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A Discussion On The News Corp Scandal

Every now and then it is nice to have a light writing day. Today is such a day, but that does not mean today’s post is lacking in substance. I am pleased to send you here – an extensive discussion of the FCPA (and other) implications of the News Corporation scandal on Legal Talk Network and Lawyer2Lawyer. Joining me on the program, moderated by Bob Ambrogi, was Jane Kirtley, the Silha Professor of Media Ethics and Law at the School of Journalism and Mass Communication at the University of Minnesota (see here).


In other News Corp. FCPA related news, Gateway News reported here that Representative Ed Perlmutter (D-CO) joined the growing list on Capital Hill calling for DOJ and SEC FCPA investigations of News Corp. Readers may recall that Representative Perlmutter previously introduced a bill seeking to amend the FCPA to provide a limited private right of action. See here and here for the prior posts. According to Gateway News, Representative Perlmutter plans to soon re-introduce his private right of action bill.


A good weekend to all.

News Corp Hires Mendelsohn … And More On The Revolving Door

The Wall Street Journal (here) reports that “News Corp. has hired Mark Mendelsohn, a partner in the Washington, D.C. office of Paul, Weiss, Rifkind, Wharton & Garrison LLP.”

From 2005 to 2010, Mendelsohn (here) was Deputy Chief of the DOJ Fraud Section and “was responsible for overseeing all DOJ investigations and prosecutions under the FCPA.” As such, Mendelsohn is widely viewed as the architect of this new era of FCPA enforcement. The WSJ previously noted (here) that “it has been up to the Justice Department – and specifically to Mr. Mendelsohn – to interpret [the “particularly vague” FCPA]” during its era of resurgence. As Dionne Searcey of the WSJ recently noted (here) Mendelsohn “presided over an across-the-board crackdown on corporate corruption abroad, levying record-breaking fines and prosecuting executives for bribery.”

How Mendelsohn (and those he supervised while at the DOJ) interpreted the FCPA was often aggressive, new, and novel. Indeed, in this interview with “The Boardroom Channel” Mendelsohn was asked about the increase in FCPA enforcement actions and candidly stated that “what’s really changed is not so much the legislation, but the enforcement and approach to enforcement by U.S. authorities.”

Prior posts (here and here) discussed News Corp.’s potential FCPA exposure given the London police officer payments at issue and how the conduct fits within the type of FCPA enforcement frequently pursued by the DOJ during this era of the FCPA’s resurgence. Mendelsohn’s DOJ FCPA unit did not invent FCPA enforcement actions involving payments to “foreign officials” to secure general business advantages (as opposed to foreign government contracts as were traditionally pursued), but these type of actions soared under his leadership. Thus, Mendelsohn’s News Corp. representation may now put him face-to-face with the same aggressive enforcement theories he championed while at the DOJ.

Nathan Vardi (who wrote a feature Forbes article (here) in 2010 titled the “Bribery Racket”) wrote yesterday at Forbes (here) “it will be interesting to see how Mendelsohn handles his new assignment.”

Seperately, Bloomberg reported (here) that News Corp’s independent directors have hired Mary Jo White and Michael Mukasey of the law firm Debevoise & Plimpton. While at the DOJ, White participated in FCPA prosecutions and Mukasey (the former Attorney General) recently testified on behalf of the U.S. Chamber of Commerce during the FCPA hearing last month in the House. See here for a summary of his testimony and the hearing.


Mendelsohn’s 2010 departure from the DOJ’s FCPA unit to a private practice career was part of a clear trend of FCPA enforcement attorneys enforcing the law one day and then providing FCPA defense services the next.

