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Issues To Consider From The Nordion (Canada Inc.) Enforcement Action

Issues

This previous post went in-depth on the recent Foreign Corrupt Practices Act enforcement action against Nordion (Canada, Inc.).

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

A future post will explore how the seemingly minor enforcement action (the settlement amount was a mere $375,000) should leave anyone who cares about FCPA enforcement speechless. An additional future post will pose the question of why did Nordion voluntarily disclose while also highlighting that its FCPA scrutiny cost the company in excess of $20 million in pre-enforcement action professional fees and expenses (a shocking 50:1 ratio compared to the settlement amount).

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Just When You Think You’ve Seen It All – Along Comes The Nordion (Canada) Inc. Enforcement Action

kidding me

There have been several Foreign Corrupt Practices Act enforcement actions in the past 30 days or so.

But, just when you think you’ve seen it all in FCPA enforcement-land, along comes the Nordion (Canada) Inc. enforcement action announced yesterday by the SEC.

The basic findings, as set forth in this administrative order, were as follows.

Approximately 16 years ago, Mikhail Gourevitch (a dual Canadian and Israeli citizen who was fired years ago by Nordion) represented to the company that “his purported childhood friend from Russia” could help the company’s business in Russia.

Gourevitch and this eventual agent “conspired to use a portion of the funds Nordion paid the Agent to bribe Russian government officials to obtain approval for TheraSphere” a liver cancer therapy.

Gourevitch also received kickbacks from the Agent and otherwise “hid the scheme from Nordion” through, among other things, misrepresentations to his employer. In the words of the SEC, through his conduct Gourevitch “secretly enrich[ed] himself” and received “at least $100,000 for his role in the arrangement which was not disclosed to Nordion.”

In August 2014, Nordion was acquired by Nordion (Canada) Inc., a privately held company. The SEC’s order finds that Nordion (not the actual Respondent in the action Nordion (Canada) Inc.) violated the FCPA’s books and records and internal controls provisions and Nordion (Canada) Inc. agreed, without admitting or denying the SEC’s findings, agreed to pay $375,000.

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DOJ Gets It Right In Recent FCPA Opinion Procedure Release

i found you!

In this November 2010 post regarding the FCPA guidance, I flagged the below statement as one of the ten most meaningful statements in the Guidance.

“Successor liability does not […] create liability where none existed before. For example, if an issuer were to acquire a foreign company that was not previously subject to the FCPA’s jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuer.” (Pg. 28)

I flagged the statement because … well … it was an accurate statement of black-letter law, but one often overlooked when analyzing Foreign Corrupt Practices Act issues in the connection with merger and acquisition activity.

Last Friday, the DOJ released this FCPA opinion release dated November 7th.  The Requester was a U.S. issuer in the consumer products industry and contemplating an acquisition of a foreign target.  In pertinent part, the opinion release states:

“Requestor is a multinational company headquartered in the United States. Requestor intends to acquire a foreign consumer products company and its wholly owned subsidiary (collectively, the “Target Company”), both of which are incorporated and operate in a foreign country (“Foreign Country”). In the course of its pre-acquisition due diligence of the Target Company, Requestor identified a number of likely improper payments – none of which had a discernible jurisdictional nexus to the United States – by the Target Company to government officials of Foreign Country, as well as substantial weaknesses in accounting and recordkeeping. In light of the bribery and other concerns identified in the due diligence process, Requestor has set forth a plan that includes remedial pre-acquisition measures and detailed post-acquisition integration steps.

Requestor seeks an Opinion as to whether the Department, based on the facts and representations provided by Requestor that the pre-acquisition due diligence process did not bring to light any potentially improper payments that were subject to the jurisdiction of the United States, would presently intend to bring an FCPA enforcement action against Requestor for the Target Company’s pre-acquisition conduct. Requestor does not seek an Opinion from the Department as to Requestor’s criminal liability for any post-acquisition conduct by the Target Company.

