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Closing Out The 70’s

[This post is part of a periodic series regarding “old” FCPA enforcement actions]

Previous posts (here and here) detailed FCPA enforcement actions from the 1970’s against:  (i) Page Airways, Inc. (and six officers and/or directors of the company); and (ii) Kenny International Corporation and Finbar Kenny (Chairman of the Board, President and majority shareholder of Kenny International).

The 1970’s also witnessed:  (i) a SEC civil complaint against Katy Industries, Inc. and its executives Wallace Carroll and Melvan Jones; and (ii) a DOJ civil complaint against Roy Carver and R. Eugene Holley; and (iii) a SEC civil complaint against International Systems & Controls Corporation and its executives J. Thomas Kenneally, Herman Frietsch, Raymond Hofker, Albert Angulo and Harlan Stein.

These enforcement actions are summarized below.

Katy Industries, Wallace Carroll and Melvan Jacobs

In August 1978, the SEC alleged in a civil complaint for permanent injunction that Katy Industries, Inc. (“Katy”), Wallace Carroll (Chairman of the Board and CEO of Katy) and Melvan Jacobs (Director and Member of Katy’s Executive Committee and also an attorney who acted as counsel to Katy as to the conduct at issue)  “have engaged, are engaged and are about to engage in acts and practices” which constitute violations of various securities law provisions including the FCPA’s anti-bribery provisions.

According to the SEC complaint, Katy was interested in obtaining an oil exploration concession in Indonesia and retained a consultant who was a “close personal friend of a high level Indonesian government official.”  The complaint alleges that Katy representatives and the consultant met with the official and his representative and during the meeting “the official agreed to assist Katy in obtaining an oil production sharing contract.”  Katy agreed to compensate the consultant if it received the contract and the SEC alleged that Katy representatives were “told that the consultant would give a portion of such compensation to the official and the official’s representative.”  According to the SEC, Katy entered into various agreements with the consultant and the official’s representative and thereafter “Katy entered into a thirty year Production Sharing Contract with Pertamina, the Indonesian Government-owned oil and gas enterprise.”  The SEC alleged that “Katy, Carroll and Jacobs knew or had reason to know that the official and the official’s representative would directly or indirectly share in the payments to the consultant for the duration of the thirty year Contract.”  In addition, the SEC alleged that Katy’s books and records did not reflect the true nature and purpose of the payments and that a “substantial portion” of the money paid by Katy to the consultant and the official’s representative “was expected by Katy to be given by the recipient to the official.”

Without admitting or denying the SEC’s allegations, Katy, Carroll and Jacobs consented to entry of final judgment of permanent injunction prohibiting future violations.  Katy also agreed to establish a Special Committee of its Board “to review the matters alleged in the complaint and to conduct such further investigation as it deems appropriate into these and other similar matters” and to file the Special Committee’s findings publicly with the SEC.

See here for original source documents.

Roy Carver and R. Eugene Holley

In April 1979, the DOJ alleged in a civil complaint for permanent injunction that Roy Carver (Chairman of the Board and President of Holcar Oil Corporation) and R. Eugene Holley (Vice President of Holcar Oil Corporation) “have engaged, are engaged and are about to engage in acts and practices which constitute violations” of the FCPA’s anti-bribery provisions.  The complaint alleges that on a trip to Doha, Qatar, Carver and Holley learned of “the possibility of engaging in the business of petroleum exploration in that country” if a “substantial payment of money were to be made to Ali Jaidah [an official of the government of Qatar – specifically the Director of Petroleum Affairs) for his official approval of a concession agreement.”

According to the complaint, the defendants agreed to proceed with the project by forming Holcar in the Cayman Islands “as a vehicle for the purpose of exploiting the concession.”  The complaint alleges that the defendants further agreed “that an appropriate payment would be paid to Ali Jaidah to secure the necessary approval of the Government of Qatar.”  During a subsequent meeting in Doha, the complaint alleges that Carver and Holley met with Ali Jaidah who requested a $1.5 million payment “into the account of his brother, Kasim Jaidah, at the Swiss Credit Bank of Geneva, Switzerland.”  The complaint alleges that the defendants made the payment “knowing or having reason to know that all or a portion of such funds would be transferred to Ali Jaidah.”  According to the complaint, thereafter, “as a result of the cooperation, influence and approval of Ali Jaidah, the government of Qatar entered into an oil drilling concession agreement with Holcar.”  In addition, the complaint alleges that the defendants were willing to make additional payments to a new Director of Petroleum Affairs (Abdullah Sallat) when Holcar’s original concession agreement was under threat of termination given the company’s financing difficulties.  However, the complaint asserts that “neither Director Sallat nor any other official of the government of Qatar has directly or indirectly received or solicited or been offered any payment in connection with renewal of Holcar’s oil concession.”  Based on the above conduct, the DOJ charged that defendants “violated and may continue to violate” the FCPA’s anti-bribery provisions.

