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Chamber of Commerce Blasts FCPA-Related Civil Litigation

A prior post (here) discussed the rise in claims and so-called investigations by plaintiff firms representating investors as soon as FCPA scrutiny is disclosed or soon after FCPA enforcement actions are resolved.

When a company’s FCPA violations are found to be condoned or encouraged by the board or officers, such plaintiff causes of action would seem to be warranted. However, these types of FCPA violations are rare – the more typical situation is where, because of respondeat superior, a company faces FCPA exposure because of the actions of a single or small group of employees whose conduct was in violation of the company’s FCPA policies and procedures. In these typical situations, I question what value these so-called “investigations” by plaintiff firms have or what purpose these derivative or securities fraud claims serve.

I do not find myself in complete agreement with the U.S. Chamber as to all of its FCPA reform proposals (see here for those proposals), but I agree with the Chamber sponsored Congressional testimony last month on the issue of FCPA-related litigation.

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Last month John Beisner (a partner at Skadden – see here) testified on behalf of the U.S. Chamber Institute for Legal Reform before the Subcommittee on the Constitution of the Committee on the Judiciary United States House of Representatives. The hearing, held on May 24th was titled “Can We Sue Our Way to Prosperity?: Litigation’s Effect on America’s Global Competitiveness.”

In his prepared statement (here) Beisner “highlighted four specific areas in which we are still seeing substantial litigation abuse” including “private lawsuits that piggyback on government investigations.”

As to this issue, the bulk of Beisner’s remarks focused on the FCPA and he stated as follows.

“More recently, the piggyback-litigation phenomenon has been most noticeable with respect to Foreign Corrupt Practices Act (“FCPA”) enforcement proceedings brought by the Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”). These piggyback cases tend to fall into two categories: (1) shareholder class actions alleging that a company did not adequately disclose its FCPA exposure; and (2) derivative actions against officers and directors alleging that they failed to prevent a company from bribing foreign officials.”

“Follow-on FCPA cases target companies at a difficult time. Companies going through DOJ or SEC FCPA enforcement proceedings often spend tens of millions of dollars, if not more, on attorneys and forensic accountants – on top of potentially multimillion-dollar criminal and civil fines and disgorgement – in order to determine whether their employees (often at a relatively low level) acted improperly. Enforcement proceedings also interrupt normal business operations, as companies make employees and documents available to lawyers, and take action against truly culpable employees. The investigations themselves are disclosable events and are almost always “bad news,” resulting in negative publicity. Shareholder suits against companies involved in enforcement proceedings threaten to further delay the companies’ ability to return to normal operations and to further damage shareholder value. These suits serve no purpose but to take money from current shareholders and transfer it to former (or other) shareholders – with a hefty slice cut out for the plaintiffs’ lawyers.”

“Derivative shareholder suits are equally problematic in this arena. These suits tend to target senior officers and directors, not the employees who actually paid any bribes or condoned others paying them. The reason is simple enough: directors and officers are backed by the deep pockets of the company’s D&O insurer; culpable employees have little money to pay in private civil damages, especially if they themselves have been the target of an individual enforcement proceeding.”

“Often, lawyers filing shareholder class actions against companies under investigation or derivative actions against directors and officers of a company under investigation do not even wait until the government investigation is complete. Such tactics are particularly egregious, because they necessarily involve the company and senior management in defending against a private civil suit – and in making strategic judgments regarding such defense – when their focus should be on resolving the government’s investigation. Both the DOJ and the SEC have developed leniency policies for companies that actively assist in government investigations. These policies acknowledge that U.S. government resources are limited, and that cooperating companies can materially assist the government in enforcing the law and protecting shareholders. As part of cooperating with the government, companies in FCPA investigations frequently investigate their own potential wrongdoing and self-report misconduct to the government. When companies and their senior officers and directors face personal civil liability in addition to any exposure to the DOJ and SEC, their judgments regarding what issues to investigate and what results to report to the DOJ and SEC necessarily will be affected, possibly to the detriment of the integrity of the government’s investigation.”

