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Friday Roundup

From the campaign stump, Wal-Mart civil suits start to pour in – plus a comment regarding statute of limitations, where should the money go, don’t believe the hype, and for the weekend reading stack.  It’s all here in the Friday roundup.

From The Stump

Zein Obagi (here [1] – a  fiscally conservative Democratic candidate for California’s new 33rd Congressional District) earlier this week posted a letter (here [2]) he sent to U.S. Senator Dianne Feinstein (D-CA).  Titled “Keeping California Companies Competing Abroad Competitive” the letter begins as follows.  “I am writing to ask you to show our party’s understanding of international trade by updating and clarifying the Foreign Corrupt Practices Act.  As you know Senator, both sides of the aisle have put forth efforts to clarify the FCPA, to assist in its enforcement and also keep America competitive with foreign nations’ trade practices.”  In the letter, Obagi states that “California businesses expend enormous resources with insufficient assurances that they will not run afoul of the FCPA.”

Kudos to Obagi for the courage to tackle the politically sensitive issue of reforming the FCPA.  His letter reminds us of an issue lost in the FCPA reform debate – that certain aspects of FCPA reform share bipartisan support.  See here [3] for the transcript of the Senate’s 2010 FCPA hearing (particularly statements from Democratic Senators Amy Klobuchar and Chris Coons) and here [4] for the transcript of the House’s 2011 FCPA hearing (particularly statements from Democrat Representative John Conyers).

Wal-Mart Civil Suits Begin to Pour In

One of my earlier Wal-Mart posts (here [5]) noted that not only will the DOJ and SEC likely be examining the conduct of Wal-Mart executives, but so too will plaintiff law firms representing shareholders who will likely scour Wal-Mart’s SEC filings and other statements to the market in bringing derivative claims alleging breach of fiduciary duty and potential Section 10(b) claims based on material omissions concerning Wal-Mart Mexico.  On this score, shareholders are likely to allege, among other things, that Wal-Mart’s officers and directors demonstrated conscious disregard for fiduciary duties by failing to act diligently in the face of known facts suggesting a duty to act.

Approximately ten days later the civil suits are starting to pour in.  See here [6] (New York Times) and here [7] (Los Angeles Times) for the derivative lawsuit brought by the California State Teachers’ Retirement System, the country’s second-largest public pension fund, the California State Teachers’ Retirement System,  against current and former board members and executives of Wal-Mart Stores Inc., accusing them of using bribery and corruption to gain authorization from Mexican government officials to build new stores.

The complaint (here [8]) generally tracks the New York Times article (see here [9] for a prior summary), but also includes allegations suggesting potential insider trading.  The complaint alleges as follows.  “[T]he trading records of defendants [H. Lee Scott Jr.] and [Eduardo] Castro-Wright show that both of these defendants began selling millions of dollars worth of Wal- Mart shares in the months after The New York Times first contacted the Company regarding possible FCPA infractions by Wal-Mex in December 2011. Scott and Castro-Wright were divesting their shares in Wal-Mart in apparent anticipation of the publication of The New York Times exposé and the corresponding stock drop that would undoubtedly occur, and did occur. On the three trading days after The New York Times’ April 21, 2012 exposé, Wal-Mart stock dropped eight percent, wiping out all of its gains in 2012. Scott and Castro-Wright sold uncharacteristically large amounts of stock while in possession of the materially adverse nonpublic information that the Company was exposed to undisclosed liability for massive FCPA penalties and other contingences relating to the bribes and cover-up …”.

In addition, yesterday Gilman Law LLP announced here [10] a derivative lawsuit filed in the United States District Court for the Western District of Arkansas against Wal-Mart.  According to the release, the “complaint alleges the Directors of Wal-Mart breached their fiduciary duties by violating the Foreign Corrupt Practices Act and engaging in a six-year-long cover-up of a massive bribery scheme concerning Wal-Mart’s expansion in Mexico.”

Wal-Mart Statute of Limitations

In recent days, there has been much talk about the FCPA’s statute of limitations (5 years) and how the limitations period can generally be extended through conspiracy charges.  All correct observations as to a fundamental black-letter law concept.  Except in corporate FCPA inquiries, one can generally toss aside fundamental black-letter law concepts because they simply do not matter.

Sure, Wal-Mart (or any other company subject to FCPA scrutiny) can talk about statute of limitations around conference room tables behind closed doors in Washington D.C., but to truly challenge the DOJ on this issue (as all others) first requires that the company be criminally indicated, something few corporate leaders are willing to let happen.  Cooperation is the name of the game in corporate FCPA inquiries and to assert statute of limitations issues is not cooperating.  Given the “carrots” and “sticks” relevant to resolving FCPA enforcement actions (to learn more about these “carrots” and “sticks” please read ”The Facade of FCPA Enforcement” – here [11]), one of first steps during a corporate disclosure of FCPA issues (one that Wal-Mart made in December 2011) is to enter into a tolling agreement or to waive any statute of limitations defenses.

