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Issues To Consider From The Analogic Enforcement Action

Issues

This previous post went in-depth regarding last week’s $14.9 million Foreign Corrupt Practices Act enforcement action against Analogic Corp. and a related entity.

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

Sparse Allegations

Rarely has an SEC enforcement action against an issuer contained such few allegations against, well, the issuer.

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Another Week And More SEC Speeches

Speaking8

SEC 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

Roundup2

Exasperated, skittish, checking in, scrutiny alerts and updates, and for the reading stack.  It’s all here in the Friday roundup.

Exasperated

This recent post highlighted Assistant Attorney General Leslie Caldwell’s recent speech in which she stated – in reference to FCPA internal investigations – “we do not except companies to aimlessly boil the oil.”

This recent Law360 article notes that some attorneys are exasperated by Caldwell’s remarks.  The article states:

“[D]efense attorneys have balked at the idea that they’re spending too much time or money on investigations they’re conducting in large part for the government’s sake, saying they’re not willfully adding unnecessary work to an FCPA probe.

Many companies still feel like they’re being forced to walk the fine line between investigating problems thoroughly enough to satisfy the government without making it seem like they’re holding something back or impeding an investigation, according to Day Pitney LLP partner Bob Appleton.

“On the one hand they’re saying, ‘Be fast and don’t do an over-thorough job,’ but on the other hand, they’re saying, ‘If you only partially disclose you’ll get in trouble,’” said Appleton, a former assistant U.S. attorney.

And the costs of an investigation aren’t just limited to what a company self-reports, since the government will often then ask how the company can be sure the problem isn’t popping up anywhere else, according to Colleen P. Mahoney, partner at Skadden Arps Slate Meagher & Flom LLP.

“One of the biggest challenges is the expense after it starts,” Mahoney said about FCPA investigations at a Practicing Law Institute event Friday.

At the PLI event, SEC enforcement chief Andrew Ceresney said it was up to a company to decide what law firm to retain and how deep to investigate a potential bribery matter.

“We’re not micromanaging your internal investigation,” he said.”

Numerous posts on FCPA Professor have highlighted the staggering amount of pre-enforcement action professional fees and expenses (see also “FCPA Ripples“).

Speaking of which, Key Energy Services disclosed yesterday $18 million in expenses – for the first quarter of 2015 -“related to the previously disclosed Foreign Corrupt Practices Act (“FCPA”) investigations.”

I’ve had several conversations with FCPA practitioners about this issue.  For what it is worth, the common response is something along the following lines: FCPA practitioner agrees that pre-enforcement action professional fees and expenses have spun out of control in many instances, but FCPA practitioner insists that his/her firm is not part of the problem.

Other practitioners are also pushing back as to other aspects of Caldwell’s recent speech – namely “what cooperation looks like”.  In this recent post on the FCPA Blog an anonymous contributor states:

 “When client companies and I have opted to cooperate early on and open up all information and records to the DOJ investigative units, I have seen the FCPA investigative team to be less interested in whether facts or evidence show violations or point to evidence raising red flags, as to how the client (and lawyer also) is bowing and mewling in anguish and sorrow before the government.

Provided the client is willing to genuflect and cry out mea culpa and beg for mercy (all three are required) there can be a happy and acceptable outcome in correcting corporate deficiencies and reaching an early valid resolution.

Executives who have somewhat less capacity to grovel underfoot are punished with the promise of crippling expansions of the process including raids and countless subpoenas to uninvolved officers, employees, consultants and accountants.

My experience is that this is not based on early findings of probable cause, but rather a haughty outrage that there was insufficient willingness to self-immolate.”

Skittish

Much has been written about whether the FCPA and its enforcement deters foreign investment.  (See here for instance).

Companies obviously make foreign investment decisions based on a host of legal and non-legal risks and thus empirically separating and measuring the impact of FCPA enforcement on foreign investment decisions is difficult.  Moreover, despite the general rise in FCPA enforcement concerning conduct in certain high risk jurisdictions such as China, India, and Brazil, there continues to be vast amounts of foreign direct investment in those countries by companies subject to the FCPA prohibitions.

