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Friday Roundup

The SEC files an amended complaint, Judge Leon strikes again, a provocative press release, a focus on lobbying and for the reading stack.  It’s all here in the Friday roundup.

SEC Files Amended Complaint in Jackson / Ruehlen Matter

As highlighted in this prior post, this past December Judge Keith Ellison (S.D. Tex.) issued a lengthy 61 page decision (here) in SEC v. Mark Jackson and James Ruehlen.  In short, Judge Ellison granted Defendants’ motion to dismiss the SEC’s claims that seek monetary damages while denying the motion to dismiss as to claims seeking injunctive relief.  Even though Judge Ellison granted the motion as to SEC monetary damage claims, the dismissal was without prejudice meaning that the SEC was allowed to file an amended complaint.  As explained in the prior post, Judge Ellison’s decision was based on statute of limitations grounds (specifically that the SEC failed to plead any facts to support an inference that it acted diligently in bringing the complaint) as well as the SEC’s failure to adequately plead discretionary functions relevant to the FCPA’s facilitation payments exception.

Last week, the SEC filed its amended complaint (here).  The most noticeable difference in the amended complaint, based on my brief review of the 58 page document, appears to be several allegations regarding Nigerian law, including the Customs & Excise Management Act.

Judge Leon Strikes Again

This prior post generally discussed Judge Richard Leon’s rejection of the SEC v. IBM FCPA settlement, a case that still lingers on the docket.

As noted in this Main Justice story and this Wall Street Journal story, Judge Leon has struck again.  According to the reports, yesterday Judge Leon conducted a scheduled hearing in SEC – Tyco FCPA case in chambers, much to the dismay of media assembled in open court.

As noted in this prior post, in September 2012, the DOJ and SEC announced an FCPA enforcement against Tyco International Ltd. and a subsidiary company.  Total fines and penalties in the enforcement action were approximately $26.8 million (approximately $13.7 million in the DOJ enforcement action and approximately $13.1 million in the SEC enforcement action).  As noted in this SEC release, Tyco consented to a final judgment that orders the company to pay approximately $10.5 million in disgorgement and approximately $2.6 million in prejudgment interest.  Tyco also agreed to be permanently enjoined from violating the FCPA.

Although both the IBM and Tyco enforcement actions involve the SEC’s neither admit nor deny settlement language, this would not seem to be the key thread between these two enforcement actions that is drawing the ire of Judge Leon.  Rather as explained in this post summarizing the IBM enforcement action and this post highlighting various notable features of the Tyco action, both companies are repeat FCPA violators.  In resolving the “original” FCPA enforcement actions – IBM in 2000 and Tyco in 2006 – both companies agreed to permanent injunctions prohibiting future FCPA violations.

This prior post titled “Meaningless Settlement Language” detailed Judge Jed Rakoff’s discussion of so-called “obey the law” injunctions in SEC v. Citigroup and this prior guest post discussed an Eleventh Circuit decision last year vacating a SEC “obey the law” injunction.

A Provocative Press Release

The law firm Bienert, Miller & Katzman (“BMK”) represented Paul Cosgrove (a former executive of Control Components Inc.) in the so-called Carson enforcement actions.  The Carson action involved a notable “foreign official” challenge and as highlighted in previous posts here, here, and here, after Judge Selna issued a pro-defendant jury instruction, the DOJ soon thereafter offered the remaining defendants (Stuart Carson, Hong Carson, David Edmonds, and Cosgrove) plea agreements which the defendants accepted.  As to those plea agreements, I ended each post by saying – the conclusions are yours to reach.  In Fall 2012, the defendants were sentenced as follows:  S. Carson (four months in prison), H. Carson (three years probation), Edmonds (four months in prison) and Cosgrove (15 months of home detention).  See this prior post regarding Carson sentencing issues.

In a January 17th press release (here), BMK stated as follows.

“BMK and counsel for three other defendants … conducted a worldwide investigation and developed evidence suggesting the government’s evidence was incomplete, the court documents indicate.  Ultimately,  most companies bought CCI valves because they were the best in the world (not because of bribes); most of the supposed “public officials” denied receiving any bribes; and, in most cases, the alleged improper payments were never actually made, according to court records.

Further, through an aggressive litigation and motion strategy, counsel were able to obtain jury instructions that highlighted the government’s heavy burden of proof at trial.  For example, the trial court agreed with defense counsel that the government was obligated to prove defendants’ knew they were dealing with “foreign officials,” something that would have been extremely difficult for the government to prove.  The supposed bribery recipients worked for companies that appeared to operate like private companies in the United States, making it very unlikely that the defendants realized they were dealing with “government officials.”

BMK and other defense counsel  raised several other issues that brought the government’s ability to obtain a conviction, or defend an appeal, into serious doubt.  These motions called into question whether the alleged bribe recipients were even “public officials” as intended by the FCPA; whether the Travel Act even applied to the case; and, whether defendants were entitled to millions of pages of documents that had been withheld from them by CCI, their former employer.  Each of these issues likely would have been decided for the first time on an appeal in this case.”