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For additional reading on the rise in FCPA related civil litigation (see here from Jeffrey Johnston and Erika Tristan of Vinson & Elkins and here from Sean Griffin of Steptoe & Johnson).

President Obama Visits Allison Transmission

President Obama will be in the Indianapolis area today visiting Allison Transmission. See here. [Update: given the budget talks in Washington, President Obama has postponed his visit to Allison Transmission].

Readers may recall that in November 2010, Allison Transmission was named as a defendant in a “noisy exit” case. See here for the prior post and here for the prior coverage in the Indianapolis Business Journal (“IBJ”).

Stephen Lowe (Allison’s former Managing Director for China, Japan & Korea Operations) alleged in a civil complaint that Allison fired him because he “refused to engage in violations of the FCPA.” Lowe’s complaint implicated both Allison’s Vice President of International Sales and Marketing and Allison’s Commercial Director of Asia Strategy.

As noted here by the IBJ, Lowe’s lawsuit against Allison was quickly settled in January 2010.

I noted, for the IBJ article, that Allison could be dealing with FCPA exposure for years to come given that such employee allegations often result in a company launching an internal investigation and/or for the DOJ to become interested in the allegations and the company’s overall FCPA compliance.

Fast forward to late March when Allison filed a registration statement with the SEC for an initial public offering. See here for the IBJ coverage.

Allison’s registration statement (here) is silent as to FCPA issues aside from a generic template-like statement as to future risk factors.

This suggest a number of possibilities: (1) that Lowe’s complaint lacked merit yet was settled for nuisance value; (2) that Lowe’s complaint had merit, but the DOJ has not yet contacted the company or perhaps never will; or (3) that Lowe’s complaint had merit, the DOJ has contacted the company, but Allison has chosen not to disclose this in its registration statement.

In any event, none of this is likely to come up during Obama’s visit to Allison Transmission today, but Obama’s visit did provide a good opportunity to check up on Allison Transmission.

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A good weekend to all.

Interesting, Significant and Bold

Last week I had the pleasure of participating in Securities Docket’s Year in Review webcast (see here for viewing – the FCPA portion begins at about 51 minutes).

For those of you who missed the event, below are my thoughts on four significant events from 2010, three interesting events from 2010, and two bold predictions for 2011.

The FCPA in 2010 was interesting, significant, and bold all at once. Among other things, it was a year in which Assistant Attorney General Lanny Breuer declared a “new era of FCPA enforcement.” (see here).

Significant Events

The Foreign Corrupt Practices Act

If anyone out there still believes that the FCPA is a law that only applies to U.S. companies, you clearly have been living under a rock.

2010 was the year of non-U.S. companies resolving FCPA exposure.

BAE (here)(I am hesitant to call this matter an FCPA enforcement action because it wasn’t, but everyone seems to be doing so), Daimler (here), Technip (here), Eni/Snamprogetti (here), ABB (here), Panalpina (here), and most recently Alcatel-Lucent (more in a future post).

It has been reported that approximately 90% of 2010 FCPA fines and penalties were paid by foreign companies.

I expect this trend to continue – albeit perhaps not at the level seen in 2010. The 4th member of the JV involved in Bonny Island bribery – JGC of Japan – has yet to settle, certain of the medical device and pharma companies that have disclosed FCPA issues are non-U.S. companies, and an emerging trend I see is an increased focus on China-based issuers. For instance, last year, 25% of the IPOs were China based issuers and last month, Rino International (see here) disclosed an FCPA inquiry, the first time I believe a China-based issuer has been the focus of an FCPA inquiry.

Two Tiers of Justice

Under basic rule of law principles, the law is to be equally and consistently applied to all subject to the law, regardless of how big or small the company is and regardless of what type of company is involved.

In a troubling trend, two tiers of justice have emerged from FCPA enforcement.
If the company is a large multinational company, the company will end up paying large fine, but chances are the company will not be charged with FCPA anti-bribery violations.