Both Carver and Holley consented to the entry of a final judgment of permanent injunction enjoining future FCPA violations.  See here for original source documents.

International Systems & Controls Corp., J. Thomas Kenneally, Herman Frietsch, Raymond Hofker, Albert Angulo and Harlan Stein

In July 1979, the SEC filed a complaint against International Systems & Controls Corporation (“ISC”) and J. Thomas Kenneally (a director of ISC and its fomer CEO and Chairman of the Board), Herman Frietsch (Senior Vice President), Raymond Hofker (former General Counsel), Albert Angulo (former Treasurer) and Harlan Stein (Chief Engineer).  The complaint alleged, among other things, that ISC “paid more than $23 million through one or more subsidiaries to certain foreign persons and entities in order to assist the company in securing certain contracts.”  The complaint alleged that “in furtherance of this scheme, ISC disguised such payments on its books and records as consulting fees, consulting services, agent’s fees and commissions.”  The complaint also alleged that “ISC violated the internal accounting controls provisions by failing to devise an adequate system of internal controls because it failed to require vouchers, expense statements, or similar documentation for the activities or services for which certain expenditures were made.”

According to various media reports, the payments at issue were made to government officials and members of ruling families in Iran, Saudi Arabia, Nicaragua, Ivory Coast, Algeria, Chile and Iraq in connection with contracts for engineering and construction projects.

The SEC’s complaint charged violations of the FCPA’s books and records and internal controls provisions, as well as antifraud, proxy, and reporting violations.  In December 1979, ISC, Kenneally and Frietsch, without admitting or denying the SEC’s allegations,  consented to the entry of a final order enjoining future violations.   In addition, the final order directed ISC to, among other things, “appoint a special agent … who shall investigate and report on certain specific transactions.”  Furthermore,  Kenneally and Frietsch (for periods of four and two years respectively) agreed to be employed as an officer or director of an issuer only if that company “has a committee with duties and functions to those required of the ISC Audit Committee” as required by the consent degree.

See here for original source documents plus this packet of materials sent to me by a loyal reader.

*****

What are the take-away points from FCPA enforcement in the 1970’s?  Clearly, the enforcement agencies were getting their feet wet enforcing an infant statute and, in many of the enforcement actions, the agencies were confronted with conduct that actually pre-dated enactment of the FCPA in December 1977.  Thus, little can – or should be – taken away from the actual charging decisions in these early FCPA cases.

However, one meaningful take-away point is this.  While one can question how the enforcement agencies held company employees accountable (i.e. criminal v. civil charges), one can not question that the enforcement agencies did hold company employees accountable.  All five FCPA enforcement actions from the 1970’s involved company employees – a figure that stands in stark contrast to 2010 FCPA enforcement in which approximately 70% of corporate FCPA enforcement actions have not resulted (at least yet) in any DOJ charges against company employees.  See here for the prior post.

The FCPA As A Foreign Policy Stick

Michael Jacobson’s piece (see here) about using the FCPA as perhaps a way to increase pressure on Iran has been discussed elsewhere (see here).

Below are some additional issues to consider.

The suggestion that the FCPA “gives the government extraterritorial reach over non-U.S. companies” and that “any foreign company listed on the U.S. stock exchange falls under FCPA jurisdiction” is not entirely accurate.

True, the FCPA’s books and records and internal control provisions apply to non-U.S. companies which issue stock on a U.S. exchange, and true the books and records and internal control provisions contain no specific jurisdictional requirement. If a company is an issuer (including a foreign issuer) it must comply with the books and records and internal control provisions.

However, the jurisdictional reach of the anti-bribery provisions as to foreign companies is a different story.

The anti-bribery provisions were amended in 1998 to include an alternative “nationality” jurisdictional test for U.S. issuers and domestic concerns (see 78dd-1(g) and 78dd-2(i)).

