements–these convictions came just 15 months after Chinese officials began their investigation.”  ”Chinese authorities moved very quickly to assess significant penalties in a forum that provided very little transparency”  (here)
  • “Many of us had wondered when the GSK investigation in China would end and we all found about the trial when it was announced in the newspapers last week. It certainly showed that the quality of justice in China is quite different than in the west. While it is not entirely clear how long the trial lasted, it appeared that it was [a one-day trial] …” (here)

Without in any way trying to comprehensively compare the overall U.S. legal system to the overall Chinese legal system, the following attributes of FCPA enforcement must at least be acknowledged.

The vast majority of corporate FCPA enforcement actions lack transparency and the resolution documents (whether a non-prosecution agreement, deferred prosecution agreement or civil administrative order) are the result of an opaque process ultimately controlled by the same office prosecuting or bringing the action.

As to the swiftness of FCPA enforcement actions, one can only assume that the majority of general counsels and board of directors of companies under FCPA scrutiny would be jumping for joy if the scrutiny – from start to finish – would resolve itself in 15 months rather than the typical 3-5 years (and in some instances more) of FCPA scrutiny lingering.

The concluding point is this:  before criticizing how other countries are enforcing their anti-corruption laws (something the U.S. government has been pleading for other countries to do for years), we should at least look in the mirror regarding various aspects of FCPA enforcement.

Posted by Mike Koehler at 12:02 am. Post Categories: ChinaDouble Standard




October 15th, 2014

Trade Barriers And Distortions As A Root Cause Of Bribery – A Focus On China

I do not normally cite Chinese criminal defendants; in fact, I never have.

Yet, individuals from all circumstances in life are capable of recognizing the big picture and when such individuals with actual experience with the root causes of bribery make a valid point, we should at least take notice.

As highlighted in this recent Wall Street Journal article, Liu Tienan (the former head of China’s National Energy Administration and Senior Director in the National Development Reform Commission) admitted to accepting bribes in connection with various projects.  As noted in the article, “in his three decades at NDRC, Mr. Liu became one of the most powerful party officials running an agency that is rooted in China’s Communist past and that still decides which companies can expand and how banks should allocate loans.”

As noted in the article, at a hearing Mr. Liu reportedly testified that reducing official power is key to curbing corruption and stated “the major point, which is based on my own experience, is to give the market a great deal of power to make decisions.”

As Tom Fox observed on his FCPA Compliance and Ethics Blog, “it is almost if Lui is channeling his inner FCPA Professor when he speaks against artificial barriers to market entry.”

Indeed, I have long maintained that trade barriers and distortions are often the root causes of bribery and a reduction in bribery will not be achieved without a reduction in trade barriers and distortions.

These barriers and distortions – whether complex customs procedures, import documentation and inspection requirements, local sponsor or other third-party requirements, arcane licensing and certification requirements, quality standards that require product testing and inspection visits, or other foreign government procurement practices – all serve as breeding grounds for bribery.

The formula is not complex.

  • Trade barriers and distortions create bureaucracy.
  • Bureaucracy creates points of contact with foreign officials.
  • Points of contact with foreign officials create discretion.
  • Discretion creates the opportunity for a foreign official to misuse their position by making bribe demands.

Several FCPA enforcement actions demonstrate this point (see my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense” pgs. 619-625).  In addition, as highlighted in this prior post, there is a positive correlation between regulatory burdens when doing business in a foreign country and corruption in that foreign country.

In short, removal of trade barriers and distortions can help reduce bribe demands and the focus of the anti-corruption community should be less narrowly focused on pounding the pavement for more enforcement of FCPA-like laws (see prior posts here and here).  Among other things, enforcement of FCPA-like laws only addresses the supply of bribes, not the demand of bribes, or the root causes of many bribes.  More energy and attention should be spent on encouraging nations to eliminate trade barriers and distortions.

Back to Liu’s comments and how various trade barriers and distortions in China can serve as the root cause of bribery and corruption.