For instance, the DOJ’s allegations against BAE (see here) included that the company provided various benefits – through U.S. payment mechanisms – to influence Saudi officials through and through other conduct that clearly had a U.S. nexus. Yet, BAE, one of the world’s largest defense contractors, was not charged with any FCPA anti-bribery violation.

Daimler, according to the DOJ (see here), had a corporate culture that tolerated and/or encouraged bribery and its numerous bribery schemes involved various high-ranking executives. Yet, Daimler, was not charged with any FCPA anti-bribery violations.

It’s bribery yet no bribery, and it contributes to what I’ve called the façade of FCPA enforcement (see here).

While certain companies in certain industries appear immune from FCPA anti-bribery charges, in other instances, instances generally involving small companies such as Nexus Technologies (here) or Lindsey Manufacturing (here), the DOJ seems to come out with guns a blazing and criminally indicts the company for violating the FCPA. One can legitimately ask what did these companies do that BAE, Daimler, and some other companies didn’t do?

The two tiers of justice is also present when it comes to individual enforcement actions. As was highlighted in the recent Senate hearing, one odd aspect of the most high-profile, egregious instances of corporate bribery is that, for the most part, no individuals are charged. Yet in cases that can only be called minor in comparison, Nexus Technologies, Lindsey Manufacturing and the Haiti Teleco cases come to mind, the DOJ again seems to come out with guns a blazing and criminally indicts multiple individuals.

Companies that commit bribery on a major scale, involving hundreds of millions dollars, are still able to secure multi-million dollar U.S. government contracts (see here and here). On the other hand, individuals like Charles Jumet are sent to prison for nearly 7 years for making a $200,000 payment to secure a lighthouse and buoy contract and conspiring to violate the same law that major companies are apparently immune from violating. (See here).

DOJ officials frequently talk about the rule of law (here), and the importance of consistency and transparency in charging decisions (here), but these examples raise the issue of whether such principles are followed when it comes to FCPA enforcement.

Is the Facilitating Payments Exception Meaningless?

When Congress passed the FCPA in 1977 and amended it in 1988 it clearly understood and accepted that the statute was not going to cover every conceivable unethical payment made in transacting overseas business. (See here). The legislative history is clear on this point and that is why the FCPA contains an express exception for so-called facilitating or grease payments.

Yet one can legitimately ask whether this exception intended by Congress has any meaning.

In November, a group of companies collectively paid approximately $235 million to settle FCPA enforcement actions principally involving import permits for oil rigs, other customs and duty payments to Nigerian officials, and payments to expedite shipment of product in Nigeria and some other jurisdictions. (See here for a summary of the CustomsGate enforcement actions).

It seems a bit silly when several major companies settle an FCPA enforcement action for this amount of money to ask the question – did the conduct at issue even violate the FCPA, but this question should be asked in connection with the CustomsGate enforcement actions. It is also a question that can legitimately be asked as to several other recent FCPA enforcement actions that involve permits, licenses, certifications and other administrative tasks that have nothing to do with obtaining or retaining government contracts.

The issue as I see it is not whether such payments are ethical, but whether such payments violate the narrow anti-bribery provisions Congress intended and whether, once again, the DOJ and the SEC are actually enforcing the FCPA as Congress intended or whether the FCPA has morphed into a broader corporate ethics statute.

If the FCPA should become a broader corporate ethics statute, let Congress make that decision – not the DOJ or the SEC.

Emergence of a Plaintiff’s Bar

The FCPA, it has been held by some courts, does not contain a private right of action – yet there are other legal avenues available to plaintiffs to hold companies that violate the FCPA accountable. (See here).

Common causes of action include derivative claims against officers and directors, securities fraud claims by investors, RICO claims, unfair competition claims and antitrust claims such as last year when one of Innospec’s competitors sued it in Virginia state court in connection with its recently settled FCPA enforcement action. (See here).

Such causes of action have been pursued before 2010, but 2010 witnessed an explosion in such claims and so-called investigations by plaintiff firms representing investors.