[Full disclosure – I was an engaged expert in the Carson cases, filed a “foreign official” declaration in connection with the motion to dismiss, and was disclosed as a testifying expert for the trial]

Lobbying

In my double-standard series (here), I have highlighted various aspects of lobbying here in the U.S.  The beginning of the recent opinion in U.S. v. Ring (D.C. Circuit) is an interesting read.  In pertinent part, it states as follows (internal citations omitted).

“Lobbying has been integral to the American political system since its very inception.  […] As some have put it more cynically, lobbyists have besieged the U.S. government for as long as it has had lobbies.” […]  By 2008, the year Ring was indicted, corporations, unions, and other organizations employed more than 14,000 registered Washington lobbyists and spent more than $3 billion lobbying Congress and federal agencies. […] 

The interaction between lobbyists and public officials produces important benefits for our representative form of government. Lobbyists serve as a line of communication between citizens and their representatives, safeguard minority interests, and help ensure that elected officials have the information necessary to evaluate proposed legislation. Indeed, Senator Robert Byrd once suggested that Congress “could not adequately consider [its] workload without them.” […]

In order to more effectively communicate their clients’ policy goals, lobbyists often seek to cultivate personal relationships with public officials. This involves not only making campaign contributions, but sometimes also hosting events or providing gifts of value such as drinks, meals, and tickets to sporting events and concerts. Such practices have a long and storied history of use—and misuse. During the very First Congress, Pennsylvania Senator William Maclay complained that “New York merchants employed ‘treats, dinners, attentions’ to delay passage of a tariff bill.” […] Sixty years later, lobbyists working to pass a bill that would benefit munitions magnate Samuel Colt “stage[d] lavish entertainments for wavering senators.” […] Then, in the 1870s, congressmen came to rely on railroad lobbyists for free travel. […]. Indeed, one railroad tycoon complained that he was “averag[ing] six letters per day from Senators and Members of Congress asking for passes over the road.”

Reading Stack

Some dandy articles/essays to pass along regarding the FCPA books and records provisions, victim issues and criminal procedure.

FCPA Books and Records Provisions

Michael Schachter (Willkie Farr & Gallagher and a former Assistant United States Attorney in the Southern District of New York, where he focused on criminal prosecution of securities fraud and was a member of the Securities and Commodities Fraud Task Force) recently authored an article concerning the FCPA’s books and records provisions.  Titled “Defending an FCPA Books and Records Violation” and published in the New York Law Journal, the article begins as follows.

“In recent years, the books and records provisions of the [FCPA] have taken on new life, as both the [DOJ and SEC] have announced their intention to bring more charges, especially against individuals, for violation of this section of the FCPA.  A review of recent enforcement actions reveals that the Justice Department and the SEC consider the books and records requirement violated whenever corrupt payments are made to a foreign official and recorded in a corporation’s books as anything other than a ‘bribe,’ including, but not limited to, such things as commissions, social payments, or after sales service fees.  This article proposes that the books and records provision is, in fact, narrower than the Justice Department and the SEC interpretations suggest, and argues that both agencies may be using the provision to punish behavior falling outside the FCPA’s reach.”

Spot on.  See prior posts here and here.  See here for a word cloud of the FCPA’s books and records and internal control provisions.

Corporate Employer’s As Victims

The title of Professor Peter Henning’s recent White Collar Crime Watch post in the New York Times DealBook was “How Can Companies Sue Defendants in Insider Trading Cases?”  The post concerned the Mandatory Victims Restitution Act and Professor Henning writes that it “has been interpreted to allow companies that incur costs in cooperating with the government to seek repayment of their expenses from defendants” and the “statute requires a court to order the reimbursement to victims of ‘other expenses incurred during participation in the investigation or prosecution of the offense.'”

The parallels to a company incurring expenses in connection with FCPA investigations based on employee conduct is obvious.

Yet, Professor Henning writes as follows.

“[T]he crucial word in the Mandatory Victims Restitution Act is “incurred,” and there isn’t a consensus among federal courts over what expenses are covered.  Companies want it to include all costs related to any part of the case, including dealing with the S.E.C. even though it can only pursue a civil enforcement case. Defendants take a much narrower view, arguing that mandatory restitution covers only expenses arising as direct result of the criminal prosecution by the Justice Department.

Ham Sandwich Nation

Glenn Reynolds (University of Tennessee College of Law) recently published an essay titled “Ham Sandwich Nation: Due Process When Everything is a Crime” (see here to download).  The essay does not mention the FCPA, yet it is very much applicable to the FCPA.  In just the past year, approximately 25 individuals criminally indicted by the DOJ have put the DOJ to its burden of proof and ultimately prevailed.  Ham Sandwich Nation would also seem applicable given the extensive use of NPAs and DPAs in the FCPA context.  The thesis of the essay is spot on.  Reynolds write as follows.

