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The Silver Lining

No company invites or welcomes a Foreign Corrupt Practices Act investigation or FCPA scrutiny.  Timely, costly, distracting, you name it, it’s all there.

Yet, in my experience conducting many FCPA investigations during my practice career, I was always struck that, at the end of the process (whether that process ended with a voluntary disclosure and enforcement action or no disclosure but the company internally implementing remedial measures), company executives came to appreciate (or at least more easily accept) what was learned during the process.

It’s the silver lining of FCPA investigations and scrutiny.

Company executives involved in or advised of the investigation learn more about the company’s business in foreign countries, how the company operates in foreign countries (whether through agents, distributors, etc.), the people who run the business units and make the key decisions, who supervises these people, and whether effective internal controls are in place.  During the stress and strain of the process, company executives (assuming they themselves are not culpable) grow closer and develop a deeper trust of each other.  The company’s committment to FCPA compliance (and compliance in general) grows stronger and given the motivation to improve, the company may try new things, such as aligning executive and managerial compensation more closely to compliance metrics, and/or rewarding rank and file employees for compliance-related achievements.

You ask, what prevents company executives from doing these things even if the company is not under FCPA scrutiny?  The answer of course is nothing, except perhaps the plain and practical realities of the business world.

I was reminded of the FCPA’s silver lining in connection with Wal-Mart.  Regardless of whether Wal-Mart’s alleged conduct violated the FCPA (see here for the prior post), Wal-Mart is clearly in the early stages of a timely, costly, and distracting process (see here for its June 1st quarterly filing).

More to the point, during a June 1st investor conference call, the following exchange occurred between a Raymond James & Associates analyst and Wal-Mart CEO Michael Dukes.

BUDD BUGATCH, ANALYST, RAYMOND JAMES & ASSOCIATES: “… I’m going to step into the FCPA issue, if I can … I think the investment community’s already voted that it’s not really an issue from our standpoint, in terms of financial issues, but it’s obviously a big one reputationally and a big one that you had to deal with from a standpoint of the media and all of that … Which really, we think, are probably unfair because of a lot of good things that Walmart has been involved in over the last decade and continues to be involved in.  How do you use this opportunity? How do you think about it? I know [Jeff Gearhart, executive vice president, general counsel] has got to think about it from protecting the Company and that’s what that outside investigation is. But Mike, you have to think about it from a standpoint of transparency, and how do you lift this up and then show the entire world how you handle this situation and crisis, which has come to the Company and not at your desire, but from just those events that have transpired?

MICHAEL DUKE:  “One thing that’s clear is that we will be a better company because of this. Sometimes when there’s a situation, like this, you can treat it as a challenge or create an opportunity. And frankly, you can see we’re already taking this as an opportunity to be a better company. And so even the focus on doing business the right way, and the initiatives of outreach to communities is something we’re just going to be — you might say just doubling the efforts to be a better company in everything that we do. And frankly, I think it will just lead to long-term being a better company serving communities and serving customers. So yes, a short-term challenge; long-term, it creates us a greater opportunity to be even better.”


The above exchange also furthers the observable point that investors generally care very little about a company’s potential FCPA exposure.  Sure, there may be initial investor reaction (such as a 5% – 10% drop in the company’s stock price) when a company discloses or is otherwise reported to be under FCPA scrutiny, but that dip tends to be very temporary as investors come to realize that doomsday scenarios are often overblown.  (See here for the prior post regarding Wal-Mart’s stock price – since the post approximately two weeks ago, the company’s stock price has trended even higher).

Even as to the most dramatic stock price drop I am aware of because of FCPA scrutiny (see here for the 2010 post regarding SciClone Pharmaceuticals and its 30+% stock price drop upon disclosing FCPA scrutiny) the company’s stock soon recovered the lost value and began trading, and still trades, at a higher price.


Friday Roundup

Wal-Mart news, the shadow regulatory state, save the date, checking in on Wynn-Okada, and there’s an app for that.

Wal-Mart News

Yesterday Wal-Mart released its first quarter financial results and stated as follows in its SEC filing.

