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Friday Roundup

Motion to dismiss filed in the former Magyar Telekom execs case, a noticeable lack of FCPA charges, checking in on recent disclosures, quotable from the current SEC FCPA Unit Chief, quotable regarding FCPA Inc., what’s up with that investigation, I hear you travel alot, there’s an app for that, counter-points, and for the weekend reading stack.  It’s all here in the Friday roundup.

Motion to Dismiss Filed in SEC Enforcement Action

This previous post highlighted how former Magyar Telekom executives Elek Straub, Andras Balogh and Tamas Morvai planned to challenge the SEC’s charges against them.  Earlier this week, the defendants filed this memorandum in support of their motion to dismiss.

In summary fashion, the memorandum states as follows.

“There are several bases for dismissing the complaint.

 First, this Court lacks personal jurisdiction over the defendants. The complaint alleges conduct by foreign national defendants that occurred wholly outside, and with no nexus to, the United States. Nowhere does the complaint allege that defendants purposefully directed their conduct at the United States. Following constitutional due process principles, the defendants lack the requisite minimum contacts with the forum, and it would be inconsistent with traditional notions of fair play and substantial justice to require them to defend this action in the United States. Indeed, the SEC has acknowledged that its jurisdictional position lacks precedent “on all fours factually” and “may be breaking new ground[.]”

“Second, the SEC’s claims are time-barred […]  There is no doubt that the complaint was filed outside the five-year period. Specifically, the complaint was filed on December 29, 2011, more than five years after all three defendants had left Magyar Telekom, and more than five years after the alleged conduct occurred. Consequently, the five-year period has expired.”

“Third, with regard to the remaining claims, the complaint fails to adequately state the claims alleged. More specifically, the complaint: (i) fails to adequately plead that the defendants corruptly made use of interstate commerce, as is required to state a claim for bribery and the claims stemming from the alleged bribery under the FCPA (books and records and internal controls violations, falsifying books and records, and lying to auditors); (ii) fails to adequately plead that the intended payment recipients were “foreign official[s]” under the FCPA; (iii) fails to allege sufficient facts supporting the aiding and abetting claims; and (iv) fails to meet the heightened pleading requirements under Rule 9, including allegations of individualized culpable conduct by each defendant. The complaint also merely parrots the statutory language and fails to allege that the defendants profited personally from any of the alleged conduct. For all these reasons, the complaint should be dismissed with prejudice.”

As to “foreign official” the motion states that the complaint’s reference to “officials” “government officials” and other vague allegations represent “mere legal conclusions that the recipients were “foreign officials” under the FCPA.  The motion states as follows.  “A legal conclusion couched as a ‘factual allegation’ is insufficient to establish the essential element that the intended recipient be a foreign official.  Repeated references to “government officials” without underlying facts presents nothing ‘more than labels and conclusions’ that constitute ‘a formulaic recitation of the elements of a cause of action.””

Indeed, in my 2010 article “The Facade of FCPA Enforcement” (here) I noted the frequency in which enforcement agency FCPA pleadings “contain little more than uninformative, bare-bones statement of facts replete with legal conclusions.”  I said that the “most common and troubling use of bare-bones, uninformative, legal conclusory statements of facts or allegations is when the enforcement agencies describe the ‘foreign officials’ involved in the alleged conduct giving rising to the FCPA violation.”  In the article, I noted that because there is generally no threat that these bare-boned, uninformative facts or legal conclusions will ever be subject to meaningful judicial scrutiny, that the enforcement agencies get away with such practices.

At least until recently.

Noticeable Lack of FCPA Charges

Numerous FCPA enforcement actions have been based on allegations of payments to foreign customs personnel in connection with customs, license, permit type issues.

Thus, the lack of FCPA charges were noticeable in the DOJ’s recent criminal indictment of APEGO Inc., and various of is employees and agents.  As noted in this recent DOJ Release (N.D. of Georgia), charges were filed alleging conspiracy and twelve counts of importing notebooks and filler paper from China using false  documents.

The indictment (here) includes the following allegations.