For instance, why is the Hollywood film industry under FCPA scrutiny for its practices in China?  It probably has something to do with the fact that “Hollywood studios have spent more than a decade working their way into China past government quotas, censors, and ever-changing regulations.”  (See here).

More comprehensively, consider a recent report by Covington & Burling detailing “market access restrictions and other restraints on foreign investment” in China.  As noted in the firm’s release:

“[Covington] developed an unparalleled database of publicly recorded laws, regulations, and other measures containing provisions that frame or limit foreign investment in China. The Covington team searched hundreds of thousands of measures issued by 80 central government agencies and five representative provincial-level governments, and in the process identified hundreds of provisions restraining foreign investment in China.

Beyond published measures, we reviewed key trade publications and conducted interviews with industry groups to identify and catalogue administrative practices that also may have a restraining effect on foreign investment. As foreign business leaders in China are well aware, many of the biggest obstacles to foreign participation in the Chinese economy are imposed unofficially by government officials exercising legal or extralegal discretion.

[...]

To facilitate our ability to identify restraining measures, we defined the following three categories of restraints:

Category 1: Restraints that favor domestic investors or investments over foreign investors or investments;

Category 2: Restraints that favor state-owned investors or investments over privately-owned (including foreign-owned) investors or investments; and

Category 3: Restraints that possibly favor domestic investors or investments over foreign investors or investments, depending on whether foreign-invested enterprises (FIEs) established in China would be regarded as “Chinese” entities and therefore deemed eligible to receive, on an equal basis, benefits made available to such entities.

[...]

[Covington's] manual review process identified over 800 restraints, which could be divided into three broad groups:

Pre-establishment restraints that impede market access for foreign investment;

Post-establishment restraints that treat foreign-invested entities less favorably; and

Broad policy statements that potentially result in less favorable treatment for foreign investors and investments during both the pre-establishment and post-establishment stages.

We found that within these three groups, restraining measures in China could be further subdivided into (i) four types of pre-establishment restraints – discriminatory local partner/equity requirements, market entry restrictions, approval process restraints, and technology transfer-related measures –and (ii) three types of post-establishment restraints – differentiated treatment through targeted enforcement, government financial support, and government procurement. In addition, we determined that the large number of broad policy statements we identified also constitute an important group of restraints, even though they do not mandate specific discriminatory treatment in and of themselves, because they often lead central government agencies or local governments to promulgate discriminatory measures or to exercise their administrative discretion in ways that disadvantage foreign investors and investments.

Investment activities by foreign businesses are also subject to restraining administrative practices, which reflect the following three characteristics of China’s administrative system:

Industrial policies explicitly designed to support the development of domestic industries and champions;

Relatively opaque approval processes led by officials explicitly mandated to help China achieve its industrial policy goals; and

The absence of effective recourse if approval authorities have not complied with international commitments or China’s own regulations.”

For a complete copy of the Covington report see here.  (See also this prior post which highlights a similar publication from Covington on “China’s Approval Process for Inbound Foreign Direct Investment”).

In short, Liu is right.

Key to achieving a reduction in bribery and corruption is eliminating trade barriers and distortions.

This problem of course is not China specific.

As noted in this recent op-ed in the Wall Street Journal by India’s Prime Minister Narendra Modi, his new administration is committed to “eliminating unnecessary laws and regulations, making bureaucratic processes easier and shorter, and ensuring that our government is more transparent, responsive and accountable.”  (See also here as relevant to India).

Although trade barriers and distortions are often a root cause of bribery, I am not confident that there will be a broad consensus to eliminate such trade barriers and distortions.  After all, as highlighted in this recent post, trade barriers and distortions are used by all governments as “carrots” and “sticks” to accomplish selfish domestic goals whether political, economic or national security.

That is fine on one level, but so long as this dynamic persists, a reduction in bribery will not be fully achieved because trade barriers and distortions are often the root causes of bribery.

