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Friday Roundup

What others are saying, more candy, seriously out-of-whack, not first hand, and for the reading stack.  It’s all here in the Friday Roundup.

What Others Are Saying

Last week, I published this article “Why You Should Be Alarmed By The ADM FCPA Enforcement Action.”  I’ve received a higher than norm amount of feedback – all positive – about the article via e-mail and social media.  Below is what others are saying about the article.

“For many reasons this is a terrific article.  [You are] very brave to write this necessary and timely analysis.”

“Just wanted to say thank you for keeping me updated on your FCPA-related work.  It looks like your 2010 Facade article is still holding up pretty well, despite the DOJ’s “Guidance” from last year.  It will be interesting to see how long the agencies can continue with their relatively unconstrained enforcement practices.”

Thanks for sharing Mike. And don’t change: you are as good as ever!

“Excellent article, Mike!  Readable even by those of us who are not lawyers.  The conclusion about why ADM chose settlement is undoubtedly true of many others who are charged, but leads to a question of the [conduct] of those who are charged to extract “easy takings” rather than have to justify themselves to the SEC or DOJ.  On whose behalf are they acting?”

Also a thank you for the many positive and encouraging comments I’ve received since publishing two posts (here and here) concerning the recent departure of the DOJ’s FCPA Unit Chief.

In other news on that front, White & Case recently announced here that Kathleen Hamann will join the firm as a partner “from the DOJ where she was an anticorruption policy counsel and trial lawyer assigned to the Foreign Corrupt Practices Act (FCPA) Team in the Criminal Division’s Fraud Section.”  The head of White & Case’s Global White Collar Practice stated: “Kathleen’s experience at the DOJ gives her a strong understanding of the complexities of the FCPA and the federal government’s anticorruption policies.  Kathleen is a wonderful addition to our global white collar team, and will further strengthen our ability to represent and defend clients around the world in all phases of investigations, and criminal and civil enforcement proceedings.”

More Candy

This previous post “Like a Kid In A Candy Store” highlighted the abundant offerings of FCPA year in reviews this time of year.

There is more candy to digest.

See here for the slick Global Bribery and Corruption Review 2013 from Hogan Lovells.

See here for Mayer Brown’s FCPA Update:  Year-End 2013.

But again, be warned – the divergent enforcement statistics are likely to make you dizzy at times and as to certain issues.  [Given the increase in FCPA Inc. statistical information and the growing interest in empirical FCPA-related research, I again highlight the need for an FCPA lingua franca (see here for the prior post), including adoption of the “core” approach to FCPA enforcement statistics (see here for the prior post), an approach endorsed by even the DOJ (see here), as well as commonly used by others outside the FCPA context (see here)]

Seriously Out-Of-Whack

One could have either of the following positions.

DOJ enforcement of criminal laws is more about leverage against public companies and risk aversion by corporate leaders rather than facts and law.  Therefore, even if a company settles various enforcement actions for approximately $20 billion in a year, it is not surprising that a company’s profits and stock price are up and that the company’s CEO is therefore given a substantial raise.

DOJ enforcement of criminal laws is about facts and law and if a company settles various enforcement actions for approximately $20 billion in a year, it is just not right that the company’s CEO is given a substantial raise.

Regardless of your position (I know where I fall), you would have to agree that things are seriously out-of-whack these days.

See here and here for articles regarding the compensation of James Dimon (CEO of JPMorgan).  As highlighted in the Wall Street Journal article.