Any “evidence” that the FCPA and its enforcement deters foreign investment thus tends to be anecdotal.

Following up on this prior post regarding Cambodia, the Phnom Penh Post reports:

“Despite high-profile US companies like Coca-Cola announcing plans to expand their footprint in the Kingdom, foreign investment from the US remains low compared to regional heavyweights. Large US businesses appear reluctant in setting up in the Kingdom due to corruption concerns, an unpredictable regulatory environment, and a lack of economic attractiveness that allows US interests to thrive.

[…]

Corruption remains one of the major factors keeping US companies away. According to an American Chamber of Commerce survey for 2015, 82 per cent of American businesses in Cambodia were dissatisfied with corruption – the second highest in the region after Laos.”

Checking In

Way back in 2010, Steven Jacobs, the former President of Macau Operations for Las Vegas Sands Corp., filed a civil lawsuit against Las Vegas Sands (LVS) in which Jacobs alleged various improprieties at LVS including in the FCPA context.

As noted in this Bloomberg article, Sheldon Adelson, the billionaire founder and chairman of LVS, recently testified in open court about the case and stated, among other things, that “after four years of investigating, they [the DOJ and SEC]  haven’t found a shred of evidence yet.”

Scrutiny Alerts and Updates

CSC / ServiceMesh

CSC is a Virginia-based IT company and in October 2013 it acquired acquire ServiceMesh, a cloud management company.  Various reports note that Eric Pulier, the former CEO of ServiceMesh, and head of the ServiceMesh division within CSC since ServiceMesh was acquired by that company, has left the company.

CSC sent the following statement to media about Pulier’s departure:

“On March 26, 2015 Eric Pulier was notified that his actions involving payments from the ACE Foundation—an organization founded by Mr. Pulier and not related to CSC—to former IT executives of Commonwealth Bank of Australia, a CSC client, violated CSC’s code of conduct related to conflicts of interests and appearance of improprieties. Mr. Pulier was further notified that these violations were grounds for termination of his employment.”

PTC

In this release, PTC stated:

“We have, since making a voluntary disclosure to the U.S. Securities and Exchange Commission and the Department of Justice, been cooperating to provide information to those agencies concerning expenditures by certain of our business partners in China and by our China business, including for travel and entertainment, that apparently benefitted employees of customers regarded as state owned enterprises in China. This matter involves issues regarding compliance with laws, including the U.S. Foreign Corrupt Practices Act. Negotiations with the SEC to reach a resolution of its investigation have begun but have not been concluded. We expect to begin negotiations with the Department of Justice to resolve its investigation in the near future. Resolution of this matter is likely to include fines and penalties. Given the uncertainty regarding whether settlements can be reached and, if reached, on what terms, we are not able to estimate a range of reasonably possible loss with regard to any such settlements and have not recorded any liability in connection with this matter. If settlements are reached, we believe that the associated financial liability could be material to our results of operations for the fiscal period in which the liability is recorded. Further, any settlement or other resolution of this matter could have collateral effects on our business in China, the United States and elsewhere.”

Braskem SA

Brazil-based Braskem recently disclosed in an SEC filing:

“In the context of anti-corruption allegations against certain individuals and entities in Brazil, including Petrobras, we were mentioned in allegations of improper payments made in order to receive favorable treatment in connection with certain contracts that we are party to with Petrobras. We have not received notice of any proceeding or investigation involving us that has been commenced in Brazil or the United States in connection with these allegations.

Although we have certain procedures in place, we have implemented additional procedures and controls to monitor our compliance with applicable anti-corruption laws and as a result of the recent allegations against us, have engaged Brazilian and U.S. legal counsel to conduct a voluntary internal investigation of this matter.  If any of these allegations prove to be true, or if we or any of our subsidiaries, or joint venture partners fails to comply with any of these laws, we could be subject to applicable civil or criminal penalties, which could adversely affect our overall performance.”