Posted by Mike Koehler at 12:04 am. Post Categories: ChinaTrade Barriers and Distortions




October 14th, 2014

An Open Invitation To The DOJ And SEC To Refute These Numbers

As highlighted in this prior post, at a recent American Bar Association event Kara Brockmeyer (Chief of the SEC’s FCPA Unit) and Patrick Stokes (Chief of the DOJ’s FCPA Unit) spoke on a panel titled “DOJ-SEC FCPA Update:  Trends and Significant Developments.”

Towards the end of the panel, after hearing Brockmeyer and Stokes carry forward enforcement agency rhetoric concerning individual prosecutions, I asked the following general question.

The DOJ and SEC frequently talk about individual FCPA enforcement actions and indeed recognize the importance of individual enforcement in maximizing deterrence.  However, the reality is that since 2008 approximately 80% of corporate FCPA enforcement actions lack any related enforcement action against company employees.  Indeed, the SEC has not brought an individual FCPA enforcement action in nearly 2.5 years.  Is one possible explanation for these statistics – that corporate FCPA enforcement actions do not necessarily represent provable FCPA violations?

Both Brockmeyer and Stokes strongly disagreed with my statistics and called them false, wrong, deeply flawed, etc.

Stokes also seemed to hint at FCPA enforcement that is not public (see this prior post regarding apparent secret FCPA enforcement) as well as FCPA charges that are currently under seal and thus not yet publicly known.  The later point is obviously valid as the public can only keep FCPA enforcement statistics based on information currently in the public domain.

In other respects however, Stokes merely did what former DOJ Deputy Assistant Attorney General Denis McInerney did when I highlighted the same general statistics at a public conference in May 2013 (see here); in other words Stokes talked about the small minority of cases in which a corporate employee has indeed been charged in connection with a corporate FCPA enforcement action.

In addition, Stokes also mentioned a number of instances in which the DOJ has charged individuals with FCPA charges. This of course is true, but as highlighted in prior posts here and most recently here, it must be noted that the DOJ appears to follow a clear “clustering” approach in charging individuals.  For instance (with statistics calculated through the end of 2013,  53% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just four cases and 75% of the individuals charged by the DOJ since 2008 have been in just nine cases.  In other words, just a few cases (such as 22 individuals in the failed Africa Sting case, 9 individuals in the Haiti Teleco case, 8 individuals in the Control Components case, 8 individuals in the Siemens case – and most recently 6 individuals in the April 2014 Indian mining license case) account for the substantial bulk of individual FCPA charges.

For approximately two years (see prior posts here and here) I have been keeping the below statistics.

I now “show my work” and the below data is based on public information found on the DOJ and SEC’s websites (see here and here).

I invite the DOJ and SEC to refute these numbers and commit to publishing any response the DOJ and SEC sends to me.  I can be e-mailed at fcpaprofessor@gmail.com

For starters, the easiest statistic is the fact that the SEC has not brought an individual FCPA enforcement action in approximately 2.5 years.  As clearly evidenced from the SEC’s FCPA website, the last individual FCPA action was in April 2012 against Garth Peterson.

The next statistic is that since 2008, the SEC has brought 68 corporate FCPA enforcement actions.  As highlighted by the below chart, 12 of these actions have resulted in a related enforcement action against a company employee.  Thus, 82% of corporate SEC FCPA enforcement actions since 2008 have not resulted in any related enforcement action against a company employee.

SEC

Year

 

Corporate Action

Related Action Against Any Employee 

2008

Fiat

No

2008

Siemens

Yes

2008

Con-Way

No

2008

Faro

Yes

2008

Willbros

Yes

2008

AB Volvo

No

2008

Flowserve

No

2008

Westinghouse Air Brake

No

2009

UTStarcom

No

2009

AGCO

No

2009

Nature’s Sunshine

Yes

2009

Helmerich & Payne

No

2009

Avery Dennison

No

2009

United Industrial Corp.

Yes

2009

Novo Nordisk

No

2009

ITT Corp.