“It was further part of the conspiracy that [certain individuals] paid bribes to Taiwanese customs officials on behalf of defendants APEGO and Gung to allow U.S.-bound lined paper products made by the Watanabe Group in China but lacking required country of origin labels, or mislabeled ‘Made in Taiwan,’ to enter Taiwan from China and clear Taiwanese customs.”

Elsewhere, the indictment alleges: (i) that in December 2006 various bribes were paid to Taiwanese customs officials which “allowed defendant APEGO to transship these products from Taiwan to the United States more quickly and less expensively by limiting the need to ‘rework’ the products and cartons (i.e. relable ‘Made in Taiwan’) in Taiwan”; (ii) that in March 2007 when customs officials at a certain Taiwan port no longer accepted bribes, the company arranged for its shipments to be processed through another port in a different part of the country where bribes were paid for the same purpose

Recent Disclosures

Owens-Illinois

Owens-Illinois, Inc. (an Ohio based company that describes itself as the world’s largest glass container manufacturer and preferred partner for many of the world’s leading food and beverage brands) recently disclosed as follows.

“The Company is conducting an internal investigation into conduct in certain of its overseas operations that may have violated the antibribery provisions of the United States Foreign Corrupt Practices Act (FCPA), the FCPA’s books and records and internal controls provisions, the Company’s own internal policies, and various local laws. In October 2012, the Company voluntarily disclosed these matters to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). The Company intends to cooperate with any investigation by the DOJ and the SEC. The Company is presently unable to predict the duration, scope or result of its internal investigation, of any investigations by the DOJ or the SEC or whether either agency will commence any legal action. The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, fines, penalties, and modifications to business practices. The Company also could be subject to investigation and sanctions outside the United States. While the Company is currently unable to quantify the impact of any potential sanctions or remedial measures, it does not expect such actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition.”

Given the recent FCPA scrutiny of the beverage industry (Diageo, Beam Inc., and Central European Distribution Company) one might wonder whether Owens-Illinois’s recent disclosure is connected to those developments.

Barclays

This previous post detailed how Barclays PLC’s relationship with Qatar’s sovereign-wealth fund was under scrutiny by U.K. authorities.

The company recently disclosed (here) as follows.  “Subsequent to reporting the investigations of the Financial Services Authority and Serious Fraud Office in July and August 2012 respectively, Barclays has been informed by the US Department of Justice (DOJ) and US Securities and Exchange Commission (SEC) that they are undertaking an investigation into whether the Group’s relationships with third parties who assist Barclays to win or retain business are compliant with the United States Foreign Corrupt Practices Act. Barclays is investigating and fully co-operating with the DOJ and SEC.”

According to this article in the Wall Street Journal, the focus is “on Barclay’s use of external brokers who facilitated meetings between bank officials and powerful Middle Eastern families.”  The article further notes that “Barclays recently started conducting an internal investigation, with the help of an outside law firm, to figure out whether it or its Middle Eastern introducers might have run afoul” of the FCPA.

Schlumberger

The company recently disclosed as follows.

“In 2007, Schlumberger received an inquiry from the United States Department of Justice (“DOJ”) related to the DOJ’s investigation of whether certain freight forwarding and customs clearance services of Panalpina, Inc., and other companies provided to oil and oilfield service companies, including Schlumberger, violated the Foreign Corrupt Practices Act. In October 2012, Schlumberger was advised by the DOJ that it has closed its inquiry as it relates to Schlumberger.”

For more on the numerous Panalpina-related enforcement actions – what I’ve termed CustomsGate – see here.

The company’s recent disclosure would seem not to address the issues previously the focus of a front-page Wall Street Journal article in October 2010 concerning alleged conduct in Yemen.  (See here for the prior post).

Quotable

In this recent Reuters article, current SEC FCPA Unit Chief Kara Brockmeyer stated as follows.

“I would hate to think the companies view [FCPA] enforcement actions as the cost of doing business.  If we find that out, it will certainly increase the size of the penalty.”

One thing that is becoming increasingly clear in this new era of FCPA enforcement is that investors do appear to view FCPA scrutiny and enforcement actions as a cost of doing business and akin to a regulatory violation.

