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Plaintiffs Allege Harm At The Hands Of Terrorist Group Funded In Part By Corrupt Sales Practices Of Various Multinational Companies

Mahdi Army

Various courts have held that the Foreign Corrupt Practices Act does not confer a private right of action. However, as highlighted in “FCPA Ripples” and several other posts on this website, private plaintiffs with increasing frequency are using allegations of corruption to allege other substantive causes of action in what amounts to “offensive use” of the FCPA and related topics.

Recently, American service members and civilians and their families who were killed or wounded while serving in Iraq filed this 203 page civil complaint against AstraZeneca, General Electric, Johnson & Johnson, Pfizer and Roche claiming that the companies’ alleged acts of corruption in Iraq present viable civil claims under the federal Anti-Terrorism Act and for intentional infliction of emotional distress. Specifically, the plaintiffs allege that they or their family members were attacked by a terrorist group (Jaysh al-Mahdi) funded in part by the defendants’ corrupt sales practices.

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Rolls-Royce Resolves $170 Million FCPA Enforcement Action

Rolls

If you were scoring at home, the last few weeks of the Obama administration were quite active for Foreign Corrupt Practices Act enforcement. But then again this was expected.

First it was the $13 million joke of an enforcement action against Mondelēz International, Inc. on January 9th. Then it was the $30.4 million Biomet became an FCPA repeat offender enforcement action on January 12th. Then it was no U.S. nexus, no problem $30.5 million enforcement action against Sociedad Quimica y Minera de Chile S.A on January 13th. Then it was the DOJ’s announcement (summarized in this post) on January 17th that U.K. based Rolls-Royce plc agreed to pay the U.S. net approximate $170 million (including an unusual component never before seen in FCPA enforcement) to resolve an FCPA enforcement action concerning conduct in Thailand, Brazil, Kazakhstan, Azerbaijan, Angola and Iraq. Then it was $6 million Orthofix Int’l also became an FCPA repeat offender enforcement action on January 18th. Then in the finals hours of the Obama administration it was unusual $7 million enforcement action against Las Vegas Sands (headed by major Republican donor Sheldon Adelson who was front and center at Trump’s inauguration) based on the same core conduct as the SEC’s enforcement action against the company nine months earlier.  Individual FCPA enforcement actions (here and here) were sprinkled in as well.

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“Get The Business, I Don’t Want To Know How”

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

In 1989 the DOJ charged (see here) Goodyear International Corp., a subsidiary of Goodyear Tire & Rubber Co., with FCPA anti-bribery violations.  The two-paragraph information states, in pertinent part, as follows.

“[In 1984] Goodyear International corruptly used the U.S. mails to convey a check, in payment of an invoice for bogus advertising expenses in the amount of $167,429, in furtherance of an offer, payment and promise to pay money in the aggregate amount of $981,124, to an official of the Government of Iraq, to induce said official to use his influence to affect and influence an act of the Government of Iraq, to wit, the purchase of truck tires manufactured by the defendant, in order to obtain and retain business with the Government of Iraq.”

Goodyear International pleaded guilty (see here for the plea agreement) to the information and was ordered to pay a fine of $250,000 (see here).

The “Statement of Facts Supporting the Guilty Plea” (see here) makes for an interesting read.

The conduct at issue focused on David Janasik (a regional export manager for Goodyear International) and his relationships with certain alleged Iraqi officials.  According to the statement of facts, an Iraqi official told Janasik that Goodyear International’s competitors “had been willing to pay cash ‘commissions’ to the official in order to ensure a ‘good relationship’ between those companies and the Iraqi government’s purchasing organization.  The same official then “explained to Janasik that absent such payments Goodyear International could hope for only very limited business from” the government.  The statement of facts indicate, however, that “Janasik told [the official] that such payments were against [company] policy and that he did not feel that he could do business on those terms.”

Thereafter, according to the statement of facts, Janasik told Goodyear International’s Assistant Director for Export Operations of the payment demand and the Assistant Director for Export Operations, in turn, discussed the payment demand with Goodyear International’s Regional Director for Europe / Vice President who stated, with respect to Janasik’s contact in Iraq, “get the business, I don’t want to know how.”

