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Point – Counterpoint With Billy Jacobson

A few weeks ago, I took issue with Mark Mendelsohn’s (DOJ Deputy Chief, Fraud Section and the DOJ’s FCPA “top cop”) recent defense of the 2008 Siemens enforcement action. (see here).

In response, I heard from William Jacobson.

I am always grateful for reader feedback, especially when its comes from someone the caliber of Jacobson – the former Assistant Chief for FCPA Enforcement at the Fraud Section, Criminal Division, U.S. Department of Justice. While at DOJ, Jacobson worked closely with Mendelsohn, including on the Siemens matter. For more on Jacobson’s role at DOJ see this recent profile in Main Justice. Jacobson is currently the Vice President, Co-General Counsel, and Chief Compliance Officer at Weatherford International, Ltd. (see here).

With Jacobson’s permission, I set forth our e-mail exchange below.

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WJ – I have to take issue with your recent post regarding the Siemens settlement. As a recent émigré to the world of in-house counsel, I can assure you that the staggering monetary settlement made a tremendous impact in boardrooms across the U.S. and the world. One can certainly argue that the government should have kept investigating Siemens until it uncovered every scrap of evidence against the company. One can also argue that the fine and disgorgement amounts could have been greater. However, the government’s goal was not to destroy the company and thereby cause untold damage to its shareholders. In fact, I think it is fair to say that the government’s goal was to sufficiently punish the company without destroying the company. An investigation lasting several more years and a fine of several billion dollars could well have done that – not to mention debarment, the lack of which you have also criticized.

Since at least 2001, the Fraud Section has been trying to bring “real-time” prosecutions as often as possible. This often means focusing on the one or two most egregious transactions at issue in a case, bringing a case based upon those transactions and moving on. An important component of this strategy in FCPA cases has been ensuring that companies improve their compliance departments to mitigate the chances of bad conduct recurring. This is precisely what the Fraud Section (as well as the SEC and the Munich Prosecutor) did with Siemens and, in my opinion, it was the correct approach.

MK – Nice to hear from you and thanks for reading the blog. I am not suggesting that in a case that apparently involved hundreds, if not thousands, of separate bribe payments, that the DOJ/SEC need to fully investigate each and every instance, perhaps focusing on six, ten (I don’t know what the magical number is or should be) is desirable. Even so, is it too much to ask that, as to those six or ten instances, that the criminal charges actually fit the facts? In other words, is it too much to ask of the DOJ to actually charge a company that clearly committed FCPA antibribery violations with FCPA antibribery charges?

Point taken that the “government’s goal was not to destroy the company and thereby cause untold damage to its shareholders.” Indeed, that is a legitimate policy issue present in any corporate criminal matter, FCPA or not. However, is agreeing to an overall penalty LESS than the amount of the alleged payments and LESS than the amount of the business allegedly obtain or retained – is that “sufficiently punishing” the company. Siemens net income between 2004-2008 (a time period that does not even cover the full range of the relevant time period) was approximately $28.3 billion. Thus, the worldwide fines and penalties accounted for approximately 5% of its net income, how does this “sufficiently punish” the company? Is not one justified, when viewing the amounts at issue, to conclude that this whole episode was a net positive for Siemens?

You raise the debarment issue, which I have discussed on my blog as well. My opinion is that the message DOJ says it wants to send in these cases, will not be sent until a company is debarred for a specific time period. If the DOJ is looking for deterrence it has the tools at its disposal.

If “real-time” prosecutions are indeed the goal of the DOJ (a dubious assertion given that many, many disclosed FCPA cases have languished for years and years) that is a good goal. However, the rush to get things settled and put a nice shiny bow around a case so that the enforcement agencies can conserve resources and focus elsewhere, and so that the company can move on, should not result in a situation, which I think is reflected in the Siemens and BAE enforcement actions, that certain companies in certain industries which sell to certain customers are essentially immune from FCPA antibribery violations.

WJ: While I agree that debarment would send an even stronger deterrent message than non-debarment, it is hard to see how a $1.6B penalty equates with immunity as you suggest. There is always more punishment that is possible, but the maximum does not have to be applied for DOJ to be effective.

Another factor that should be considered is jurisdiction. If I remember correctly, the Siemens charging papers state that its Venezuelan and Bangladeshi subsidiaries used U.S bank accounts to further their bribe schemes. The papers do not make similar US-nexus allegations for either the parent company or the Argentine subsidiary. Thus, it may be that DOJ felt it didn’t have jurisdiction over the parent company for a bribery charge. As for BAE, I can only say what press reports make clear – the case was enormously challenging for many different reasons. I think the folks at DOJ would agree that their settlement was not perfect, but I think they did an admirable job of not having perfect be the enemy of good.