The Reuters article also stated that there has yet to be a repeat FCPA prosecution.  This is a false statement.  Companies that have resolved more than one FCPA enforcement action over time include: Tyco, ABB, Baker Hughes and General Electric.

Quotable

On his Corruption, Crime & Compliance site (here) Michael Volkov recently observed as follows.

“The FCPA Paparazzi has done a great disservice to the business community.  Call it a complete lack of credibility.  Legal marketing has become confused in this day and age – marketing has now been turned into the “Fear Factor,” meaning that lawyers need to scare potential clients into hiring them.  That is flat out wrong.   Each week, new client alerts, client warnings and other cries of impending disaster are transmitted through the Internet to businesses.  If I were a general counsel, I would have them on “auto delete.”  Talk about a waste of time and effort.”

What’s Up With That Investigation?

One of the many FCPA industry sweeps reportedly underway concerns Hollywood movie industry in China.  (See here for the prior post).  This recent post on the New York Times Media Decoder blog highlights the “powerful gatekeeper of China’s rapidly growing film world, the China Film Group chairman Han Sanping who was recently in the U.S. to receive a China Entertainment Visionary of the Year award, and asks what’s up with the investigation.

I Hear You Travel Alot

My frequent searches for FCPA content often turn up interesting content.  Such as this thread from top-law-schools.com which asks what type of attorneys get to travel the most?  One response was as follows.   “From what I hear, FCPA is the way to go for travel to other countries because you have lots of interviews of foreign employees.”

The FCPA is certainly the reason for the majority of stamps in my passport.

Counter-Points

Alexandra Wrage (President of Trace International) made some observations recently in her Corporate Counsel column (here) about FCPA enforcement in various Presidential administrations.  While interesting to think about, the actual stats have little substantive value.  Instances of FCPA scrutiny tend to last between 2-4 years (and thus straddle administrations) and various instances of FCPA scrutiny (for instance Pfizer) can last approximately 8 years.  Moreover, rather than “aggressively enforce the FCPA,” as the article notes, what the enforcement agencies more often than not actually do (as evidenced by statistics demonstrating which enforcement actions resulted from voluntary disclosures) is process corporate voluntary disclosures.

There’s An App for That

Law firm O’Melveny & Myers announced (here) the “launch of its FCPA app, the first multi-functional mobile application (app) created by a law firm.”  Richard Grime, partner and head of O’Melveny’s FCPA practice stated as follows.  “We understand the complexities our clients and colleagues face in achieving their business goals in the global marketplace, and thus, have created this mobile application as a fast, yet informative, way for them to remain current with the evolving statutes and provisions imposed by the FCPA and other anti-corruption laws.”

Weekend Reading

Sidley & Austin recently released its Anti-Corruption Quarterly (here).  Among other articles is one focused on the new “sheriff in town.”

The article states as follows.

“Investigating potential violations of the FCPA historically has been the purview of the SEC and the DOJ, but recently, Congress has entered the fray. Two House committees, the House Oversight and House Energy committees, recently instituted an independent FCPA investigation of Wal-Mart, after a New York Times article reported on an alleged massive bribery campaign at Wal-Mart’s Mexican affiliate. These House investigations mean that companies now have to consider the possibility of facing a congressional investigation—in addition to investigations by the SEC and the DOJ—when FCPA violations have occurred.”

The article further states as follows.

“Although congressional committees routinely investigate companies, the current congressional investigation into Wal-Mart is the first investigation in the FCPA context and it may signal the beginning of a trend: high-profile companies or companies that are drawn into political fights (often unwillingly) may find themselves the target of a congressional inquiry if their FCPA problems become public. Whatever effect the congressional investigation may have on Wal-Mart, the possibility of such an investigation is a factor that high-profile companies facing FCPA concerns should weigh.”

For more on Wal-Mart’s FCPA scrutiny, see my recent article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure” (here).

Miller Chevalier also recently released its FCPA Autumn Review – see here.

Morrison Foerster also recently released its End of Summer Round-Up – see here.

