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Customer Reward Programs

At this moment, it is likely that some company operating in China has a customer rewards program whereby customers are awarded points based on the level of purchases.

At this moment, it is likely that some person employed by an entity with some level of state-ownership or control just received an iPad or camera because the individual redeemed points under the program based on the purchase the individual previously authorized.

The SEC is concerned about the customer rewards program and whether it complies with the FCPA and the company is spending hundreds of dollars an hour investigating the program so that it can present its conclusions to the SEC and the DOJ.

Your first response upon reading the above paragraph might be – are you serious or is this paragraph from the Onion (see here), a satire news organization that parodies just about everything.

Nothing make believe about the first paragraph, it is derived from RAE Systems May 12th proxy statement filed with the SEC.

In the filing (here), RAE Systems stated as follows.

“In the course of telephonic discussions between April 15 and 19, 2011, outside counsel for [RAE] was asked by the SEC whether RAE China had adopted a sales program whereby customers are awarded points based on the level of their purchases of RAE products and are then eligible to redeem those points at year-end for gifts such as iPads or cameras, and whether such a program complies with the Foreign Corrupt Practices Act (“FCPA”). We do not believe that any RAE China personnel have been engaging in such a practice. We are conducting a review in response to the SEC’s inquiry, and intend to provide our conclusions to the SEC and Department of Justice.”

In December 2010, RAE Systems resolved a DOJ/SEC enforcement action concerning the acts of its subsidiaries’ joint venture partners in China. See here for the prior post. RAE Systems agreed to pay approximately $2.95million in fines and disgorgement and agreed to a three-year DOJ non-prosecution agreement (here).

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The clock is now ticking to see who will publish (presumably) the first client alert or host the first webinar on “The FCPA Compliance Risks of Customer Rewards Programs.”

In the meantime, there is likely a “foreign official” somewhere with his eye on the six piece stoneware gourmet mixing bowl set (here) available for 2000 points under Coke’s rewards program.

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Interested in reading more about the Harris Corporation enforcement action? As highlighted earlier this week (see here) the recent Lindsey Manufacturing case was not the first instance of a company putting the DOJ to its burden of proof in an FCPA trial. Harris Corporation (and certain of its executives) did just that and prevailed in an FCPA trial. As described in the post, U.S. District Judge Charles A. Legge (N.D. Cal.) directed a verdict of acquittal after the DOJ’s case.

Michael H. Huneke (Hughes Hubbard & Reed – see here) was kind to send the Defendants’ motion for acquittal, the DOJ’s response, and the transcript of oral arguments and Judge Legge’s ruling.

If old FCPA enforcement actions are your thing – here you go! If others have interesting FCPA enforcement documents from … say 1978 – 1995 – send them my way.

A good weekend to all.

Judge Selna Concludes “The Question of Whether State-Owned Companies Qualify as Instrumentalities Under the FCPA is a Question of Fact”

Yesterday, U.S. District Court Judge James Selna denied the Carson “foreign official” challenge. See here for his written decision.

Judge Selna concluded that “the question of whether state-owned companies qualify as instrumentalties under the FCPA is a question of fact.”

Judge Selna stated that “several factors bear on the question of whether a business entity constitutes a government instrumentality” including the following.

• The foreign state’s characterization of the entity and its employees;

• The foreign state’s degree of control over the entity;

• The purpose of the entity’s activities;

• The entity’s obligations and privileges under the foreign state’s law,
including whether the entity exercises exclusive or controlling power to
administer its designated functions;

• The circumstances surrounding the entity’s creation; and

• The foreign state’s extent of ownership of the entity, including the level of
financial support by the state (e.g., subsidies, special tax treatment, and
loans).

[In April, Judge Howard Matz (C.D. of Cal.), in denying the Lindsey “foreign official” challenge (see here for the prior post) identified the following “non-exclusive list” of “various characteristics of government agencies and departments” that fall within the description of instrumentality:

• The entity provides a service to the citizens – indeed, in many cases to all the inhabitants – of the jurisdiction.

• The key officers and directors of the entity are, or are appointed by, government officials.

• The entity is financed, at least in large measure, through governmental
appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties, such as entrance fees to a national park.