MK – I am clearly not suggesting that Siemens escaped liability for its “egregious,” “staggering,” and “brazen” corrupt conduct (those are the enforcement agencies’ words – not mine). However, it sure seems that certain companies have come to be immune from FCPA antibribery charges. Any time a particular company is immune from particular aspects of a law, respect for that law and indeed the rule of law suffers.

As to Siemens and whether there was a U.S. nexus sufficient to charge an antibribery violation, the DOJ’s information clearly states that Siemens Power Generation (with offices in Florida), Siemens Power Transmission and Distribution (with offices in North Carolina) and Siemens Transportation Systems (with offices in California) were key players in the overall bribery scheme – presumably DOJ included the “with offices” in the U.S. part for a reason.

In any event, where does this leave the future of FCPA enforcement. I teach the FCPA to my students, should I now conclude my FCPA section with “FCPA enforcement – an area of law where perfect should not be the enemy of good.” If you are an individual sitting in prison today because you violated the FCPA’s antibribery provisions, how do you explain to such an individual that certain companies are immune from the same conduct for which they are sitting in prison?

WJ: Those of your students that aspire to prosecution, especially white collar prosecution, would be well served to learn that concept, yes. Prosecutorial discretion is a wonderful feature of our judicial system which often leads to imperfect solutions, but, on balance, usually – though certainly not all the time — works out just about right.

Understanding Issuers

The FCPA (both the antibribery provisions and the books and records and internal control provisions) apply to issuers.

That was easy.

What is not so easy is figuring out just which companies are issuers. The FCPA defines an issuer as when a company “has a class of securities registered” with the SEC pursuant to the securities laws or when a company is “required to file reports” with the SEC pursuant to the securities laws.

These terms can be confusing, particularly when talking about non-U.S. based companies.

In connection with both the BAE and Technip matters, there was some mention of a potential SEC angle despite the fact that neither company currently has shares traded on a U.S. exchange.

Miller & Chevalier’s release in connection with the BAE matter (here) states:

“The U.S. pleadings detail significant issues with BAE’s compliance program and internal controls, yet the pleadings did not allege substantive violations of the FCPA’s accounting provisions, and the Securities and Exchange Commission (“SEC”) has yet to bring an action against BAE. The absence of SEC charges may reflect a lack of SEC jurisdiction because BAE was not subject to the registration and reporting requirements of the Securities and Exchange Act during the relevant time period, which is required for FCPA accounting provision jurisdiction. According to press accounts, however, the SEC may have investigated BAE in connection with the al-Yamamah arms sale. The status of this possible investigation remains unclear.”

Technip’s release (here) speaks of both the DOJ and SEC involvement in resolution of that matter.

Enter James Tillen (here), one of the co-authors of the Miller & Chevalier piece, to help explain SEC jurisdiction in these two similar, yet different matters.

Here is what he had to say.

“We specifically note in the Client Alert that the absence of an SEC resolution was likely due to the fact that the SEC did not have jurisdiction: ‘The absence of SEC charges may reflect a lack of SEC jurisdiction because BAE was not subject to the registration and reporting requirements of the Securities and Exchange Act during the relevant time period, which is required for FCPA accounting provision jurisdiction.’ Press accounts reported that the SEC was investigating at some point so it was worth raising the question of why no SEC resolution (especially since the DOJ effectively brought an internal controls case).

I looked quite closely at the issue of whether BAE was an issuer and concluded the following:

The definition of issuer includes any entity “which has a class of securities registered pursuant to” Section 12(g) of the Securities Exchange Act of 1934 or “which is required to file reports under” Section 15(d) of the Securities Exchange Act. 15 U.S.C. §§ 78dd-1(a), 78c(a)(8), 781, 78o(d). During the relevant time period, BAE Systems plc’s ADRs were sold in the United States Over The Counter (“OTC”), and not on any national securities exchanges, such as the NYSE, which require registration with the SEC. In fact, BAE has filed for an exemption from registration under Section 12(g) of the Exchange Act since at least 2002. See List of Foreign Issuers That Have Submitted Information Under the Exemption Relating to Certain Foreign Securities, SEC Release No. 34-45855 (May 1, 2002) (BAE listed as British Aerospace plc), SEC Release No. 34-49846 (June 10, 2004), and SEC Release No. 34-51893 (June 28, 2005). Pursuant to this exemption, BAE must provide information to the SEC on a yearly basis by completing Form F-6. See Rule 12g3-2. However, BAE is exempt from the annual and other periodic reports under Section 15(d) of the Act. See 17 C.F.R. § 240.15d-3. Based on these considerations, it would appear that BAE is not subject to the registration and reporting requirements of the Securities Exchange Act and therefore not an “issuer” for purposes of FCPA jurisdiction.”