“Though people suspected of a crime have extensive due process rights in dealing with the police, and people charged with a crime have even more extensive due process rights in courts, the actual decision whether or not to charge a person with a crime is almost completely unconstrained.  Yet, because of overcharging and plea bargains, that decision is probably the single most important event in the chain of criminal procedure.”

Year In Review

The Year in Review version of Debevoise & Plimpton’s always informative and comprehensive FCPA Update is here.   Among the many topics discussed in the FCPA Update is the notion that many FCPA enforcement actions are based on very old conduct and the following observation.  “Targets of enforcement actions also run the risk that regulators – whether consciously or not – apply current expectations of appropriate compliance measures and effective internal controls mechanisms when evaluating the adequacy of procedures that existed at times when less rigorous standards may have commonly been considered acceptable.”  For my similar previous observation, see this prior post.

*****

A good weekend to all.

Friday Roundup

Better late than never, Judge Leon pulls a Judge Rakoff, Edmonds sentenced, it’s official, whistleblower statistics, it ought to stop marketing, China related issues, ICE melted quickly, and a U.K. enforcement action.  It’s all here in the Friday roundup.

The Foreign Corrupt Practices Act Under The Microscope

Academic publishing is seldom quick. Yet before the calendar flips into another year, I am pleased to share my article concerning 2011 FCPA enforcement.  The abstract of “The Foreign Corrupt Practices Act Under The Microscope” (see here to download) recently published in the University of Pennsylvania Journal of Business Law is as follows.  Information in the article is current as of January 16, 2012.

For most of the Foreign Corrupt Practices Act’s history, key decisions concerning its scope and enforcement were made behind closed doors around conference room tables in Washington, D.C. The FCPA took on a life of its own and, in many instances, the statute came to mean whatever the DOJ or SEC could get putative corporate FCPA defendants (mindful of the consequences of actual prosecuted charges) to agree to behind those closed doors. However, as the enforcement agencies continued to push the envelope on enforcement theories and practices, and as the DOJ brought more individual FCPA enforcement actions, including through manufactured sting operations, business entities and individuals alike began to openly fight back. While many FCPA enforcement decisions and procedures remain opaque, 2011 witnessed the most intense year of public scrutiny in the FCPA’s history. This Article (i) provides an overview of 2011 FCPA enforcement and discusses certain problematic enforcement trends, and (ii) highlights how in 2011 the FCPA was subjected to the most meaningful public scrutiny in its history. FCPA enforcement trends and scrutiny demonstrate that as the FCPA nears its thirty-fifth year, basic legal and policy questions remain as to the purpose, scope, and effectiveness of the FCPA.

Start your collection of FCPA Year in Reviews.  For my 2011 (short version), see here.  For 2010, see here (short version), here (long version).  For 2009, see here (long version).

Judge Leon Pulls a Judge Rakoff

My post concerning the SEC’s March 2011 enforcement action against IBM was titled “Questions Abound in IBM Enforcement Action.”  (See here).  Among the issues I discussed were the following.  That in December 2000, IBM resolved an FCPA enforcement action and consented, as part of the settlement, to the entry of an Order that requires IBM to cease and desist from committing or causing any future violation of [the FCPA’s books and records provisions].  I noted that because the March 2011 enforcement action alleged FCPA books and records charges, that IBM was thus in clear violation of the 2000 court order.

The case was assigned to Judge Richard Leon (of Africa Sting fame) and lingered for a long time.  This Wall Street Journal Corruption Currents post and this Bloomberg article report that Judge Leon has refused to approve the settlement.

As stated by Bloomberg – “The heart of the dispute is that Leon, who has had the case under review for 22 months, wants reporting on a broader range of possible wrongdoing than the company is willing to turn over.  Leon, who spoke loudly and angrily, asked why the regulator would agree to limit such requirements for a company with a history of books-and-records violations. […]   “I guess you want that $10 million judgment on your list of achievements this year,” Leon told [the SEC lawyer]. “Well, it’s not going to happen.”  He scheduled a hearing for Feb. 4.”

As stated by Wall Street Journal Corruption Current – “Leon also questioned broader SEC settlement policies and warned that he was among “a growing number of district judges who are increasingly concerned” by those policies.”

In not “rubber stamping” the SEC – IBM settlement, Judge Leon pulled a Judge Rakoff.  Judge Rakoff of the S.D. of N.Y. has been a frequent focus on this site – see here, here, here and here.  See also, the discussion of Judge Rakoff in my 2010 article “The Facade of FCPA Enforcement.”

