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BellSouth Gets Hung Up In Latin America

bellsouth

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

In 2002, the SEC announced the filing of a settled civil complaint against BellSouth Corporation charging the telecommunications company with violations of the FCPA’s books and records and internal controls provisions.

The conduct at issue focused on an indirect subsidiary in Venezuela (and BellSouth’s inability to “reconstruct the circumstances of purpose” of certain payments) and an indirect subsidiary in Nicaragua (which retained the wife of the chairman of a Nicaraguan legislative committee with oversight of telecommunications).

As frequently highlighted on these pages, the root cause of many FCPA enforcement actions are foreign trade barriers and restrictions and in this regard, as the complaint notes, Nicaraguan law prohibited foreign companies from acquiring a majority interest in Nicaraguan telecommunications companies.”

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Hyperdynamics Resolves FCPA Enforcement Action For $75,000, But Spends $12.7 Million To Get There

Surprise

Not that Foreign Corrupt Practices Act are conveniently timed or anything like that, but the SEC’s fiscal year ends on September 30th and for the second consecutive day, the SEC announced an FCPA enforcement action (in the past two days the SEC has announced 22 other enforcement actions).

Two days ago, it was Hitachi (see here for the prior post).

Yesterday, it was Hyperdynamics Corp  – an oil and gas company with shares quoted by the OTCQX, an over-the-counter marketplace operated by OTC Market Group, Inc.

If there was ever an inconsequential FCPA enforcement this would be it. In fact, the SEC’s normally chatty press office didn’t even issue a release. However, as relevant to the title of this post, tell Hyperdynamics shareholders that this episode was inconsequential and they are likely to have a different opinion.

In this slim administrative action (the specific factual allegations are a mere four paragraphs) the SEC states:

“Hyperdynamics was founded in 1996 as a commercial computer and communications service provider. In 2001, the company transitioned to the oil and gas industry, and one year later, Hyperdynamics purchased contract rights from a small oil company which owned the exclusive drilling rights offshore the Republic of Guinea. Company executives began travelling to Guinea in 2005, and eventually opened a wholly-owned subsidiary in Conakry to facilitate ongoing operations.

From July 2007 through October 2008, Hyperdynamics, through its subsidiary, paid $130,000 for public relations and lobbying services in the Republic of Guinea to two supposedly unrelated entities – $55,000 to BerMia Service SRL, and $75,000 to Africa Business Service (“ABS”). The subsidiary’s books and records were consolidated with Hyperdynamics’s books and records, and these payments were recorded as public relations and lobbying expenses, even though the company lacked sufficient supporting documentation to determine whether the services were actually provided and to identify the ultimate recipient of the funds.

In late 2008, Hyperdynamics discovered that a Guinean-based employee controlled BerMia and ABS. Hyperdynamics also learned that this employee was the sole signatory on the ABS account. But Hyperdynamics could not determine how, if at all, BerMia or ABS spent the funds they had received, or whether any services actually were provided. Moreover, the company could not recover the funds. There is no evidence that these funds were in fact spent on legitimate public relations and lobbying activities, yet Hyperdynamics’s books and records continued to reflect that the funds were spent for these purposes.

Hyperdynamics lacked adequate internal accounting controls over its disbursement of funds through its Guinean subsidiary, as well as its recording of such disbursements. In addition, the company did not have a due diligence and monitoring process in place for vetting third-party vendors; accordingly, it failed to conduct due diligence on BerMia and ABS. As a result, Hyperdynamics did not timely discover that the payments were made to companies controlled by its employee, nor could it ascertain the true purpose for which these funds were spent. The inadequate controls also led Hyperdynamics to record these disbursements as public relations and lobbying expenses without any supporting documentation that such services were provided.”

Based on the above, the SEC found that Hyperdynamics violated the FCPA’s books and records and internal controls provisions.

Under the heading “Remedial Efforts and Cooperation,” the order states:

“Beginning in July 2009, Hyperdynamics replaced its senior management team and its entire Board of Directors. The company also hired its first in-house lawyer, who implemented a number of training programs and revised company policies related to its Guinean operations. Hyperdynamics also increased the number of its accounting personnel, and instituted a series of procedures to more strictly control and identify transfers of funds to Guinea, including the transfer of signature authority over Guinean accounts to Houston-based employees, as well as requiring corporate pre-approval for all Guinean expenditures.

In determining to accept the Offer, the Commission considered remedial acts undertaken by Respondent and cooperation afforded the Commission staff.”