• The entity is vested with and exercises exclusive or controlling power to administer its designated functions.

• The entity is widely perceived and understood to be performing official (i.e., governmental) functions]

Judge Selna stated that his above-listed “factors are not exclusive, and no single factor is dispositive.” “As applicable here, their chief utility is simply to point out that several types of evidence are relevant when determining whether a state-owned company constitutes an ‘instrumentality’ under the FCPA – with state ownership being only one of several considerations. Accordingly, for these reasons and those discussed in more detail below, Defendants’ Motion is not entirely segregable from the evidence to be presented at trial, and therefore must be denied.”

Later in the opinion, Judge Selna stated as follows. “Admittedly, a mere monetary investment in a business entity by the government may not be sufficient to transform that entity into a governmental instrumentality. But when a monetary investment is combined with additional factors that objectively indicate the entity is being used as an instrument to carry out governmental objectives, that business would qualify as a governmental instrumentality.”

Judge Selna found that the “meaning of the statutory text is clear,” “that the meaning of instrumentality should be considered both within the context of the preceding terms of the FCPA [departments and agencies] and in view of the FCPA as a whole,” and that the “use of the term instrumentality in the FCPA produces no such crisp exclusion of a state-owned entity.” Judge Selna stated: “to the contrary, a state-owned entity – just like an agency or department – is a modality through which a government may conduct its business.”

Judge Selna then noted that “the fact that corporations have long been used in this country to carry out governmental objectives supports the conclusion that state-owned companies could be considered an instrumentality.” He stated that “given this country’s long history of using corporations to carry out governmental objectives, the Court rejects the idea that governmental and commercial actions are necessarily incompatible.”

Judge Selna also noted as follows. “The fact that Congress passed FSIA a year before the FCPA, and defined instrumentality to include state-owned companies, ultimately supports the Court’s conclusions that an instrumentality could include such entities under the FCPA.”

Judge Selna found “that the statutory language of the FCPA is clear, that the statutory scheme is coherent and consistent, and that resort to the legislative history of the FCPA is unnecessary.”

Under the heading “Conclusion for Statutory Construction,” Judge Selna stated as follows. “The Court concludes that some business entities may be considered an instrumentality but this is a fact-specific question that depends on the nature and characteristics of the business entity.” Elsewhere, Judge Selna similarly stated as follows. “state-owned companies may be considered instrumentalities under the FCPA, but whether such companies qualify as instrumentalities is a question of fact.”

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Earlier this week, Judge Selna issued an “Order Regarding Briefing Schedule and Hearing Date.”

Among other things, Judge Selna ordered that “the parties shall submit their proposed jury instructions and legal support for the “instrumentality” and scienter instructions on June 30, 2011. Objections to disputed instructions shall be filed no later than July 25, 2011.” “The hearing to address the “instrumentality” and scienter jury instructions, Defendants’ motion to dismiss the Travel Act charges, and Defendants’ Grand Jury motions, shall be scheduled for August 12, 2011 at 1:30 p.m.”

Tenaris Resolves FCPA Enforcement – SEC Uses a DPA For the First Time

Once upon a time there was a law enforcement system in this country where companies that committed crimes or engaged in other wrongdoing were prosecuted criminally and/or civilly and where companies that did not commit crimes or did not engage in other wrongdoing were not prosecuted. That system has to a large extent been abandoned by the DOJ years ago – particularly in the FCPA context – and now that system appears to be crumbling at the SEC as well.

In December 2010, the SEC entered into its first non-prosecution agreement – albeit not in the FCPA context (see here for the prior post) and yesterday the SEC announced its first deferred prosecution agreement – of any kind – against Tenaris to resolve an FCPA enforcement action.

As has generally happened with the DOJ’s enforcement of the FCPA, the SEC’s enforcement of the FCPA will now be even further removed from judicial scrutiny and resolutions will now more frequently be negotiated over private conference room tables.

This is a troubling development on many fronts and it gives the public little confidence that our laws are enforced in a consistent and transparent manner or that regulators and companies are being held accountable.

With that introduction, let’s take a look at the Tenaris enforcement action.