This recent Jones Day publication concerning upcoming FCPA Guidance contains the following paragraph that should be read by those who simply label companies that have resolved FCPA enforcement actions or are the subject of FCPA scrutiny as bad or corrupt companies.

“It is the job of a prosecutor to make charging decisions and to decide in the first instance what does and does not violate the law. As prosecutors and enforcement attorneys assess the facts to make charging decisions, they are compelled to view the world, therefore, in binary terms: black and white, right and wrong. As defense counsel, settlement discussions with our counterparts in the DOJ and SEC frequently hinge on which side of the line the conduct sits. Particularly for those of us who served as prosecutors, we acknowledge in these discussions the difficult mission of the enforcement officials to draw and defend lines. The world of business, however, frequently operates in territory that is somewhat grey: a world in which business persons strive to grow the company ethically in situations where the application of the existing rules are not entirely clear. For instance, in the current era of FCPA enforcement, international businesses struggle with their responsibilities to monitor and control the conduct of third parties with whom they do business: distributors and sub-distributors, joint venture partners, dealers, and resellers. Even for companies that are firmly dedicated to compliance with the FCPA, is not always clear when a third party amounts to an agent whose improper conduct might someday be ascribed to the company and its employees. Good and ethical companies struggle, every day, with the concept of defining an agent of the company as opposed to an independent customer who engages in an arm’s-length transaction to purchase the company’s products.”

*****
A good weekend to all.

Potpourri

Retail Industry Sweep

This previous post discussed the Wal-Mart effect, how Wal-Mart is clearly not the only company subject to the FCPA that needs licenses, permits and the like when doing business in Mexico, and that it is likely that Wal-Mart’s potential FCPA exposure has caused sleepless nights for many company executives doing business in Mexico and the general region.

Sure enough.

Aruna Viswanatha reports in this Reuters story that “retailers have been reviewing their international operations in light of a bribery scandal at Wal-Mart’s operations in Mexico that is the subject of investigations by the Justice Department and the Securities and Exchange Commission.”  According to the story, “other retail companies have also since reported to U.S. agencies suspicions of their own potential violations, which in turn has the Justice Department and SEC considering a sweep of the entire industry.”  For more on industry sweeps, see this previous post.

Barclays Dealings With Sovereign-Wealth Funds Scrutinized

The Wall Street Journal reported on Friday (here) that Barclays PLC’s “chief financial officer is under investigation by British authorities related to the bank’s 2008 fundraising activities with Middle Eastern investors.”  According to the story, the “probe is focused at least in part on how Barclays wooed Qatar’s sovereign-wealth fund to pump billions of pounds into the bank as the financial crisis intensified.”  According to this Wall Street Journal article, Barclays previously disclosed “£240 million of payments made to Qatar Holding and Abu Dhabi’s Sheik Mansour Bin Zayed Al Nahyan related to its £7.3 billion capital raise in 2008.”

Barclays has ADRs traded on the New York Stock Exchange and, according to the article, the SEC “is aware of the probe” and will be updated on its progress.  As the article notes, the SEC is currently conducting an expansive investigation of various financial institutions concerning relationships with sovereign-wealth funds.

Halliburton’s Latest Disclosure

Halliburton previously disclosed potential FCPA issues concerning the use of an Angolan vendor.  Last week in this quarterly report, the company provided an update on that investigation as well as new investigations concerning additional conduct in Angola as well as Iraq.  The disclosure states as follows.

“We are conducting internal investigations of certain areas of our operations in Angola and Iraq, focusing on compliance with certain company policies, including our Code of Business Conduct (COBC), and the FCPA and other applicable laws. In December 2010, we received an anonymous e-mail alleging that certain current and former personnel violated our COBC and the FCPA, principally through the use of an Angolan vendor. The e-mail also alleges conflicts of interest, self-dealing, and the failure to act on alleged violations of our COBC and the FCPA. We contacted the DOJ to advise them that we were initiating an internal investigation. Since the third quarter of 2011, we have been participating in meetings with the DOJ and the SEC to brief them on the status of our investigation and have been producing documents to them both voluntarily and as a result of SEC subpoenas to the company and certain of our current and former officers and employees. During the second quarter of 2012, in connection with a meeting with the DOJ and the SEC regarding the above investigation, we advised the DOJ and the SEC that we were initiating unrelated, internal investigations into payments made to a third-party agent relating to certain customs matters in Angola and to third-party agents relating to certain customs and visa matters in Iraq. We expect to continue to have discussions with the DOJ and the SEC regarding the Angola and Iraq matters described above and have indicated that we would further update them as our investigations progress. We have engaged outside counsel and independent forensic accountants to assist us with the investigations. We intend to continue to cooperate with the DOJ’s and the SEC’s inquiries and requests in these investigations. Because these investigations are ongoing, we cannot predict their outcome or the consequences thereof.”