According to the statement of facts, Janasik then carried out the scheme by using Goodyear International’s advertising manager for Greece – who has once operated an advertising agency in Iraq – to arrange for false invoices to be prepared billing Goodyear for Arab language advertising purportedly placed in Baghdad newspapers.

According to this New York Times article, “Goodyear auditors uncovered the scheme in 1985 and immediately reported it to the Justice Department for prosecution.” Interestingly, according to other media reports, Charles F.C. Ruff, a lawyer for Goodyear, said “I don’t think by any measure the company blesses everything that was said in the statement of facts.”

According to media reports,  Janasik pleaded guilty to federal income tax charges in connection with the bribery scheme, cooperated in the DOJ’s investigation, and was sentenced to two years’ probation and a $10,000 fine.

An Update From Australia – AWB Wheat Kickbacks To Iraq Result In Sentences

Today’s post is from Robert Wyld (Partner, Johnson Winter & Slattery – here).  Wyld is the Australia Expert for FCPA Professor.

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Nearly 13 years after wheat sales to Iraq started under the much maligned United Nations Oil-For-Food Program and 5 years after Australia’s corporate regulator, the Australian Securities and Investments Commission (ASIC) commenced civil penalty proceedings against various former AWB directors and officers, the Supreme Court of Victoria  handed down on August 9th and 10th sentences against the former AWB Managing Director, Andrew Lindberg and the former AWB CFO, Paul Ingolby (see judgments at ASIC v Lindberg [2012] VSC 332 and ASIC v Ingolby [2012] VSC 339 available at www.austlii.edu.au).

Court sentences

The Victorian Supreme Court accepted the agreed submissions on facts and penalty as presented to it by ASIC and each defendant although the sentence imposed on Mr Ingolby was reduced.

The Court made the following orders:

  • as against Mr Lindberg, declarations that he had contravened his duties as a director and officer contrary to s180(1) of the Corporations Act 2001, fined him $100,000 and disqualified him from managing the affairs of a corporation until 14 September 2014;
  • as against Mr Ingolby, declarations that he had contravened his duties as an officer contrary to s180(1) of the Corporations Act 2001, fined him $10,000 and disqualified him from managing the affairs of a corporation until 31 December 2012.

The Court made certain observations about the conduct of each of Mr Lindberg and Mr Ingolby. The Court found that the admitted conduct was akin to an admission of negligence in the performance of their duties. The contraventions against each did not involve deliberate wrongful acts, dishonesty or any moral turpitude. The Court was satisfied that each contravention was serious, thereby warranting the imposition of a fine.

The Lindberg Contraventions

The Lindberg contraventions covered 4 matters, in that Mr Lindberg failed:

  • to make inquiries as to whether the recovery of what was known as the “Tigris Debt” was in accordance with the prevailing UN resolutions or had been approved by the UN;
  • to inform the AWB Board that the Tigris Debt had been recovered by inflating certain wheat contract prices and the AWB agreement with Tigris Corporation (a Gibraltar company run by a Norman Davidson Kelly, a former BHP Billiton executive) incorrectly stated the payment as a “service fee” rather than a debt and the payment to AWB of a success commission;
  • to inform the AWB Board that “Project Rose” (the internal AWB review of allegations from the United States that AWB had paid kickbacks to Iraq to secure wheat contracts) was limited as 3 former employees likely to have knowledge of the kickback scheme had not been interviewed; and
  • to inform the AWB Board of the evidence he learned from the UN IIC Inquiry into the Oil-For-Food Program that a Jordanian transport company, Alia For Transportation & General Trade (Alia Transport) had been used as a front to channel funds to Iraq and all suppliers, including AWB, had paid such funds to Alia Transport and then to the Iraq Government.

None of the contraventions save for one involved anything surprising to those who had experienced the Cole Royal Commission into AWB’s wheat sales to Iraq. AWB and all its senior executives had consistently given evidence that they knew nothing wrong and they believed everything they did was approved by the UN and/or the Australian Government. Commissioner Cole did not accept this evidence and delivered a damning indictment on AWB’s corporate conduct[1].