Requestor intends to acquire 100% of the Target Company’s shares beginning in 2015. The Target Company’s shares are currently held almost exclusively by another foreign corporation (“Seller”), which is listed on the stock exchange of Foreign Country. Seller is a prominent consumer products manufacturer and distributor in Foreign Country, with more than 5,000 full-time employees and annual gross sales in excess of $100 million. The Target Company represents part of Seller’s consumer products business in Foreign Country and sells its products through several related brands.

Seller and the Target Company largely confine their operations to Foreign Country, have never been issuers of securities in the United States, and have had negligible business contacts, including no direct sale or distribution of their products, in the United States.

In preparing for the acquisition, Requestor undertook due diligence aimed at identifying, among other things, potential legal and compliance concerns at the Target Company. Requestor retained an experienced forensic accounting firm (“the Accounting Firm”) to carry out the due diligence review. This review brought to light evidence of apparent improper payments, as well as substantial accounting weaknesses and poor recordkeeping. On the basis of a risk profile analysis of the Target Company, the Accounting Firm reviewed approximately 1,300 transactions with a total value of approximately $12.9 million. The Accounting Firm identified over $100,000 in transactions that raised compliance issues. The vast majority of these transactions involved payments to government officials related to obtaining permits and licenses. Other transactions involved gifts and cash donations to government officials, charitable contributions and sponsorships, and payments to members of the state-controlled media to minimize negative publicity. None of the payments, gifts, donations, contributions, or sponsorships occurred in the United States and none was made by or through a U.S. person or issuer.

The due diligence showed that the Target Company has significant recordkeeping deficiencies. The vast majority of the cash payments and gifts to government officials and the charitable contributions were not supported by documentary records. Expenses were improperly and inaccurately classified in the Target Company’s books. In fact, the Target Company’s accounting records were so disorganized that the Accounting Firm was unable to physically locate or identify many of the underlying records for the tested transactions. Finally, the Target Company has not developed or implemented a written code of conduct or other compliance policies and procedures, nor have the Target Company’s employees, according to the Accounting Firm, shown adequate understanding or awareness of anti-bribery laws and regulations. In light of the Target Company’s glaring compliance, accounting, and recordkeeping deficiencies, Requestor has taken several pre-closing steps to begin to remediate the Target Company’s weaknesses prior to the planned closing in 2015.

Requestor anticipates completing the full integration of the Target Company into Requestor’s compliance and reporting structure within one year of the closing. Requestor has set forth an integration schedule of the Target Company that encompasses risk mitigation, dissemination and training with regard to compliance procedures and policies, standardization of business relationships with third parties, and formalization of the Target Company’s accounting and recordkeeping in accordance with Requestor’s policies and applicable law.”

Under the heading “Analysis” the opinion release states:

“Based upon all of the facts and circumstances, as represented by Requestor, the Department does not presently intend to take any enforcement action with respect to preacquisition bribery Seller or the Target Company may have committed.

It is a basic principle of corporate law that a company assumes certain liabilities when merging with or acquiring another company. In a situation such as this, where a purchaser acquires the stock of a seller and integrates the target into its operations, successor liability may be conferred upon the purchaser for the acquired entity’s pre-existing criminal and civil liabilities, including, for example, for FCPA violations of the target.

“Successor liability does not, however, create liability where none existed before. For example, if an issuer were to acquire a foreign company that was not previously subject to the FCPA’s jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuer.” FCPA – A Resource Guide to the U.S. Foreign Corrupt Practices Act, at 28 (“FCPA Guide”). This principle, illustrated by hypothetical successor liability “Scenario 1” in the FCPA Guide, squarely addresses the situation at hand. See FCPA Guide, at 31 (“Although DOJ and SEC have jurisdiction over Company A because it is an issuer, neither could pursue Company A for conduct that occurred prior to the acquisition of Foreign Company. As Foreign Company was neither an issuer nor a domestic concern and was not subject to U.S. territorial jurisdiction, DOJ and SEC have no jurisdiction over its pre-acquisition misconduct.”).