The Audit Committee of the Company’s Board of Directors (the “Audit Committee”), which is composed solely of independent directors, is conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other alleged crimes or misconduct in connection with foreign subsidiaries including Wal-Mart de México, S.A.B. de C.V. (“Walmex”) and whether prior allegations of such violations and/or misconduct were appropriately handled by the Company. The Audit Committee and the Company have engaged outside counsel from a number of law firms and other advisors who are assisting in the on-going investigation of these matters. The Company is also conducting a voluntary global review of its policies, practices and internal controls for FCPA compliance. The Company is engaged in strengthening its global anti-corruption compliance programs through appropriate remedial anti-corruption measures. In November 2011, the Company voluntarily disclosed that investigative activity to the U.S. Department of Justice (the “DOJ”) and the SEC.

The Company has been informed by the DOJ and the SEC that it is also the subject of their respective investigations into possible violations of the FCPA. The Company is cooperating with the investigations by the DOJ and the SEC. A number of federal and local government agencies in Mexico have also recently initiated investigations of these matters. Walmex is cooperating with the Mexican governmental agencies conducting these investigations. Furthermore, lawsuits relating to the matters under investigation have recently been filed by several of the Company’s shareholders against it, its current directors, certain of its former directors, certain of its current and former officers and certain of Walmex’s current and former officers.

The Company could be exposed to a variety of negative consequences as a result of the matters noted above. There could be one or more enforcement actions in respect of the matters that are the subject of some or all of the ongoing government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders or other relief, criminal convictions and/or penalties. The shareholder lawsuits may result in judgments against the Company and its current and former directors and officers named in those proceedings. The Company cannot predict accurately at this time the outcome or impact of the government investigations, the shareholder lawsuits, or its own internal investigation and review. In addition, the Company expects to incur costs in responding to requests for information or subpoenas seeking documents, testimony and other information in connection with the government investigations, in defending the shareholder lawsuits, and in conducting its internal investigation and review, and it cannot predict at this time the ultimate amount of all such costs. These matters may require the involvement of certain members of the Company’s senior management that could impinge on the time they have available to devote to other matters relating to the business. The Company may also see ongoing media and governmental interest in these matters that could impact the perception among certain audiences of its role as a corporate citizen.

The Company is in the early stages of assessing and responding to the governmental investigations, the shareholder lawsuits, and its internal investigation and review are on-going. Although the Company does not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business in the future.

Wal-Mart stock closed yesterday at $61.68.  On Friday April 20th (the day before the New York Times article – see here for the prior post) Wal-Mart stock closed at $62.45.  See here for a recent Forbes column titled “Mexican Bribery Gave Me A Chance To Make Money In Wal-Mart” in which the contributor states as follows.  “My 30 years of experience in the markets has repeatedly shown to me that whenever a company is accused of violations of FCPA, headlines are always scary, but in the end, the downdraft in the stock invariably becomes a buying opportunity.”

In other Wal-Mart news, as highlighted in this prior post, Elijah Cummings (D-MD), Ranking Member, House Committee on Oversight and Government Reform, and Henry Waxman (D-CA), Ranking Member, House Committee on Energy and Commerce have taken a keen interest in Wal-Mart’s potential FCPA exposure.  Yesterday, the Congressmen sent this letter to Wal-Mart CEO Michael Dukes in which they state, among other things, that “we have obtained hundreds of internal documents relating to the Wal-Mart bribery allegations.”

The Shadow Regulatory State

In this previous post, I called for the abolition of non-prosecution and deferred prosecution agreements in the FCPA context.  I noted how use of NPAs and DPAs to resolve alleged corporate criminal liability in the FCPA context present two distinct, yet equally problematic public policy issues and highlighted other critiques of NPAs and DPAs as well.

This recent report titled “The Shadow Regulatory State:  The Rise of Deferred Prosecution Agreements” by James Copland (Senior Fellow, Manhattan Institute for Policy Research) caught my eye.  Copland states as follows.