Tenaris (here) “is a leading supplier of tubes and related services for the world’s energy industry and certain other industrial applications.” Tenaris is headquartered in Luxembourg and its American Depository Receipts (“ADRs”) are listed on the New York Stock Exchange. In FCPA-speak, that makes Tenaris an “issuer.”

The enforcement action involved both a DOJ and SEC component. Total settlement amount was $8.9 million ($3.5 million criminal penalty via a DOJ non prosecution agreement; $5.4 million in disgorgement and prejudgment interest via a SEC deferred prosecution agreement … its feels odd just writing that).

Both enforcement actions involve commission payments to an Uzbekistan agent to receive confidential bidding documents in connection with tenders conducted by alleged Uzbekistan state-owned or state-controlled companies. The enforcement actions state that Tenaris employees “were aware or substantially certain that all or a portion” of the commission payments would be offered by the Agent to employees at the SOEs and that certain of the payments were paid via a wire transfer through a New York bank account.

DOJ

The NPA (here – dated March 14, 2011) begins as follows.

The DOJ “will not criminally prosecute” Tenaris and its subsidiaries and affiliates for any crimes “related to Tenaris’s knowing violations of the anti-bribery and books and records provisions of the FCPA … arising from and related to the making of improper payments by employees and agents of Tenaris to officials of OJSC O’ztashqineftgaz (“OAO”), an Uzbekistan state-controlled oil and gas production company, and the accounting and record-keeping associated with these improper payments.”

The NPA has a term of two years and Tenaris admitted, accepted, and acknowledged responsibility for the below described conduct. As is typical in FCPA NPAs or DPAs, Tenaris agreed “not to make any public statement contradicting” the described conduct.

According to the NPA, Tenaris has more than 24,000 employees around the world and it conducts operations in 12 countries and its customers include the world’s leading oil and gas companies. The NPA states that Tenaris’s operations included supplying steel pipe and related servics in the Caspian Sea region, including Uzbekistan. This region accounted for approximately 1% of Tenaris’s total global sales and services from 2003 to 2008. Tenaris’s Caspian Sea business was run from offices in Azerbaijan and Kazakhstan.

According to the NPA, “Tenaris obtained oilfeld services business in the Caspian Sea region in part by bidding on contracts solicited by state-owned companies or governmental agencies to provide pipeline used in the development and production of oil and natural gas. Tenaris often used agents to assist in biddig on government contracts in the Caspian Sea region.”

The conduct at issue focused on OAO contracts between 2006 and 2007. According to the NPA, OAO “was a wholly owned subsidiary of Uzbekneftegaz, the state holding company of Uzbekistan’s oil and gas industry” and during the relevant time period “Uzbekneftegaz and OAO were wholly owned by the Government Uzbekistan.” The NPA then states, “OAO was an agency and instrumentality of the Government of Uzbekistan and its employees were foreign officials within the meaning of the FCPA.”

According to its website (here) the current ownership of OAO is as follows: “government’s share – 51%; foreign investors’ share – 37.27%; free market trade share – 11.73%.”

According to the NPA, in December 2006, Tenaris “was introduced to a potential agent (“OAO Agent”) to help Tenaris bid on additional contracts with OAO” and “as an incentive to retain the OAO Agent, the OAO Agent offered Tenaris access to confidential bidding information of competitors obtained from officials in OAO’s tender department, who would allow Tenaris to submit revised bids after reviewing the confidential information.” The NPA states that “Tenaris would use the confidential competitor bid information to submit revised bids in order to increase the likelihood of Tenaris being awarded the underlying contract.”

According to the NPA, Tenaris “agreed to pay the OAO Agent a fee of 3.5% for these services” and that Employees A, B, C, and D (non-U.S. citizens but “employees and agents” of Tenaris) “were aware or substantially certain that all or a portion of such money would be offered by the OAO Agent to one or more OAO employees.”

The NPA then lists approximately $19.4 million in contracts Tenaris obtained using this system and states that certain of the commission payments to the OAO Agent were paid via wire transfer through a New York bank account.