Edmonds Sentence

This past June, David Edmonds, a defendant in the long-running “Carson” enforcement action involving former employees of Control Components Inc., agreed to plead guilty on the eve of trial to substantially reduced charges. (See here for the prior post).  Earlier this week, Judge James Selna sentenced Edmonds to four months in prison and four months of home confinement.  (See here for Judge Selna’s sentencing memo).  As noted in the DOJ’s sentencing memo (here), the DOJ sought a 14 month prison sentence.

Other defendants previously sentenced in the case are Stuart Carson (4 months in prison followed by 8 months of home detention), Hong Carson (3 years probation to include 6 months of home detention) and Paul Cosgrove (13 months home detention).

It’s Official

Imagine a foreign country in which the president is actively seeking and accepting corporate money to fund inaugural festivities.  All sorts of red flags right?

But wait, this describes the United States and President Obama’s upcoming inauguration.  As detailed in this prior post, President Obama’s fundraising advisers “have urged the White House to accept corporate donations for his January 2013 inaugural celebration rather than rely exclusively on weary donors who underwrote his $1 billion re-election effort.”

It’s now official.  As noted by this recent New York Times article “President Obama’s finance team is offering corporations and other institutions that contribute $1 million exclusive access to an array of inaugural festivities.”  As noted in the article, Obama’s finance team is offering four different packages “with differing levels of access depending on the level of contribution.”

Our FCPA enforcement agencies are bringing enforcement actions against companies for conduct that includes providing $600 bottles of wine, Cartier watches, cameras, kitchen appliances, business suits, and executive education classes to individuals employed by foreign companies that are allegedly state-owned or state-controlled.  (These are all allegations found in recent FCPA enforcement actions).

But remember, as Assistant Attorney General Lanny Breuer recently declared (see here), “we in the United States are in a unique position to spread the gospel of anti-corruption.”

Whistleblower Statistics

The Dodd-Frank Act enacted in July 2010 contained whistleblower provisions applicable to all securities law violations including the Foreign Corrupt Practices Act.  In this prior post from July 2010, I predicted that the new whistleblower provisions would have a negligible impact on FCPA enforcement.  As noted in this prior post, my prediction was an outlier (so it seemed) compared to the flurry of law firm client alerts that predicted that the whistleblower provisions would have a significant impact on FCPA enforcement.

So far, there have not been any whistleblower awards in connection with FCPA enforcement actions.  Given that enforcement actions (from point of first disclosure to resolution) typically take between 2-4 years, it still may be too early to effectively analyze the impact of the whistleblower provisions on FCPA enforcement.

Whatever your view, I previously noted that the best part of the new whistleblower provisions were that its impact on FCPA enforcement can be monitored and analyzed because the SEC is required to submit annual reports to Congress.  Last month, the SEC released (here) its annual report for FY2012.

Of the 3,001 whisteblower tips received by the SEC in FY2012, 3.8% (115) related to the FCPA.  As noted in this similar post from last year, in FY2011 (a partial reporting year)  3.9% of the 334 tips received by the SEC related to the FCPA.

It Ought to Stop Marketing

In this previous post titled “It Ought to Stop” I focused on the FCPA conference industry and how conference firms drive attendance to their events by touting the public servants who will speak at the event.

Here is how conference firm C5 touts its upcoming conference in a press release (here).

Ask the U.S. DOJ and U.S. SEC directly how your company can remain compliant

Hear the latest on the newly released FCPA guidance. Along with the U.S. Securities & Exchange Commission’s, Charles E. Cain, the Deputy Chief of the FCPA Unit, Enforcement Division, we will have Matthew S. Queler, from the Criminal Division at the U.S. Department of Justice, presenting comprehensive, insightful and practical details of the U.S. government’s interpretation of the guidance, and highlight recent examples designed to help prevent future violations.  Their session at 14:00 on Day 1, will help you navigate the ever evolving markets and recognize the current enforcement trends; giving you the tools to reanalyse risk profiles and minimize areas of exposure. Finally, to top off the hour you will be given an exclusive opportunity to have your FCPA questions answered. The only way to obtain answers directly from the U.S. DOJ and U.S. SEC is to register for this forum!

The event, depending when you register and which package you select, costs between €4341 – €1795.

It ought to stop.

China Related Issues

An occassional topic of discussion on this site is Chinese state-owned enterprises (SOEs) and how such companies are frequently doing business outside its borders, including here in the U.S. (See here, here, and here for prior posts).

Wall Street Journal Columnist Dennis Berman “hit the nail on the head” in his recent column when he noted that one of “the most intriguing business stories of the past month has been taking place in San Francisco, where a group of U.S. developers is planning the biggest real-estate expansion there since the 1906 earthquake. The group—which includes Lennar Corp., Ross Perot Jr. and others —isn’t getting financing from an American bank or pension fund. No, the money, some $1.7 billion of it, is coming from the China Development Bank, a policy arm of the Chinese state.  As Berman further notes, a financing contingency is that China Railway Construction Corp. – a state-owned infrastructure builder with roots in the People’s Liberation Army—take part in the projects, which will develop up to 20,000 new homes.