Without admitting or denying the SEC’s findings, Hyperdynamics agreed to pay a $75,000 penalty.

In this disclosure, the company states:

“As previously disclosed, the SEC had issued a subpoena to Hyperdynamics concerning possible violations of the FCPA.  This settlement fully resolves the SEC’s investigation.  As previously disclosed in May 2015, the DOJ closed its investigation into possible FCPA violations by Hyperdynamics without bringing any charges against the Company.

The allegations in the Order relate to certain issues concerning the company’s books and records and internal controls in 2007-2008. Hyperdynamics consented to the SEC Order without admitting or denying the SEC’s findings and agreed to pay a $75,000 penalty to the SEC.

In reaching this resolution, the Commission considered remedial acts undertaken by the company and cooperation afforded the Commission staff.  The SEC Order recognizes that, beginning in July 2009, Hyperdynamics replaced its senior management team and its entire Board of Directors, revised its policies, implemented training programs, increased its legal and accounting personnel, and instituted a series of procedures to more strictly control transfers of funds.”

According to the company’s most recent annual report:

“We incurred approximately $7.5 million in legal and other professional fees associated with the FCPA investigations in the year ended June 30, 2014, and another $5.2 million in the year ended June 30, 2015, for a total of $12.7 million.”

Calculating the ratio between pre-enforcement action professional fees and expenses and settlement amounts, this represents a whopping 170 to 1 ratio. (To learn more about such ratios see “FCPA Ripples“).

If I were a Hyperdynamics shareholder, I would be asking some serious questions.

Nancy Kestenbaum, Lanny Breuer and Barbara Hoffman of Covington & Burling reportedly represented Hyperdynamics.

Corruption And Anti-Corruption: Challenges And Future Perspectives

Today’s post is from Professor Bruce Bean (Michigan State University College of Law).  Prior to academia, Bean had a diverse practice career including at various law firms and in-house counsel positions.

*****

Last week in London, the University of Sussex Centre for the Study of Corruption presented its annual conference, this year entitled “Corruption and Anti-Corruption: Challenges and Future Perspectives.”  This one day affair, organized by Professor Dan Hough, Director of the Centre, was held at the Canary Wharf offices of Clifford Chance with about 150 attendees.

Professor Michael Johnston from Colgate, author of Syndromes of Corruption, gave the keynote address, Are we there yet?

He emphasized these themes:

  1. All countries have corruption.  It is not simply a problem of the “warmer parts of the world.”
  2. Corruption will never be “eliminated.”
  3. Anti-corruption efforts should not mean “Be like us.”
  4. Corruption is one aspect of political integrity, and the liberal democracies have a major corruption problem with the funding of political campaigns where we have merely legalized corruption.

My presentation emphasized the practical problems of complying with Section 7 of the Bribery Act, the strict liability corporate crime of Failing to Prevent a Bribe.  Lost on my co-panelists was my principal point, that the penalties and disgorgement amounts extracted in settlements with the Department of Justice and the Securities and Exchange Commission deplete shareholder funds while not incentivizing corrective action by senior management.

Robert Barrington, Executive Director of Transparency International U.K., had no sympathy for the dilemma faced by companies doing only a “part of a business” in the UK, the sole jurisdictional nexus required under Section 7 of the Bribery Act.  Ignoring the moral hazard of permitting senior executives to continue business as usual since it is only shareholders who might have to pay, Barrington suggested, naively in my view, that if shareholders do not approve of such settlements, “they can always change the CEO.”

Barrington’s major focus was on Transparency’s new global initiative, a world-wide survey of lobbying.  He pointed out, as an example, that there is currently no information available to the public about lobbyists in London, and that Parliament is currently considering this issue.  Barrington flatly stated that the bill before Parliament was “appallingly bad.”   Referring to the U.S. requirement that lobbyists register and report, he observed that the U.S. procedure is a good example of where “transparency is not enough.”

Dmitri Vlassis, Chief of the Economic Crime Branch of the United Nations Office on Drugs and Crime in Vienna, noted that 2013 was the 20th anniversary of the creation of Transparency International and the 10th anniversary of the United Nations Convention Against Corruption.  Vlassis announced that 167 nations have become party to the UNCAC, but, curiously, New Zealand has not.  New Zealand declines to ratify the UNCAC on the theory that they are already #1 on the Transparency International Corruption Perceptions Index!