“J.P. Morgan Chase’s board delivered a strong endorsement of Chief Executive James Dimon, boosting his pay 74% for a year in which the nation’s largest bank agreed to more than $20 billion in legal payouts …”  […] The raise reflects the view among the board that most shareholders believe Mr. Dimon is doing a good job protecting the bank’s earnings power and driving the stock price higher despite the high-profile legal settlements, according to people familiar with the board’s conversations. […] Many large shareholders seem comfortable with the bank’s leadership, too. The company’s stock price rose 33% during 2013, outpacing the 30% increase in the S&P 500 stock index. If not for its billions in legal expenses, J.P. Morgan likely would have earned record profits.  […]   Warren Buffett, the billionaire investor who personally owns an undisclosed number of shares in J.P. Morgan, described Mr. Dimon as a “bargain.” “If I owned J.P. Morgan Chase, he would be running it, and he would be making more money than the directors are paying him,” said Mr. Buffett, who has publicly defended the bank executive before.”

“Not First Hand”

JPMorgan of course is under FCPA scrutiny for its alleged hiring practices in China.  (See here among other posts).

In this video interview, Goldman Sach’s CEO Lloyd Blankfein talks about hiring issues at his company.  As noted in the related article, “asked whether he had seen any hiring that looked like a bribe, Mr. Blankfein paused for a moment” and said “not first hand.”

Reading Stack

From BalkanInsight, an in-depth piece regarding the Magyar Telecom enforcement action (see here for the prior post).

From the Economist regarding Brazil’s new FCPA-like law.

*****

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.

Magyar Telekom and Deutsche Telekom Resolve $95 Million FCPA Enforcement Action – SEC Also Charges Former Magyar Executives

Hold the phone on the 2011 FCPA enforcement statistics. 

Once again, the end of the year sees a telecom company resolving an FCPA enforcement action.  In 2007, it was Lucent Technologies (see here and here);  in 2009 it was UTStarcom (see here for the prior post); in 2010 it was Alcatel-Lucent (see here for the prior post); and in 2011 it is Magyar Telekom and Deutsche Telekom.

Earlier today, the DOJ and SEC announced (see here and here) parallel FCPA enforcement actions against Magyar Telekom (a Hungarian telecommunications company) and Deutsche Telekom (a German telecommunications company that is the majority owner of Magyar).  Fines and penalties in the DOJ and SEC enforcement actions is approximately $95 million.

DOJ

The DOJ release states that the companies agreed to pay a combined $63.9 million criminal penalty to resolve an FCPA investigation into activities by Magyar Telekom and its subsidiaries in Macedonia and Montenegro. 

The DOJ filed a three-count information (see here) against Magyar Telekom charging it with one count of violating the FCPA’s  anti-bribery provision and  two counts of violating the FCPA’s  books and records provisions.  The DOJ release notes that at the time of the charged conduct, Magyar Telekom’s American Depository Receipts (ADRs) traded on the New York Stock Exchange. 

The DOJ’s release states as follows.  “Magyar Telekom’s scheme in Macedonia stemmed from potential legal changes being made to the telecommunications market in that country.    In early 2005, the Macedonian government tried to liberalize the Macedonian telecommunications market in a way that Magyar Telekom deemed detrimental to its Macedonian subsidiary, Makedonski Telekommunikacii AD Skopje (MakTel).   Throughout the late winter and spring of 2005, Magyar Telekom executives, with the help of Greek intermediaries, lobbied Macedonian government officials to prevent the implementation of the new telecommunications laws and regulations.  Magyar Telekom eventually entered into an agreement with certain high-ranking Macedonian government officials to resolve its concerns about the legal changes.   In the secret agreement, a so-called “protocol of cooperation,” Macedonian government officials agreed to delay the entrance of a third mobile license into the Macedonian telecommunications market, as well as other regulatory benefits.   Magyar Telekom executives signed two copies of the protocol of cooperation, each with high-ranking officials of the different ruling parties of Macedonia.   The Magyar Telekom executives then kept the only executed copies outside of Magyar Telekom’s company records.   According to court documents, in order to secure the benefits in the protocol of cooperation, the Magyar Telekom executives engaged in a course of conduct with consultants, intermediaries and other third parties, including through sham consultancy contracts with entities owned and controlled by a Greek intermediary, to pay €4.875 (approximately $6 million) under circumstances in which they knew, or were aware of a high probability that circumstances existed in which, all or part of such payment would be passed on to Macedonian officials.   The sham contracts were recorded as legitimate on MakTel’s books and records, which were consolidated into Magyar Telekom’s financials.   Deustche Telekom, which owned approximately 60 percent of Magyar Telekom, reported the results of Magyar Telekom’s operations in its consolidated financial statements.  Additionally, the criminal information charges Magyar Telekom with falsifying its books and records in regard to its activity in Montenegro.   According to the court filing, Magyar Telekom made improper payments in connection with its acquisition of a state-owned telecommunications company in Montenegro.   These payments were documented on Magyar Telekom’s books and records through the execution of four bogus contracts.   For example, two of the contracts were backdated and concealed the true counterparties, and no legitimate services were provided under the contracts even though the contracts were for €4.47 million.”