In the latest example (see here, here and here for other recent examples), Paul Weiss announced recently (see here) that Bruce Searby, the prosecutor in the DOJ’s successful of Gerald and Patricia Green will be joining the firm’s Washington D.C. office. Mendelsohn stated in the release that the “growing intolerance of corruption … is leading to increasing scrutiny of organizations’ business activities and a greater focus on compliance and prevention” and that Searby’s addition will enable Paul Weiss “to help our clients better navigate the regulatory environment, conduct internal reviews, and, where necessary, respond to inquiries from U.S. and foreign authorities.” Paul Weiss chair Brad Karp noted that “the demand for top-tier legal advice on complying with domestic and foreign anti-corruption legislation has never been greater.”

I agree and that is why I believe it is in the public interest (recognizing the niched nature of both the DOJ and SEC FCPA units) that all FCPA enforcement attorneys should be prohibited when leaving the government from providing FCPA defense or compliance services for a five-year time period. For additional reading see this piece I co-authored.

Others have also recently brought attention to the public policy concerns of the revolving door. In this recent article in Forbes, Harvey Silvergate profiles a non-FCPA DOJ departure to the private sector and how the former DOJ prosecutor is now on the other side of cases the individual “so zealously prosecuted” during his DOJ career. As to the numerous DOJ departures, Silvergate writes as follows. “From an outside perspective, [such moves seem] like a zero-consequence decision: corporations now have lawyers who understand the federal prosecutorial machinery and, importantly, maintain their relationships with former colleagues remaining in government service. And, of course, the federal government will easily enough be able to find replacements among the many eager law school graduates seeking these plum positions. Everybody wins, right? Everybody, that is, except for the justice system as a whole. Underlying the revolving door is a pernicious underbelly of overzealous and often unfair prosecutions, juked conviction stats, and a culture of plea-bargaining that is spiraling out of control, all in order to bring down some of the biggies in the business world. In short, the revolving door is facilitated by a federal criminal justice system geared more for making prosecutors’ reputations on the scalps of private sector companies and executives, than for achieving true justice.” Silvergate correctly concludes by stating that “revolving door between the Department of Justice and white shoe law firms is a phenomenon that deserves more attention by the press and other elements of civil society…”.


On July 12th, the Government Accountability Office (“GAO” – the investigative arm of Congress) released a report (here) titled “Existing [SEC] Post-Employment Controls Could Be Further Strengthened.” As to the SEC’s revolving door, the GAO states that it conducted its study because “this practice raises questions about the potential impact on SEC’s ability to effectively carry out its mission, including the potential for undue influence by former SEC employees on SEC matters or cases.”

On the same day the GAO released its report, the law firm Labaton Sucharow announced (here) that Jordan Thomas (a former Senior SEC attorney who “played a leadership role in the development and implementation of the SEC’s [new] Whistleblower Program”) joined the firm to “launch its Whistleblower Representation Practice.” According to the firm’s release, “Labaton Sucharow is the first and only law firm to recruit a senior SEC attorney to lead a national whistleblower practice focused exclusively on representing individuals who report violations of the federal securities laws.”

Wall Street Journal Goes On Offense

It is not everyday FCPA details are dissected on the editorial page of a major newspaper. But then again, it is not everyday that the parent company of a major newspaper is embroiled in a major scandal that has an FCPA element to it.

Yesterday, in a lengthy and wide-ranging editorial (here), the Wall Street Journal had this to say about the FCPA implications of the News Corp. scandal.

“The political mob has been quick to call for a criminal probe into whether News Corp. executives violated the U.S. Foreign Corrupt Practices Act with payments to British security or government officials in return for information used in news stories. Attorney General Eric Holder quickly obliged last week, without so much as a fare-thee-well to the First Amendment.”

“The foreign-bribery law has historically been enforced against companies attempting to obtain or retain government business. But U.S. officials have been attempting to extend their enforcement to include any payments that have nothing to do with foreign government procurement. This includes a case against a company that paid Haitian customs officials to let its goods pass through its notoriously inefficient docks, and the drug company Schering-Plough for contributions to a charitable foundation in Poland.”