Under the heading “Additional Improper Conduct to Avoid Detection,” the NPA states that in November 2007 the above referenced employees learned of complaints from company competitors as to the bidding process on certain of the contracts and that an investigation by Uzbekekspertiza JSC (a Uzbekistani government agency) might commence. According to the NPA, “in an effort to avert the potential investigation of the bidding process, the OAO Agent recommended to Tenaris that the OAO Agent make an improper payment to Uzbekekspertiza officials to refrain from recommending the investigation against Tenaris or re-opening the bidding process to Tenaris’s competitors” and that the employees “agreed to pay the recommended payment” to the officials to avert the investigation. However, the NPA states as follows: “the investigation did not uncover evidence that any such payment was made.”

As to books and records, the NPA states that “the books, records and accounts reflecting Tenaris’s transactions … were incorporated into Tenaris’s consolidated year-end financial statements” and that “Tenaris knowingly failed to make and keep books, records, and accounts that accurately and fairly reflected Tenaris’s transactions … and the payments to the OAO Agent.”

Based on the above conduct, Tenaris agreed to pay a $3.5 million criminal penalty. The NPA states as follows. “This substantially reduced monetary penalty reflects the DOJ’s determination to meaningfully credit Tenaris for its extraordinary cooperation with the Department, including its timely and voluntary disclosure, its subsequent investigation, and the effective manner in which Tenaris conveyed information to the [DOJ and the SEC].”

Inquiring minds want to know – how much was the penalty “substantially reduced?”

According to the NPA, the DOJ agreed to resolve the action via an NPA based, in part, on the following factors.

(a) Tenaris’s timely, voluntary, and complete disclosure of the conduct at issue;

(b) Tenaris’s extensive, thorough, real-time cooperation with the DOJ and the SEC;

(c) subsequent to its voluntary disclosure of certain conduct unrelated to Uzbekistan, but prior to discovery of the unlawful conduct related to Uzbekistan, Tenaris’s voluntary investigation of the Company’s business operations throughout the world, specifically including the thorough and effective manner in which this investigation was carried out and information was disclosed to the DOJ and SEC;

(d) Tenaris’s remedial efforts already undertaken and to be undertaken, including voluntary enhancements to its compliance program; and

(e) Tenaris’s commitment to implement enchanced compliance measures described in the NPA.

Based on (c) above, inquiring minds want to know – what did Tenaris originally voluntarily disclose?

Under the heading, “Disclosure and Investigation of Improper Activity,” the NPA states as follows.

“In or about March 2009, a third party disclosed to Tenaris information indicating that certain sales agency payments were made by Tenaris in relation to business in a country other than Uzbekistan. These payments appeared to be for an improper purpose. In response to this information, Tenaris’s Audit Committee retained outside counsel to investigate the allegations. Thereafter, in a Form 20-F filed with the SEC on or about June 30, 2009, Tenaris disclosed information related to these allegations. Tenaris also made a prompt, full disclosure of the information to the [DOJ] and the [SEC] concerning the allegations. In or around July 2009, counsel for Tenaris met with the [DOJ and SEC] and disclosed preliminary findings of the internal investigation. Such disclosure was related to facts known to Tenaris at the time but was not related to transactions in Uzbekistan. Tenaris’s counsel also informed the [DOJ and the SEC] that it would conduct a thorough, world-wide investigation of its business operations and internal controls and would report the findings to the [DOJ and SEC]. Tenaris’s investigation plan included significant collection and review of a substantial quantity of electronic and paper records from the company and third parties from multiple locations around the world, translation of all relevant materials into English, subsequent interviews of relevant personnel including senior executives and third parties, and review and testing of internal controls and compliance procedures. In or around June 2010, Tenaris disclosed the factual findings from its internal investigation in a thorough, complete and useful manner to the [DOJ and SEC]. As a result of its internal investigation, Tenaris discovered facts and transactions in Uzbekistan that constitute the violations set forth above. Tenaris voluntaly engaged in certain remediation efforts to include termination and disciplinary measures of the persons involved. Tenaris also thoroughly reviewed its pre-existing compliance program and applicable internal controls, and undertook voluntary, affirmative steps to update and improve its compliance program and to implement enhanced compliance measures and controls. Tenaris also agreed to provide real and meaningful cooperation with the [DOJ and SEC] and any law enforcement agency in connection with this matter.”