The final speaker of the day was Sir Ian Blair, Head of the Metropolitan Police (Scotland Yard) from 2005-2008.  He made the surprising disclosure that Scotland Yard has itself had serious corruption problems.  In the 1970’s, the then head of the Yard announced that he was trying to insure that there were more criminals apprehended by the Metropolitan Police than were working there.  According to Blair, this problem has been substantially improved upon, but even at Scotland Yard, corruption will always be an issue.

Transparency International’s new emphasis on lobbying may indicate the beginning of a long overdue focus on political integrity in the economically advanced nations.  Meanwhile, we await an indication of the approach prosecutors will take toward strict corporate criminal liability under the Bribery Act.

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.

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A good weekend to all.

In Depth On The Magyar Telekom and Deutsche Telekom Enforcement Action

This post analyzes the DOJ and SEC enforcement actions against Magyar Telekom, Deutsche Telekom and certain former executives of Magyar generally discussed in this previous post. 

Total fines and penalties were approximately $95 million ($59.6 million against Magyar Telekom via a DOJ deferred prosecution agreement, $4.4 million against Deutsche Telekom via a DOJ non-prosecution agreement,  and $31.2  million against Magyar Telekom via a settled SEC civil complaint).  The SEC action against former Magyar executives remains active.

Because Magyar Telekom and Deutsche Telekom were “foreign issuers,” jurisdiction under the FCPA’s anti-bribery provisions require “use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance” of a bribery scheme.  The sole jurisdictional allegations in the enforcement action (other than the companies made filings with the SEC) are two e-mails that passed through, were stored on, and transmitted to servers located in the U.S. 

It is also noteworthy that the companies faced FCPA exposure based on the conduct of a few Magyar executives who concealed their conduct from others.  Indeed, the DOJ alleged that the existence and true purpose of the sham contracts used in the bribery scheme “were unknown to anyone within Magyar Telekom and Deutsche Telekom other than [two executives]’ and a relatively small number of additional participants.”  Furthermore, the DOJ alleges that the executives, assisted by Greek intermediaries, circumvented Magyar Telekom’s internal controls by, among other things, backdating contracts and creating other fabricated documents.

The DOJ’s NPA with Deutsche Telekom states that the DOJ “will not criminally prosecute Deutsche Telekom … for any crimes … related to the offering or making of improper payments by employees of Magyar Telekom to foreign officials, foreign political parties, and officials of foreign political parties in Macedonia and the accounting and record-keeping associated with these improper payments in violation” of the FCPA’s books and records provisions.”  Yet one struggles to find any facts that would justify criminal charges against Deutsche Telekom.  The DOJ has said in the past that it “does not prosecute corporations based on the acts of a single rogue employee.”   Yet all one learns from reading the NPA is that a Deutsche Telekom executive was a board member of Magyar Telekom and one of its subsidiaries and that the  executive had passive knowledge of the scheme and later learned of the Magyar Telekom executives circumvention of Magyar Telekom’s internal controls.  In all other respects, Deutsche Telekom’s criminal and civil exposure appears to be based on a strict liability like theory in that Magyar Telekom’s financial results were incorporated into Deutsche Telekom’s for purposes of financial reporting.

DOJ

The DOJ enforcement action involved a criminal information (here) against Magyar Telekom resolved through a deferred prosecution agreement (here) as well as a non-prosecution agreement (here) with Deutsche Telekom.

Criminal Information

The information focuses on conduct in Macedonia and Montenegro.

Macedonia

As to Macedonia, the information alleges as follows.   “During 2005 and 2006, certain executives then employed by Magyar engaged in a course of conduct with consultants, intermediaries and other third parties, including contracting through sham contracts to pay an aggregate amount of  €4.875 million to

the Cypriot Shell Company [a shell company controlled by Greek Intermediary #1 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials), Greek Intermediary #2 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials), and Greek Intermediary #3 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials) that executed contracts with, submitted paperwork to, and received payments from, Magyar Telekom and its subsidiaries]

and one of its affiliates, under circumstances in which they knew, or were aware of a high probability that circumstances existed in which, all or a portion of the proceeds of such payments would be offered, given, promised or paid, directly or indirectly to

Macedonian Government Official #1 [a high-ranking government official with responsibility related to telecommunications laws and regulations and a leader of Macedonian Political Party A],

Macedonian Government Official #2 [a high-ranking government official with responsibility for telecommunications laws and regulations and a leader of Macedonian Political Party B],

Macedonian Political Party A, and/or Macedonian Political Party B [collectively political parties in the Macedonian governing coalition each representing a traditional ethnic group in Macedonia] 

with the intention of obtaining business and advantages for Magyar Telekom.  In addition, Macedonian Political Party B was offered the opportunity to designate the beneficiary of a business venture in exchange for the party’s support of Magyar Telekom’s desired benefits.”