“Applying this standard to British tabloids could turn payments made as part of traditional news-gathering into criminal acts. The Wall Street Journal doesn’t pay sources for information, but the practice is common elsewhere in the press, including in the U.S.”

With the WSJ now suggesting that payments to police officers are “part of traditional news-gathering” – at least in certain countries – and it suggesting that paying sources for information is “common,” it may be possible that the next FCPA industry sweep will be of the media industry. Previous industry sweeps have included the oil and gas industry, a current sweep of the pharmaceutical / medical device industry that has been active for some time, and a recently initiated sweep of the financial services industry.

The remainder of this post details the two FCPA enforcement actions referenced in the WSJ’s editorial.

For starters, the WSJ is correct when its stated as follows. “The foreign-bribery law has historically been enforced against companies attempting to obtain or retain government business. But U.S. officials have been attempting to extend their enforcement to include any payments that have nothing to do with foreign government procurement.”

During the FCPA’s first 20 years, every FCPA enforcement action concerned allegations that payments to a “foreign official” assisted the payor in “obtaining or retaining business” with a foreign government or alleged foreign government “department, agency, or instrumentality.”

FCPA enforcement then changed – most notably with the U.S. v. Kay prosecution.

U.S. v. Kay

In 2001, David Kay and Douglas Murphy (the “Defendants”), the president and vice president of Houston-based American Rice, Inc. (“ARI”), were criminally indicted. The indictment charged FCPA anti-bribery violations and alleged that the defendants made improper payments to Haitian “foreign officials” for the purpose of reducing customs duties and sales taxes owed by ARI to the Haitian government.

The indictment, while specific as to other items, merely tracked the FCPA’s “obtain or retain business” language and did not specifically allege how the alleged payments assisted ARI in obtaining or retaining business in Haiti or what business was obtained or retained. “In other words, the indictment recite[d] no facts that could demonstrate an actual or intended cause-and-effect nexus between reduced taxes and obtaining identified business or retaining identified business opportunities.”

The trial court granted Defendants’ motion to dismiss the indictment and held, as a matter of law based on the FCPA’s legislative history, that the alleged payments were not payments made to “obtain or retain business” and thus did not fall within the scope of the FCPA’s anti-bribery provisions. The DOJ appealed the decision and one issue on appeal was whether payments to “foreign officials” to obtain favorable tax and customs treatment can come within the scope of the FCPA’s anti-bribery provisions.

The Fifth Circuit, like the trial court, concluded that the FCPA’s “obtain or retain business” element was ambiguous and it thus analyzed the FCPA’s legislative history. The Fifth Circuit focused specifically on the U.S. Senate’s 1977 sponsored bill and the SEC report on which the Senate’s proposal was based. According to the court, the SEC report “exhibited concern about a wide range of questionable payments [including those at issue in Kay] that were resulting in millions of dollars being recorded falsely in corporate books and records.” Although the Fifth Circuit recognized that the Senate’s proposal did not expressly cover payments that seek to influence the administration of tax laws or seek a favorable tax treatment, the Senate, in the words of the court, “was mindful of bribes that influence legislative or regulatory actions, and those that maintain established business opportunities.” In short, the Fifth Circuit was convinced that Congress intended to prohibit a range of payments wider than those that only directly influence the acquisition or retention of government contracts or similar arrangements. The Fifth Circuit held that making payments to a “foreign official” to lower taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business. The court concluded that there was “little difference” between these type of payments and traditional FCPA violations in which a company makes payments to a “foreign official” to influence or induce the official to award a government contract.

However, the Kay court emphatically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. According to the court, the key question of whether Defendants’ alleged payments constituted an FCPA violation depended on whether the payments were intended to lower ARI’s costs of doing business in Haiti enough to assist ARI in obtaining or retaining business in Haiti. The court then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country. On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.