Again, inquiring minds want to know – what did Tenaris originally voluntarily disclose?

See here for the DOJ’s release announcing the enforcement action.

SEC

The SEC DPA (here) is based on the same core conduct described above.

As to internal controls, the SEC DPA states as follows.

“… Tenaris’s system of internal controls failed to detect or prevent payments to OAO officials in an effort to obtain and retain business in Uzbekistan, including a failure to ensure that proper and effective due diligence was conducted on the Agent for the OAO contracts, and that the review process for authorization or approval of payments to the Agent failed to detect or prevent the illegal payments to OAO officials. Tenaris’s policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act (“FCPA”) compliance in place at that time warranted further strengthening to ensure effective compliance with the related laws.”

One of the undertakings Tenaris agreed to in the DPA was the following.

“To conduct effective training regarding anticorruption and compliance with the FCPA for (1) all current officers and managers, (2) all employees working in Finance, Accounting, Internal Audit, Sales, and Government Relations, (3) all other employees working in positions Tenaris deems to involve activities implicated by Tenaris’s policies regarding anticorruption and compliance with the FCPA, on or before December 31, 2011, and (4) all such future employees within 90 days oftheir affiliation with Tenaris.”

Under the terms of the two-year DPA, Tenaris, without admitting or denying the SEC’s allegations (the same way defendants are ordinarly allowed to resolve SEC enforcement actions), agreed to pay $5.4 million in disgorgement and prejudgment interest.

Pursuant to the DPA, Tenaris agreed “not to contest or contradict the factual statements” supporting the Statement of Facts. As noted in this prior post when the SEC announced its intention to make use of NPAs and DPAs, “[a]n admission or an agreement not to contest the relevant facts underlying the alleged offenses” is a key factor the SEC will consider in determining whether a company should receive a deferred prosecution agreement.

Like the SEC’s prior NPA, the Tenaris DPA is very similar to DOJ DPAs and NPAs.

In a release (here) the SEC touted its first use of a DPA.

Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows. “The Tenaris foreign bribery scheme was unacceptable and unlawful, but the company’s response demonstrated high levels of corporate accountability and cooperation. The company’s immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training made it an appropriate candidate for the Enforcement Division’s first Deferred Prosecution Agreement. Effective enforcement of the securities laws includes acknowledging and providing credit to those who fully and completely support our investigations and who display an exemplary commitment to compliance, cooperation, and remediation.”‬

Cheryl Scarboro (Chief of the SEC’s FCPA Unit) stated as follows. “Tenaris’s conduct was clearly in violation of the FCPA. The company’s employees bribed government officials in Uzbekistan to obtain government contracts. But when Tenaris discovered the illegal conduct, it took noteworthy steps to address the violations and significantly enhance its anti-corruption policies and practices to remediate weaknesses in its internal controls.”

Robert Giuffra, Jr. of Sullivan & Cromwell (here) represented Tenaris.

“Foreign Official” – What Others Are Saying

What mattered most from the Lindsey matter was not so much the jury verdict (see here for the prior post), but Judge Matz’s pre-trial decision on the “foreign official” issue. This is from a jurisprudence standpoint because obviously the jury verdict very much mattered to the defendants, their friends and family, and other employees of Lindsey Manufacturing and I am not trying to diminish or make light of the very human element of the jury verdict.

While we await final rulings in the Carson and O’Shea “foreign official” challenges, let’s revisit Judge Matz’s April 20th ruling (see here for the previous post) and see what others are saying.

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In this client alert, King & Spalding stated as follows. “In his decision, Judge Matz provided a helpful but non-exclusive list of illustrative criteria for determining whether a state-owned entity is sufficiently similar to a government agency or department to consider it a government ‘instrumentality.’ […] Importantly, although in this case the court found that CFE may be an instrumentality of the Mexican government, the court’s opinion leaves ample room for argument in future cases that other state-owned corporations – such as those that do not share many characteristics with government departments and agencies, and those that are only
partially owned by a foreign government – may not fall within the FCPA’s reach.”