The most noteworthy example is what I called the feeding frenzy surrounding SciClone Pharamaceutials. (See here). Last August, the company simply made an FCPA disclosure – that it was contacted by the SEC and the DOJ in connection with the government’s pharma industry sweep. The company’s stock dropped about 30%. Within weeks about a dozen plaintiff firms announced “investigations” and/or filed securities fraud cases – never mind the company’s stock price regained all that value within about a month.

When a company’s FCPA violations are found to be condoned or encouraged by the board or officers, such plaintiff causes of action would seem to be warranted.

However, these types of FCPA violations are rare – the more typical situation is where, because of respondeant superior, a company faces FCPA exposure because of the actions of a single or small group of employees whose conduct was in violation of the company’s FCPA policies and procedures. In these typical situations, I question what value these so-called “investigations” by plaintiff firms have or what purpose these derivative or securities fraud claims serve.

Interesting Events

Giffen Enforcement Action

When an enforcement action begins with allegations (here) that James Giffen made more than $78 million in unlawful payments to two senior Kazakhstan officials in connection with oil transactions for major American oil companies and abruptly ends with a one-paragraph superceding information (here) charging a misdemeanor tax violation and the company he worked for settling an FCPA enforcement action focused solely on two snowmobiles (here) – I call that interesting.

Even more interesting is that part of Giffen’s defense was that his actions were taken with the knowledge and support of the CIA, the National Security Council, the Department of State and the White House. (See here for a prior post).

A few years ago George Clooney and Matt Damon starred in Syriana (here) a movie about the FCPA.

The Giffen enforcement action presents a superb Hollywood script – it is the most mysterious conclusion to an FCPA enforcement action ever – made even more interesting given that the presiding judge called Giffen a cold war hero and stated that the case should never have been brought in the first place. (See here for the prior post).

Africa Sting Cases

In January 2010, the DOJ arrested 22 defendants – most while attending a gun show in Las Vegas – in connection with a major undercover sting operation in which the government, utilizing an individual who had already pleaded guilty to separate FCPA violations, assisted the government in manufacturing a case involving a fake foreign official from Gabon. (See here, here and here for prior posts).

The defendants (see here) are principally owners or employees of small gun and weapons companies.

I would put this case in the interesting category.

Contrary to media reports and even DOJ statements, it is not the first time undercover tactics were used in connection with an FCPA investigation (see here), but the magnitude and breadth of the tactics were indeed unprecedented.

This case is far from over and the remaining defendants are sure to raise entrapment, among other legal issues, and this will be an interesting case to follow in 2011.

The Africa Sting case has draw the attention of an industry that probably had never thought much about FCPA compliance. Thus, regardless of the ultimate outcome of the case, it has likely resulted in an industry and small enterprises thinking more proactively about FCPA compliance and risk assessment.

Greater Scrutiny and Why Questions

2010 also saw greater scrutiny and why questions about the FCPA, FCPA enforcement and what I have called FCPA Inc.

For the time time in nearly a decade, Congress held hearings (see here) on the FCPA in which some basic why questions were asked.

The U.S. Chamber sponsored a paper (here) titled “Restoring Balance – Proposed Amendments to the FCPA” that was widely covered and, in some circles, railed.

Several members of Congress are legitimately scratching their heads as to why companies that settle fraud, bribery and corruption cases continue to secure lucrative U.S. government contracts and the House passed a bill (here) that seeks to debar companies found to be in violation of the FCPA from receiving U.S. government contracts. Problem is, because of the façade of FCPA enforcement (see here), it will be an impotent bill.

In May 2010, Congressman Towns, chairman of the House Committee on Oversight and Government Reform, sent a letter to Attorney General Holder expressing concern that settlements of civil and criminal cases, including FCPA cases, by the DOJ are being used as a shield to foreclose other appropriate remedies such as suspension and debarment. (See here for the prior post).

And in Spring 2010, Forbes ran a front-page story titled “The Bribery Racket,” an article, notwithstanding some of its flamboyant language, raised several valid and legitimate questions and issues when it comes to FCPA enforcement. (See here for the prior post).

