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Friday Roundup

Out with the tide, a former DOJ Fraud Section Chief speaks on voluntary disclosure, guidance issues, will candy fall from the pinata, schooled in the FCPA, a Section 1504 development, and “Minegolia.”

Tidewater Derivative Complaint Dismissed

As highlighted in this previous post, in November 2010 Tidewater Inc. was one of several companies to resolve a “CustomsGate” case.  The conduct at issue focused on Azeri tax officials and Nigerian temporary import permits and the company resolved DOJ and SEC enforcement actions by agreeing to pay $15.7 million in fines and penalties.

As if on cue in this new era of FCPA enforcement, along came the private plaintiff firms representing shareholders who filed a derivative complaint alleging that officers and members of the Board of Directors of Tidewater breached their fiduciary duties “in that they: (1) knew or recklessly disregarded the fact that employees, representatives, agents and/or contractors were paying, had paid and/or had offered to pay bribes to Azerbaijani and Nigerian government officials to obtain favorable treatment for Tidewater; (2) caused Tidewater to pay bribes and to disguise the bribe payments as legitimate expenses in Tidewater’s books and financial disclosures; and (3) failed to maintain adequate internal controls to ensure compliance with the FCPA and Exchange Act.”

Earlier this week, the case was swept out with the tide as U.S. District Court Judge Jane Triche Milazzo dismissed the complaint – see here for the decision.  In short, Judge Milazzo found that “Plaintiff did not adequately plead demand futility.”  Judge Milazzo utilized various tests in reaching her decision such as director interest and independence and whether the board could impartially consider the merits of the demand without being influenced by improper considerations.

As to interest, Judge Milazzo stated as follows.

“This Court finds that the Complaint is completely devoid of any allegations of an interested director. There is no allegation that any director appeared on both sides of a transaction or expected to derive a personal financial benefit from it. Nowhere in the Complaint can it be found that any one of the directors, much the less a majority of them, benefitted from the bribes themselves, benefitted from failing to establish and maintain adequate internal controls, benefitted from enforcing policies and programs designed to prevent violations, benefitted from improperly recorded payment of bribes in Tidewater’s books and records or benefitted from inadequately training their employees, agents, representatives and/or contractors with respect to compliance with the FCPA.”

As to alleged director participation or knowledge , Judge Milazzo stated that the “Complaint falls woefully short of pleading facts that are sufficient to show that there was any knowledge or conscious disregard on behalf of the directors.”

As to whether the directors exhibited bad faith sufficient to overcome business judgment rule presumptions, Judge Milazzo stated as follows.  “While Plaintiff’s allegations are sufficient to show that Tidewater was evidently violating both the FCPA and the Exchange Act, nowhere in the Complaint do Plaintiff’s allegations meet the specificity to show that the Individual Defendants were acting with the intent to violate these laws.  ‘[T]he mere fact that a violation occurred does not demonstrate that the board acted in bad faith.  Alleging that ‘upon information and belief’ the ‘Headquarters’ made the decision to avoid tax assessments in violation of the FCPA falls woefully short of the pleading requirements. Nowhere can this Court find who made this decision, how this decision was made or that there was an intent to violate any law. Moreover, the Court finds it significant that Tidewater’s directors voted and voluntarily initiated an FCPA investigation and advised the federal government of their violations before the government even suspected any violations.”

Tyrell on Voluntary Disclosure

You know the talking points.  The DOJ wants companies to voluntarily disclose, not ifs, ands or buts about it.  It’s interesting though how this becomes less of a black and white issues when individuals leave the DOJ.

In this recent Q&A in The Metropolitan Corporate Counsel, Steven Tyrell (a former DOJ Fraud Section Chief and current partner at Weil Gotshal – here) was asked the following question – “what is the role of voluntary reporting in establishing a good relationship with the regulatory and enforcement authorities?”

He stated as follows.