“… [P]rosecutors’ virtually unchecked powers under DPAs and NPAs threaten our constitutional framework. To be sure, prosecutors are acting upon duly enacted laws, but federal criminal provisions are often vague or ambiguous, and the fact that prosecutors and large corporations alike feel obliged to reach agreement, rather than follow an orderly regulatory process and litigate disagreements in court, denies the judiciary an opportunity to clarify the boundaries of such laws. Instead, the laws come to mean what the prosecutors say they mean—and companies do what the prosecutors say they must. Federal prosecutors are thus assuming the role of judge (interpreting the law) and of legislature (setting broad policy choices about industry conduct), substantially eroding the separation of powers. That such discretion is often delegated to private contractors with sweeping powers—namely, corporate monitors—makes the denial of justice even graver.”

Save the Date

I am pleased to be participating in this June 5th program sponsored by The American Bar Association Criminal Justice Section and the ABA Center for Continuing Legal Education in cooperation with Dorsey & Whitney & LLP, and  Pepper Hamilton, LLP.  Titled “The New Era of FCPA Enforcement and the Collapse of the Africa Sting Cases:  Time to Reevaluate?” the program will “evaluate the impact of Africa Sting cases in view of key New Era trends,  calls for FCPA reform, and a reevaluation of the prosecution standards utilized  by the DOJ and the SEC in enforcing statutes.”  Panelists include DOJ, SEC, and OECD representatives, Stanley Sporkin and noted FCPA practitioners including Greg Andres (former DOJ who testified on behalf of the DOJ at the November 2010 Senate and June 2011 House FCPA hearings).


Remember that Wynn-Okada dispute?  (See here, here, here, and here for the prior posts).

Here is an update from Vegas Inc.

There’s An App For That

Click 4 Compliance recently launched “C4C Mobile Compliance Officer App” (see here).  In a release (here) the company says the free mobile app “places practical anti-corruption compliance tips (including the FCPA and UK Bribery Act) in the hands of your company’s workforce and partners.”


It’s an FCPA world – a good weekend to all.

Cobalt Experiences The Front Page Effect As Well

Wal-Mart’s stock is not alone in experiencing a wild ride based on recent front page news coverage of FCPA issues.  Last week, Cobalt International (a Houston based oil exploration and production company) experienced a wild ride as well.

On Friday, April 13th, Cobalt’s shares closed at $28.38.

On Sunday, April 15th, the Financial Times (“FT”) published two articles: “Spotlight Falls on Cobalt’s Angola Partner” and “Angola Officials Held Hidden Oil Stakes” that spooked investors the following day.  Never mind that, as in Wal-Mart’s case, Cobalt disclosed FCPA scrutiny weeks earlier – see here for the prior post.  (Point taken that market reaction to Wal-Mart – the stock was down an additional 3% yesterday, down approximately 8% this week – is likely not just based on Wal-Mart’s potential FCPA scrutiny, but Wal-Mart’s response (or lack thereof) to the payments since 2005 and the impact this could have for senior leadership at the company).

The FT articles document how in 2008 Cobalt was looking to obtain rights to drill for oil in Angolan waters.  According to the FT, an Angolan government stipulation was that Cobalt would have partner with Nazaki Oil & Gaz, described by the FT as “an obscure local company.”  According to the articles, FT confirmed that “three of the most powerful figures in the Angolan regime have held interests in Nazaki.”  The FT stated that these individuals “interests in Cobalt’s local partner could raise questions about compliance with U.S. anti-corruption laws, which make it a crime to pay or offer anything of value to foreign officials to win business.”  For its part, Cobalt stated in the articles that its extensive and ongoing due diligence “has not found any credible support for the central allegation that Angolan government officials, and specifically the officials identified … have any ownership in Nazaki” and that the company “has at all times complied fully with both U.S. and Angolan laws.”

Nevertheless, in mid-day trading on Monday, April 16th, the company’s stock plunged approximately 11% and closed at $26.35, down approximately 7% from its previous close.

After watching its stock dive based on the FT article, Cobalt issued a release (here) strongly refuting “any allegations of wrong doing and once again stood behind its principles of full compliance with all laws in all jurisdictions in which it operates.”  According to Cobalt’s release, “prior to publication of [the FT] articles, Cobalt went on the record asking for any documentation that the Financial Times could offer which was at  odds with its position. The Financial Times declined Cobalt’s repeated requests for supporting documentation. In fact, in the course of these communications, Cobalt informed the Financial Times of certain egregious, demonstrably false allegations that it provided to Cobalt.”  As noted in the release, “Cobalt began its investigation into its Angola business relationships in 2007. Cobalt has based its decisions and actions on the results of these  extensive investigations and will continue to maintain rigorous due diligence in all of its worldwide activities. Cobalt remains confident that it has not violated any US or Angolan Law and will vigorously defend its reputation and legal rights in this matter.”