Luce Forward, in this eUpdate, stated as follows. “The Court, however, nimbly sidestepped Lindsey’s legislative history argument. It simply cited the Mexican government’s descriptions of the role of CFE in the government hierarchy and noted that in CFE’s own (English language) website it identified itself as a government agency (and by implication, therefore, a government instrumentality). The Court said its ruling was based on “simple statutory construction” and that its finding on the status of CFE was an issue of law, not of fact, and wouldn’t be subject to further evidence on that question during trial.”

This FCPA Update by Debevoise & Plimpton provides a lengthy summary of the recent “foreign official” challenges as well as an overview of Judge Matz’s ruling.

In this write-up, Fulbright & Jaworski stated as follows. “The Lindsey Manufacturing ruling is significant as it represents a victory for the DOJ that will, at least for the present time, likely strengthen and embolden the government’s efforts to bring enforcement actions against companies and individuals based on its expansive interpretation of the term “foreign official.” Additionally, while it is not certain to what degree the Lindsey Manufacturing ruling will affect the Carson and O’Shea courts’ decisions, it is probable that the decision will be weighed as both courts consider whether to narrow the current government view of who is a “foreign official” for purposes of FCPA enforcement under the respective facts of each of those cases. The next two decisions will be highly anticipated. Certainty regarding who will be considered a “foreign official” under the FCPA and, thus, who should be considered a potential recipient of an improper payment under the Act, is critical as companies determine how best to formulate an effective compliance program in the current FCPA enforcement environment.”

In this memorandum, Simpson & Thacher stated as follows. “The ruling is not a whole-hearted endorsement of DOJ’s broad interpretation of the FCPA’s definition of “foreign official.” The judge did not rule that employees of state-owned entities necessarily fall within the definition of “foreign official.” Rather, he merely left open the possibility that employees of state-owned entities – depending on the specific facts in play – will be “foreign officials.” Indeed, while the judge ultimately ruled that the CFE officers in question may be “foreign officials,” he did so only after a close analysis of factual circumstances that many practitioners might agree presented an easy case for this conclusion. For instance, unlike other types of state owned businesses, CFE provides a service that is constitutionally mandated as an exclusive state function; and CFE even describes itself as a government “agency” on its own website. It remains an open question as to whether employees of other state-owned enterprises that do not share these features – such as a state-owned steel company – would be found to fall within the definition of foreign official. Nonetheless, the judge provided some new guidance for FCPA practitioners seeking to determine whether an entity might be an instrumentality of a foreign government. In the end, the decision leaves ample room for litigants in other situations to dispute whether state-owned enterprises are covered by the FCPA.”

In this summary, WilmerHale stated as follows. “Notably, the Court’s ruling is a very narrow one. First, the Court clearly rejected the Defendants’ argument that no corporation could qualify as an “instrumentality.” Second, the Court left open the question of whether all corporations that perform some public function qualify as “instrumentalit[ies].” Finally, the Court’s ruling about CFE was based on unusual facts which were unique to the entity. These key aspects of the Court’s ruling appear to leave the door open to future challenges.”

In this summary, Haynes & Boone stated as follows. “The DOJ and the SEC have been aggressively pushing an expansive interpretation of “foreign official” for years. In the past, the Government’s targets have chosen to settle rather than press the issue and face a jury. That has kept the Government’s analysis from judicial scrutiny. Noriega is the first of several ongoing cases that bucks this trend, puts the Government to its proof, and tests its interpretation of the statute. The result should be a clearer understanding of who is a foreign official for FCPA purposes. The decision released last week is a strong affirmation of the Government’s more forward-leaning stance on the question. The decision’s five-factor test to determine whether a state-owned corporation is an instrumentality of the state offers clarity on a narrow but important question facing global companies doing business overseas. If the foreign company is created by statute, overseen by government officials or appointees, financed through taxes, exercises exclusive control over its designated functions, and is widely understood to be performing government functions, then that company is likely an instrumentality of a government and the FCPA applies. The potential game-changer in the opinion is the Court’s willingness to accept the Government’s contention that “foreign official” should be construed in light of the OECD Convention. The Convention definition of “public enterprise” includes “any enterprise” over which a government “may, directly or indirectly, exercise a dominant influence.” In certain jurisdictions where governments play a more active role in the economy, the Government may have many different ways to directly or indirectly exercise dominant influence. This could potentially expand the scope of covered foreign officials under the FCPA in many jurisdictions.”

