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Issues To Consider From The Vantage Drilling Enforcement Action

This previous post [1] went in-depth into the rather unusual Vantage Drilling Foreign Corrupt Practices Act enforcement action and this post continues the analysis by highlighting additional issues to consider.

Timeline

As highlighted here [2], in July 2015 (or shortly thereafter) Vantage Drilling voluntarily disclosed to the DOJ/SEC. Thus, from start to finish the company’s FCPA scrutiny lasted approximately 3.5 years. While this is below recent averages of approximately 4.5 years, it is still too long for FCPA scrutiny to last particularly since Vantage Drilling, in the words of the SEC:

“The Company provided significant cooperation to the Commission during the entire course of its investigation. Vantage voluntarily disclosed information obtained during its own internal investigation, highlighted key documents, and disclosed facts that the Commission would not have been able to readily and independently discover.”

No-Charged Bribery Disgorgement

The Vantage Drilling enforcement action is the latest example (of numerous prior examples) of the SEC seeking a disgorgement remedy in the absence of FCPA anti-bribery charges or findings. Specifically, the $5 million settlement amount, based on findings of internal controls violations, consisted entirely of disgorgement.

As highlighted in this [3] previous post (and numerous prior posts thereafter), so-called no-charged bribery disgorgement is troubling. Among others, Paul Berger (here [4]) (a former Associate Director of the SEC Division of Enforcement) has stated that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” Berger noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”

Kokesh Only Matters to the Extent Companies Don’t Roll Over and Play Dead

The disgorgement amount in the Vantage Drilling enforcement action was troubling for another reason.

As highlighted here [5], in June 2017 the Supreme Court unanimously held in SEC v. Kokesh that disgorgement is a penalty and thus disgorgement actions must be commenced within five years of the date the claim accrues. However, as highlighted in this post [6], Kokesh, not to mention other Supreme Court decisions and other legal principles, only matter to the extent companies under FCPA scrutiny do not roll over and play dead.

Per the SEC, “Vantage increased the risk that it financed the bribes [of its former director and agent] by making substantial payments to the director in 2008 and 2012.” In other words the problematic conduct occurred 6 to 10 years prior to the enforcement action.

[7]

In short, Kokesh is not going to matter one bit if companies role over and play dead when under FCPA scrutiny and presumably Vantage Drilling did what most companies under FCPA scrutiny do: either waive or toll statute of limitation defenses. As highlighted in this previous guest post [8] from a former SEC Enforcement Division attorney and DOJ Fraud Section prosecutor, issuers simply need to stop doing this.

Ripples

Based on the company’s prior disclosures, its pre-enforcement action professional fees and expenses appear to have been approximately $30 million. This far exceeds the settlement amount of $5 million.

In addition, throughout its FCPA scrutiny, Vantage Drilling bonds have been downgraded. (See here [9] for a prior post).

Notable

In prior disclosures,  Vantage Drilling stated:

“In connection with our cooperation with the DOJ and SEC, we recently advised both agencies that in early 2010, we engaged outside counsel to investigate a report of allegations of improper payments to customs and immigration officials in Asia. That investigation was concluded in 2011, and we determined at that time that no disclosure was warranted; however, in an abundance of caution, we are reviewing the matter again in light of the allegations in the Petrobras matter.”

The FCPA enforcement action did not address such conduct.

As highlighted in this previous July 2018 post [10]:

“Brazilian prosecutors have filed corruption and money laundering charges against Paul Bragg, the former chief executive officer of Houston-based offshore drilling contractor Vantage Drilling. Federal prosecutors said in a Thursday night statement that Bragg was involved in the payment of $31 million in bribes to a former executive of state-owned oil company Petrobras. The statement says the bribe was paid to help Vantage win a $1.8 billion contract in 2009 to charter a drill ship to Petrobras.”