In 2009, Halliburton and related entities settled DOJ and SEC FCPA enforcement actions concerning Bonny Island, Nigeria conduct by agreeing to pay $579 million in combined fines and penalties.  See here and here.  Pursuant to the SEC settlement, Halliburton is permanently enjoined from violating the FCPA’s books and records and internal control provisions.

W.W. Grainger Updates Its Disclosure

This previous post discussed W.W. Grainger’s February disclosure concerning an investigation that sales employees of a China subsidiary may have provided prepaid gift cards to certain customers.  As noted by Chris Matthews in this recent Wall Street Journal Corruption Currents post, the company in a recent SEC filing stated as follows.

“The results of the investigation, which have been submitted to the DOJ and the SEC, did not substantiate initial information suggesting significant use of gift cards for improper purposes. The Company cannot predict at this time whether any regulatory action may be taken or any other potential consequences may result from this matter.”

The Corruption Currents post contains a quote from Grainger spokeswoman as follows.  “We conducted a very thorough investigation, and based on our findings we do not believe this is a material issue.  We have submitted our findings to the DOJ and the SEC and we are in conversations with them regarding the conclusion of this matter.”

Contrary to the Corruption Currents headline “W.W. Grainger’s FCPA Probe Finds No Wrongdoing” the disclosure is qualified by the term “significant” use of gift cards for improper purposes and the quote from the company representative is qualified by the term “material” issue.  Very few FCPA issues in multinational companies rise to the level of quantitative materiality – even if the SEC takes the view that all payments in violation of the FCPA are qualitatively material.

As noted in this previous post concerning Congressional interest in DOJ FCPA declination decisions, the DOJ has stated that it “has declined to prosecute corporate entities in several cases based on particular facts and circumstances presented in those matters” including the following:  “a single employee, and no other employee, was involved in the provision of improper payments; and the improper payments involved minimal funds compared to the overall business revenues.”

Too Much Guanxi

“In the end, Garth Peterson, a rising star at Morgan Stanley in China, was undone by his pursuit of “guanxi.”  So begins this 2009 Reuters article that details the rise and fall of Peterson, fired by Morgan Stanley in 2008, “amid suspicions” that he had violated the FCPA.  According to the article, Morgan Stanley, voluntarily reported the case to U.S. authorities after a nine month internal investigation.

Yesterday the DOJ and SEC announced a joint enforcement against Peterson.

DOJ

In this release, the DOJ announced that Peterson, a former managing director for Morgan Stanley’s real estate business in China, pleaded guilty to a one count criminal information (unavailable at this point) for “conspiring to evade internal accounting controls that Morgan Stanley was required to maintain under the FCPA.”

The release states as follows.

“According to court documents, Morgan Stanley maintained a system of internal controls meant to ensure accountability for its assets and to prevent employees from offering, promising or paying anything of value to foreign government officials.  Morgan Stanley’s internal policies, which were updated regularly to reflect regulatory developments and specific risks, prohibited bribery and addressed corruption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, charitable contributions and employment.  Morgan Stanley frequently trained its employees on its internal policies, the FCPA and other anti-corruption laws.  Between 2002 and 2008, Morgan Stanley trained various groups of Asia-based personnel on anti-corruption policies 54 times.  During the same period, Morgan Stanley trained Peterson on the FCPA seven times and reminded him to comply with the FCPA at least 35 times.  Morgan Stanley’s compliance personnel regularly monitored transactions, randomly audited particular employees, transactions and business units, and tested to identify illicit payments.  Moreover, Morgan Stanley conducted extensive due diligence on all new business partners and imposed stringent controls on payments made to business partners.”