Assuming the accuracy of Requestor’s representations, none of the potentially improper pre-acquisition payments by Seller or the Target Company was subject to the jurisdiction of the United States. For example, none of the payments occurred in the United States, and Requestor has not identified participation by any U.S. person or issuer in the payments. Requestor also represents that, based on its due diligence, no contracts or other assets were determined to have been acquired through bribery that would remain in operation and from which Requestor would derive financial benefit following the acquisition. The Department would thus lack jurisdiction under the FCPA to prosecute Requestor (or for that matter, Seller or the Target Company) for improper payments made by Seller or the Target Company prior to the acquisition. See 15 U.S.C. §§ 78dd-1, et seq. (setting forth statutory jurisdictional bases for anti-bribery provisions).

The Department expresses no view as to the adequacy or reasonableness of Requestor’s integration of the Target Company. The circumstances of each corporate merger or acquisition are unique and require specifically tailored due diligence and integration processes. Hence, the exact timeline and appropriateness of particular aspects of Requestor’s integration of the Target Company are not necessarily suitable to other situations.

To be sure, the Department encourages companies engaging in mergers and acquisitions to (1) conduct thorough risk-based FCPA and anti-corruption due diligence; (2) implement the acquiring company’s code of conduct and anti-corruption policies as quickly as practicable; (3) conduct FCPA and other relevant training for the acquired entity’s directors and employees, as well as third-party agents and partners; (4) conduct an FCPA-specific audit of the acquired entity  as quickly as practicable; and (5) disclose to the Department any corrupt payments discovered during the due diligence process. See FCPA Guide at 29. Adherence to these elements by Requestor may, among several other factors, determine whether and how the Department would seek to impose post-acquisition successor liability in case of a putative violation.”

In the release, the DOJ got it right.

Not all bribery that allegedly occurs in the world is subject to the DOJ’s jurisdiction and just because a company that is subject to the FCPA acquires a foreign company, such an acquisition does not magically create FCPA liability where there was none before.  In layman’s terms, what happened is similar to the following:  a foreign person – not subject to U.S. law – was speeding in a foreign country and just because a U.S. company then purchases the car does not create liability under U.S. law for speeding.

The DOJ also got it right as a matter of policy.  By its opinion, the contemplated transaction is likely to close whereas a contrary opinion might have caused the Requestor to abandon the transaction.  If the transaction indeed closes, a previously compromised foreign company is going to be brought within the corporate family of a U.S. company subject to the FCPA with an existing internal controls system.

On this score, I am reminded of Richard Alderman’s (former Director of the UK Serious Fraud Office) comment “that society benefits if an ethical corporation takes over and sorts out a corporation that has corruption problems.”

*****

The DOJ’s FCPA Opinion Procedure program is often criticized because of the length of time it takes to obtain an opinion.  On this issue, the opinion release highlights the following dates.  The request was initially submitted on April 30th, the Requestor provided supplemental information on May 12th, July 30th, and October 9, 2014, and the release was issued on November 7th.  Thus, from start to finish, the process took approximately six months.

*****

As to background information of the DOJ’s FCPA Opinion Procedure program:

The FCPA, when enacted, directed the DOJ Attorney General to establish a procedure to provide responses to specific inquiries by those subject to the FCPA concerning conformance of their conduct with the DOJ’s “present enforcement policy.  Pursuant to the governing regulations of the so-called DOJ Opinion Procedure Release Program, only “specified, prospective—not hypothetical—conduct” is subject to a DOJ opinion.  While the DOJ’s opinion has no precedential value, its opinion that contemplated conduct conforms with the FCPA is entitled to a rebuttable presumption should an FCPA enforcement action be brought as a result of the contemplated conduct.  Since the program went live in 1980, the DOJ has issued approximately sixty releases on a wide range of issues from charitable contributions to gifts, travel and entertainment, to third parties.

Is There Successor Liability For FCPA Violations?

A guest post today from Taylor Phillips (an attorney with Bass Berry & Sims in Washington, D.C.).

*****

Imagine you deliver pizza for a living.  You are good at your job, but there is another deliveryman who is the best in the business – Hiro Protagonist.  Thanks to a remarkably fast car, Hiro always makes his deliveries on time.