In contrast, Tillen stated that Technip “had American Depository Shares listed on NYSE from at least 2001 until 2007. Thereafter, it delisted (see here and here) and now only trades on the OTC (over-the-counter) market. When it was listed, Technip was an ‘issuer’ for purposes of the FCPA.”

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Thanks for the explanation James.

As my mentor was fond of saying … “at least now I am confused on a higher level.”

The BAE “Soapbox”

Below is a compilation of what certain others in the FCPA community are saying about the BAE enforcement action.

Steven Tyrrell (here) notes (here) that the BAE “case again demonstrates the DOJ’s willingness to push its jurisdictional reach in cases involving foreign-based, non-issuers that make suspect payments outside the United States.” Tyrrell notes that “in spite of [a] seemingly slight jurisdictional nexus, DOJ aggressively pursued this FCPA matter and obtained an agreement from BAE to plead guilty to a felony and pay a $400 million penalty.” Even though the BAE criminal information contained bribery allegations (see here), the information did not change any FCPA offenses. Yet, Tyrrell and many others, continue to describe the BAE matter as an “FCPA matter.” Tyrrell’s aggressive comments are curious (and perhaps telling) in that he was the DOJ Chief of the Fraud Section responsible for prosecuting the FCPA from 2006 until his recent departure into private practice. (See here).

Miller Chevalier recently released (here) a thorough alert on the BAE matter. Among other things, the alert points out that the BAE matter “raises a host of significant legal and policy questions that are only partly explained in the public documents” associated with the matter. The alert points the “differences in the factual allegations in the two settlements” [SFO/DOJ] and notes that “the oblique nature of the violations charged, the negotiated terms of the settlements, and the allegations that are not made in the public settlement documents provide a glimpse of the political undercurrents, legal maneuvering, and policy objectives that underlie this settlement and raise potentially far-reaching precedential issues.”

Brian Whisler (here) had this to say:

“In a nutshell, the BAE resolution: (1) reconciles with DOJ’s publicly-stated commitment to deter corruption and bribery through the enforcement / prosecution of high impact, high profile cases — there are apparently other similar large scale matters in the DOJ pipeline (e.g., DaimlerChrysler); (2) reconciles with the UK’s effort to become a bigger player on the world enforcement scene, with the enhancement of penalties and other legislative efforts to give more teeth to the UK’s anti-corruption regime (keeping up with Germans in the aftermath of Siemens); and (3) suggests that defense contractor and procurement fraud in general will remain in the sights of the enforcement community for a considerable time, so long as we have one or more theaters of active military engagement.”

An FCPA lawyer who wished to remain anonymous had this to say:

“First, the SFO and the British justice system in general suffer in this settlement. From the British side, the deal has the feel of something that was quickly put together to put a lid on what else might develop. SFO investigators reportedly were still interviewing people on the morning the BAE resolution was announced. Larger than that issue, BAE clearly did wrong in Tanzania, but its actions in other markets were far equally disturbing and there will be no formal accounting for those acts. The unwritten message seems to be that industrialized nations continue to recognize that certain companies are “too big to fail,” and will take steps to protect even a company that does wrong, so long as the company is critical to some important national issue like defense or homeland security. Ultimately, these types of actions erode the moral authority of the industrialized world to demand the developing world to clean up its house. U.S. authorities have made a strong effort to have others step up and take the lead on anti-corruption issues, so that the world does not see anti-corruption as simply a U.S. issue. To some degree, the settlement in the U.S. diminishes that effort, as well. The developing world will see this deal as having been pushed by the U.S. They also will see the deal as not doing much to help the countries that BAE harmed through its corrupt business efforts. The small charity payment to Tanzania seems almost an afterthought inside of a $400 million deal, which is a drop in the bucket compared to BAE’s profits. The world likely will view the entire fine as a fairly minor slap for a company that has made a lot of money in the world market place because of its improper conduct.”

Finally, Ben Heineman, Jr. (here) noted that the BAE story is “depressingly familiar.” He notes that the BAE matter (and the Siemens matter) represent problems “in the developed world (!!), not in the developing world” and states that if “these iconic developed world companies had such widespread issues, it is reasonable to think that they are hardly alone.”

Willing to share you thoughts on the BAE matter? The comment box is open.

Africa Sting – Entrapment?

As previously indicated (here) a key FCPA issue presented in the Africa Sting indictments is whether offering to bribe or paying a bribe to a fictitious “foreign official” or a real, but non-participating “foreign official” can constitute a substantive FCPA violation given the influence and induce language in the statute.

Another obvious legal issue raised by the Africa Sting indictments is entrapment.

This is an area of law that is a bit “outside of my strike zone” so I went to the bullpen.

On the mound, Dru Stevenson, a Professor of Law at South Texas College of Law (here). With several entrapment publications (here), Professor Stevenson drops in today for a guest post on the law of entrapment and the legal landscape facing the Africa Sting defendants.