Recent Disclosure

In its most recent 10-Q, Vantage Drilling stated:

“On August 31, 2015, PAI and PVIS, both subsidiaries of Petrobras, notified the Company of the termination of the Drilling Contract between PVIS and Vantage Deepwater Company and which had been novated to PAI and Vantage Deepwater Drilling, Inc., claiming the Company had breached its obligations under the Drilling Contract. Vantage Deepwater Company and Vantage Deepwater Drilling, Inc. are both wholly-owned subsidiaries of the Company.  We immediately filed an international arbitration claim against PAI, PVIS, and Petrobras, claiming wrongful termination of the Drilling Contract.

On July 2, 2018, an international arbitration tribunal issued an award in favor of Vantage Deepwater Company and Vantage Deepwater Drilling, Inc. The tribunal found that PAI and PVIS breached the Drilling Contract, and awarded Vantage Deepwater Company and Vantage Deepwater Drilling, Inc. damages in the aggregate amount of $622.0 million against PAI, PVIS, and Petrobras and dismissed the Petrobras entities’ counterclaims against the Company with prejudice. The tribunal also awarded the Company interest on the foregoing award amount at an annual rate of 15.2%, compounded monthly, to accrue from (i) April 1, 2018, with respect to $615.6 million thereof, (ii) October 20, 2015, with respect to $5.2 million thereof, and (iii) November 19, 2015, with respect to $1.2 million thereof, in each case, until final payment of the awarded sums.  In accordance with the terms of the award, each of the Company and Petrobras will bear its own legal fees, and the fees and expenses of the tribunal, including the compensation of the arbitrators, aggregating approximately $1.5 million, will be borne equally by both sides.

In connection with enforcing the arbitration award against Petrobras, on August 22 2018, we secured an order from the Amsterdam District Court in the Netherlands freezing assets of Petrobras in the Netherlands that we believe are valued in excess of our claim at this time.

On April 27, 2018, the Company was added as an additional defendant in a legal proceeding by the Brazilian Federal Prosecutor against certain individuals, including an executive of Petrobras and two political lobbyists, in connection with the contracting of the Titanium Explorer drillship to Petrobras under the Drilling Contract, with the Brazilian Government and Petrobras as interested parties. The Company is alleged to have been involved in and benefitted from the purported bribery scheme at Petrobras through Messrs. Padilha and Hsin-Chi. We first became aware of the legal proceeding on July 19, 2018 as it was previously under seal. The Company has not been formally served nor advised by any Brazilian authorities of any particular charges. The Company understands that the legal proceeding is part of the Brazilian Federal Prosecutor’s larger “Car Wash” investigation into money laundering and corruption allegations at Petrobras.

The damages claimed in the proceeding are in the amount of BRL 102.8 million (approximately $31 million), together with a civil fine equal to three times that amount. The Company understands that the court hearing the proceeding has issued an order authorizing the seizure and freezing of the assets of the Company and the other three defendants in the legal proceeding, as a precautionary measure, in the amount of approximately $124 million. The Company and the other three defendants are jointly and severally liable for this amount. The seizure order has not had an effect on the Company’s assets or operations, as the Company does not own any assets in Brazil, and does not currently intend to relocate any assets to Brazil. On September 5, 2018, the Brazilian judge issued another decision (i) acknowledging receipt of a statement from the Brazilian Federal Prosecutor that they intend to seek mutual legal assistance from the U.S. authorities pursuant to the United Nations Convention against Corruption of 2003 to carry out service of process of the improbity action and obtain a freezing order against the Company’s U.S. assets in the amount of $124 million, and (ii) ordering that the Brazilian Federal Prosecutor provide an update on their progress within 30 days. The Company intends to vigorously defend any such allegations and seizures; however, we can neither predict the ultimate outcome of this matter nor that there will not be further developments in the Car Wash investigation or in any other ongoing investigation or proceeding that could adversely affect us.”

Inability to Pay

The SEC’s order states:

“[I]n determining the disgorgement amount and not to impose a penalty, the Commission has considered Vantage’s current financial condition and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.”

For other “inability to pay” FCPA enforcement actions, see here [11].

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