The criminal charges against Magyar Telekom were resolved via a deferred prosecution agreement (see here).  Pursuant to the DPA, Magyar Telekom agreed to pay a $59.6 million penalty for its illegal activity, implement an enhanced compliance program and submit annual reports regarding its efforts in implementing the enhanced compliance measures and remediating past problems.

The DOJ also entered into a two-year non-prosecution agreement (see here)  with Deutsche Telekom for its failure to keep books and records that accurately detailed the activities of Magyar Telekom.   At the time of the conduct at issue, Deutsche Telekom’s ADRs traded on the NYSE.  The NPA requires Deutsche Telekom to pay a $4.36 million penalty and to enhance its compliance program.

The DOJ release states as follows.  “Both agreements acknowledge Magyar Telekom and Deutsche Telekom’s voluntary disclosure of the FCPA violations to the department and the leadership of Magyar Telekom’s audit committee in pursuing a ‘thorough global internal investigation concerning bribery and related misconduct.’   In addition, the agreements highlight that the companies have already undertaken remedial measures and have committed to further remedial steps through the implementation of an enhanced compliance program.”

SEC

Based on the same core conduct, the SEC also charged (see here for the complaint) Magyar Telekom and Deutsche Telekom.  Magyar Telekom is charged with FCPA anti-bribery violations as well as books and records and internal controls violations.   Deutsche Telekom is charged with FCPA books and records and internal controls violations.

Without admitting or denying the SEC’s allegations, Magyar Telekom and Deutsche Telekom consented to the entry of final judgments.  Magyar Telekom agreed to settle the SEC’s charges by paying $31.2 million in disgorgement and pre-judgment interest.

The SEC also alleged in a separate complaint (see here) that the three former top executives at Magyar Telekom “orchestrated, approved, and executed”  the Macedonia and Montenegro bribery schemes.  Charged in the complaint are:  Elek Straub (former Chairman and CEO); Andras Balogh (former Director of Central Strategic Organization); and Tamas Morvai (former Director of Business Development and Acquisitions). 

The complaint alleges that the individuals violated or aided and abetted violations of the FCPA’s anti-bribery, books and records, and internal controls provisions; knowingly circumvented internal controls and falsified books and records; and made false statements to the company’s auditor.  Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated as follows.  “Magyar Telekom’s senior executives used sham contracts to funnel millions of dollars in corrupt payments to foreign officials who could help them keep competitors out and win business.  They purposely structured the sham contracts to circumvent internal review, and when questions were eventually raised about their use of ‘consulting’ contracts, they reconfigured them as ‘marketing’ contracts to avoid scrutiny and prolong their scheme.”  The SEC seeks disgorgement and penalties and the imposition of permanent injunctions against the individuals.

Stay tuned for additional analysis of the enforcement actions.

Offices of Deutsche Telekom Searched

According to this September 3rd Dow Jones Newswire story “a German public prosecutor’s office based in Bonn [recently] searched German telecommunications company Deutsche Telekom AG offices as part of an initial inquiry into bribery allegations involving eight people, in response to a request from U.S. authorities.”