This scrutiny in 2010 raised valid and legitimate public policy questions that hopefully will be picked up on in 2011.

Bold Predictions

After a year in which (1) the largest individual prosecutions involved a fake “foreign official” (2) the most egregious cases of corporate bribery were prosecuted without FCPA anti-bribery charges; and (3) a signature case abruptly ended with a misdeamenor tax violation and a corporate prosecution involving two snowmobiles, I wonder what bold will look like in 2011.

Here are two bold predictions for 2011.

The Dodd-Frank Whistleblower Provisions Will Have a Negligible Impact on FCPA Enforcement

My (what seems) contrarian thoughts are the same as when I first made this post in July.

Enforcement of the U.K. Bribery Act Will Be Disciplined and Measured

The U.K. Bribery Act, already delayed, and with implementation slated for April 2011, has been the subject of much discussion and much over-hype in my opinion.

It has been called the FCPA “on steroids” (here) and if one subscribes to the industry marketing material, you might be left with the impression that the end of the world is near.

True, the Bribery Act is broader than the FCPA. For starters, it is an all-purpose bribery and corruption statute and addresses bribery and corruption in the private sector – not just bribery to “foreign officials” like the FCPA.

True, the Bribery Act has potentially a very broad reach – so does the FCPA.

True, the Bribery Act has no exception for facilitating payments – the FCPA does – although as highlighted above, query whether this exception means anything.

However, the Bribery Act has the “adequate procedures” defense – something the FCPA does not have – but query whether it should.

Thus, while the Bribery Act is indeed more broad than the FCPA, because of this defense, it is at the same time more narrow than the FCPA.

Public statements by U.K. officials suggest that this adequate procedures defense is a meaningful defense. For instance, in September at the World Corruption and Compliance Forum, an event I chaired in London, the U.K. Attorney General (Dominic Grieve) stated (see here) that “any company small or large” that puts into place a system of adequate procedures “has nothing to fear” when an employee or agent “goes off the rails” and makes a bribe payment. Attorney Grieve said that a company should have nothing to fear if it is “walking the walk, and talking the talk” when a rogue employee makes an improper payment. On the other hand, Attorney Grieve stated that that “those who don’t heed the warnings and don’t take the necessary steps have something to fear.” Richard Alderman, the Director of the U.K. Serious Fraud Office, stated in October (see here) as follows. “I have heard some people say that this offence is one of strict liability. I do not agree. No offence will have been committed if there were adequate procedures. I have also heard people say that the fact of bribery might mean that there were inadequate procedures by definition and so the defence can never be made out. Again, I do not agree. In the real world there may be occasional lapses despite adequate procedures rigorously enforced. The issue ultimately for the Judge and jury (and for the SFO in deciding on a prosecution) will be – were those procedures adequate?” As to the adequate procedures defense, Vivian Robinson (General Counsel of the Serious Fraud Office) said in an October webcast (here) that because of the defense “there is every reason to be optimistic that we won’t get as a result of the Act and this particular section a huge expanse in the number of prosecutions of corporates.”

As demonstrated by the Innospec matter (see here), the U.K. courts are playing, and rightfully so, a much greater role than U.S. courts in reviewing bribery and corruption cases. I’ve been told that even if the SFO prosecutes a corporate bribery case with an NPA or DPA, the U.K. courts will still play a meaningful oversight role – a role that is unfortunately not true here in the U.S.

In sum, I don’t see how companies already subject to the FCPA and already thinking about compliance in a pro-active manner, have much to worry about when it comes to the U.K. Bribery Act because of the adequate procedures defense.

I will be surprised if U.K. enforcement of the Bribery Act reaches the level of U.S. enforcement of the FCPA and I will be surprised if the U.K. Bribery Act develops outside of the judicial system as has generally been true with U.S. enforcement of the FCPA.

Still Yet Another Noisy Exit

Perhaps it is a new trend.

Perhaps it is because the media now covers anything and everything FCPA related.

In any event, it is noticeable.

There has been still yet another “noisy exist.”

Including the below example, I count five in the last few months. See here, here and here for the prior posts.

