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Judge Finds The Term Instrumentality “Unclear” And Narrowly Construes “Foreign Official” Element Contrary To The DOJ’s Position

Judicial Decision

There is little substantive Foreign Corrupt Practices Act case law, even fewer judicial decisions of precedent. Nevertheless, in the aftermath of FCPA enforcement actions or merely FCPA scrutiny, plaintiffs counsel (no doubt representing shareholders on a contingent fee basis) frequently file securities fraud class actions hoping some get past the motion to dismiss stage.

In deciding motions to dismiss, federal trial court judges occasionally directly comment upon FCPA issues and this post highlights a recent example in a matter involving Rio Tinto. As discussed below, a federal court judge found the term “instrumentality” in the FCPA’s “foreign official” definition “unclear” and otherwise narrowly construed the term in a way contrary to the DOJ’s current position.

In Das v. Rio Tinto PLC (S.D.N.Y. Aug. 31, 2018, 2018 WL 4189512) purchasers of the company’s American Depositary Receipts alleged that Rio Tinto as well as Tom Albanes (former CEO and member of the board), Alan Davies (former CEO of the Energy & Minerals Group), and Sam Walsh (former CEO and member of the board) violated Section 10(b) and 20(a) of the Securities Exchange Act. The underlying conduct concerned the company’s mining operations in Guinea and Rio Tinto entering into an arrangement with Francois Polge de Combret, a friend of Guinea’s then Presidnet Alpha Conde. As alleged in the complaint:

“During the course of this relationship, Individual Defendants agreed to pay Combret $10.5 million (“Combret payment”) for his help protecting the mining rights for blocks 3 and 4, in which they were ultimately successful. Plaintiff alleges this payment constituted a bribe in violation of the U.S. Foreign Corrupt Practices Act.”

As to the alleged misleading statements at issue in the alleged securities fraud, Plaintiffs alleged:

“During the class period, Defendants made numerous public statements to Rio Tinto’s investors via SEC filings, earnings calls, the Company’s code of conduct, media releases, and its website. These statements fall into five main categories: (1) Rio Tinto’s commitment to law abidance and anti-corruption, (2) the Company’s work with the GoG [Government of Guinea], (3) the Company’s contingent liabilities, (4) the adequacy of the Company’s of internal controls,  and (5) SOX certifications. Plaintiff contends that these statements were materially misleading because, in short, Defendants failed to disclose that they paid Combret a $10.5 million bribe which violated their code of conduct, subjected the Company to regulatory and legal action, and made clear the ineffectiveness of their internal controls.”

The defendants moved to dismiss the action for, among other reasons, failure to state a claim. After reviewing the relevant legal standards and pleading requirements, Judge Andrew Carter first addressed whether Plaintiff pled the existence of any underlying illegal conduct and summarized the positions as follows: plaintiff alleges that the Combret payment violated the FCPA; Defendants contend that, absent allegations that the payment was made to a “foreign official,” it cannot violate the statute.

Judge Carter stated, under the heading “Whether Combret is a Foreign Official,” as follows:

“Plaintiff contends that Defendants indirectly bribed Guinean government officials by paying $10.5 million to Combret for the purposes of effectuating the $700-million settlement with the GoG that allowed the Company to maintain its hold on the Simandou concessions and strengthen its relationship with the GoG. Defendants respond that Plaintiff fails to allege that any of the Company’s payment to Combret was ultimately offered to any foreign official. Moreover, allegations that Combret and President Conde had a close relationship are insufficient to show that Combret actually offered President Conde anything of value.

The Court agrees with Defendants that such allegations are insufficient.

[…]

Plaintiff argues in the alternative that Combret is himself a foreign official “acting as an ‘instrumentality’ of or ‘on behalf of the GoG,” and thus the payment was a direct bribe. First, the definition of “instrumentality” in the FCPA is unclear and not defined by statute. However, the text of the FCPA compels a reading of “instrumentality” as something other than a person, since the definition of a foreign official includes an “officer or employee of a … instrumentality [of a foreign government].” While not reaching this precise issue, courts assessing the meaning of “instrumentality” appear to have interpreted it as an entity, not a person. See, e.g., United States v. Duperval, 777 F.3d 1324, 1333 (11th Cir. 2015) (defining instrumentality as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own”); United States v. Carson, No. SACR 09-00077- JVS, 2011 WL 5101701, at *4-5 (CD. Cal. May 18, 2011) (“[W]hether employees of state-owned companies could be “foreign officials” within[ ] the meaning of the FCPA turns on whether state-owned companies can be considered “instrumentalities” under any circumstances.”) (emphasis added). In addition, the DOJ and the SEC have indicated that such a reading should be followed. See U.S. Dep’t of Justice & SEC, A Resource Guide to the U.S. Foreign Corrupt Practices Act 20 (Nov. 14, 2012) (“The term ‘instrumentality’… can include state-owned or state-controlled entities.”). Since Combret is an individual, not an entity, he does not qualify as an instrumentality.