One day, however, Hiro asks if you are interested in buying the car.  He tells you that he had a “near miss” with a pedestrian and, shaken, he has decided to hang up his insulated pizza bag for good.  Because he offers you a good price on the car, you accept.

A few months later, the police show up at your door.  They inform you that Hiro did not have a “near miss” – he hit a pedestrian while making a delivery.  Worse, they say that because you bought substantially all of Hiro’s business assets, you are criminally culpable for the hit-and-run.  Moreover, because pizza delivery is a highly regulated industry, the Sicilian Edibles Commission brings an administrative action against your business based on Hiro’s failure to properly account for expenses related to the hit-and-run.

*****

Obviously, this hypothetical is grossly oversimplified, but its patent injustice highlights the problems with expansive successor liability.  As FCPA practitioners know, successor liability is a key part of the government’s enforcement of the FCPA.  Consequently, as the FCPA Professor put it recently, “the FCPA is a fundamental skill set for all business lawyers and advisers, including in the mergers and acquisitions context.”

Of course, many attorneys who are not well-versed in the FCPA will look first to the DOJ and SEC’s Resource Guide to the U.S. Foreign Corrupt Practices Act.  It emphasizes that “[a]s a general legal matter, when a company merges with or acquires another company, the successor company assumes the predecessor company’s liabilities. . . . Successor liability applies to all kinds of civil and criminal liabilities, and FCPA violations are no exception.”  But is that right?

To assess the statement in the Resource Guide, it’s worth stepping back and considering how companies are purchased by other companies.  The most common acquisition structures are mergers, stock purchases, and asset purchases.  In a statutory merger, the resulting company assumes all the civil and criminal liability of its predecessor companies.  Thus, no transactional lawyer should be surprised that FCPA liabilities will transfer in a merger.  Conversely, in a stock purchase, there is no “successor”—the purchased company still exists, with all its existing liabilities.

Thus, asset purchases typically are the only cases in which “successor liability” is meaningfully analyzed by courts.  Interestingly, the rule is different from that stated in the Resource Guide: as a general legal matter, when a company acquires substantially all of another company’s assets, it does not assume the seller’s liabilities – even when it continues the seller’s business, brand, and contracts.

Of course, most rules have their exceptions, and there are four commonly recognized exceptions to the general rule of nonliability for asset purchasers.  The first exception—express or implied assumption of liabilities—simply states that where an acquirer intends to assume the liabilities of the seller, the law will enforce that intent.  The second exception—fraud—applies when the sale of assets would work a fraud on the seller’s creditors.  Finally, the third and fourth traditional exceptions—“mere continuation” and de facto merger—commonly are considered to be a single exception which can involve a number factors, depending on the idiosyncrasies of state law.  Critically, however, continuity of ownership between the buyer and seller typically is considered to be an indispensable factor for these two exceptions.  Thus, in accordance with traditional common law, an arms-length buyer that does not intentionally assume the seller’s liabilities nor engage in fraud will not be liable for the seller’s legal violations.  In other words, if only these exceptions applied to the hypothetical, the police would be wrong, and you would not have any successor liability, civil or criminal, for Hiro’s hit-and-run (even if you were well aware of it prior to the transaction).

Given this fairly clear answer, what explains the government’s silence regarding asset purchasers in the Resource Guide?  One potential answer is the “substantial continuity” exception.  In addition to the four traditional exceptions to successor nonliability referenced above, some federal courts have applied federal common law to find arms-length asset purchasers liable for violations of the seller where the asset purchaser (1) knew of the liability prior to the acquisition and (2) continued the enterprise of the seller.  Thus, unlike the traditional exceptions of “mere continuation” and “de facto merger,” the “substantial continuity” exception does not require continuity of ownership – merely continuity of enterprise.  Thus, if the substantial continuity exception applied to FCPA violations, there would be a plausible argument that China Valves had successor liability for Watts Waters’ FCPA violations (and that you would be at least civilly liable for Hiro’s hit-and-run).