Interestingly, in relation to the Tigris Debt, both ASIC and Mr Lindberg in their Agreed Facts annexed to the judgment, use as a starting point a proposition that the Iraq Grains Board (IGB) owed BHP Ltd (as BHP Billiton then was) a debt of approximately US$8m for a shipment of wheat (at [19] of the judgment). This is in direct contrast to the findings of Commissioner Cole who, having heard evidence from executives of both BHP and AWB (but not Mr Kelly who as a resident outside Australia declined to volunteer any evidence to the Commission), concluded that[2]:

  • AWB concluded a sale to the IGB of 20,000 tonnes of wheat;
  • BHP paid for that wheat against an AWB invoice; and
  • BHP entered into the transaction on the basis that, according to the evidence from John Prescott, its former CEO, it was a gift, ostensibly given to the Iraq Government because BHP was dead keen to secure preferential treatment if certain Iraq oilfields were opened up for exploration.

The evidence before Commissioner Cole was clear – the Australian Government had told AWB and BHP that any credit offer to sell wheat in return for payment, even deferred payment outside the UN sanction regime, was not permissible. Mr Prescott said this in his evidence[3]I did not believe or understand that the grant approved by me was a loan to Iraq. There was no obligation on Iraq to repay any amount to BHP.

In light of this evidence, ASIC’s starting point, accepted by the Court, appears very peculiar. It must be acknowledged that these events occurred long before Mr Lindberg became AWB’s Managing Director. By the time he was in charge at AWB, the “Tigris Debt”, once a gift had transmogrified into a debt and then a payment for services rendered, involving an undisclosed success fee. Some might think this gets very close to a secret commission involving the creation of false or misleading documents, while others may legitimately say no, particularly as the intent of the parties to the Tigris Debt is still hotly contested and before the Victorian Court. Perhaps it was sufficient for ASIC to start from a base upon which it could secure a successful result. After all, a regulator needs to win, even if by winning only half the story is told.

The Ingolby Contraventions

In contrast to Mr Lindberg, the Ingolby contraventions appeared more prosaic.

Mr Ingolby was subjected to one alleged contravention – that between December 2001 and September 2004, as AWB’s CFO, he failed to discharge his duties as an officer of the company, in that he:

  • co-authorised payments to Alia Transport for inland transport fees;
  • had information available to him that questioned the legitimacy of those fees and that they were ultimately being paid to the Iraq Government;
  • took no steps to ascertain the true position;
  • took no or no reasonable steps to inform the AWB Board of the information available to him,

in circumstances where he knew that the Oil-For-Food Program prohibited direct payments  to Iraq and payments from the escrow account controlled by the UN could only be made for the purposes of the Program.

The Court took into account the role actually played by Mr Ingolby within AWB and the nature of how AWB conducted its wheat sale business. In short, Ingolby admitted that he failed to “join the dots” and had he done so with the benefit of hindsight, he would have realised that AWB was acting in breach of the UN sanctions (which did not, at that time, give rise to any direct civil or criminal offence in Australia). The Court accepted, in particular, that Mr Ingolby:

  • acted with the degree of care and diligence consistent with his statutory obligations;
  • he was not involved in making the wheat contracts;
  • his areas of responsibility concerned areas outside the sales and marketing of wheat contracts; and
  • he had cooperated with ASIC.

The Court therefore reduced the proposed penalty from $40,000 to $10,000 and shortened the period of disqualification.

The question still remains what would have Mr Ingolby or any other AWB executive done had they “joined the dots” – continue a very lucrative commercial relationship with Iraq selling Australian wheat to the benefit of the company and Australian wheat farmers with bumper wheat crops, or investigating and reporting the conduct to the UN with the risk of losing out on future wheat sales – therein lies the moral barometer!