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There are two versions of the entrapment defense, the “subjective test” (which is the majority rule, and focuses on the defendant’s predisposition) and the “objective test,” (favored by the Model Penal Code and about 15 states, and focused on the egregiousness of the government’s conduct). Given that this “Africa Sting” case is in federal court (brought under a federal statute, the FCPA), the court will have to apply the subjective test, because the United States Supreme Court adopted this rule in a series of five cases spread over several decades.

All federal courts use the subjective test; so this case will focus on the defendant’s “predisposition” rather than the actual government conduct in the case. The conduct of the FBI or their agents (including non-agency individuals recruited to act as informants or recruiters for the sting operation) will matter only to the extent that it sheds light on how much persuasion was necessary to convince the defendant(s) to violate the law, because this is one factor in showing “predisposition.” The same is true for the “inducement” or enticement (in this case, substantial kickbacks or bribes) involved – it will not really matter except to the extent that it suggests the defendant would never have committed the crime “but for” the undercover agent’s inducement.

Other factors that can show “predisposition” by the defendant are a history of committing similar acts, the alacrity/resistance with which the defendant responded to the undercover agent’s proposition, and the amount of time it took to entangle the defendant in the illegal activity. The subjective test is really a “but-for” test: “but for” the government’s inducement, the defense must show, the culprit would never have pursued such a course of action. It is important to keep this idea distinct from the notion of opportunity. The subjective test does not ask whether it was wrong for the government to provide an opportunity, or even if the undercover agents were deceptive or somewhat unethical in the approach that they used. It is a question of the defendant’s predisposition, which relates to both character and willingness, not opportunity. The subjective test looks at the defendant’s subjective preferences, choices, and history.

This is an uphill battle for defendants in sting operations, because the sting itself was planned out ahead of time to catch the defendant “in the act” with plenty of documentation about the time, place, and manner in which the crime occurred (stings are often on video!). It takes a lot of creativity and charisma to convince a jury that the defendant was actually not inclined to commit the act that he did in fact commit. The conventional wisdom among defense attorneys and legal scholars is that the entrapment defense usually does not work, and there is empirical evidence suggesting that fewer and fewer defendants use it each year.

There is also a significant hazard with raising the entrapment defense in federal court: the defendant’s criminal history becomes admissible evidence at the trial, where it otherwise might be excluded completely. Normally, the federal rules of evidence prohibit prosecutors from introducing the defendant’s prior convictions, because this could be so prejudicial for jurors (they might punish the defendant again for his previous crimes, regardless of his guilt under the present charges). With the entrapment defense, however, the defendant has put his own “predisposition” into issue in the case, arguing that he would never have committed the crime but for the government’s pressure. This opens the door for the prosecutor to submit the defendant’s “rap sheet” or “priors” to rebut his assertion that he lacked the predisposition to commit the crime.

The entrapment defense is, in fact, our country’s primary way of regulating sting operations. On a secondary level, the internal, administrative regulation of sting operations comes from the U.S. Attorney General’s Guidelines on Federal Bureau of Investigation Undercover Operations, which set rules for sting operations that the Federal Bureau of Investigation (the “FBI”) may conduct. The rules (see here) are the subject of modifications every few years, at the discretion of the Attorney General, and the last modification occurred in 2002, under John Ashcroft, mostly in response to the 9/11 terrorist attacks and the reactionary “War on Terror” that ensued thereafter. These Guidelines help illuminate the type of planning that went into this sting operation, but provide no remedies whatsoever for a defendant who is the victim of entrapment. The Guidelines, however, are a contributing factor to the difficulty of prevailing with an entrapment defense – the FBI knows the rules, is required to plan the sting operation carefully before proceeding or obtaining funding, and will generally plan the operation so that they steer clear of providing a potential entrapment defense to their targets.

A final note that may be relevant for these FCPA cases: there is no such thing as “private entrapment,” and even the notion of “vicarious entrapment” gets little traction in the federal courts. By private entrapment, I mean solicitation to commit a crime by someone who is not working for the government – that is, a false friend setting you up to get caught committing a crime, or even a fellow criminal who makes an “offer you cannot refuse.” If the defendant was induced to commit the crime by a private actor, not working for the FBI, no entrapment defense is available. “Vicarious entrapment” is similar: this is the situation where a defendant was recruited to commit a crime by another defendant, who might actually have a valid entrapment defense. In other words, suppose the FBI really crossed the line and recruited otherwise-innocent Defendant A, who was not predisposed to commit the crime but was overwhelmed by the undercover agent’s pressure or enticements; Defendant A might have a valid entrapment defense. If, however, Defendant A went and recruited his ever-willing colleague, Defendant B, into the conspiracy, Defendant B does NOT have a valid entrapment defense. Defendant A’s entrapment claim is non-transferable.

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