[…]

In early March 2015, declarations made by defendants in lawsuits filed against third parties were made public, in which Braskem and two of its former executive officers were cited in allegations of supposed improper payments between 2006 and 2012 to benefit the Company in raw-material supply agreements entered into with Petrobras. As of April 24, 2015, to the knowledge of the management, Braskem has not received any notification of the filing of any proceeding or investigation by Brazilian or U.S. authorities.

In light of such facts, the Company’s Management and Board of Directors approved in April the internal plan for investigation into the allegations (“Investigation”) to be carried out by law firms experienced in similar cases in the United States and in Brazil.  The law firms will work under the coordination of an ad hoc committee formed by members of its Board of Directors, specially created for this purpose.

In addition, the following measures have already been taken:

i)    Voluntary announcement about the Investigation and periodical updates sent to regulatory agencies of capital markets in Brazil (Securities and Exchange Commission of Brazil – CVM) and the United States (Securities and Exchange Commission – SEC, and the Department of Justice – DOJ);

ii)    Publication of two Material Fact notices and one Notice to the Market to clarify the news reports and to keep shareholders and the market informed of actions taken by the Company;

iii)   Updating the Audit Board and external auditors about the progress of the Investigation and of the actions already taken.

Braskem and its subsidiaries are subject to a series of anticorruption and anti-bribery laws in the countries where they operate. To reduce the likelihood of infringement of such laws, a series of procedures and controls were implemented and are continuously being improved.

On the other hand, if any of the allegations proves to be true, the Company may be subject to material penalties envisaged in law. At this moment, the Company Management believes that it is not possible to estimate the duration or outcome of the Investigation and, consequently, whether it will have any impact on future financial statements.

The Management is committed to taking all the necessary measures to clarify the facts and will keep the market informed of any progress on this matter.”

United Technologies

Recently, the company disclosed:

“As previously disclosed, in December 2013 and January 2014, UTC made voluntary disclosures to the United States Department of Justice (DOJ), the Securities and Exchange Commission (SEC) Division of Enforcement and the United Kingdom’s Serious Fraud Office to report the status of its internal investigation regarding a non-employee sales representative retained by United Technologies International Operations, Inc. (UTIO) and IAE for the sale of Pratt & Whitney and IAE engines and aftermarket services, respectively, in China.  On April 7, 2014, the SEC notified UTC that it was conducting a formal investigation and issued a subpoena to UTC.  UTC continues to cooperate fully with the investigations and has responded to requests for documents and information.  The DOJ and SEC also continue to request information, and the SEC issued a second subpoena on March 9, 2015 seeking documents related to internal allegations of alleged violations of anti-bribery laws from UTC’s aerospace and commercial businesses, including but not limited to Otis businesses in China.  Because the investigations are ongoing, we cannot predict the outcome or the consequences thereof at this time.”

For the Reading Stack

The NY Times goes in depth regarding the U.S’s attempt to extradite Dmitry Firtash, a Ukrainian national criminally indicted in April 2014 along with others (see here for the prior post).  According to the article:

“An Austrian judge will issue a crucial ruling in the case on Thursday at an extradition hearing here, where Mr. Firtash’s lawyers will argue that his arrest — on charges of bribing officials in India to secure a titanium mining deal that never materialized — was really an effort by the United States to remove him from public life in Ukraine, where he controls major business interests and still holds considerable clout. The Justice Department has repeatedly declined to discuss the case because it is an active prosecution, but the United States attorney’s office in Chicago, which led the investigation, has flatly denied any political motivations.

[…]

Andras Knopp, a Hungarian businessman and longtime associate of Mr. Firtash’s who is also charged in the case, said that the United States authorities had made no effort to extradite him, or even to talk to him about the case, even though he was at the center of the Indian titanium deal …”.

*****

The most recent edition of the always informative Debevoise & Plimpton FCPA Update is here.  Among the topics discussed are developments in India including potential amendments to the Prevention of Corruption Act providing for liability for a commercial organizations whose employees bribe but also creating a defense for a commercial organization commercial organization if it can prove it had “adequate procedures” in place to prevent bribery.

*****

This Bloomberg article (“The Dinner Proposal That Led United Into Corruption Probe”) begins:

“United Airlines Inc. was seeking hundreds of millions of dollars in public investment for the airport in Newark when its chief executive dined with New Jersey Governor Chris Christie’s top Port Authority official in September 2011.