Supreme Court precedent, however, strongly suggests that federal courts should incorporate state law rather than expand federal common law.  In particular, the Supreme Court’s decisions in United States v. Kimbell Foods, 440 U.S. 715 (1979), and United States v. Bestfoods, 524 U.S. 51 (1998), indicate that federal courts should adopt state law, rather than create a federal law of corporate liability.  Accordingly—as many circuit courts have found in other contexts—state successor liability law is applicable to many federal causes of action.  Because most states do not recognize the federal substantial continuity exception, several circuits do not apply the exception except in environmental, labor, and employment cases.

In short, there is a compelling argument that arms-length asset purchasers—even asset purchasers who continue the business of the seller and know about the seller’s FCPA violations—do not, as a matter of law, have successor liability for the FCPA violations of the seller.  For additional development of this argument see The Federal Common Law of Successor Liability and the Foreign Corrupt Practices Act, ___ William & Mary Business Law Review ___ (forthcoming).

Despite the general rule of successor nonliability, the Resource Guide does not squarely address FCPA liability for asset purchasers.  If only there was some way to ask the government for guidance on its present enforcement position with respect to successor liability…

“The FCPA – A View From The Hill”

At the Oil and Gas Supply Chain Compliance conference yesterday in Houston (see here), Todd Harrison (Chief Counsel, Oversight and Investigations, Energy and Commerce Committee, U.S. House) gave a presentation titled “The FCPA – A View from the Hill.”

Harrison provided his personal views on FCPA reform, specifically the “currents on the Hill” regarding the issue and a “sense of what Congress is thinking about in terms of changing” the law.  Harrison stated that until recently, the FCPA has not been a “tremendous focus on Capitol Hill” and that even against the backdrop of recent efforts to reform the FCPA “there is not a lot of momentum on the Hill for changes to the FCPA.”  However, Harrison stated that it “usually takes a lot of time to get things rolling and for legislation to come to fruition” and that changes to legislation often take place over 2-3 Congresses (each with a two year term) because there a lots of discussions with various stakeholders.”

[As a historical aside, the last period of major FCPA substantive reform occurred in the 1980’s and that process took 8 years from the time the first reform bill was introduced until President Reagan signed the Omnibus Trade and Competitiveness Act of 1988 which contained FCPA amendments at Title V, Subtitle A, Part I.]

Harrison next spoke of the “very prominent setbacks” the DOJ has recently suffered, most notably the Africa Sting cases, and that in light of these setbacks there was indeed “momentum gaining to make changes to the FCPA.”  However, Harrison said that the New York Times Wal-Mart article “changed the tide and mood entirely.”

During the Q&A, I asked Harrison generally as follows – “I know that Capitol Hill is a political institution and body, but explain why the Wal-Mart investigation should impact FCPA reform, after all, Wal-Mart is now one of approximately 125 companies under FCPA scrutiny and it is debatable whether the Wal-Mart payments at issue even violate the FCPA.”  (see here for the prior post).

Harrison said that as a “practical matter, public opinion matters, what happens in the real world matters” and that the atmosphere surrounding FCPA reform after the Wal-Mart article has made it “harder for different groups to advocate” for FCPA reform.  Harrison acknowledged that this perception “does not have a whole lot to do with the underlying facts” of the Wal-Mart matter, but that “public perception and pressure on government institutions” matters.

As to substantive FCPA reform, Harrison focused mostly on successor liability issues, which he called the Chamber’s number one reform issue.  However, Harrison said that this concern was hypothetical because as a “practical matter the DOJ has not been bringing prosecutions under this theory.”  During the Q&A I asked him whether anyone on the Hill is actually reading the enforcement actions because recent DOJ or SEC enforcement actions based on successor liability theories include Alliance One, General Electric and Watts Water Technologies.  In response, Harrison backtracked and said “no one has come to me about those particular cases” and that “none of these particular cases have become prominent on Capitol Hill.”

In short, Harrison’s personal view was that there is not a “wave of support or pressure to make actual legislative changes regarding successor liability.”

In response to a question, Harrison did not have any insight as to the timing of expected FCPA guidance.  He stated that his “personal guess is not anytime soon.”

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