Another occasional topic of discussion on this site is how Chinese companies are listing shares on U.S. exchanges and thus becoming “issuers” for purposes of the FCPA.  (See here for a prior post).  A core FCPA enforcement action of a Chinese issues has never occurred, but I predict it will some day – diplomatic and foreign policy issues aside.  Only now, the universe of potential targets is shrinking.  As noted in this recent Wall Street Journal article, several Chinese companies have delisted from U.S. exchanges.  The article provides the following information.  “At the peak, at year-end 2010, 167 Chinese companies were listed on Nasdaq and 99 on the NYSE. That compares with 84 China-based companies on NYSE and 129 on Nasdaq as of Nov. 30, 2012, according to the exchanges.”  For more, see this recent article from the New York Times.

ICE Melted Quickly

This recent post highlighted the cert petition of Instituto Constarricense de Electricidad of Costa Rica (“ICE”) to the Supreme Court related to victim issues in connection with the December 2010 Alcatel-Lucent FCPA enforcement action.  After several unsuccessful 11th Circuit appeals, ICE petitioned the Supreme Court to hears it case (see here).  The question presented for review is as follows.  “Whether a crime victim who is denied rights conferred by the federal Crime Victims’ Rights Act has a right to directly appeal the denial of those rights.”

The ice melted quickly as recently the Supreme Court denied ICE’s petition.

U.K. Enforcement Action

Earlier this week, the U.K. Serious Fraud Office announced (here) charges against former employees of Swift Group (an oil and gas services provider) following “a two-year investigation into allegations of corruption in relation to the tax affairs of Swift Technical Energy Solutions Ltd, a Nigerian subsidiary of the Swift Group of companies.”  According to the SFO release,  “the value of the bribes alleged to have been paid is approximately£180,000.”

The SFO release notes that Paul Jacobs (the former Chief Financial Officer of Swift), Bharat Sodha (the former Tax Manager of Swift), Nidhi Vyas (the former Financial Controller of Swift), and Trevor Bruce (the former Area Director for Nigeria of Swift) were charged in relation to “bribes to tax officials to avoid, reduce or delay paying tax on behalf of workers placed by Swift.  The charges relate to payments said to have been made to agents of the Rivers State Board of Internal Revenue and the Lagos State Board of Internal Revenue, both in Nigeria. The payments were made in 2008 and 2009.”

*****

A happy holiday season to all.

Questions Abound In IBM Enforcement Action

Last week, the SEC announced (here) a settled FCPA enforcement action against International Business Machines Corporation (“IBM”).

This post summarizes the enforcement action and then addresses the many questions raised by the enforcement action.

Summary of Enforcement Action

According to the SEC complaint (here): “During the period from 1998 through 2009, in violation of the Foreign Corrupt Practices Act of 1977, employees of certain of [IBM’s] subsidiaries and a majority-owned joint venture provided cash payments, improper gifts, as well as improper travel and entertainment to government officials in South Korea and China.”

The conduct at issue focused on:

IBM-Korea, Inc. (“IBM-Korea”), a South Korean corporation “wholly-owned indirectly by IBM International Group B.V, which, in turn is wholly-owned by IBM;”

LG IBM PC Co. Ltd. (“LG-IBM”), a South Korean joint venture formed in 1996 by IBM-Korea (51% owner of the JV) and LG Electronics (“LG”) (49% owners of the JV); and

IBM (China) Investment Company Limited and IBM Global Services (China) Co. Ltd. (collectively “IBM-China”) – entities “owned by IBM China/Hong Kong Limited, a Hong Kong company that is ultimately owned by IBM.”

In summary fashion, the SEC alleged as follows.

“From 1998 to 2003, employees of [IBM-Korea] and [LG-IBM] made payments to various government officials in South Korea. The purpose of these payments was to secure the sale of IBM products through IBM-Korea and LG-IBM’s business partners. During the relevant period, these managers paid approximately KRW 216,832,500 (South Korean Won), or $207,000, in cash bribes to South Korean government officials, including providing improper·gifts and payments of travel and entertainment expenses.”

“From at least 2004 to early 2009, employees of [IBM-China] engaged in a widespread practice of providing overseas trips, entertainment, and improper gifts to Chinese government officials. The misconduct in China involved several key IBM-China employees and more than 100 IBM China employees overall.”

As to IBM, the parent-company issuer, the SEC alleged as follows.

“Despite its extensive international operations, IBM lacked sufficient internal
controls designed to prevent or detect these violations of the FCPA. During the period 1998 to 2009, IBM had corporate policies prohibiting bribery and procedures relating to compliance with the FCPA; however, deficient internal controls allowed employees of IBM’s subsidiaries and joint venture to use local business partners and travel agencies as conduits for bribes or other improper payments to South Korean and Chinese government officials over long periods of time.”