Jeffery Smisek, United’s chief executive officer, wanted funding for several projects, including an estimated $600 million extension of the PATH train from downtown Newark to the airport, as the airline worked through its merger with Continental Airlines.

Halfway through dinner at Novita, an Italian restaurant in Manhattan, Port Authority Chairman David Samson surprised the group with a request of his own. He complained that he and his wife had grown weary of the trip to their weekend home in Aiken, South Carolina, because the best flight out of Newark was to Charlotte, North Carolina, 150 miles away. Until 2009, Continental had run direct service from Newark to Columbia, South Carolina, 100 miles closer.

In a tone described by one observer as “playful, but not joking,” Samson asked: Could United revive that route? An awkward silence fell over the table.

Though the United CEO didn’t agree to the request at the dinner, according to the accounts of some who attended, the airline ultimately added the money-losing route that became known as “the chairman’s flight.” Now federal prosecutors are looking into whether its genesis crossed the line from legitimate bargaining into illegal activity.”

*****

A good weekend to all.

Issues To Consider From The Alstom Action

Issues

recent post dived deep into the Alstom FCPA enforcement action.

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

A Real Head-Scratcher

Alstom entities engaged in conduct in violation of the FCPA.  This is clear from the DOJ’s allegations and consistent with DOJ enforcement theories.  Yet, if the DOJ’s FCPA enforcement program is to be viewed as legitimate and credible, the charged conduct must fit (for lack of a better term) the crime.

The charges against Alstom S.A. are a real head-scratcher.

The conventional wisdom for why the Alstom action involved only a DOJ (and not SEC) component is that Alstom ceased being an issuer in 2004 (in other words 10 years prior to the enforcement action).

Yet, the actual criminal charges Alstom pleaded guilty to – violations of the FCPA’s books and records and internal controls provisions –  were based on Alstom’s status as an issuer (as only issuers are subject to these substantive provisions).

In other words, Alstom pleaded guilty to substantive legal provisions in 2014 that last applied to the company in 2004.

This free-for-all, anything goes, as long as the enforcement agencies collect the money nature of FCPA enforcement undermines the legitimacy and credibility of FCPA enforcement.

Enforcement Action Origins

What were the origins of the Alstom enforcement action?

It appears to be a 2011 Swiss enforcement action that began in October 2007.  (See here, here and here).

Indeed, in briefing in an individual enforcement action (Lawrence Hoskins) connected to the Alstom Indonesia conduct, the DOJ stated:

“When the Government began investigating this case, it sought evidence from various countries including Switzerland […].  The Government obtained orders pursuant to 18 USC 3292, tolling the statute of limitations in this case for the shorter of three years or the time it took to receive the evidence sought.  The first request, to Switzerland, was transmitted on September 22, 2010, and the tolling order reflects tolling beginning on that date.  Switzerland provided responses to the request on December 23, 2013.”

In the Swiss action, “Alstom Network Schweiz AG … was fined CHF2.5 million for negligence in implementing proper controls to prevent bribery by company officials in Latvia, Tunisia and Malaysia, and it was ordered to pay an additional CHF36 million for profits connected to the negligence.”

The foreign law enforcement origins of the Alstom action are typical of other enforcement actions in the Top Ten List of FCPA settlements (Siemens and the Bonny Island, Nigeria enforcement actions – KBR/Halliburton, Snamprogetti/ENI, Technip, and JGC Corp).

No Monitor

On one level, it seems odd that the Alstom enforcement action did not involve a corporate monitor as a condition of settlement. After all, the $772 million enforcement action was the largest DOJ FCPA enforcement action of all-time and per the DOJ “Alstom’s corruption scheme was sustained over more than a decade and across several continents. It was astounding in its breadth, its brazenness and its worldwide consequences.”

However, the resolution documents note “that Alstom is already subject to monitoring requirements pursuant to a February 2012 World Bank Resolution.” (See here).  As stated in the DOJ resolution documents: “in the event that the Integrity Compliance Office [of the World Bank] does not certify that the Company has satisfied the monitoring requirements contained in the World Bank Resolution, the Company shall be required to retain an Independent Compliance Monitor.”