No

2009

KBR/Halliburton

Yes

2010

Alcatel-Lucent

No

2010

RAE Systems

No

2010

Panalpina

No

2010

Pride Int’l

Yes

2010

Tidewater

No

2010

Transocean

No

2010

GlobalSantaFe

No

2010

Noble Corp.

Yes

2010

Royal Dutch Shell

No

2010

ABB

No

2010

Alliance One

Yes

2010

Universal

No

2010

GE/Ionics

No

2010

Eni/Snamprogetti

No

2010

Veraz Networks

No

2010

Technip

No

2010

Daimler

No

2010

Innospec

Yes

2010

Natco

No

2011

Magyar Telekom

Yes

2011

Aon

No

2011

Watts Water

Yes

2011

Diageo

No

2011

Armor Holdings

No

2011

Tenaris

No

2011

Rockwell

No

2011

Johnson & Johnson

No

2011

Comverse

No

2011

Ball Corp.

No

2011

IBM

No

2011

Tyson

No

2011

Maxwell Tech.

No

2012

Eli Lilly

No

2012

Allianz

No

2012

Tyco

No

2012

Oracle

No

2012

Pfizer

No

2012

Orthofix

No

2012

Biomet

No

2012

Smith & Nephew

No

2013

Philips

No

2013

Parker Drilling

No

2013

Ralph Lauren

No

2013

Total

No

2013

Diebold

No

2013

Stryker

No

2013

Weatherford Int’l

No

2013

ADM

No

2014

Alcoa

No

2014

HP

No

2014

Smith & Wesson

No

The next statistic is that since 2008, the DOJ has brought 63 corporate FCPA enforcement actions.  As highlighted by the below chart, 16 of these actions have resulted in a related enforcement action against a company employee.  Thus, 75% of corporate FCPA enforcement actions since 2008 have not resulted in any related enforcement action against a company employee.

DOJ

Year

Corporate Action

Related Action Against Any Employee 

2008 Faro No
2008 AGA Medical No
2008 Nexus Technology Yes
2008 Fiat No
2008 Flowserve No
2008 AB Volvo No
2008 Siemens Yes
2008 Willsbros Yes
2008 Westinghouse Air Brake No
2009 Control Components Yes
2009 Helmerich & Payne No
2009 KBR / Halliburton Yes
2009 Latin Node Yes
2009 UTStarcom No
2009 AGCO No
2009 Novo Nordisk No
2010 Innospec No
2010 Daimler No
2010 Technip No
2010 Snamprogetti No
2010 Alliance One Yes
2010 Universal No
2010 Mercator Yes
2010 ABB Yes
2010 Lindsey Yes
2010 Panalpina No
2010 Pride International No
2010 Tidewater No
2010 Transocean No
2010 Noble No
2010 Royal Dutch Shell No
2010 RAE Systems No
2010 Alcatel-Lucent Yes
2011 Maxwell Yes
2011 Tyson No
2011 JGC No
2011 Comverse No
2011 Johnson & Johnson No
2011 Tenaris No
2011 Cinergy Telcommunications Yes
2011 Armor Holdings Yes
2011 Bridgestone Yes
2011 Aon No
2011 Magyar / Deutsche Telekom No
2012 Marubeni No
2012 Smith & Nephew No
2012 BizJet / Lufthansa Yes
2012 Biomet No
2012 Data Systems & Solutions No
2012 Orthofix No
2012 NORDAM Group No
2012 Pfizer No
2012 Tyco No
2013 Parker Drilling No
2013 Ralph Lauren No
2013 Total No
2013 Diebold No
2013 Weatherford No
2013 Bilfinger No
2013 ADM No
2014 Alcoa No
2014 Marubeni No
2014 HP No
Posted by Mike Koehler at 12:03 am. Post Categories: FCPA StatisticsIndividual Enforcement Action




October 13th, 2014

An M&A Case Study

The Foreign Corrupt Practices Act is a niche practice area for sure.

At the same time, FCPA issues intersect with other business law issues such that the FCPA is a fundamental skill set for all business lawyers and advisers, including in the mergers and acquisitions context.