On Tuesday April 17th, as if on cue, a plaintiff shareholder firm announced (here) that it is investigating “potential claims on behalf of purchasers of the securities of Cobalt International Energy Inc. concerning whether the company and certain of its officers and directors have violated federal securities laws.”  Other shareholder firms have joined in as well – see here.

Also on Tuesday April 17th, Morgan Stanley, in a morning equity summary, said that the “market is overreacting to worries of alleged” Cobalt violations and that Cobalt “has no risk of losing” its interest in the Angola blocks.  The company’s shares climbed approximately 4% and closed at $27.44.  Since then the company’s stock has generally trended downward, yesterday it closed at $26.41.

What to make of Cobalt’s potential FCPA exposure?

Time will tell of course, but the DOJ has previously brought FCPA enforcement actions where the thing of value given to the “foreign official” was provided in the context of a business relationship with a company owned or controlled by a “foreign official” or family members.

For instance, in both the Charles Jumet and John Warwick (these individuals were employed by Ports Engineering Consultants Corporation) charging documents (here and here) the DOJ generally alleged as follows.

“Government Official A was the Administrator of Panama’s National Maritime Ports Authority (APN), the Panamanian governmental entity responsible for operating and maintaining the lighthouses and buoys in the waterways near the Panama Canal.” “Government Official B” was at various times the Deputy Administrator or Administrator of APN.  “Government Official C was a very high-ranking executive official of the Republic of Panama.”

According to the charging documents, Government Official A owned a shell corporation, Soderville Corporation, which become a majority shareholder of Ports Engineering Consultants Corporation (PECC).  Government Official B’s relatives were corporate officers of Warmspell Holding Corporation, which became a shareholder of PECC.

The DOJ alleged a conspiracy “to pay money secretly to Panamanian government officials in return for awarding PECC contracts to maintain lighthouses and buoys along Panama’s waterways.”  According to the DOJ, part of the conspiracy was that Government Official A and Government Official B received “corrupt payments” in the form of purported ‘dividends’ and that Government Official C received “bearer” shares from PECC as part of the conspiracy.

Doing business with a “foreign official” of course is not per se illegal under the FCPA and several FCPA Opinion Procedure Releases discuss the issue – see here, here and here for instance.

Yet one of the red flags when engaging foreign partners is when a company is told by the foreign government who to do business with.  In such a situation, a company needs to ask itself – why are we being told to do business with this company?  A company needs to do sufficient pre-engagement due diligence, as Cobalt claims it did in Angola, to understand who the owners are to be satisfied that it is not being told to do business with the particular entity simply as an indirect way of enriching foreign officials.

It’s An FCPA World

For the second time in the last several months (News Corp in July was the other example), the Foreign Corrupt Practices Act was the dominant news story around the world.  As a friend stated mid-day, it really is an FCPA world.

Today’s post will be a short post, but will keep you informed on Wal-Mart related developments.

The company’s stock dropped approximately 4.7% in the first day of trading after the New York Times investigative piece from the weekend.  See here for the prior post discussing the Times article and here for additional analysis.

Congress is demanding answers.  In this letter to Wal-Mart CEO Michael Dukes, Elijah Cummings (D-MD), Ranking Member, House Committee on Oversight and Government Reform, and Henry Waxman (D-CA), Ranking Member, House Committee on Energy and Commerce state “we are initiating an investigation into [the matters discussed in the New York Times article] and request a meeting with company officials who can respond to these allegations no later than April 27.”

Plaintiff law firms are also already demanding answers.  See here, here, and here.

Others – just like in the News Corp. situation from last summer – are using Wal-Mart’s FCPA scrutiny to further their anti-FCPA reform positions – see here (“while Wal-Mart’s largest subsidiary spent millions of dollars  systematically bribing Mexican officials, the company back home has been working, through big business groups like  the U.S. Chamber of Commerce, to weaken the Foreign Corrupt Practices  Act”); while others predict, wrongly in my estimation, that Wal-Mart’s FCPA scrutiny “will sound the death knell for any efforts to amend the Foreign Corrupt Practices Act” (see here).