Moreover, the vast majority of the alleged improper conduct in the DOJ enforcement action resided in business units that will soon be part of General Electric in 2015.  Thus, to impose a monitor on Alstom would, in effect, have been to impose a monitor on General Electric.

Third Party Red Flags

Most FCPA enforcement actions result from the conduct of third parties and ineffective corporate controls over third parties.

In this regard, the following paragraph from the Alstom enforcement is a dandy regarding third party red flags.

“A number of consultants that Alstom hired raised a number of “red flags” under Alstom’s own internal policies.  Certain consultants proposed for retention had no expertise or experience in the industry sector in which Alstom was attempting to secure or execute the project.  Other consultants were located in a country different than the project country.  At other times, the consultants asked to be paid in a currency or in a bank account located in a country different than where the consultant and the project were located.  In multiple instances, more than one consultant was retained on the same project, ostensibly to perform the very same services.  Despite, these “red flags,” the consultants were nevertheless retained without meaningful scrutiny.”

FCPA enforcement actions of course are no laughing matter, but the following specific allegations sort of make one chuckle.

“Alstom did not perform any due diligence on the consultant even though the consultant had no knowledge about, or experience in, the power industry.  Rather, the information alleges, the consultant “sold furniture and leather products, and exported chemical products and spare parts.”

“An Alstom entity formally retained a consultant on a [rapid transit] project even thought the consultant did not have the requisite expertise in the transport sector.  According to the information, the consultant’s expertise was as a “wholesaler of cigarettes, wines and pianos.”

More Information Needed As to Lack of Cooperation

Repeatedly in the resolution documents, the DOJ states that Alstom did not “cooperate.”

“The Defendant initially failed to cooperate with the Department’s investigation, responding only to the Department’s subpoenas to the Defendant’s subsidiaries.  Approximately one year into the investigation, the Defendant provided limited cooperation, but still did not fully cooperate with the Department’s investigation.”

“The Company and its parent initially failed to cooperate with the Department’s investigation, responding only to the Department’s subpoena.  Approximately one year into the investigation, the Company and its parent provided limited cooperation, but still did not fully cooperate with the Department’s investigation.”

Likewise, at the DOJ press conference, Assistant Attorney General Caldwell stated:

“The guilty pleas and resolutions announced today also highlight what can happen when corporations refuse to disclose wrongdoing and refuse to cooperate with the department’s efforts to identify and prosecute culpable individuals.”

[…]

“Alstom did not voluntarily disclose the misconduct to law enforcement authorities, and Alstom refused to cooperate in a meaningful way during the first several years of the investigation.”

If the DOJ wants its cooperation message to be fully absorbed by the corporate community, the DOJ should have been more specific about Alstom’s lack of “cooperation.”

Moreover, if “responding only to the DOJ’s subpoena” is considered lack of cooperation by the DOJ, this is troubling.  (See here for the prior post “Does DOJ Expect FCPA Counsel to Role Over and Play Dead?”).

A “Foreign Official” Stretch?

It was a relatively minor allegation in the context of the overall Alstom enforcement action, but one which caught my eye because of its extraordinarily broad implication.

As highlighted in this previous post, Asem Elgawhart was employed by Bechtel Corporation (a U.S. company) and was assigned by Bechtel to be the General Manager of Power Generation Engineering and Services Company (PGESCo), a joint venture between Bechtel and Egyptian Electricity Holding Company (the alleged “state-owned and state-controlled electricity company in Egypt”). According to the DOJ, Elgawhart “used his position and authority as the General Manager of a power generation company to solicit and obtain millions of dollars of kickbacks for his personal benefit from U.S. and foreign power companies that were attempting to secure lucrative contracts to perform power-related services.” “In total,” the DOJ alleged, “Elgawhart received more than $5 million in kickbacks to help secure more than $2 billion in contracts for the kickback-paying companies, all of which he concealed from his employer, from bidding companies that did not pay kickbacks and from the U.S. Internal Revenue Service.” Based on these allegations, and as indicated in this DOJ release, Elgawhart was charged in a 8-count indictment with mail and wire fraud, money laundering and various tax offenses.