In one sense, Mr Ingolby was in the classic position of a corporation CFO – not directly involved in the sales relationship with the customer, but was sufficiently across the financing processes that he was “involved” in the transactions by co-authorising payments. It is this salutary lesson to CFO in any large corporation engaged in trade in “high risk” jurisdictions – know your customer and know your business. Whether you can rely on what others tell you will depend upon the circumstances, but the more complex and lucrative the commercial pressures are, the greater the personal risk if it all goes pear-shaped.

General observations

In both judgments, the Court made it clear that it treated the allegations and contraventions as serious, and worthy of a penalty that acted to provide sufficient general deterrence to others committing similar offences. The Court’s attitude to directors and officers who are found to have contravened their clear statutory duties is best described by Justice Robson[4]:

The obligation imposed by s 180(1) demands a standard of care and diligence in directors and other officers of the corporation in managing the affairs of the corporation…The obligation is important in ensuring that proper standards of care and diligence are maintained in our corporations…The punishment determined by the Court may appear harsh in light of a career of honest and loyal conduct particularly where the personal and family hardship experienced by the defendant (Lindberg) is taken into account. Nevertheless, there is a significant public importance in appropriate standards being expected of directors and other officers of corporations. These standards of conduct are not unduly high…The contraventions…involved a lack of care and diligence in the performance of his duties that a reasonable director or other person would exercise in his position.

The ASIC proceedings continue on against the remaining defendants although for how long the war of attrition will continue, is anyone’s guess!


 

[1] A copy of the 5 volume report can be found at www.oilforfoodinquiry.gov.au.

[2] Cole Report, Vol 3, page 163, para 27.84.

[3] Cole Report, Vol 3, page 162, para 27.79.

[4] Justice Robson delivered the 2 sentencing judgments, at [68] to [73] of ASIC v Lindberg and [56] to [61] of ASIC v Ingolby:

Friday Roundup

Add two more companies to the list, a reply to a retort, Avon developments, Total S.A. perhaps nears a top-5 settlement, the reason for those empty Olympic seats, another FCPA-inspired derivative action is dismissed, Sensata Technologies and more on the meaning of “declination,” one of my favorite reads and additional material for the weekend reading stack.  It’s all here in the Friday roundup.

Recent Disclosures

As noted in this Wall Street Journal Corruption Currents post “German healthcare firm Fresenius Medical Care AG has opened an internal investigation into potential violations” of the FCPA.  The company’s recent SEC filing (here) states as follows.

“The Company has received communications alleging certain conduct that may violate the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-bribery laws. In response to the allegations, the Audit and Corporate Governance Committee of the Company’s Supervisory Board is conducting an internal review with the assistance of counsel retained for such purpose. The Company has voluntarily advised the U.S. Securities and Exchange Commission and the U.S. Department of Justice that allegations have been made and of the Company’s internal review. The Company is fully committed to FCPA compliance. It cannot predict the outcome of its review.”

In addition, as noted in this Wall Street Journal Corruption Currents post, “the Securities and Exchange Commission is investigating Teva Pharmaceutical Industries Ltd, the world’s largest manufacturer of generic drugs, for possible violations” of the FCPA.   The Israel based company recently stated in an SEC filing (here) as follows.

“Teva received a subpoena dated July 9, 2012 from the SEC to produce documents with respect to compliance with the Foreign Corrupt Practice Act (“FCPA”) in Latin America. Teva is cooperating with the government. Teva is also conducting a voluntary investigation into certain business practices which may have FCPA implications and has engaged independent counsel to assist in its investigation. These matters are in their early stages and no conclusion can be drawn at this time as to any likely outcomes.”

U.K. DPAs

In this previous post, I discussed my letter to the U.K. Ministry of Justice urging the MoJ to just say no to deferred prosecution agreements.  Over at thebriberyact.com (a site that has lead discussion of the issue) the authors disagree with me (see here).  That’s all fine and dandy and healthy to the discussion, but the substance of the retort is not persuasive.