Deutsche Telekom holds a 59% stake in Magyar Telekom (see here) and the article suggests that the search is in connection with Magyar Telekom’s previously disclosed FCPA inquiry.

As the article notes, Hungary-based Magyar Telekom (see here), a company with ADRs listed on the New York Stock Exchange, disclosed suspicious payments and in December 2009 the company released this detailed press release.

In its Presentation of Second Quarter Results 2010 (see here) Magyar Telekom stated as follows:

“As previously announced, the DOJ, the SEC and the Ministry of Interior of the Republic of Macedonia have commenced investigations into certain of the Company’s activities that were the subject of the internal investigation. Further, in relation to certain activities that were the subject of the internal investigation, the Hungarian Central Investigating Chief Prosecutor’s Office has commenced a criminal investigation into alleged corruption with the intention of violating obligations in international relations and other alleged criminal offenses. Also, as previously announced, the Hungarian National Bureau of Investigation (“NBI”) has begun a criminal investigation into alleged misappropriation of funds relating to payments made in connection with the Company’s ongoing internal investigation and the possible misuse of personal data of employees in the context of the internal investigation. These governmental investigations are continuing, and the Company continues to cooperate with those investigations.

The Company, through its external legal counsel, has recently engaged in discussions with the DOJ and the SEC regarding the possibility of resolving their respective investigations as to the Company through negotiated settlements. The Company has not reached any agreement with either the DOJ or the SEC regarding resolution of their respective investigations, and discussions with both agencies are continuing. We may be unable to reach a negotiated settlement with either agency. Any resolution of the investigations could result in criminal or civil sanctions, including monetary penalties and/or disgorgement, against the Company or its affiliates, which could have a material effect on the Company’s financial position, results of operations or cash flows, as well as require additional changes to its business practices and compliance programs. The Company cannot predict or estimate whether or when a resolution of the DOJ or SEC investigations will occur, or the terms, conditions, or other parameters of any such resolution, including the size of any monetary penalties or disgorgement, the final outcome of these investigations, or any impact such resolution may have on its financial statements or results of operations. Consequently, the Company has not made any provisions in its financial statements as of June 30, 2010 with respect to the investigations.

Magyar Telekom incurred HUF 1.4 bn expenses [approximately $6.3 million] relating to the investigations in the first half of 2010, which are included in other operating expenses of Group Headquarters.”

Did An FCPA Enforcement Action Contribute to a Foreign Coup?

Law firms crank out FCPA news releases, client alerts, etc. all the time to inform clients and potential clients about FCPA risks or the who, what, and where of a recent enforcement action ending with a few compliance lessons.

These pieces are informative, but rarely do they raise provocative questions.

That is, until Gregory Paw’s (Pepper Hamilton LLP) recent piece (see here) in which he asks whether the Latin Node FCPA enforcement action in the U.S. contributed to the June 2009 coup of Honduran president Manuel Zelaya.

By way of background, in April 2009, DOJ announced (see here) that Latin Node, Inc. (a privately-held telecommunication services company headquartered in Miami) pled guilty to violating the FCPA’s anti-bribery provisions in connection with improper payments made to officials in Honduras and Yemen in order to obtain and retain business. The criminal information (see here) details Latin Node’s efforts to obtain and retain business with Hondutel (the Honduran government-owned telecommunications company) and charges that despite recognized “financial weaknesses” in Latin Node’s proposal, Hondutel ultimately selected Latin Node for the agreement because of various improper payments Latin Node made or authorized to various Honduran “foreign officials.”

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Hungry for more?

Yesterday, Magyar Telekom, the leading Hungarian telecommunications service provider with shares traded on a U.S. exchange, issued what is perhaps the longest, most detailed press release ever about a potential FCPA issue (see here).

The potential issue was first voluntarily disclosed in February 2006 (see here – p. 14) and yesterday the company announced that it’s Audit Committee issued the final report of FCPA’s counsel investigation.

I will leave it for you to think about potential application of the issues/questions I raised earlier this week in this post.

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