“During the period 1998 to 2009, IBM failed to make and keep books and records that accurately reflected the improper payments made in South Korea and China. Instead, these payments were recorded as legitimate business expenses.”

The body of the SEC’s complaint alleges various “things of value” provided to alleged South Korean “foreign officials” including shopping bags filled with thousands of dollars, cash-filled envelopes exchanged in parking lots and free personal computers, and travel and entertainment expenses.

According to the SEC, such “things of value” were: “in exchange for designating IBM-Korea a preferred supplier of mainframe computers to [an alleged government entity] and for placing orders with IBM-Korea at higher prices;” “in exchange for (1) maintaining IBM-Korea as the supplier of mainframe computers to [an alleged government entity]; and (2) for helping an IBM-Korea business partner win bids to supply mainframe computers and storage equipment to [an alleged government entity] worth more than [$21 million]; “in exchange for [an alleged “foreign official’s] assistance to IBM-Korea in obtaining a contract with [an alleged government entity] worth approximately [$13 million] for the installation of a mainframe computer in 2002;” “to entice [foreign official’s] to purchase IBM products:” “to win a contract to supply 657 (later increased to 825) personal computers valued at [approximately $1.4 million]; “in exchange for providing LG-IBM with certain confidential information regarding the product specifications on [an alleged government entity’s] request for procurement;” “to persuade employees of [an alleged government entity] to purchase IBM products;” and to entice alleged foreign officials “to purchase IBM products or to provide information to assist LG-IBM in the bidding process.”

The body of the SEC’s complaint as to China conduct alleges as follows.

“From at least 2004 to early 2009, IBM-China employees created slush funds at local travel agencies in China that were then used to pay for overseas and other travel expenses incurred by Chinese government officials. In addition, IBM-China employees created slush funds at its business partners to provide a cash payment and improper gifts, such as cameras and laptop computers, to Chinese government officials. IBM failed to record accurately these payments in its books and records.”

Specifically, the SEC alleged as follows:

“Between 2004 and 2009, IBM’s internal controls failed to detect at least 114
instances in which (1) IBM-China employees and its local travel agency worked together to create fake invoices to match approved [Delegation Trip Requests] DTRs; (2) trips were not connected to any DTRs; (3) trips involved unapproved sightseeing itineraries for Chinese government employees; (4) trips had little or no business content; (5) trips involved one or more deviations from the approved DTR; and (6) trips where per diem payments and gifts were provided to Chinese government officials.”

Based on the above allegations, the SEC charged IBM with violating the FCPA’s books and records and internal control provisions. As noted in the SEC release, IBM, without admitting or denying the SEC’s allegations, consented to the entry of a final judgment permanently enjoining the company from future FCPA violations. IBM agreed to pay $10 million (disgorgement of $5.3 million, $2.7 million in prejudgment interest, and a $2 million civil penalty).

Peter Barbur and Evan Chessler (Cravath, Swaine & Moore – here and here) represented IBM.

Questions Abound

For starters, this is not the first time IBM has been the focus of an FCPA enforcement action.

In December 2000 (see here), the SEC found, in a cease and desist proceeding, that IBM violated the FCPA books and records provisions in connection with a $250 million contract to integrate and modernize computer systems in Argentina. As part of the settlement, “IBM consented to the entry of an Order that requires IBM to cease and desist from committing or causing any future violation of [the FCPA’s books and records provisions].

Given that IBM was charged last week with FCPA books and records violations, IBM has clearly violated this 2000 court order.

In my recent “Facade of FCPA Enforcement” article (here), I highlight various pillars that contribute to the facade of FCPA enforcement.

Pillars include, unsupported legal conclusions serving as the foundation for an enforcement action, including as to “foreign official” and disgorgement issues; the tendency of factually similar cases being resolved materially different ways; and bribery, yet no bribery.

These pillars are present in the IBM enforcement action.

For starters, who were the “government officials in South Korea and China.” Were they traditional bona-fide government officials or employees of alleged state-owned or state-controlled enterprises and thus “foreign officials” under the enforcement agencies’ interpretation – an interpretation currently the subject of judicial challenges?

As to the South Korean officials, the complaint merely alleges that the “foreign government officials involved worked for sixteen South Korean government entities.” These officials included the “Chief of Operations for the Electronic Operations Division” of an entity; an employee of the same entity; a “manager of the government-controlled entity”; the “Director of Planning” of another entity; employees of an entity; an employee of a “state-owned agency of the South Korean government;” a “Director of Information Technology” at another entity; employees of another entity; and “key decision makers at ten other” entities.

As to the Chinese officials, the complaint merely alleges that the individuals were associated with “government-owned or controlled customers in China for hardware, software, and other services.”