“According to court documents, Peterson conspired with others to circumvent Morgan Stanley’s internal controls in order to transfer a multi-million dollar ownership interest in a Shanghai building to himself and a Chinese public official with whom he had a personal friendship.  The corruption scheme began when Peterson encouraged Morgan Stanley to sell an interest in a Shanghai real-estate deal to Shanghai Yongye Enterprise (Group) Co. Ltd., a state-owned and state-controlled entity through which Shanghai’s Luwan District managed its own property and facilitated outside investment in the district.  Peterson falsely represented to others within Morgan Stanley that Yongye was purchasing the real-estate interest, when in fact Peterson knew the interest would be conveyed to a shell company controlled by him, a Chinese public official associated with Yongye and a Canadian attorney.  After Peterson and his co-conspirators falsely represented to Morgan Stanley that Yongye owned the shell company, Morgan Stanley sold the real-estate interest in 2006 to the shell company at a discount to the interest’s actual 2006 market value.  As a result, the conspirators realized an immediate paper profit of more than $2.5 million.  Even after the sale, Peterson and his co-conspirators continued to claim falsely that Yongye owned the shell company, which in reality they owned.  In the years since Peterson and his co-conspirators gained control of the real-estate interest, they have periodically accepted equity distributions and the real-estate interest has appreciated in value.”

Assistant Attorney General Lanny Breuer stated as follows.  “Mr. Peterson admitted today that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official.  As a managing director for Morgan Stanley, he had an obligation to adhere to the company’s internal controls; instead, he lied and cheated his way to personal profit.  Because of his corrupt conduct, he now faces the prospect of prison time.”

Peterson is to be sentenced on July 17th.

As to Morgan Stanley, the release states as follows.

“After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to Peterson’s conduct.  The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation.”

Kudos to the DOJ.  Would anything really change with an FCPA compliance defense – see here for “Revisiting a Foreign Corrupt Practices Act Compliance Defense”?

SEC

In this complaint, the SEC alleged in summary as follows.

From at least 2004 to 2007, Defendant Garth Peterson, while employed at Morgan Stanley & Co., Inc. ‘s (“Morgan Stanley”) real estate investment and fund advisory business, secretly acquired millions of dollars worth of real estate investments from Morgan Stanley’s funds for himself, the former Chairman of Yongye Enterprise (Group) Co. (“Yongye”) -a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai-and others. Peterson also arranged to have paid to himself and the former Chairman of Yongye (“the Chinese Official”) at least $1.8 million in what he misrepresented were finder’s fees Morgan Stanley’s funds owed to third parties. In exchange for offers and payments from Peterson, the Chinese Official helped Peterson and Morgan Stanley obtain business while personally benefitting from some of these same investments. This self-dealing and misappropriation by Peterson breached the fiduciary duties he and Morgan Stanley owed to their clients.”

Based on the above conduct, the SEC charged Peterson with violating the FCPA’s anti-bribery and internal controls provisions, as well as aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act.

In this release, the SEC noted that Peterson agreed to a settlement of the SEC’s charges “in which he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement, and relinquish his interest in the valuable Shanghai real estate (currently valued at approximately $3.4 million) that he secretly acquired through his misconduct.”

Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows.  “Peterson crossed the line not once, but twice. He secretly bribed a government official to illegally win business for his employer and enriched himself in violation of his fiduciary duty to Morgan Stanley’s clients.  This case illustrates the SEC’s commitment to holding individuals accountable for FCPA violations, particularly employees who intentionally circumvent their company’s internal controls.”

Kara Novaco Brockmeyer (Chief of the SEC Enforcement Division’s FCPA Unit) stated as follows.  “As a rogue employee who took advantage of his firm and its investment advisory clients, Peterson orchestrated a scheme to illegally win business while lining his own pockets and those of an influential Chinese official.”

As to Yongye and the Chinese Official, the complaint states as follows.