According to the information, in early 2005, the Macedonian Parliament enacted a law designed to liberalize the telecommunications market in a manner that would have been unfavorable to Magyar Telekom.  Specifically the law authorized the telecommunications regulatory bodies in Macedonia to hold a public tender for a license to operate a third mobile telephone business that would directly compete in Macedonia against Magyar Telekom’s Macedonian subsidiary, MakTel, and imposed increased frequency fees and other regulatory burdens.  According to the information, certain Magyar Telekom executives and the Greek Intermediaries met with Macedonian Official #1 and others to “inform them that a third mobile license was not acceptable.”

According to the information, certain Magyar Telekom executives approved and executed two secret agreements with Macedonian Official #1 to delay or preclude the issuance of a third mobile telephone license and to mitigate the other adverse effects of the new law, including not requiring MakTel to pay the full amount of the increased frequency fee.  The information alleges, among other things, that an e-mail was sent to a Macedonian government official “at his U.S. based e-mail address” that “was passed through, stored on, and transmitted from servers located in the United States” and that a MakTel executive received an e-mail discussing the secret agreements in his “Hotmail email account, which passed through, was stored on, and transmitted to servers located in the United States.”

The information alleges that between 2005 and 2006 Magyar Telekom received the benefits promised in the agreements and that Magyar Telekom executives authorized MakTel and other Magyar Telekom subsidiaries to enter into a series of sham contracts and to pay an aggregate amount of  € 4.875 million under those contracts to the Cypriot Shell Company and one of its affiliates, under circumstances in which the Magyar Telekom Executives knew, or were aware of a high probability that circumstances existed in which, all or a portion of the proceeds of such payments would be offered, given, promised, or paid, directly or indirectly to Macedonian government officials. 

The information alleges that following the sham contracts “the Macedonian government delayed the introduction of a third mobile telephone competitor until 2007 and reduced the frequency fee tariffs imposed on Magyar Telekom’s Macedonian subsidiary, MakTel.”

According to the information, “the existence and true purpose of the agreements were unknown to anyone within Magyar Telekom and Deutsche Telekom other than [the two executives] and a relatively small number of additional participants.”  In fact, the information alleges that the two executives, assisted by Greek Intermediary #1, circumvented Magyar Telekom’s internal controls by, among other things, backdating contracts or creating other fabricated documents.

Nevertheless the information alleges as follows.  “The payments made under these sham contracts were recorded on Magyar Telekom’s books and records in a manner that did not accurately reflect the true purposes of the contracts under which they were made, and the false books and records were consolidated into DT’s financial statements.”

Based on the above allegations as to Macedonia, the information charges FCPA anti-bribery violations and FCPA books and records violations.

Montenegro

The information states as follows.  “In October 2004, the Government of Montenegro issued a tender to privatize its approximately 51% stake in the state-owned telecommunications company TCG [Telekom Crne Gore A.D.].  Magyar Telekom submitted a bid that sought to obtain a super-majority ownership stake, consisting of the government’s 51% share, plus enough additional minority shares from private investors to give Magyar Telekom ownership of at least two-thirds of TCG.”  According to the information, in March 2005 Magyar Telekom succeeded in acquiring an approximately 73% stake in TCG, and after the Government of Montenegro facilitated Magyar Telekom’s acquisition of shares of TCG from minority shareholders, certain Magyar Telekom executives caused Magyar Telekom, TCG, and/or its affiliates to enter into four contracts that purported to relate to the TCG acquisition and/or Magyar Telekom’s operations in Montenegro, but under which no valuable performance was actually rendered.  The information alleges that “payments under those contracts were not recorded accurately on Magyar Telekom’s or Magyar Telekom’s subsidiaries’ books and records.”

According to the information, “the payments under the four contracts … were recorded on Magyar Telekom’s books and records, or those of certain of Magyar Telekom’s subsidiaries, in a manner that did not accurately reflect the true purposes of the contracts under which they were made, and the false books and records were consolidated into Magyar Telekom’s and DT’s financial statements.”

Based on the above conduct as to Montenegro, the information charges FCPA books and records violations.

