Top Menu

Next Up For The Second Circuit – An Opportunity To Construe The FCPA’s Corrupt Intent And Obtain And Retain Business Elements

Judicial Decision

Fresh off its recent decision in U.S. v. Hoskins (see here and here for prior posts), the Second Circuit has another Foreign Corrupt Practices Act appeal on its docket.

This July post previewed the FCPA (and related) appeal of Ng Lap Seng who was convicted of two counts of violating the FCPA, one count of paying bribes and gratuities, one count of money laundering and two counts of conspiracy “for his role in a scheme to bribe United Nations ambassadors to obtain support to build a conference center in Macau that would host, among other events, the annual United Nations Global South-South Development Expo.”

Recently Seng formally filed this appellate brief. The FCPA issues on appeal concern the corrupt intent element and the obtain or retain business element. There is an abundance of information in the legislative history regarding these topics, the open question is whether Seng’s lawyers will fully take advantage of it.

Continue Reading

A Preview Of Seng’s Appeal

Seng2

Foreign Corrupt Practices Act appeals are not as rare as Halley’s Comet, but nevertheless rare. Thus, when an FCPA appeal occurs and an appellate court is presented with the opportunity to construe the law, almost be definition, it is a big deal.

As highlighted in this prior post, in July 2017 after a long trial a federal jury convicted Ng Lap Seng of two counts of violating the FCPA, one count of paying bribes and gratuities, one count of money laundering and two counts of conspiracy “for his role in a scheme to bribe United Nations ambassadors to obtain support to build a conference center in Macau that would host, among other events, the annual United Nations Global South-South Development Expo.”

Continue Reading

A Case Study In Risk Aversion Or What Happens When Defendants Fight Back

fightback

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

Previous posts here and here highlighted the 2001 DOJ/SEC FCPA enforcement action against KPMG Siddharta Siddharta & Harsono (KPMG-SSH) and Sonny Harsono and Baker Hughes regarding alleged improper payments in connection with an Indonesia tax assessment. All of the defendants resolved the enforcement actions without putting the DOJ/SEC to its burden of proof (the risk aversion portion of this post).

However, also in 2001 the SEC charged Eric Mattson (the former CFO of Baker Hughes) and James Harris (the former Controller of Baker Hughes) with Foreign Corrupt Practices Act offenses based on the same substantive allegations. Unlike the other defendants, as highlighted in this post, Mattson and Harris fought back – a process that resulted in a federal court judge dismissing the FCPA charges against them.

Continue Reading

Issues To Consider From The Qualcomm Enforcement Action

Issues

This prior post went in-depth as to the recent $7.5 million Qualcomm Foreign Corrupt Practices Act enforcement action based on alleged improper hiring and other practices in China.

This post continues the analysis by highlighting various issues to consider.

Timeline

Qualcomm’s FCPA scrutiny was, at least partially, related to September 2010 formal order of private investigation from the SEC that arose from a “whistleblower’s” allegations made in December 2009 to the audit committee of the Company’s  Board of Directors and to the SEC. As Qualcomm previously disclosed, “the audit committee completed an internal review of the allegations with the assistance of independent counsel and independent forensic accountants. This internal review into the whistleblower’s allegations and related accounting practices did not identify any errors in the Company’s financial statements.”

More directly related to the FCPA scrutiny, according to Qualcomm’s previous disclosures: “On January 27, 2012, the Company learned that the U.S. Attorney’s Office for the Southern District of California/DOJ has begun a preliminary investigation regarding the Company’s compliance with the Foreign Corrupt Practices Act (FCPA), a topic about which the SEC is also inquiring.”

Thus, from start to finish Qualcomm’s FCPA scrutiny lasted between 4-6 years (depending on one’s interpretation of the above disclosures).

If the SEC wants the public to have confidence in its FCPA enforcement program, it must resolve instances of FCPA scrutiny much quicker. Whether its nearly 6 years or merely 4 years, this long time period is simply inexcusable.

Continue Reading

Court Dismisses Wal-Mart Shareholder FCPA-Related Derivative Claims

Dismissed

In the aftermath of Wal-Mart’s Foreign Corrupt Practices Act scrutiny, certain company shareholders (as is fairly typical in instances of FCPA scrutiny) filed derivative actions against various current or former Wal-Mart officers and directors alleging, among other things, breach of fiduciary duties.

By way of background as to derivative claims, the internal affairs of a corporation, such as the rights of corporate directors, are governed by state law.  State law, including most prominently Delaware law, provides directors broad discretion to manage the corporation subject to their fiduciary duties to the corporation and its shareholders.  A director’s fiduciary duties include the duty of care and the duty of loyalty, including its subsidiary component the duty of good faith.

A corporate director’s duty of good faith has evolved over time to include an obligation to attempt in good faith to assure that an adequate corporate information and reporting system exists.  In the notable Caremark decision by the influential Delaware Court of Chancery, the court held that a director’s failure to do so, in certain circumstances, may give rise to individual director liability for breach of fiduciary duty.

In Stone v. Ritter, the Delaware Supreme Court provided the following necessary conditions for director oversight liability under the so-called Caremark standard: (i) a director utterly failed to implement any reporting or information system or controls; or (ii) having implemented such systems or controls, a director failed to monitor or oversee the corporation’s operations. The court held that both situations require a showing that a director knew that they were not discharging their fiduciary obligations and courts have widely recognize that a director’s good faith exercise of oversight responsibility may not necessarily prevent employees from violating criminal laws or from causing the corporation to incur significant financial liability or both.

