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In A Domestic Corruption Case, The First Circuit Rejects The Narrative In Recent FCPA Enforcement Actions Concerning Internship And Hiring Practices

You be the Judge

In the past 1.5 years or so, there have been three Foreign Corrupt Practices Act enforcement actions focused on internship and hiring practices of family members of alleged “foreign officials” and several other companies are remain under scrutiny for the same alleged practices.

As highlighted here and here, in August 2015 BNY Mellon agreed to pay $14.8 million to resolve SEC findings that the company provided “valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.”

As highlighted here and here, in March 2016 Qualcomm agreed to pay $7.5 million to resolve SEC findings that the company “provided or offered full-time employment and paid internships to family members and other referrals” of alleged “foreign officials” at state-owned or state-controlled enterprises.

As highlighted here and here in November 2016 JPMorgan agreed to pay $202.6 million to resolve DOJ and SEC findings that the company violated the FCPA based on its internship and hiring practices involving so-called Chinese princelings, and other family members of private business individuals, with the DOJ stating “awarding prestigious employment opportunities to unqualified individuals in order to influence government officials is corruption, plain and simple.”

None of these enforcement actions, as is common in corporate FCPA enforcement, were subjected to any judicial scrutiny.

Nevertheless, in a truly absurd statement, in November 2016 SEC Director of Enforcement Andrew Ceresney stated:

“In the wake of some of the Commission’s prior hiring practices cases, including our cases against Bank of New York Mellon and Qualcomm, some questioned whether providing internships could amount to an FCPA violation.  But the JPMorgan case should put that debate to rest.”

As if exercising leverage against risk averse corporations to extract a settlement amount on a disputed legal theory in the absence of judicial scrutiny puts anything to rest other than that the government possesses leverage.

In any event, the narrative in all three enforcement actions was that providing an internship or job to a family member of an alleged “foreign official” represented an attempt to improperly influence the “foreign official” who then exercised discretion – presumably because of the internship or job provided to a family member – to benefit the company.

Recently, in the domestic corruption context, the First Circuit rejected this narrative and the decision represents the second judicial decision in just the past few months to do so. (See here for the October 2016 post regarding how a London judge rejected the narrative link between a Goldman Sachs internship and “foreign official” decision making).

The alleged facts of U.S. v. Tavares (844 F.3d 46) were that defendants ran a corrupt hiring scheme at the Massachusetts Office of Probation (OCP) by catering to the hiring requests from members of the state legislature with the hope of obtaining favorable legislation for the Department of Probation and OCP.

The defendants were criminally charged with RICO conspiracy, substantive RICO violations and numerous mail fraud offenses. The substantive RICO count was based on the predicate acts of mail fraud and Massachusetts gratuities and bribery violations. As stated by the court:

“The Massachusetts gratuities statute penalizes those who give illegal gratuities to officials as well as officials who receive illegal gratuities. Here the Government sought to prove that [defendant] ‘knowingly … offered or promised anything of substantial value’ to a public official ‘for or because of any official act performed or to be performed’ by that official.”

At trial, the defendants were convicted of various criminal offenses and an appeal followed.

The court began its opinion by noting that the defendants “misran the Probation Department and made efforts to conceal the patronage hiring system.” However, the court noted “bad men, like good men, are entitled to be tried and sentenced in accordance with the law” and that “not all unappealing conduct is criminal.”

As set forth below, the court reversed the trial court convictions finding that the “government has not in fact demonstrated that the conduct satisfies the appropriate criminal statutes.”

Citing the Supreme Court’s opinion in U.S. v. Sun-Diamond Growers of Cal. 526 U.S. 398 (1999) the court stated that the “government must prove a link between a thing of value conferred upon a public official and a specific official act for or because of which it was given.”

The court next stated:

“In that vein, the Government cannot show the requisite linkage merely be demonstrating that the gratuity was given ‘to build a reservoir of goodwill that might ultimately affect one or more of a multitude of unspecified acts, now and in the future.”

[…]

The Government’s evidence as to the gratuities predicates does not show adequate linkage between the thing of “substantial value” conferred by [defendant] (the jobs) and an “official act” performed or to be performed. […] Many of the Government’s arguments are predicated on bootstrapping: because [defendant] was constantly conferring with legislators and hiring based on legislative preferences, any “official act” taken by an affected legislator must satisfy the nexus requirement. But we do not read the gratuities statute so broadly: the Supreme Court in Sun–Diamond “offered a strictly worded requirement that the government show a link to a ‘specific official act’ to supply a limiting principle that would distinguish an illegal gratuity from a legal one,” a principle unnecessary “in the extortion or bribery contexts.” United States v. Ganim, 510 F.3d 134, 146 (2d Cir. 2007). Given a choice between treating a gratuities statute as “a meat axe or a scalpel,” the Supreme Court chose the latter, and we follow suit. Sun–Diamond Growers of Cal., 526 U.S. at 412, 119 S.Ct. 1402; see also Valdes v. United States, 475 F.3d 1319, 1323 (D.C. Cir. 2007) (“Sun–Diamond’s interpretive gloss, like the rule of lenity, thus works to protect a citizen from punishment under a statute that gives at best dubious notice that it has criminalized his conduct.”).

Because the DOJ or SEC rarely face the prospect of judicial scrutiny they have, in certain circumstances including the above-referenced hiring and internship matters, used the FCPA as a meat axe rather than a scalpel.

The cure for meat axes is judicial scrutiny, but because of how the DOJ and SEC has chosen to enforce the FCPA (largely through resolution vehicles not subjected to any meaningful judicial scrutiny) and given the dynamics of corporate settlements, the meat axe approach to FCPA enforcement prevails regardless of Congressional intent and regardless of whether or not a court would agree.

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