The retort is  basically that the SFO “frequently has to fight its corner in court” and that “sometimes it loses” whereas in the U.S. “the accepted wisdom [is] that an FCPA investigation would result in a corporate settlement” and the “DOJ simply [does] not have to test its legal theories in court.”  In short, the authors state “statistically in the US corporates and their counsel often fold in the face of a DOJ investigation” but “in the UK this is not so.”

Contrary to the suggestion in the retort, I did not ignore the Bribery Act’s Section 7 offense – rather it is all the more reason to reject DPAs.

The retort closes as follows.  “Sadly, as it stands, the UK enforcement agencies do not have equality of arms when it comes to their enforcement toolkit.  Put another way the DOJ can end run UK enforcement agencies because it does have the potential to enter into DPA’s.  This reason alone is justification enough for putting in place a system which delivers a similar result to the US system.”

This confirms in my mind that the UK’s desire for DPAs has little to do with justice and deterring improper conduct, but more to do with enforcement statistics and posturing in an emerging “global arms race” when it comes to “prosecuting” corruption and bribery offenses.

Avon Developments

Avon was in the news quite a bit this week.

On Monday, the Wall Street Journal reported (here) that “federal prosecutors looking into possible bribery of foreign officials by Avon have asked to speak to Andrea Jung, the former chief executive and current full-time chairman.”

On Wednesday, the company filed its quarterly report and stated, among other things, as follows.  “We are in discussions with the SEC and DOJ regarding mutually resolving the government investigations. There can be no assurance that a settlement will be reached or, if a settlement is reached, the timing of any such settlement or that the terms of any such settlement would not have a material adverse effect on us.”  During the Q2 earnings call, company CEO Sheri McCoy stated as follows.   “We are in discussion with the SEC and DOJ regarding mutually resolving the government investigations.”

On Thursday, the Wall Street Journal reported (here) that McCoy “frustrated with the pace of Avon’s internal probe, has pushed to bring in a second law firm for advice on the progress of the investigation.   The company has held discussions with law firm Allen & Overy LLP for that role.”  Arnold & Porter has been leading Avon’s investigation.  According to the article, Avon’s “probe has turned up millions of dollars of payments in Brazil and France made to consultants hired to assist with Avon’s tax bills in those countries.”

What to make of the above information?

It is unusual for the enforcement agencies to want to speak to a former CEO and current chairman in connection with an FCPA inquiry.  But then again, prosecutors have reportedly spoken to several other Avon executives in connection with the probe.  Given Avon’s disclosure that it has begun settlement discussions, this would suggest that the factual portion of the enforcement agencies investigation is over.

Avon’s FCPA scrutiny has perhaps been most notable for the amount of pre-enforcement action professional fees and expenses – approximately $280 million.  Thus, yesterday’s report that the company is considering bringing in a second law firm nearly four years into the investigation is interesting and unusual.

Even though Avon has disclosed it is in settlement talks, an enforcement action in 2012 is not certain.  In many cases, companies have disclosed the existence of FCPA settlement discussions, but the actual enforcement action did not happen for 6-12 months (or longer).

Whenever the enforcement action occurs, and whatever the ultimate fine and penalty is, Avon’s greatest financial hit  has likely already occured – its pre-enforcement action professional fees and expenses.  For instance, assuming a settlement amount would match the $280 million, this would be the sixth largest FCPA settlement of all time, and none of the enforcement actions in the top 5 were outside the context of foreign “government” procurement.

Total Settlement Near?

For some time, there has been speculation that Total S.A. (you better sit down for this) would actually mount a defense and put the DOJ and SEC to its burden of proof in an enforcement action.  Information in a recent company press release suggests that this is unlikely to occur.  In this recent release, Total stated as follows.  “Total has been cooperating with the … SEC and DOJ in connection with an investigation concerning gas contracts awarded in Iran in the 1990’s.  Total, the SEC, and the DOJ have conducted discussions to resolve issues arising from the investigation.  In light of recent progess in these discussions, Total has provisioned 316 million euros [$389 million]  in its accounts in the second quarter of 2012.”

A $389 million settlement would be a top five FCPA settlement in terms of fine and penalty amounts.  For additional coverage, see here from Reuters.