The court specifically stated:

“[I]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

Despite the equivocal nature of the Kay holding, the decision clearly energized the enforcement agencies and post-Kay there has been an explosion in FCPA enforcement actions where the alleged improper payments have nothing to do with obtaining or retaining foreign government business. Many of these enforcement actions are profiled in my article “The Façade of FCPA Enforcement” (here at pages 971-976). None of these enforcement actions were challenged or subjected to meaningful judicial scrutiny and the Kay decision remains the only caselaw on the FCPA’s key “obtain or retain business” element.

For original source documents related to the Kay enforcement action see here.


The other FCPA enforcement action referenced by the WSJ is the 2004 enforcement action against Schering-Plough. Notably this was only an SEC civil enforcement action and only charged FCPA books and records and internal control violations.

The SEC civil complaint (here) 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 where the founder/president of the foundation was also the director of a government health fund (the “Director”) that provided money to hospitals throughout Poland for the purchase of pharmaceutical products. According to the SEC, “during thc period in which the payments were being made to the foundation, S-P Poland’s sales two of its oncology products, increased disproportionately compared with sales of those products in other regions of Poland.” As is typical in SEC FCPA enforcement actions, there was no meaningful judicial scrutiny of this action and the company settled the charges without admitting or denying the SEC’s allegations.

News Corp And The FCPA

On July 7th the U.K. Guardian reported (here) that “up to five [U.K. police] officers were paid between them a total of at least £100,000 in cash from the News of the World.” The next day, Dominic Rushe and Jill Treanor of the U.K. Guardian made the link (see here) between these payments and the Foreign Corrupt Practices Act.

What followed over the next 10 days was the most intense worldwide media coverage of the FCPA in its nearly 35 year history.

Last Wednesday, in a development seldom – if ever – seen in the FCPA context, Senator Barbara Boxer (D-CA) and John Rockefeller (D-WV) wrote Attorney General Eric Holder and SEC Chairman Mary Schapiro (see here) requesting “that the U.S. Department of Justice and the Securities and Exchange Commission investigate whether News Corporation, a U.S.-based corporation, has violated United States law – specifically the Foreign Corrupt Practices Act of 1977.” Separately, Senator Frank Lautenberg (D-NJ) wrote Holder and Schapiro (see here). Senator Lautenberg stated as follows. “The limited information already reported in this case raises serious questions about the legality of the conduct of News Corporation and its subsidiaries under the FCPA. Further investigation may reveal that current reports only scratch the surface of the problem at News Corporation. Accordingly, I am requesting that DOJ and the SEC examine these circumstances and determine whether U.S. laws have been violated.”

Public interest groups (see here for one example) also began demanding an FCPA inquiry into the News of the World scandal.

Soon thereafter, it was reported that the FBI (an agency that investigates allegations of criminal violations of the FCPA under the supervision of the Fraud Section of the DOJ Criminal Division) opened an investigation of News Corp. Among others, Congressmen John Conyers “applaud[ed] Attorney General Eric Holder’s announcement that the Justice Department has opened a formal investigation into allegations that News Corp. may have violated both federal wiretapping statutes and the Foreign Corrupt Practices Act.” (See here).

The News Corp. scandal is wide in scope potentially implicating several laws both here in the U.S. and the U.K. This post focuses on News Corp.’s potential FCPA exposure.

Can the FCPA apply to News Corp. even if the improper conduct took place outside of the U.S.?

Yes. News Corp. is a U.S. company and as such the FCPA has extraterritorial application meaning it can face FCPA liability even if the conduct at issue takes places entirely outside of the U.S. Indeed, in most FCPA enforcement actions the conduct at issue takes place outside of the U.S. Further, it is very common in FCPA enforcement actions for parent companies to be held legally responsible for the acts of subsidiary employees on the theory that such employees acted as “agents” of the parent company and that the parent company ultimately derived the financial benefit from the improper conduct at issue.