DPA

The DOJ’s charges against Magyar Telekom were resolved via a deferred prosecution agreement.  Pursuant to the DPA, Magyar Telekom admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees, agents, and those of Magyar Telekom’s subsidiaries as charged in the Information.”

The term of the DPA is two years and it states that the DOJ entered into the agreement based on the following factors.

(a) following reports by the company’s auditors, Magyar Telekom made a timely and voluntary disclosure to the DOJ and SEC about potential misconduct;

(b) over the course of several years, Magyar Telekom’s audit committee led a thorough global internal investigation concerning bribery and related misconduct;

(c) Magyar Telekom’s audit committee reported its findings to the DOJ and SEC;

(d) the pervasiveness of the scheme, the involvement of a number of now-former senior managers at Magyar Telekom and certain of its subsidiaries , and conduct by some of those employees designed to obstruct the audit committee’s investigation;

(e) Magyar Telekom undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures; and

(f) Magyar Telekom agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of Magyar Telekom’s current and former employees, agents, consultants, contractors, subcontractors, and subsidiaries relating to violations of the FCPA.

As detailed in the DPA, the advisory Sentencing Guidelines range for the charges at issue was $72.5 million – $145 million.  Pursuant to the DPA, Magyar agreed to pay $59.6 million (18% below the minimum Guidelines range).  According to the DPA, this amount was “appropriate given the nature and extent of Magyar Telekom’s cooperation in this matter and the remediation undertaken by Magyar Telekom.”

Pursuant to the DPA, Magyar Telekom represented that “it has implemented and will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA” and related laws throughout its operations.  The specific compliance provisions are set forth in an attachment to the DPA.  In addition, Magyar Telekom agreed to “report to the DOJ annually during the term of the Agreement regarding remediation and implementation of the compliance measures” set forth in the attachment.  As is common in FCPA DPA’s Magyar Telekom expressly agreed “that it shall not [directly or indirectly through others] make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by Magyar Telekom” of the above described facts.

The DOJ’s enforcement action also included a non-prosecution agreement  against Deutsche Telekom.  It states that the DOJ “will not criminally prosecute Deutsche Telekom … for any crimes … related to the offering or making of improper payments by employees of Magyar Telekom to foreign officials, foreign political parties, and officials of foreign political parties in Macedonia and the accounting and record-keeping associated with these improper payments in violation” of the FCPA’s books and records provisions.

The DOJ agreed to enter into the NPA based on the following factors: “(a) DT’s timely, voluntary, and complete disclosure of the facts [described below]; (b) DT’s thorough cooperation with the DOJ and SEC; and (c) DT’s remedial efforts already undertaken and to be undertaken, including enhancements to its compliance program …”.

The NPA relates only to conduct in Macedonia and the NPA contain similar facts as described above.  The NPA also states that a DT Executive was a board member of Magyar Telekom and a MakTel mobile subsidiary.  According to the NPA, the “DT Executive supported” Magyar Telekom entering into an agreement described above and the DT executive was aware an executed agreement “was not kept in Magyar Telekom’s books and records.”  As to the sham contracts with Greek Intermediaries used to circumvent Magyar Telekom’s internal controls and to avoid detection, the NPA states that the DT Executive “later learned of these contracts and the circumstances in which they were executed.”

Under the section heading “Impact on DT’s Books and Records,” the NPA states as follows.  “Magyar Telekom recorded the payments under [the sham contracts] on its books and records in a manner that did not accurately reflect the true purpose of the contracts.  The false entries in Magyar Telekom’s books and records were consolidated into the books and records of DT, which reported the results of Magyar Telekom’s operations in its consolidated financial statements.”

The NPA has a term of two years and, as is standard, DT agreed not to make any public statements contradicting the described facts.  Under the NPA, DT agreed to pay a monetary penalty of $4.36 million.

See here for the DOJ’s release.

SEC

The SEC enforcement action involved a settled complaint against Magyar Telekom and Deutsche Telekom as well as a separate complaint against former Magyar Telekom executives.

The SEC’s settled civil complaint (here) against the companies involves “multiple violations” of the FCPA by Magyar Telekom and “corresponding violations of the books and records and internal controls provisions of the FCPA by Magyar Telekom’s parent company Deutsche Telekom.”  The complaint concerns the same Macedonia and Montenegro schemes identified in the DOJ enforcement action. 