As evidence, dig into the details of most FCPA enforcement actions and one quickly discovers that the conduct at issue is old – in some cases very old.  The 2012 Biomet enforcement action (see here [12] for the prior post) concerns conduct going back to 2000; the 2012 Smith & Nephew enforcement action (see here [13] for the prior post) concerns conduct going back to 1998; and the 2012 Marubeni enforcement action (see here [14] for the prior post) concerns conduct going back to 1995 (17 years ago) with the last act alleged occurring in 2004.

For a similar post on fundamental black letter law concepts in FCPA enforcement actions, see this [15] prior post “Does DOJ Expect FCPA Counsel to Roll Over and Play Dead?”

Don’t Believe the Hype

Writing at the Huffington Post (here [16]), Professor Brandon Garrett (here [17] – University of Virginia School of Law) says “Don’t Believe the Hype on Corporate Bribery.”  Professor Garrett notes that “at first, foreign bribery prosecutions may seem big and brash and the farthest thing from a wrist-slap” but he cautions that many FCPA enforcement actions “can be smaller than they appear.”

I frequently am put in the “the DOJ is too aggressive in enforcing the FCPA” camp and in many respects that is true.  However, I have also frequently stated (see here [18] for my Facade of FCPA Enforcement article, here [19] for my Senate testimony and here [20] and here [21] for prior posts as to the same Siemens and BizJet enforcement actions Professor Garrett references) that in egregious instances of corporate bribery that legitimately satisfy the elements of an FCPA anti-bribery violation involving high-level executives and/or board participation the DOJ’s aggressive rhetoric does not match the reality of the enforcement action.

See this [22] prior post for discussion of Professor Garrett’s article “Globalized Corporate Prosecutions.”

Where Should the Money Go

This [23] prior post discussed the recent letter by Socio-Economic Rights and Accountability Project (“SERAP”) (a non-governmental civil society organization in Nigeria) to SEC Enforcement Division Director Robert Khuzami (with a copy to Assistant Attorney General Lanny Breuer and Deputy Chief, Fraud Section Charles Duross)  regarding “FCPA civil penalty and disgorgement proceeds that companies agree to pay to resolve US Foreign Corrupt Practices Act investigations.”

The specific SERAP proposal is as follows.  “…[A]fter, and ony after, public notice of an FCPA settlement agreement, the victim foreign government entity and any applicant NGO would have 60 days to file a request that the Enforcement Division pay some or all of the agreed payment proceeds to or for the benefit of the victim government entity or to a home country-based or US based NGO that would present a proposal [to] spend the proceeds for public purposes (e.g. on public health programs) in the country of the victim entity.  Thereafter, the Enforcement Division would have 60 days to act upon the request, favorably or not in its discretion; in this context the Enforcement Division should provide a brief statement of its reasons for its decisions.  In reaching its decisions the Enforcement Division would have the inherent authority to consult with Executive Branch agencies of the US government.

Recently the SEC responded to the letter (see here [24]).  The SEC thanked SERAP for its ‘thoughtful submission” and stated that it will “give appropriate consideration” to its suggestions while also noting as follows.  “Although the macro effects of corruption can be ascribed generally, the framework of our securities laws requires a proximate connection to the harm caused by a particular violation.  The question of identifying investors or other parties that suffer cognizable harm in connection with the securities law violation(s) at issue in a given enforcement matter is driven by the facts and circumstances of that particular case.”

For more, including my views, see here [25] from Trustlaw.

Others are also thinking about the issue of where FCPA enforcement proceeds should go.  In this [26] draft paper titled “Reforming the Foreign Corrupt Practices Act to Reduce Rent Seeking and Better Deter Transnational Bribery,” Matthew Turk argues as follows: “(1) the SEC should cease retaining profits disgorged by corporate defendants; (2) disgorgements should be transferred to the Host country where the bribe took place, conditional on the Host government’s cooperation with the FCPA investigation; and (3) if cooperation is not forthcoming, disgorgement proceeds should be transferred to the OECD Working Group, an international organization designed to facilitate the enforcement of an important anti-bribery treaty.”  According to Turk, “Reforming disgorgement practices in the manner suggested here would not constitute a legalistic attempt to ratchet the total level of anti-corruption enforcement up or down in a particular direction. Instead it would re-allocate the proceeds from FCPA enforcement on a global scale so as to properly align the incentives of the parties involved and provide greater access to the information required for effective enforcement.”

Weekend Reading Stack

I recommend this [27] recent Q&A in Metropolitan Counsel with Homer Moyer (Miller & Chevalier) a “Dean” of the FCPA.  Might as well make it a Homer Moyer weekend – see here [28] for a prior Q&A post on this site with Moyer.