In the first instance, if a company has a legal obligation to disclose – for example, government contractors are obliged to disclose fraud – then the analysis begins and ends there. Assuming there is no legal obligation that compels disclosure or no imminent threat of disclosure by an outside party, such as a newspaper, then I typically advise clients to take credible allegations of wrongdoing seriously, look into those allegations in a manner that is appropriate under the circumstances, and assess the nature and extent of the company’s exposure and the pros and cons of disclosure. Then, and only then, should a disclosure be made if it is in the best interest of the company – or, for a public company, if the securities laws require it. Of course, it often will not be in a company’s best interest to disclose if, for example, the allegations prove not to be credible or if it is unclear whether the conduct even amounts to a violation of law. Under those circumstances, a disclosure could unnecessarily embroil the company in a lengthy and costly government investigation and result in other repercussions such as triggering civil litigation and harm to a company’s reputation that could otherwise be avoided. It’s a challenging calculus. I can tell you from past experience that there are companies that have strong reputations for compliance with regulators and others that do not. However, the fact that a company doesn’t disclose a problem that ultimately comes to DOJ’s attention is not necessarily going to damage the company’s credibility with DOJ. Regulators recognize that not every allegation should be of interest to them – and, frankly, having counsel that knows when they’ll be interested and when they won’t is really important.”

Guidance Issues

As highlighted in this previous post, soon after Assistant Attorney General Lanny Breuer announced in November 2011 that FCPA guidance would be forthcoming in 2012, Senator Grassley sought guidance on the guidance and asked Attorney General Holder several follow-up questions for the record.  For a copy of Holder’s responses, see here.

In this previous post, among others, I commented that non-binding DOJ guidance is not the best way to accomplish real and meaningful FCPA reform.

Thus, I completely agree with former DOJ Deputy Attorney General George Terwilliger and former DOJ attorney and Senate counsel Matthew Miner (both currently at White & Case, see here and here) when they state as follows in this article.

“The fact that the Justice Department recognizes the need for such guidance underscores the existence of blurry lines and fuzzy standards surrounding the FCPA. US businesses trying to compete successfully in the international commercial arena deserve better. Justice Department ‘guidance’ is neither enough, nor is it properly the role of prosecutors to be definitive interpreters of ambiguities in criminal laws. Congress writes the laws and, as the US Supreme Court has firmly established, has a responsibility to set clear standards for what is permissible and what is not. It should not stand aside in deference to the Justice Department’s plan to craft guidance, especially when that guidance will have no effect in court.”

Yara Fertilizer

It has been said before that anytime a foreign company is the subject of a corruption probe, the U.S. enforcement agencies are like children at a birthday party waiting for some candy to fall from the pinata.  Think what you will of the analogy.

The Wall Street Journal recently reported (here) that “Norwegian fertilizer producer Yara International ASA’s chief executive, Jorgen Ole Haslestad, apologized Friday to the company’s employees after an investigation uncovered millions of dollars in ‘unacceptable’ payments in India and Switzerland, as well as ‘unacceptable offers of payments’ in Libya.”  According to the article, the “unacceptable offers of payments” in Libya involve “a consultant related to the establishment of the company Libyan Norwegian Fertilizer Co., or Lifeco, in Libya, a joint venture with the Libyan National Oil Corp. and the Libyan Investment Authority.”

As noted on the company’s website here, Yara “has a sponsored Level 1 ADR program for American Depositary Receipts (ADRs), which represent ownership in shares of foreign (non-US) companies that trade on US financial markets.”  Whether foreign companies, including those with Level 1 ADR’s can become subject to the FCPA, see this excellent piece “When Does an ADR Program Give U.S. Authorities FCPA Jurisdiction Over a Foreign Issuer?”

Time will tell if the candy falls.

Checking in on Wynn Resorts

Previous posts here, here and here focused on the Wynn-Okada dispute including Wynn’s $135 million charitable contribution to the University of Macau.  On that topic, this recent Wall Street Journal article focused on the “web of political ties” between a Macau company paid by Wynn and government officials.  Regarding Wynn’s FCPA compliance in expanding in Macau, company CEO Steve Wynn stated as follows.  “This whole business of the Foreign Corrupt Practices Act—we were schooled in this.”

Final grade is pending.