Indeed, even News Corp.’s FCPA policies and procedures (here) states as follows. “The Foreign Corrupt Practices Act (FCPA) is a U.S. law that forbids bribery of foreign (meaning non-U.S.) government officials, whether elected or appointed, even if the bribe takes place outside the United States. Because News Corporation is a U.S. corporation, the FCPA may apply to all Company employees everywhere in the world, regardless of their nationality or where they reside or do business.”

Why do the London police payments implicate the FCPA’s anti-bribery provisions?

As a general matter, the FCPA’s anti-bribery provisions prohibit the payment of money or anything of value to a “foreign official” to “obtain or retain business.” London police officers are “foreign officials” under the FCPA. For instance, in this 2006 FCPA enforcement action the DOJ asserted that an Iraqi police officer was a “foreign official” under the FCPA.

As to “obtain or retain business,” for most of its history FCPA enforcement actions focused on payments to “foreign officials” to “obtain or retain business” with a foreign government. However, during the past decade, the DOJ has brought numerous FCPA enforcement actions premised on payments to customs officials, tax officials, immigration officials and the like where the payments have nothing to do with “obtaining or retaining business” with a foreign government. Rather, the payments were alleged to have assisted the payor in “obtaining or retaining” business in the general sense.

The leading court decision on this issue is U.S. v. Kay. 359 F.3d 738, 740 (5th Cir. 2004). As further explained in this piece (pages 917-921), in Kay, a U.S. circuit court (one step below the U.S. Supreme Court) concluded that payments to a “foreign official” to lower taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business. The court concluded that there was “little difference” between these type of payments and traditional FCPA violations in which a company makes payments to a “foreign official” to influence or induce the official to award a government contract. Even so, the court stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. The court recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.

Despite Kay’s equivocal holding, there has been a significant increase in FCPA enforcement actions since the decision concerning payments to “foreign officials” that better position the payor to “obtain or retain business” in the general sense. (See for instance the “CustomsGate” category under the Search page of this site).

Thus, payments to London police officers that allowed News of the World to obtain non-public information to write sensational news stories – and thus sell more newspapers – would seem to fit the type of FCPA enforcement common post-Kay. Given that News Corp. is a media company and its product is information, such payments are similar to an oil and gas company making payments to a “foreign official” to obtain non-public information concerning the location of oil and gas deposits.

What about the FCPA’s books and records and internal control provisions?

In addition to its anti-bribery provisions, the FCPA also contains books and records and internal control provisions applicable to U.S. listed companies such as News Corp. The books and records provision requires that “issuers” (the statutory term for U.S. listed companies) “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” The internal controls provision require that “issuers” “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that:” among other things, “transactions are executed in accordance with management’s general or specific authorization;” “access to assets is permitted only in accordance with management’s general or specific authorization;” and “transactions are recorded as necessary to permit a preparation of financial statements in conformity with generally accepted accounting principles … and to maintain accountability for assets.”

These provisions, despite being part of the FCPA, are generic in scope. Thus, if other payments part of News Corp.’s wide-ranging scandal – such as “hush” settlement payments to phone hacking victims are misrecorded on the company’s books and records, such entries would provide the basis for independent FCPA books and records violations – even if such conduct does not directly implicate the FCPA’s anti-bribery provisions. As to the London police payments, such payments, if not recorded accurately on the company’s books and records, would of course also give rise to an independent FCPA books and records violation. Both the DOJ and the SEC (which also has FCPA jurisdiction over U.S. listed companies) frequently hold parent companies liable for the books and records violations of subsidiaries on the theory that subsidiary books and records are consolidated with the parent company’s books and records for purposes of financial reporting.

As to the FCPA’s internal control provisions, the enforcement agencies often take the rather simplistic position that because the payments were made or because corporate expenses were not accurately recorded, the company did not have effective internal controls.

If News Corp. faces FCPA liability does that mean that executive officers will as well?