One Win, One Loss

The conviction last week of Lindsey Manufacturing Inc. (see here for the prior post) was indeed the first instance of a company being tried and convicted on FCPA violations – as noted in the DOJ’s release (here).

However, contrary to numerous media reports, it was not the first instance of a company putting the DOJ to its burden of proof in an FCPA trial.

That first occurred in 1990-1991 when Harris Corporation (and certain of its executives) prevailed in an FCPA trial.

Thus, the DOJ’s record in corporate FCPA trials is one win, one loss.

This post summarizes the Harris Corporation enforcement action and includes information gleaned from original source newspaper accounts.

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In 1990, Harris Corporation (“Harris”), John D. Iacobucci, and Ronald L. Schultz were charged in a criminal indictment (here) filed in U.S. District Court – Northern District of California.

As alleged in the indictment, Harris was a Delaware publicly-traded corporation headquartered in Melbourne, Florida and through its Digital Telephone Systems (“DTS”) division it manufactured telephone switching systems. Iacobucci was the Vice President and General Manager of DTS and Schultz was, at various times, Director of Human Relations and Facilities at DTS, Director of Administration at DTS and responsible for Contracts Administration.

Robert O’Hara (an unindicted co-conspirator – more on O’Hara below) was the President and sole stock-holder of Polo Associations Corporation, Inc. – a Delaware corporation created by O’Hara “to engage in the business of advising telecommunications companies of ways to obtain business in Latin American countries, particularly Colombia.”

The conduct at issue involved “The Empress Nacional de Telecomunicaciones or Telecom” an alleged “instrumentality of the Government of Colombia responsible for the operation of telex services, maritime communications, and long distance and international telephone and telegraph services within the country of Colombia.” According to the indictment, “Telecom was an instrumentality of the Government of Colombia within the meaning of the FCPA.” However, as detailed below, none of the improper payments at issue were alleged to have been paid to Telecom officials.

The indictment charged that Harris, Iacobucci, Schultz and O’Hara conspired to violate the FCPA by paying and authorizing the payment of money to O’Hara “while knowing that a portion of such money” would be offered or given, directly or indirectly, to “foreign officials, that is, officials of the Government of Colombia” in order to influence the officials to award government telecommunications contracts to Harris in violation of the FCPA. The indictment further charged a conspiracy to violate the FCPA’s books and records provisions.

According to the indictment, part of the conspiracy was that Harris retained O’Hara “as a consultant based upon the representation of O’Hara that he had connections with officials of the Government of Colombia that he would use to assist” Harris in obtaining telecommunications contracts. According to the indictment, Harris agreed to pay O’Hara a 10% commission of the value of any telecommunications contracts entered into between Harris and Telecom.

The indictment does not allege that any payments went to officials of Telecom, but rather that payments went to a “member of the Camara de Representates (CDR), the national legislative of Colombia;” a local Colombian company “that was owned in part by a foreign official, that is, a member of the CDR;” and “various officials of the Government of Colombia.”

The indictment alleged specific meetings and documents that set into motion the bribery scheme.

In addition to the conspiracy charge, the indictment also charged substantive FCPA anti-bribery and FCPA books and records offenses.

Original source newspaper reports from the time detail as follows.

Theodore S. Greenberg, deputy chief of the Fraud Section of the Criminal Division, stated upon issuance of the indictment – “The department continues to view violations of the Foreign Corrupt Practices Act as serious matters and will pursue them accordingly.”

A statement from John Hartley, Chairman and Chief Executive of Harris, stated as follows. “We believe that these charges are based upon a distorted view of the facts, and they represent a radical departure from existing enforcement policies. We have cooperated fully with the Justice Department in its investigation of the allegations, providing clear evidence refuting the charges.”

At the time of the indictment, Harris Corp. was ranked 57th among Department of Defense contractors in terms of total dollar volume of contracts awarded.

Harris, Iacobucci, and Schultz put the DOJ to its burden of proof and the criminal trial began on March 4, 1991. The San Francisco Examiner stated that “the trial is significant because the Justice Department prosecutes only a few such foreign bribery cases a year.”