In the Alstom enforcement action, PGESCo and Elgawhart are described as follows:

As to Egypt, the information concerns bidding on various projects with the Egyptian Electricity Holding Company (“EEHC”), the state-owned and state-controlled electricity company in Egypt.  According to the information, “EEHC was not itself responsible for conducting the bidding [on projects], and instead relied on Power Generation Engineering & Services Co. (“PGESCo”), which was controlled by an acted on behalf of EEHC.”

PGESCo was controlled by and acted on behalf of EEHC. PGESCo worked “for or on behalf of’ EEHC, within the meaning of the FCPA, Title 15, United States Code, Section 78dd-l (f)( 1) [the FCPA’s “foreign official” definition].

According to the DOJ, Alstom used a consultant whose primary purpose “was not to provide legitimate consulting services to Alstom and its subsidiaries but was instead to make payments to Egyptian officials, including Asem Elgawhary who oversaw the bidding process.”

In short, in the Alstom action the DOJ alleged that Elgawhary, a Bechtel Corporation employee, was an Egyptian “foreign official.” This is an extraordinarily broad “foreign official” interpretation with implications for any person (privately employed) working on foreign projects with participation by a foreign government department, agency or instrumentality.

Rhetoric Undermined

As highlighted in this post, Assistant Attorney General Leslie Caldwell recently defended the DOJ’s frequent use of NPAs and DPAs by stating that the DOJ is able to achieve through such negotiated settlements reforms, compliance controls, and all sorts of behavioral change compared to what it could achieve without use of NPAs and DPAs.

As highlighted in the prior post, the notion that the DOJ is powerless to effect corporate change through old-fashion law enforcement (that is enforcing the FCPA without use of NPAs and DPAs) is plainly false.

Indeed, the Alstom and Alstom Network Schweiz AG plea agreements contain substantively the same corporate compliance program and reporting obligations as the Alstom Power and Alstom Grid DPAs.

False Certification

A likely overlooked allegation in the Alstom enforcement action concerns bidding on various grid projects with alleged state-owned and state-controlled entities in Egypt. According to the charging documents, certain of these projects were “funded, at least in part, by the United States Agency for International Development (“USAID”)” and “an Alstom entity “repeatedly submitted false certifications to USAID in connection with these projects, and did not disclose that consultants were being used, that commissions were being paid, or that unlawful payments were being made.”

These allegations are similar to DOJ allegations in the BAE enforcement action (an enforcement action that alleged conduct that could have served as the basis for FCPA violations, but resulted in no actual FCPA charges).  As noted in this previous post, in the BAE action, the DOJ “filed a criminal charge against BAE Systems charging that the multinational defense contractor conspired to impede the lawful functions of the Departments of Defense and State, made false statements to the Departments of Defense and Justice about establishing an effective anti-corruption compliance program to ensure conformance with the Foreign Corrupt Practices Act and paid hundreds of millions of dollars in undisclosed commission payments in violation of U.S. export control laws.”

How to Count FCPA Enforcement Actions

It is a basic issue:  how to count FCPA enforcement actions.

I use the “core” approach to counting FCPA enforcement actions (see here), an approach endorsed by the DOJ, but many in FCPA Inc. use various different creative counting methods that significantly distort FCPA enforcement statistics (see here).

Pursuant to the “core” approach, the Alstom action was one core enforcement action even though it involved the following components all based, in whole or in part, on the same core conduct.

  • Alstom S.A.
  • Alstom Network Schweiz AG
  • Alstom Power Inc.
  • Alstom Grid Inc.
  • Individual enforcement actions against Frederic Pierucci, David Rothschild, William Pomponi, and Lawrence Hoskins.

Counting the above as 8 FCPA enforcement actions instead of 1 core action highly distorts FCPA enforcement statistics and impacts the denominator of just about any FCPA enforcement statistic imaginable.

With several 2014 FCPA Year in Reviews to be published in January, one needs to be cognizant of these creative counting methods.

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