Not necessarily. Under U.S. legal principles, a corporate entity such as News Corp. can face legal liability based on the conduct of any employee or agent to the extent the employee or agent was acting within the scope of their authority and the conduct was intended to benefit, at least in part, the organization. Many FCPA enforcement actions against corporate entities result from the improper conduct of low to mid-ranking employees in the absence of any allegation that executive officers or board members knew about the conduct at issue or participated in the conduct at issue. Thus, just because News Corp. may face FCPA liability under these principles does not necessarily mean that executive officers will as well.

As to individuals (whether high-ranking executives or otherwise) there needs to be some evidence of culpable conduct – which in the FCPA criminal context – often means participating in the improper conduct, authorizing the improper conduct, or knowing of the improper conduct but failing to put a stop to it.

Will U.S. authorities defer to British authorities in investigating the London police payments?

Some have suggested that U.S. authorities are unlikely to bring an enforcement action because the U.K. has strong anti-corruption laws and is capable of handling this matter domestically. I disagree. The U.K. Bribery Act went live on July 1st, but it only covers conduct that occurs after that date. Prior to the Bribery Act, the U.K. had a hodgepodge of antiquated bribery and corruption statutes. However, the problem with those statutes is they required a “controlling mind” of the corporate to be involved in the conduct at issue in order to prosecute the entity. The weakness of these pre-Bribery Act laws was clearly evident in the U.K. BAE enforcement action from 2010. As the Serious Fraud Office stated in court papers “a serious evidential difficulty had been identified in respect of potential corruption charges, namely the difficulty of proving the involvement of a ‘controlling mind’ in the offending.” Thus, if there is no evidence of “controlling minds” being involved in the London police payments, pre-Bribery Act laws will be insufficient to bring bribery charges as occurred in the BAE matter. This evidentiary difficulty is one of the reasons the U.K. passed the Bribery Act.

U.S. enforcement agencies have a good relationship with their U.K. counterparts and cooperation between the agencies is likely to occur, but there is little reason to believe that the U.S. will stand down and not bring an enforcement action if that is what the evidence warrants. In fact, there have been several FCPA enforcement actions concerning U.K. business entities, based on conduct occurring in the U.K.,and/or involving U.K. citizens. See here for the 2010 FCPA enforcement action relating to Innospec, here for the FCPA enforcement action concerning employees of Pacific Consolidated Industries and here for the FCPA enforcement action against U.K. citizen Jeffrey Tesler.

What is likely to happen next?

There are multiple reasons why News Corp. will cooperate, if it is not already, in the DOJ’s FCPA investigation. The DOJ has substantial discretion (some would argue too much) in resolving corporate criminal matters. Under the DOJ’s Principles of Prosecution of Business Organizations (see here), one of the factors DOJ will consider in deciding how to resolve any potential action is the company’s cooperation. Cooperation in the FCPA context often means conducting an internal, independent review of the conduct at issue and sharing the results, witness statements, key documents, etc. with the enforcement agencies on a near real-time basis. Cooperation is also a mitigating factor under the advisory U.S. Sentencing Guidelines which provide a monetary penalty range for all FCPA criminal actions.

How long is this FCPA gray cloud likely to hang over News Corp?

Likely for a few years. It is typical for an FCPA enforcement inquiry to begin based on a certain set of limited and discrete facts – here the London police payments. However, before the enforcement agencies (DOJ or SEC) will agree to resolve an FCPA matter, it is typical for the agencies to ask the “where else” question. In other words, the question will be – if News Corp. employees (broadly speaking) made the London police payments, did other News Corp. employees around the world make similar payments to “foreign officials” to “obtain or retain business.” To answer this question, and because News Corp. is likely in cooperation mode and because the company has an incentive to learn this information itself, News Corp. will likely conduct a targeted world-wide review of its operations. Such a review takes time and often costs tens of millions of dollars in professional fees and expenses. Because of these dynamics, it is typical for FCPA scrutiny – from the point of investigation to the point of enforcement action – to last between 2-4 years.

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