Section 1504 Development

Several prior posts, see here for example, discussed Section 1504 of Dodd-Frank, the so-called Resource Extraction Disclosure Provisions and the long delay in SEC final rules.  As noted in this Corruption Current post by Samuel Rubenfeld, the SEC recently announced here that on August 22nd, “the Commission will consider whether to adopt rules regarding disclosure and reporting obligations with respect to payments to governments made by resource extraction issuers to implement the requirements of Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“Minegolia”

There has been only one FCPA enforcement concerning, at least in part, business conduct in Mongolia (see here for the 2009 UTStarcom action).  This is hardly surprising, as few companies subject to the FCPA have traditionally engaged in business in the country.  However, as noted in this recent Al Jazerra article, Mongolia or “Minegolia” as the country is sometimes called, “is undergoing a rapid transformation, due to its incredible resource wealth in minerals such as coal, copper, and gold.” At the same time, the article notes that “Transparency International placed Mongolia 120th out of 183 nations on its corruption perception index” and that “90 percent of Mongolians believe politicians are benefitting from ‘special arrangements’ with foreign enterprises over mining rights.”

*****

A good weekend to all.

Okada Cites “Federal Interest In The Uniform Interpretation Of The FCPA” In Seeking To Remove Wynn Complaint To Federal Court

Previous posts here, here and here have discussed the battle royale between Wynn Resorts and its Director Kazuo Okada and his companies.  The dispute has included Okada accusing Wynn of conduct that could implicate the FCPA and Wynn also accusing Okada of separate and distinct conduct that could implicate the FCPA.  It is a rare instance of the FCPA being used offensively to seemingly accomplish business objectives.

Yesterday, attorneys for Kazuo Okada’s companies, Aruze USA, Inc. and Universal Entertainment Corporation, filed a notice of removal (here) in the U.S. District Court, District of Nevada.  The notice of removal asserts that the wide-ranging civil complaint previously filed by Wynn Resorts in Nevada state court depends “on the resolution of a substantial, disputed federal question regarding the scope and interpretation of the Foreign Corrupt Practices Act.”  The notice of removal states that Wynn’s state court complaint seeks a “judicial declaration confirming [Wynn’s] conclusion that Defendants are ‘unsuitable’ because they violated the FCPA.”

Under the heading “Uniform Interpretation of the FCPA”, the notice of removal states that “there is an important federal interest in the uniform interpretation of the FCPA” and “given the exclusive federal jurisdiction over criminal and injunctive relief for FCPA violations, and the potential for conflicting interpretations of the ambiguous statutory language, [the federal court] should retain subject matter jurisdiction to ensure that the federal law relating to the FCPA is interpreted in a uniform manner.”

FCPA caselaw is sparse.  Because of the “carrots” and “sticks’ relevant to resolving criminal FCPA enforcement actions (as well as the SEC’s neither admit nor deny settlement policy), few corporate or individual FCPA defendants put the enforcement agencies to their burden of proof and thus many FCPA enforcement theories escape judicial scrutiny.

This is what makes the Wynn-Okada dispute so tantalizing for FCPA followers.  The civil dispute implicating the FCPA is between well funded rivals who are staking out litigation positions (including as to the FCPA) that are likely to result in judicial scrutiny.

Separately yesterday, attorneys for Kazuo Okada’s companies, Aruze USA, Inc. and Universal Entertainment Corporation filed an expansive counterclaim and answer.  As to Wynn’s $135 million donation to the University of Macau (see here for the prior post), the counterclaim and answer states as follows.  The donation “suspiciously … covers essentially the same 10-year period” as Wynn Macau’s current gaming concession, that Okada was “concerned about the lack of deliberation of the boards of Wynn Resorts and Wynn Macau” in approving the donation, and that the “Chancellor of University of Macau is also the head of Macao’s government, with ultimate oversight of gaming matters.”  As to the Freeh Report (see here for the prior post), the counterclaim and answer states that “Freeh was not preparing an objective report of the facts by an ‘independent’ investigator – he was providing the [Wynn] Board with an argumentative document as an advocate against Mr. Okada.”

Wynn Resorts $135 Million University of Macau Donation The Subject Of SEC Scrutiny

In May 2011,  Wynn Resorts donated $135 million to the University of Macau (see here for the University’s press release).