In summary fashion, the SEC complaint alleges as follows.  “During the relevant time period, Magyar Telekom and Deutsche Telekom lacked sufficient internal accounting controls to prevent and detect violations of the FCPA.  As a result, the contracts described above [used in furtherance of the schemes] were not subjected to meaningful review, and substantially all of the amounts were paid without question, prior to the initiation of an internal investigation at the direction of the Audit Committee of Magyar Telekom.  Magyar Telekom recorded the payments to third-parties under these contracts on its books and records in a manner that did not accurately reflect the true purpose of the contracts.  The false entries in Magyar Telekom’s books and records were consolidated into the books and records of Deutsche Telekom, which reports the results of Magyar Telekom’s operations in its consolidated financial statements.”

Based on the above allegations, the SEC complaint charges FCPA anti-bribery, books and records and internal controls violations as to both the Macedonia and Montenegro conduct.  As stated in the SEC’s release (here), without admitting or denying the allegations in the SEC’s complaint, Magyar Telekom agreed to settle the SEC’s charges by paying approximately $31.2 million in disgorgement and pre-judgment interest; Deutsche Telekom settled the SEC’s charges, and as part of a non-prosecution agreement with the Department of Justice agreed to pay a penalty of $4.36 million.

The SEC’s complaint (here) against the former Magyar Telekom executives, Elek Straub (former Chairman and CEO of Magyar Telekom) and Andras Balogh and Tamas Morvai (two former senior executives in Magyar Telekom’s Strategy Department), is also based on the same Macedonia and Montenegro schemes.  In both schemes, the SEC alleged that the individuals authorized or caused the payments at issue with “knowledge, the firm belief, or under circumstances that made it substantially certain” that all or a portion of the money would be forwarded to foreign officials.  The complaint also alleges that the individuals caused the payments to be falsely recorded in Magyar Telekom’s books and records. 

In addition, the complaint alleges that the individuals “made false or misleading statements or omissions to Magyar Telekom’s auditors in connection with the preparation of the company’s financial statements.”  Specifically, the SEC alleged that the individuals signed management representation letters or management sub-representation letters that contained false or misleading information.  The complaint states as follows.  “Had Magyar Telekom’s auditors known [the various facts falsified or concealed] they would not have accepted the management representation letters and other representations provided by Straub.  Nor would the auditors have provided an unqualified audit opinion to accompany Magyar Telekom’s annual report.”

The SEC’s complaint against Straub, Balogh, and Morvai alleges that they violated or aided and abetted violations of the anti-bribery, books and records, and internal controls provisions of the FCPA; knowingly circumvented internal controls and falsified books and records; and made false statements to the company’s auditor. The SEC seeks disgorgement and penalties and the imposition of permanent injunctions.

Magyar Telekom’s release (here) (which per the DPA needed to be cleared by the DOJ) states as follows.  “As previously disclosed, the Audit Committee of Magyar Telekom conducted an internal investigation regarding certain contracts relating to the activities of the Company and/or its affiliates in Montenegro and Macedonia that totaled more than EUR 31 million. In particular, the internal investigation examined whether the Company and/or its Montenegrin and Macedonian affiliates had made payments prohibited by U.S. laws or regulations, including the FCPA. The Company’s Audit Committee informed the DOJ and the SEC of the internal investigation. The DOJ and the SEC commenced investigations into the activities that were the subject of the internal investigation. The Company has previously disclosed the results of the internal investigation. As also previously disclosed, the Company’s Board of Directors approved an agreement in principle with the staff of the SEC to resolve the SEC’s investigation through a settlement.”  The release further states as follows.  “The final settlements recognize the DOJ’s and the SEC’s consideration of the Company’s self-reporting, thorough internal investigation, remediation and cooperation with the DOJ’s and the SEC’s investigations. The Company has undertaken several remedial measures to address the issues identified during the course of these investigations. These measures include steps designed to revise and enhance the Company’s internal controls, as well as the establishment of the Corporate Compliance Program. The Corporate Compliance Program promotes awareness of the Company’s compliance policies and procedures through training, the operation of a whistleblower hotline, and monitoring of, and communications with, employees and subsidiaries of the Company. The Company remains fully committed to responsible corporate behavior.”

Peter Clark (Cadwalader, Wickersham & Taft – here – a former DOJ FCPA Unit chief) represented Magyar Telekom.  Debevoise & Plimpton attorneys Mary Jo White (here – the former U.S. Attorney for the S.D. of N.Y.) and Jonathan Tuttle (here) represented Deutsche Telekom.

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