“Yongye Enterprise (Group) Co. Ltd. was a large real estate development arm of the Luwan District Government in Shanghai, China.  Since its inception in 1994, Yongye held leases for many prime areas in the Luwan District. Yongye’s business was to keep or take a small share in real estate joint ventures, including with Morgan Stanley and its funds, in exchange for helping its joint venture partner obtain the proper licensing from the local government.  Yongye owned and developed residential and commercial real property, sold and brokered real estate to Morgan Stanley and its funds, and partnered with Morgan Stanley and its funds in various real estate investments.”

“The Chinese Official was the Chairman of Yongye at all pertinent times until his retirement in September 2006. As Chairman, he exercised control over Y ongye and had the authority to make investment decisions for it. Before Yongye, the Chinese Official worked for the Luwan District government. After his retirement in September 2006, the Chinese Official continued to work with Morgan Stanley as a private real estate developer and broker until approximately the time Peterson was terminated in 2008.”

The complaint contains an entire section titled “Morgan Stanley’s FCPA Compliance Program and Internal Controls” which states as follows.

“Morgan Stanley trained Peterson on the FCPA numerous times during his employment, as follows:

(1) Morgan Stanley trained Peterson on anti-corruption policies and the FCPA at least seven times between 2002 and 2008. In addition to other live and web-based training, Peterson participated in a teleconference training conducted by Morgan Stanley’s Global Head of Litigation and Global Head of Morgan Stanley’s Anti-Corruption Group in June 2006.

(2) Morgan Stanley distributed to Peterson written training materials specifically addressing the FCPA, which Peterson maintained in his office.

(3) A Morgan Stanley compliance officer specifically informed Peterson in 2004 that employees of Yongye, a Chinese state-owned entity, were government officials for purposes of the FCPA.

(4) Peterson received from Morgan Stanley at least thirty five FCPA-compliance reminders. These reminders included FCPA-specific distributions; circulations and reminders of Morgan Stanley’s Code of Conduct, which included policies that directly addressed the FCPA; various reminders concerning Morgan Stanley’s policies on gift-giving and entertainment; the circulation of Morgan Stanley’s Global Anti-Bribery Policy; guidance on the engagement of consultants; and policies addressing specific high-risk events, including the Beijing Olympics.

(5) Morgan Stanley required Peterson on multiple occasions to certify his compliance with the FCPA. These written certifications were maintained in Peterson’s permanent employment record.

Morgan Stanley required each of its employees, including Peterson, annually to certify adherence to Morgan Stanley’s Code of Conduct, which included a portion specifically addressing corruption risks and activities that would violate the FCPA.  Morgan Stanley required its employees, including Peterson, annually to disclose their outside business interests.  Morgan Stanley had policies to conduct due diligence on its foreign business partners, conducted due diligence on the Chinese Official and Yongye before initially conducting business with them, and generally imposed an approval process for payments made in the course of its real estate investments. Both were meant to ensure, among other things, that transactions were conducted in accordance with management’s authorization and to prevent improper payments, including the transfer of things of value to officials of foreign governments.”

FINRA Reminds Firms of Their Obligations Under the FCPA

The Financial Industry Regulatory Authority (FINRA) (see here) is the largest independent regulator for all securities firms doing business in the United States. FINRA oversees nearly 4,560 brokerage firms, about 163,465 branch offices and approximately 630,820 registered securities representatives.

On the heels of increased FCPA scrutiny of financial institutions, private equity investors etc., specifically as to interactions with sovereign wealth funds and other foreign government owned or controlled investment vehicles, FINRA has released (here) a “Regulatory Notice” to remind firms of their “obligations under the Foreign Corrupt Practices Act.”

The notice states as follows:

“FINRA advises member firms to review their business practices to ensure they are complying with all of their obligations under the FCPA. A member firm’s failure to comply with its FCPA obligations will be considered conduct inconsistent with high standards of commercial honor and just and equitable principles of trade in violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).”

FINRA’s annual conference (here) will also feature a session that discusses the importance of a FCPA compliance program and due diligence of broker-dealers with foreign subsidiaries and affiliates.

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