It’s an FCPA world.

On Point

Two recent Q&A interviews in Law360 with leading white-collar practitioners caught my eye.

George Terwilliger (here) is a partner in the Washington D.C. office of White & Case and global head of the firm’s White Collar Practice Group. Terwilliger is a former U.S. Attorney, Deputy Attorney General and Acting Attorney General.

In a recent interview with Law360, Terwilliger was asked “what aspects of law in your practice area are in need of reform, and why?”

Terwilliger responsed as follows: “I represent many companies who get caught up in the ever-widening net of federal criminal offenses arising from ordinary business activity that runs afoul of government regulatory requirements or dictates. In many such cases, and as in most cases, there is room for reasonable disagreement on the application of relevant legal standards to the salient facts. But because of the collateral consequences of drawn-out investigations and/or of conviction after trial, few if any companies have the opportunity to adjudicate such reasonable disputes before a judge or jury. Consequently, prosecutors, who are entirely appropriately zealous advocates for their side of the case, also become judge and jury in determining an appropriate resolution of the matter. In a system where rule of law is determined by adversarial process, this state of affairs results in an imbalance that is not healthy for the cause of justice.”

Stephen Jonas (here) is a partner in the Boston office of WilmerHale and chairman of the firm’s Investigations and Criminal Litigation Practice Group. He is also a former state prosecutor.

In a recent interview with Law360, Jonas was similarly asked “what aspects of law in your practice are in need of reform, and why?”

Jonas responded, in pertinent part as follows. “One area greatly in need of reform, in my view, is the investigation of alleged health care fraud. This is an area in which the government regularly secures enormous settlements, starting in the tens of millions of dollars, and now exponentially expanding to the billions of dollars. Virtually every pharmaceutical company has now been subjected to one or more of these investigations and the results are predictable — enormous monetary contributions to the federal government. I find it hard to believe that wrongdoing is so rampant in this industry that every company has at least several hundred million dollars worth of it. The more likely answer is that these settlements often have far more to do with the leverage the government enjoys than the merits of what the company did or didn’t do. In order to stay in business, pharmaceutical and medical device companies must be able to sell products that can be paid for by Medicaid and Medicare. But a conviction for a health care offense would result in exclusion of the companies from federal health insurance and essentially a death sentence for their business. So they cannot afford to fight even the most debatable of charges. One of the results is that novel legal theories and sketchy evidence will never be tested in a court of law and negotiated settlements (under threat of exclusion) serve as “precedent” for the next case. That is a system badly in need of reform.”

One statement is generic, the other relates to health fraud, but both are directly on point when it comes to Foreign Corrupt Practices Act enforcement. (See here for my recent Facade of FCPA Enforcement piece in which I make several similar arguments in terms of FCPA enforcement).

With the pharma industry sweep currently in full force, Jonas’s comments, I suspect, will be even more “on point” in the coming months as numerous pharma and other health care related companies are expected to reach, what will no doubt be, multi-million FCPA settlements that will likely be resolved via resolution vehicles subject to little or no judicial scrutiny. The government will bring in millions, the news will dominate the headlines for a few days, and then the question will be asked – did the conduct at issue even violate the FCPA?

Richard Cassin at the FCPA Blog recently highlighted a “corporate investigations list” (see here). It listed 72 companies “known to be the subject of an ongoing and unresolved FCPA-related investigation.”

Similar to Jonas, I find it hard to believe that wrongdoing is so rampant that seemingly every major company has at some time run become the subject of FCPA scrutiny or run afoul of the FCPA.

There is a much bigger picture relevant to this new era of FCPA enforcement and it is this new era that is in need of urgent reform.

My own two cents, which I will elaborate on in the future, is that the answer to the problem of enforcement agencies enforcing (in many cases) the FCPA contrary to the intent of Congress and based on dubious legal theories is largely not to amend the FCPA – this will solve very little. The more fundamental question remains – how to rein in the enforcement agencies and to force judicial scrutiny of FCPA enforcement actions?

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