The FCPA enforcement and related actions in connection with the 2010 acquisition of Watts Valve Changsha Co. Ltd. by China Valves Technology, Inc. (“China Valves”) has turned into a full-fledged case study on this issue as a result of the September 29th SEC action against China Valves and various of it executives – an action that has generally flown under the radar screen in the FCPA space.

First, some background.

As highlighted in this post, in October 2011 the SEC issued (here) an administrative cease and desist order against Watts Water Technologies, Inc. (“Watts”) and Lessen Chang concerning violations of the FCPA’s books and records and internal control provisions.  The conduct at issue focused on Watts Valve Changsha Co. Ltd. (“CMV”), a wholly-owned Chinese subsidiary operated by Watts and sold in 2010.

Specifically and according to the SEC, “employees of CWV made improper payments to employees of certain [Chinese] design institutes … to influence the design institutes to recommend CWV valve products to [SOEs] and to create design specifications that favored CWV valve products.”   The SEC found that “CWV’s improper payments generated profits for Watts of more than $2.7 million.”

Based on the above conduct, Watts agreed to pay approximately $3.8 million ($2.8 million in disgorgement, $820,000 in prejudgment interest and a $200,000 civil monetary penalty).  Chang (a U.S. citizen and former interim general manager of CWV)  agreed to pay a $25,000 civil monetary penalty.

As indicated above, the FCPA enforcement action against Watts in 2011 was based on the conduct of CMV – an entity Watts had sold prior to the FCPA enforcement action.

The purchaser of CMV was China Valves.  More on that below including the recent enforcement action against China Valves and various executives.

Prior to this recent enforcement action however, and as highlighted in this prior post, Watts filed a civil lawsuit against its U.S.-based law firm for legal malpractice claiming that the law firm’s legal services in connection with Watt’s acquisition of CMV was inadequate based on insufficient due diligence.  As highlighted in this prior post, the U.S. law firm strenuously denied the allegations, yet the action was reportedly settled and little details disclosed.

The take-away point thus far in the story is that one acquired entity caused FCPA scrutiny for the acquiring company and civil scrutiny for the law firm advising the acquirer.  

Fast forward to the recent SEC action against China Valves and certain of its executives (see here for the SEC release and here for the complaint).  According to the SEC complaint, China Valves is a Nevada corporation with operations solely in China which became a U.S. issue in December 2007 through a reverse merger.

China Valves purchased CMV from Watts in January 2010 and according to the SEC did so with “full knowledge” of the FCPA issues facing CMV.  According to the SEC, when China Valves purchased CMV, China Valves paid “$2.2 million [in] outstanding sales commissions to CMV’s sales force – the very same commissions Watts declined to pay because of suspected FCPA violations.”

The above two allegations, along with several others that do not relate to the SEC, serve as the basis for the SEC’s claim that China Valves and various of its executives engaged in fraud.  For instance, the SEC alleged that the Form 8-K China Valves filed with the SEC announcing the acquisition “omitted any mention of the FCPA investigation of CMV, or that the payment of unrecorded liabilities included payment of $2.2 million in sales commissions that were not recorded on CMV’s books and that Watts had determined were not FCPA compliant.”

The SEC’s complaint also contains other similar allegations regarding China Valve’s other SEC filings over a two year period. Specifically , the SEC alleged that these filings contained material false statements and omissions “because a reasonable shareholder would want to know the true nature of the acquisition … about the FCPA Investigation at CMV, and that [China Valves] paid amounts that potentially violated the FCPA.”

In short, the alleged improper conduct at CMV created scrutiny not only for the first acquiring company (Watts) and Watt’s counsel in the form of a malpractice action, but also the second acquiring company (China Valves) and its executives.

This full-fledged M&A case study should put the FCPA on the radar screen for all business lawyers and advisors, including in the merger and acquisitions context.

Posted by Mike Koehler at 12:03 am. Post Categories: China ValvesMerger IssuesWatts Water Technologies