Based on the descriptions in the complaint, it seems as if the “foreign officials” were all employees of SOE entities. If so, two out of three corporate FCPA enforcement actions in 2011 (IBM and Maxwell Technologies – see here) involve SOE employees.

Why no FCPA anti-bribery charges against IBM or the relevant subsidiaries (accepting of course the SEC’s “foreign official” interpretation)?

According to the SEC, the conduct at issue took place between 1998 and 2009. Further, according to the SEC, “in connection with the conduct described herein, IBM, directly or indirectly, made use of the mails or the means or instrumentalities of interstate commerce in connection with the acts, transactions, practices and courses of business alleged in this Complaint.”

Why no DOJ involvement?

It is very common for the DOJ and SEC to announce FCPA enforcement actions on the same day. Thus, one can assume (perhaps future events will prove otherwise) that the DOJ elected to sit this one out.

Why?

The SEC’s complaint alleges vivid instances of bribery (not always seen in FCPA enforcement actions) in connection with multi-million dollar contracts.

Yet, no bribery – not even civil FCPA anti-bribery charges.

Is this another instance where the U.S. enforcement agencies look first at the corporate offender, its customers, and its products, and then craft a resolution that will hurt the least?

After all, one of IBM’s largest customer segments is the government (federal, state, etc.) see here.

Did this play any role in how the enforcement action was resolved?

The SEC charged IBM only with FCPA books and records and internal controls violations. Yet, as in several other cases, the SEC pursued a disgorgement remedy. As noted in my Facade article (pages 981-984) non-FCPA disgorgement case law clearly holds that disgorgement may not be used punitively. It is difficult to see how mis-recording of a payment (a payment the SEC does not allege violated the FCPA’s anti-bribery provisions) can properly give rise to a disgorgement remedy. See also here from Philip Urofsky and Danforth Newcomb on this issue.

In a transparent legal system, similar facts are supposed to be resolved with similar charges. However, it is questionable whether this fundamental principle (one that inspires trust and confidence in a legal system) is followed in many FCPA enforcement actions.

The China-related charges against IBM regarding excessive travel and entertainment expenses are nearly identical to two previous FCPA enforcement actions – the December 2007 enforcement action against Lucent Technologies and the December 2009 enforcement action against UTStarcom, Inc.

Lucent was resolved via a DOJ non-prosecution agreement (here) and an SEC enforcement action charging only FCPA books and records violations (here).

UTStarcom was resolved via a DOJ non-prosecution agreement (here) and an SEC enforcement action charging FCPA anti-bribery as well as books and records and internal controls violations (here).

IBM, as detailed above, is presumably being resolved without any DOJ involvement and an SEC enforcement action charging only FCPA books and records violations.

Three cases – all involving in whole or in part allegations of providing excessive travel and entertainment expenses to Chinese “foreign officials” – resolved in three different ways.

*****

And now, as one reader put it, the question all FCPA Professor blog readers (at least this particular reader) are dying to know.

Butler or Wisconsin?

I am a born and raised cheesehead and graduate of the University of Wisconsin Law School.

However, my allegiance is to my employer – Butler University. Let’s face it, Butler is an awesome, feel-good story. Student-athletes in every sense of the word, home games at historic Hinkle Fieldhouse, a coach who, a few years ago, left his job selling pharmaceuticals to become a volunteer coach (since promoted), and a small, cozy campus to top it off.

BU-TLE- R U a Bulldog – hell ya!

A Look Back (and Forward)

This week marks not only the end of a year, but also a decade.

So let’s take a look back at FCPA enforcement circa 2000.

In 2000, the FCPA was indeed “on the books” (the statute was enacted in 1977), yet there was little in terms of FCPA news or enforcement actions.

A “U.S. newspapers and wires” search for the FCPA in the 2000 picks up 64 “hits” and among the more noteworthy stories from that year were the following:

(1) BellSouth corporation disclosed that the SEC launched a probe into whether one of its Latin American subsidiaries violated the FCPA and the company also disclosed that its outside counsel had already investigated the conduct and found that no violations had occurred; and

(2) BF Goodrich Company announced that it was using a web-enabled training system to educate its employees about work-related legal issues including the FCPA.

One could even attend a few FCPA training sessions in 2000 as the search picked up programs sponsored by both the City of New York Bar and the Washington DC Bar.

There was even one FCPA enforcement action in 2000!

In December 2000, the SEC announced (here) the filing of a settled cease-and-desist proceeding against International Business Machines Corporation (“IBM”).

According to the SEC order (here), IBM violated the books and records provisions of the FCPA based on the conduct of its indirect, wholly-owned subsidiary, IBM-Argentina, S.A. The conduct involved “presumed illicit payments to foreign officials” in connection with a “$250 million systems integration contract” between Banco de la Nacion Argentina (“BNA”) (an apparent “government-owned commercial bank in Argentina) and IBM-Argentina.