In an 8-K filing yesterday, Wynn Resorts Ltd. disclosed as follows.

“As previously disclosed, in May 2011, Wynn Macau, a majority owned subsidiary of Wynn Resorts, Limited (the “Company”), made a commitment to the University of Macau Development Foundation in support of the new Asia-Pacific Academy of Economics and Management. This contribution consists of a $25 million payment made in May 2011 and a commitment for additional donations of $10 million each year for the calendar years 2012 through 2022 inclusive. The pledge was consistent with the Company’s longstanding practice of providing philanthropic support for deserving institutions in the markets in which it operates. The pledge was made following an extensive analysis which concluded that the gift was made in accordance with all applicable laws. The pledge was considered by the Boards of Directors of both the Company and Wynn Macau and approved by 15 of the 16 directors who serve on those boards. The sole dissenting vote was Mr. Kazuo Okada whose stated objection was to the length of time over which the donation would occur, not its propriety.

Also as previously disclosed, Mr. Okada commenced litigation on January 11, 2012 [see here for the complaint], in Nevada seeking to compel the Company to produce information relating to the donation to the University of Macau, among other things.

On February 8, 2012, following Mr. Okada’s lawsuit, the Company received a letter from the Salt Lake Regional Office of the U.S. Securities and Exchange Commission (“SEC”) requesting that, in connection with an informal inquiry by the SEC, the Company preserve information relating to the donation to the University of Macau, any donations by the Company to any other educational charitable institutions, including the University of Macau Development Foundation, and the Company’s casino or concession gaming licenses or renewals in Macau. The Company intends to fully comply with the SEC’s request.”

While the Wynn’s disclosure does not specifically mention the Foreign Corrupt Practices Act, given that the company’s disclosure of the SEC inquiry appears to link the donation to the “Company’s casino or concession gaming licenses or renewals in Macau” it is likely that the SEC’s interest in the donation is based, at least in part, on the FCPA.  As Okada alleges in his complaint “Wynn Macau’s gaming concession expires in June 2022” – the last year of Wynn’s donation committment.  According to Okada’s complaint “he objected to this donation, which appears to be unprecedented in the annals of the University” [which he alleges sits on land owned by the government].

According to Wynn’s most recent quarterly filing, the company’s Macau operations constitute approximately 75% of the company’s overall revenue.  Macau is also a focus of the company’s expansion plans.

Charitable donations are not in and of themselves prohibited by the FCPA’s anti-bribery provisions.  For instance, see here for a 2009 FCPA Opinion Procedure Release.  Yet, such donations do carry FCPA risk and, as anyone who has reviewed DOJ NPAs and DPAs know, FCPA best practices is to have adequate controls as to charitable donations (see here for the recent Aon NPA – specifically Appendix B).

Charitable donations hit the radars of FCPA practitioners as a result of a 2004 SEC FCPA enforcement action against Schering-Plough (see here).  In the enforcement action, the SEC alleged that Schering-Plough violated the FCPA when its wholly-owned Polish subsidiary (“S-P Poland”) improperly recorded a bona fide charitable donation to a Polish foundation that restored castles where the founder/president of the foundation was also a director of a government health fund  that provided money to hospitals throughout Poland for the purchase of pharmaceutical products.  Although the SEC and Schering-Plough ultimately resolved the matter based only on violations of the FCPA books and records and internal control provisions, the enforcement action is commonly viewed as standing for the proposition that “payments to a bona fide charity could violate the FCPA if made to influence the actions of a government official” (see this client alert from Wilmer Cutler).

Wynn is not the only casino under scrutiny for Macau conduct.  Las Vegas Sands has also been under FCPA scrutiny concerning its operations in Macau.  In a question out of left-field, during the June 2011 FCPA hearing in the House, Representative Quayle (R-AZ) asked the DOJ whether it “looked into the gambling practices in Macau and if there is any illegal activity occurring in that arena?”  (See here page 71).

Like Wynn’s Macau inquiry, the Las Vegas Sands inquiry also seems to have started with a civil lawsuit.  See here for the prior post.

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