Empty Olympic Seats

A reason, perhaps, for those empty Olympic seats?  According to a recent study (see here) by the Society for Corporate Compliance and Ethics  “tighter than anticipated corporate entertainment and gift policies.”

Smith & Wesson Derivative Action Dismissed

Even against the backdrop of generally frivolous plaintiff derivative claims in the FCPA context, the action against Smith & Wesson (“S&W”) stood out.  After S&W employee Amaro Goncalves was criminally indicted in the manufactured Africa Sting case, certain investors filed a derivative claim in U.S. District Court in Massachusetts suing members of the board of S&W and company officers derivatively on behalf of the corporation for failing to have effective FCPA controls and oversight, thereby breaching their duty of care.

In dismissing the complaint (see here for the decision) Judge Michael Ponsor characterized the complaint as follows. “[I]n essence, that the company enjoyed an increase in international sales and then had an employee indicted for FCPA violations. This indictment, later dropped, supposedly evidenced a failure to implement proper controls.”

For another recent dismissal of an FCPA inspired derivative claim against Tidewater, see this prior post.  See also this recent post from Kevin LaCroix at The D&O Diary blog.

Sensata Technologies

In October 2010, Sensata Technologies disclosed in a quarterly report (here) as follows.

“An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review.”

In its most recent quarterly report (here), the company disclosed as follows.

“During 2012, the DOJ informed us that it has closed its inquiry into the matter but indicated that it could reopen its inquiry in the future in the event it were to receive additional information or evidence. We have not received an update from the SEC concerning the status of its inquiry.”

Did Sensata “win a declination” as the FCPA Blog suggested here?

Since August 2010 (see here for the prior post) I have proposed that when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC, and when the DOJ and/or SEC decline enforcement, the DOJ and/or the SEC should publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.

Perhaps then we would know if the DOJ concluded it could prove beyond a reasonable doubt all the necessary elements of an FCPA charge, yet decided not to pursue Sensata – which is my definition of declination as noted in this prior post.  Anything else, is what the law commands, not a declination.

Favorite Read

One of my favorite reads is always Shearman & Sterling’s “Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act.”  See here for the most recent edition.

As to “foreign official,” the report states as follows. “[T]he government does not appear to have been deterred by the [foreign official] debate. In most of the cases brought in 2012, the relevant government officials were employed by “instrumentalities” such as state health insurance plans (Orthofix), a state-owned nuclear plant (Data Systems & Solutions), government hospitals (Biomet and Smith & Nephew), a state-owned real estate development company (Peterson) a state-owned oil company (Marubeni), and state-owned airlines (NORDAM).”

As to FCPA guidance, the report states as follows. “We understand that this guidance will be issued before October, when the US is scheduled to issue a written progress report on its implementation of the OECD Working Group on Bribery’s recommendations.”

A final kudos – Shearman & Sterling keeps its FCPA enforcement statistics the best way.  As it explains – “we count all actions against a corporate “family” as one action. Thus, if the DOJ charges a subsidiary and the SEC charges a parent issuer, that counts as one action.”  This is consistent with my “core” approach (see here), but unlike many others in the industry.

Weekend Reading Stack

An interesting and informative article (here) in Fortune about the Alba-Alcoa tussle and the role of Victor Dahdaleh.  For more on the underlying civil suit between Alba and Alcoa see this recent Wall Street Journal Corruption Currents post.

SOX’s executive certification requirements were supposed to be a panacea for corporate fraud.  It has not happened.  See here from Alison Frankel (Reuters) and here from Michael Rapoport (Wall Street Journal).  As noted in this prior post concerning the Paul Jennings (former CFO and CEO of Innospec) enforcement action, SOX certification charges were among the charges the SEC filed against Jennings.  Then SEC FCPA Unit Chief Cheryl Scarboro stated, “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.”  Speaking of Jennings, as noted in this recent U.K. Serious Fraud Office, Jennings recently pleaded guilty to one charge of conspiracy to corrupt Iraqi public officials and other agents of the Government of Iraq.

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A good weekend to all.

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