The SEC order finds that, in connection with the contract, IBM-Argentina’s Former Senior Management (without the knowledge or approval of any IBM employee in the U.S.) caused IBM-Argentina to enter into a subcontract with an Argentine corporation (“CCR”) and that “money paid to CCR by IBM-Argentina in connection with the subcontract was apparently subsequently paid by CCR to certain BNA officials.”

According to the Order, IBM-Argentina paid CCR approximately $22 million under the subcontract and “at least $4.5 million was transferred to several BNA directors by CCR.”

According to the Order, the former Senior Management “overrode IBM procurement and contracting procedures, and hid the details of the subcontract from the technical and financial review personnel assigned to the Contract.” The Order finds that IBM-Argentina “recorded the payments to CCR in its books and records as third-party subcontractor expenses” and that IBM-Argentina’s financial results were incorporated into IBM’s financial results filed with the Commission.

Based on the above conduct, the SEC concluded that “IBM violated [the FCPA’s books and records provisions] by failing to ensure that IBM-Argentina maintained books and records which accurately reflected IBM-Argentina’s transactions and dispositions of assets with respect to the Subcontract.” IBM consented to a cease and desist order and consented to entry of a judgment ordering it to pay a $300,000 penalty.

A Washington Post article about the IBM action notes that it “is the SEC’s first in three years involving overseas bribery.”

In 2000, there were no DOJ FCPA prosecutions (against corporations or individuals).

The first DOJ corporate FCPA prosecution of this decade did not occur until 2002.

In that action (here) Syncor Taiwan, Inc. (a wholly-owned, indirect subsidiary of Syncor International Corporation) pleaded guilty to a one-count criminal information charging violations of the FCPA. According to the DOJ release, “[t]he company admitted making improper payments [approximately $344,110] to physicians employed by hospitals owned by the legal authorities in Taiwan for the purpose of obtaining and retaining business from those hospitals and in connection with the purchase and sale of unit dosages of certain radiopharmaceuticals.”

The release further notes that the company “made payments [approximately $113,000] to physicians employed by hospitals owned by the legal authorities in Taiwan in exchange for their referrals of patients to medial imaging centers owned and operated by the defendant.”

Based on this conduct, the release notes that the company agreed to a $2 million criminal fine – “the maximum criminal fine for a corporation under the FCPA” (as noted in the release). The release also notes that “Syncor International has consented to the entry of a judgment requiring it to pay a $500,000 civil penalty, the largest penalty ever obtained by the SEC in an FCPA case.”.

From this retrospective, two issues jump out.

First, as demonstrated by the IBM action, the notion that an issuer may be strictly liable for a subsidiary’s (even if indirect) violations of the FCPA books and records is nothing new. (See here for a prior post on this issue).

Second, as demonstrated by the Syncor action, DOJ’s interpretation of the “foreign official” element to include non-government employees employed by state-owned or state-controlled entities stretches back to earlier this decade. (See here for prior posts on this issue).

This retrospective also highlights just how significantly FCPA enforcement has changed this decade.

For starters, the same “U.S. newspapers and wires” search for the FCPA (year to date) picks up nearly 700 “hits” (a ten-fold increase from ten years ago). In addition, if one wanted to, one could attend (it seems) an FCPA seminar, training session, bar event, etc. every week in a different state.

Further, I bet my Jack LaLanne Power Juicer received this holiday season that if the IBM enforcement action were to have recently occurred, the SEC would have also charged FCPA internal control violations as well as sought a significant disgorgement penalty given that the alleged improper payments in that matter helped secure a $250 million contract.

Moreover, the $2 million “maximum criminal fine for a corporation under the FCPA” (as noted in the Syncor DOJ release) seems laughable when viewed in the context of the $450 million Siemens criminal fine (Dec. 2008) or the $402 million Kellogg Brown & Root criminal fine (Feb. 2009). Also laughable is the $500,000 “largest penalty ever obtained by the SEC in an FCPA case” (as noted in the Syncor release) when viewed in the context of the $350 million Siemens penalty or the $177 million KBR/Halliburton penalty.

Has the conduct become more egregious during this decade or have enforcement theories and strategies simply changed? I doubt it is the former.

Why have enforcement theories and strategies changed? One of the best, candid explanations I’ve heard recently is that FCPA enforcement for the government “is lucrative.” (See here).

One of the great legal “head-scratchers” of this decade is how DOJ and SEC’s enforcement of the FCPA against business entities has taken place almost entirely outside of the normal judicial process due to the fact that corporate FCPA prosecutions are resolved through non-prosecution or deferred prosecution agreements, settled through SEC cease and desist orders, or otherwise resolved informally. The end result is that in many cases, the FCPA means what DOJ and SEC says it means.

My hope for the New Year and decade is that many of the untested and unchallenged legal theories which are now common in FCPA enforcement will actually be subject to judicial scrutiny and interpretation.

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