In October 2009, Stephen Lowe was hired by Allison Transmission (“Allison”) as its Managing Director, China, Japan & Korea Operations. [Allison (here) is an Indiana based designer, manufacturer and supplier of automatic transmissions for medium- and heavy-duty commercial vehicles and military vehicles. In 2007 (see here) The Carlyle Group and Onex Corporation acquired Allison Transmission from General Motors Corporation for US$5.575 billion.]

Lowe alleges in this complaint recently filed in Marion County (Indiana) Superior Court that Allison fired him in July 2010 because he “refused to engage in violations of the FCPA.” Lowe’s complaint implicates both Allison’s Vice President of International Sales and Marketing (“Vice President”) and Allison’s Commercial Director of Asia Strategy (“Commercial Director”).

Among other things, Lowe alleges that: (i) he witnessed the Commercial Director deliver a cash filled envelope to Beijing City Bus officials during dinner; (ii) he heard the Commercial Director describe how he purchased silver jewelry for Chinese government officials “in order to please the officials” (iii) the Commercial Director bragged about winning a Beijing City Bus Olympics contract by doing “whatever it took to please the officials” “including giving gifts, money and prostitutes” and (iv) the Commercial Director “deliberately lost” high-stakes card games to “key Beijing City Bus officials.” [Brain teaser of the day – is deliberately losing a high-stakes card game to a “foreign official” providing the official with a “thing of value”?]

According to the complaint, Allison’s Vice President knew, and approved of, certain of the Commercial Director’s conduct. According to the complaint, “a month before Allison fired him” Lowe disclosed his concerns about the Commercial Director and the Vice President to Allison’s Marketing Manager.

Lowe’s complaint, filed by The Employment Law Group law firm, alleges various Indiana state law causes of action including retaliatory discharge, breach of contract, and breach of the implied covenant of good faith and fair dealing.

For additional coverage of Lowe’s complaint, see here from the Indiana Business Journal.

Yet Another Noisy Exit

Rodolfo Michelon was the Director & Controller – Mexico of Sempra Global. Michelon was also the legal representative of various Sempra subsidiary companies located in Mexico and served as a member of the board of directors of the Mexican subsidiaries.

That is until March 10, when Michelon was terminated by Sempra.

In a lawsuit (here) recently filed in California state court, Michelon claims that his termination was wrongful for many reasons, including the following:

“Sempra regularly required Michelon to transfer funds, and account for illegitimate expenditures that boiled down to bribes of government officials – everything from fraudulent trusts ostensibly to purchase fire fighting equipment for Mexican governments, to paying off local fisherman to move their operations away from Sempra facilities, to demanding remediation of accounting that falsely stated Sepmpra’s assets, to the outright wiring of huge amounts of money to ‘consultants’ throughout Mexico. As with his other attempts to ensure he was complying with his ethical requirements as a CPA, Michelon’s repeated questioning and protests of the miscellaneous frauds and bribes was met with open hostility and threats of termination. The termination of the Controller employment was not only in retaliation for Michelon’s complaints, but it was also meant to keep Michelon from reporting the frauds and bribes to governmental, law enforcement officials.”

Sempra Global is described (here) as “the umbrella for Sempra Energy’s businesses operating in competitive energy markets. Sempra Global companies acquire, develop and operate infrastructure assets related to the production and distribution of energy, including power plants, natural gas pipelines and liquefied natural gas (LNG) receipt terminals.”

Various Sempra entities are publicly traded issuers (see here).

In this San Diego Union Tribune report Sempra officials “called Michelon a disgruntled ex-employee attempting to cash in by making ‘outlandishly false claims and misrepresentations’ after being let go in a routine reorganization.” A Sempra spokesperson said that the “company first became aware of Mr. Michelon’s claims several months ago” and that “Sempra’s board of directors ordered an independent investigation, which found Mr. Michelon’s allegations to be completely without merit.”

Michelon’s “noisy exit” is the fourth such exit publicly reported over the past three months that may implicate the FCPA. See here and here for the prior posts.

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