As a result of these amendments, the original “use of the mails or any means or instrumentality of interstate commerce” nexus is no longer required and the reach of the anti-bribery provisions as to U.S. companies and U.S. citizens is indeed extraterritorial.

However, for a foreign issuer, the old “use of the mails or any means or instrumentality of interstate commerce” jurisdictional nexus is still applicable because the alternative jurisdictional test in 78dd-1(g) only applies to an “issuer organized under the laws of the U.S.”

The other way in which a foreign company (other than an issuer) or foreign national can become subject to the FCPA anti-bribery provisions is through application of 78dd-3 (also added by the 1998 amendments). However, 78dd-3 has a “while in the territory of the U.S. […] make use of the mails or any means or instrumentality of interstate commerce” jurisdictional requirement as well.

Big picture, for foreign companies (whether issuers or not) there is a U.S. jurisdictional requirement for the anti-bribery provisions to apply.

One sees this when looking at the Statoil enforcement action, which as Jacobson points out, is indeed the first time the U.S. held a foreign company accountable under the FCPA’s criminal anti-bribery provisions – in the Statoil case for improper payments to Iranian officials to secure oil and gas rights in Iran.

However, the U.S. did not assert anti-bribery jurisdiction over Statoil merely on the basis of “its listing on the U.S. stock exchange.”

Rather, Statoil was subject to the anti-bribery provisions because the improper payments were routed through a U.S. bank in New York, thus providing the U.S. the nexus needed to hold a foreign company accountable (see here for the criminal information describing the payments through the U.S. bank account and invoking the “means and instrumentality of interstate commerce” jurisdictional clause and here for the SEC cease and desist order finding violations of the anti-bribery provisions and finding that the improper payments were routed through a U.S. bank account in New York).

The point is, because of the U.S. nexus jurisdictional requirement of the anti-bribery provisions as to foreign companies, using the FCPA to hold foreign companies accountable in Iran is not as simple as Jacobson makes it seem.

Two “bigger picture” points as well.

First, I remain skeptical as to the suggestion that increased FCPA focus by U.S. enforcement authorities as to conduct in a particular country “could sufficiently deter many companies from doing business” in that particular country.

Those that adhere to this theory have, for instance, a “China issue” to address (i.e. it is common knowledge that U.S. enforcement authorities have announced several FCPA enforcement actions relating to conduct in China, yet such increased focus by the U.S. as to China business conduct has done little to deter companies from doing business in China).

Second, and more relevant to Jacobson’s assertion that “even the suggestion of increased focus by the United States […] could sufficiently deter many companies from doing business with Iran,” is the following fact regarding Statoil in Iran.

In 2006 (as discussed above) Statoil paid $21 million in combined DOJ and SEC fines and penalties for improper payments that assisted the company in securing contracts for the South Pars field in Iran.

To my knowledge, the Statoil enforcement action is the only FCPA enforcement action concerning business conduct in Iran.

The Statoil case is thus the only “test case.”

And it is a unique test case at that because both the DOJ and SEC material specifically refer to the South Pars field (often times DOJ/SEC material is silent as to specific projects), as does the company’s annual reports filed with the SEC.

No doubt Jacobson is right when he says that the 2006 FCPA enforcement action had a “major impact” on Statoil. As Jacobson points out, “[s]ince then, Statoil has spent millions of dollars in building a more robust internal anti corruption compliance system and putting good governance procedures into place.”

You know what else Statoil has done since the 2006 enforcement action?

It has continued to do business in Iran, including in the same South Pars fields that were the subject of the 2006 FCPA enforcement action.

Here is what the company’s website says about its activity in Iran (see here).

“StatoilHydro is offshore development operator for phases 6, 7 & 8 of the South Pars gas and condensate field in the Iranian sector of the Persian Gulf. We have also engaged in onshore exploration and drilling activities.”

More specifically, here is what Statoil’s website says about South Pars (see here).

“Phases 6, 7 & 8 of South Pars – the world’s largest gas field – are being developed by StatoilHydro as operator under an agreement signed with its local partner Petropars and the National Iranian Oil Company (NIOC) in October 2002.”

For those who enjoy reading SEC’s filings, Statoil’s Annual Report on Form 20-F (2008) (see here) indicates the company has invested $225 million in developing South Pars.

So, what does the only Iran “test case” show?

At least from public documents, it appears to show that enforcing the FCPA against a foreign company doing business in Iran does not even deter the subject of the enforcement action from continuing to do business in Iran.

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