The same article contained the following background on the case. “The government’s case is based on the testimony of a whistle-blower who handed over company documents to the FBI and a consultant who has pleaded guilty to helping Harris Corp. falsify its records. […] The defendants insist that they authorized only legitimate consulting payments to secure Colombia’s business and claim that the government’s case rests on trumped-up charges by a disgruntled employee. […] At a pretrial hearing, U.S. District Judge Charles A. Legge rejected a request by defense attorneys to exclude dozens of Harris Corp. documents from the trial. They claim that [the whistleblower] stole the documents on behalf of the FBI. […] A key prosecution witness is Robert O’Hara, a consultant who is based in New York. He pleaded guilty in August to a charge of aiding Harris Corp. with falsifying its financial records.”

On March 19, 1991, Judge Legge, “after hearing the prosecution’s case … granted a verdict of acquittal … the defense was not called upon to present its case.” The San Francisco Chronicle stated as follows. “Shortly after the government rested its case, U.S. District Judge Charles Legge of San Francisco ruled from the bench that ‘no reasonable jury’ could convict the company nor its executives on any of the five bribery-related counts for which they were indicted. Citing insufficient evidence, Legge said the government had failed to show any intent by the defendants to enter into a criminal conspiracy. Legge also said it was the first time in his six years on the federal bench that he had dismissed a criminal case at mid-trial for lack of evidence.” The Chronicle called the dismissal a “stunning defeat for the Justice Department” after a 12-member jury heard two weeks of testimony by prosecution witnesses.

The Chronicle further stated as follows. “The acquittal also reinforced the Justice Department’s poor track record of prosecutions in overseas bribery cases. Federal prosecutors have won only two dozen convictions under the Foreign Corrupt Practices Act of 1977 since the law was adopted more than a decade ago.”

Hartley (the above referenced Chairman and Chief Executive of Harris) stated as follows. “We’re very pleased that our Digital Telephone Systems Division and its employees have been vindicated, but we believe the charges should never have been brought in the first place. The Justice Department’s case was based upon a distorted view of the facts and represented a radical departure from existing enforcement policies. As a result, American taxpayers have been burdened with unnecessary litigation costs, and Harris has incurred more than $3 million in legal fees, spent many hundreds of hours of our people’s time, and suffered a substantial disruption of the corporation’s business to prove an absence of wrongdoing that should have been apparent from the beginning. The case has also placed a heavy strain on our two employees named in the indictment.”

Michael Fayad, a lawyer for Harris, stated as follows. “[Judge Legge] decided to dismiss the case for all of the same reasons we had pointed out to the Department of Justice early on, prior to indictment … that there was no bribe, no contract, no agreement to pay a bribe, no corrupt intent.”

Charles Bryer, Schultz’s lawyer, stated as follows. “The case was paper-thin, built on a con man’s story and a disgruntled employee’s vengeance. We were conned to pay some money that we thought was going to be used for a legitimate purpose.”

According to newspaper accounts, DOJ prosecutor Scott MacKay said the government brought the case in good faith – “We’re disappointed with the judge’s ruling. We feel that we presented a good case, but we accept the judge’s ruling.”

Today, Harris Corporation is alive and well. See here for its webpage.

As to O’Hara, as suggested above, he pleaded guilty to related charges in the Eastern District of N.Y. before the Harris et. al trial. However, after the California directed verdict of acquittal, but before his sentencing, O’Hara sought to withdraw his guilty plea. The trial court judge denied his motion and concluded that the acquittal of O’Hara’s alleged co-conspirators was not a “fair and just reason” sufficient to allow O’Hara to withdraw his guilty plea. O’Hara appealed and the Second Circuit affirmed (See 960 F.2d 11).

*****

If non-prosecution and deferred prosecution agreements existed in 1990, would Harris have resolved the enforcement action via such a resolution vehicle? Likely yes. Yet Harris and the individual defendants all prevailed at trial.

Was there anything wrong with this prior era when NPAs and DPAs were not an option in an FCPA enforcement action? I submit no and believe that abolishing NPAs and DPAs in the FCPA context should be subject to serious debate and discussion. For more on this issue (see here).

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