Second, the FCPA requires that the individual act “in an official capacity for or on behalf of any such government.” Plaintiff does not allege that Combret worked for the GoG in any official capacity. By Plaintiff’s own admissions Combret acted “as an informal advisor” to President Conde and worked at an “independent advisory firm.” With no official position in the GoG, it strains logic to consider Combret a “foreign official.”

Let’s pause here for a moment to point out that this judicial interpretation of the “foreign official” element is contrary to the DOJ’s current position. For instance, in the Legg Mason and Och Ziff enforcement actions concerning conduct in Libya, see this prior post, the DOJ stated:

“Although Libyan Official 1 did not hold a formal title within the Libyan government, Libyan Official 1 possessed and used a Libyan diplomatic passport and conducted high-profile foreign and domestic affairs for, and on behalf of, the Libyan government. Libyan Official 1 made administrative and investment decisions for the LIA, including through proxies. Libyan Official 1 was a “foreign official” within the meaning of the FCPA.”

Likewise, in the SBM Offshore enforcement action (see here for the prior post), the DOJ alleged that a subsidiary of an Italian oil and gas company was an “instrumentality” of the Kazakh government because it was granted a concession by the Kazakh government and was thus “acting in an official capacity for or on behalf” of the Kazakh government.  As highlighted in the prior post, the breadth of this type of allegation is practically boundless.

However, Judge Carter rejected an expansive interpretation of “foreign official” in the Rio Tinto matter.

In his decision, Judge Carter further concluded:

“Plaintiff also fails to allege facts supporting the “knowing” element of an FCPA violation. Plaintiff relies on email exchanges between Individual Defendants to allege that Defendants knew that they were making an unlawful payment. It is clear that Defendants knew that they were making a payment. However, the complaint alleges no facts sufficient to show that Defendants were aware that the payment would be directed to a foreign official, as required by the FCPA.

Accordingly, Plaintiff does not allege an FCPA violation here. Since the payment was not unlawful, failure to disclose it cannot violate the Exchange Act, and Plaintiff’s § 10-b claim must fail.

As to the underlying claims, Judge Carter – like most federal trial court judges who have an FCPA-related securities fraud matter put on their docket – dismissed the claims. Consistent with other courts to address the issue, the judge held that law abidance and other statements in anti-corruption policies and procedures were non-actionable, aspirational puffery. Among other deficiencies the judge further stated as follows concerning alleged misstatements regarding the adequacy of the company’s internal controls:

“Plaintiff alleges that statements about internal controls in Defendants’ 2011-2015 Form 20-Fs are materially misleading. Those filings state that Rio Tinto “maintains disclosure controls and procedures,” has “evaluated the effectiveness of the design and operation” of those controls and, “as of the end of the period covered by this report” those disclosure controls and procedures “were effective at a reasonable assurance level.”  The 2011 Form 20-F also states that “Rio Tinto makes immediate disclosure to the listing authorities of any information that a reasonable person would expect to have a material effect on its share price in accordance with their rules.”

Plaintiff contends that the aforementioned statements are materially misleading because Defendants stated that Rio Tinto’s internal controls were sound despite knowing that its senior executives approved an unlawful payment. However as Defendants argue, an unlawful payment is not necessarily the result of faulty internal controls. Plaintiff offers no facts as to what internal controls were insufficient or not followed, how any internal controls may have been insufficient or not followed, or what actions could or should have been taken to avoid the alleged violation. Such “conclusory assertion[s] without any factual support” or specificity are insufficient to state a claim. Since Plaintiff does not specifically plead any deficiency in Rio Tinto’s internal controls, such statements are not materially misleading.”

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