Derivative claims, such as those filed against Wal-Mart’s current and former officers and directors, are subject to unique pleading requirements.  Ordinarily, a company’s board of directors has the exclusive authority to institute corporate action such as filing a lawsuit on behalf of the corporation when it has been harmed.  However, when the harm to the corporation is the result of an alleged breach of fiduciary duty by the directors, the law recognizes that the board of directors is unlikely to sue itself in such a situation.  Thus, the law provides a mechanism for shareholders to bring a lawsuit, not in their individual capacity, but on behalf of the corporation to recover monetary damages for the corporation.

Because a derivative action usurps a traditional board of director function and can be subject to harassment and abuse, state law often requires shareholders to first make a demand on the corporation to file suit or to plead with particularity so-called demand futility, meaning that demand on the board would be futile because the board is incapable of making an independent judgment concerning the conduct at issue.

Most derivative actions, including those in the FCPA context, are brought as demand futility cases because if a shareholder makes a demand on the board of directors to bring the claim it will be assumed that the shareholder views the board of directors as sufficiently independent to analyze the claim and the board’s decision will be analyzed under the board-friendly business judgment rule.  To survive a motion to dismiss, a shareholder pleading demand futility must allege more than conclusory allegations regarding a breach of fiduciary duty.  Rather, the shareholder must allege with particularly facts suggesting that the majority of directors were interested; or that the directors failed to inform themselves; or that the directors failed to exercise due care as to the conduct at issue.

Those who predicted that the Wal-Mart derivative actions would set a new standard for director liability were once again proven wrong (see here for the prior post).

Earlier this week, in this order U.S. District Judge Susan Hickey (W.D. Ark.) dismissed eight Wal-Mart shareholder FCPA-related derivative claims that were consolidated into one action.

Judge Hickey summarized the shareholders allegations as follows.

“Plaintiffs allege that the Individual Defendants breached their fiduciary duties of loyalty and good faith by: (1) permitting violations of foreign and federal laws and Wal-Mart’s code of ethics; (2) permitting the obstruction of an adequate investigation of known potential (and/or actual) violations of foreign and federal laws; and (3) covering up (or attempting to cover up) known potential (and/or actual) violations of foreign and federal laws. Plaintiffs also allege that Individual Defendants violated Sections 14(a) and 29(b) of the Exchange Act by causing Wal-Mart to make false or misleading statements in its April 2010 and April 2011 proxy materials relating to annual director elections.”

After reviewing applicable Delaware law, Judge Hickey stated, in pertinent part, as follows.

“The Complaint consistently implies that Defendants should have or must have known about the alleged misconduct by virtue of their positions and the supposed reporting structure at Wal-Mart. According to Plaintiffs, “senior executives … knew about” the alleged misconduct, those “executives [were] required to regularly report to the Audit Committee of Wal-Mart’s Board,” and the Audit Committee, in turn, “was obligated to report on [this] to Wal-Mart’s full Board.” Plaintiffs allege that, given the “inference” that information concerning bribery was reported to Wal-Mart’s Board, Wal-Mart made a conscious decision not to act on this information.

Plaintiffs reference vague “decisions” made by Defendants but do not plead with particularity who made these decisions, how these decisions were made, or when the decisions were made. Plaintiffs generally allege that the Board made a decision not to act in response to evidence of criminal conduct. Missing from the Complaint are any particularized facts that link a majority of the Director Defendants to any actual decision. Plaintiffs point to no alleged meeting, discussion, or vote where the Board allegedly made one of these decisions. This lack of such particularized facts regarding a conscious decision about how or whether to respond to the alleged misconduct indicates that an analysis under Aronson is inappropriate.”

Elsewhere, Judge Hickey stated:

“According to Plaintiffs, nine Director Defendants knew about the wrongful conduct in 2005-2006 (the alleged bribery in Mexico and the internal investigation that allegedly concealed the wrongdoing) and either actively participated in it or acquiesced in it. Defendants argue that Plaintiffs have failed to sufficiently plead that a majority of the Board knew about or consciously ignored the alleged wrongful conduct in 2005-2006 and therefore cannot show that a majority of the Director Defendants face a substantial likelihood of personal liability. The Court agrees.

Nothing in the Complaint suggests any particularized basis to infer that a majority of the Board had actual or constructive knowledge of the alleged misconduct, let alone that they acted improperly with scienter. Plaintiffs’ allegations do not provide the particulars for what each Director Defendant knew, how he or she learned of the information, or when he or she learned of the information. Thus, as discussed below, Plaintiffs have failed to plead with particularity that at least eight Director Defendants face a substantial likelihood of personal liability so that their ability to consider a demand impartially would be compromised.”

[…]

“Courts may not impute knowledge of wrongdoing to directors simply because they serve on the board or because the corporate governance structure requires that notice of the wrongdoing reach the board.”

*****

In a footnote, Judge Hickey’s order states: “The Foreign Corrupt Practices Act prohibits United States companies from bribing foreign officials to secure improper business advantage.”

This is an inaccurate statement of law.

Rather, the FCPA contains an “obtain or retain business” element that must be proved.  Indeed, the DOJ’s position that the FCPA captures payments to “secure an improper business advantage” wholly apart from the “obtain or retain business” element has been specifically rejected by courts. (See here for the prior post).

The inaccurate statement of law in the order is perhaps not surprising given that the Judge referred to the FCPA as the “Federal Corrupt Practices Act.”

*****

For additional coverage of Judge Hickey’s decision – as well as its potential impact on current Delaware court proceedings arising from the same alleged facts – see here form the D&O Blog.

Powered by WordPress. Designed by WooThemes