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What You Need To Know From Q2

This post provides a summary of FCPA enforcement actions and FCPA related events from the second quarter of 2012.  See here [1] for a similar recent post from the FCPA Blog.

DOJ Enforcement

The DOJ resolved 1 corporate FCPA enforcement action in the second quarter.  DOJ recovery in this enforcement action was approximately $8.8 million.   This enforcement action was resolved with a deferred prosecution agreement.  At present, this enforcement action has not resulted in any individual charges against company employees.

DOJ statistics through Q2 are as follows.

5 core corporate enforcement actions resolved.

$109. 3 million in total fines and penalties recovered.

All 5 corporate enforcement actions have been resolved with either a DPA or NPA.

At present, none of the corporate enforcement actions have resulted in any individual charges against company employees.

Data Systems & Solutions (June 18th)

See here [2] for the prior post.

Charges:  Conspiracy to violate the FCPA’s anti-bribery provisions and one substantive FCPA anti-bribery violation.

Resolution Vehicle: Criminal information resolved via a DPA (term 2 years).

Guidelines Range: $12.6 – $25.2 million

Penalty: $8.8 million (30% below the minimum amount suggested by the Guidelines).

Disclosure: DPA states as follows:  “following the receipt of subpoenas in connection with the government’s investigation, DS&S initiated an internal investigation and provided real-time reports and updates of its investigation into the conduct described in the Information”

Monitor: No.

Individuals Charged: No.

In addition to the above corporate enforcement action, in Q2 the DOJ brought charges against Garth Peterson (a former managing director for Morgan Stanley’s real estate business in China), see here [3] for the prior post.  As to Morgan Stanley, the DOJ’s release stated as follows.  “After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to Peterson’s conduct.  The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation.”

SEC Enforcement

The SEC did not bring any FCPA enforcement actions in Q2.

SEC statistics through Q2 are as follows.

2 core corporate enforcement actions resolved.

$10.9 million in total fines and penalties recovered.

At present, none of the corporate enforcement actions have resulted in any individual charges against company employees.

Other Events

Wal-Mart

Unless you lived in a cave during Q2, you know that Wal-Mart was in the news.  As noted in this [4] previous post, in late April the New York Times ran a front-page story concerning alleged conduct in Mexico.  This [5] previous post noted that the New York Times article was both remarkable and unremarkable.

The unremarkable portion of the Times article is that a foreign subsidiary of a multi-national company operating in a FCPA high-risk jurisdiction allegedly made payments to “foreign officials” to facilitate or grease the issuance of certain licenses or permits.  Indeed, those who closely follow the FCPA knew that Wal-Mart disclosed potential FCPA scrutiny in December 2011 (see this [6] prior post).

The remarkable aspects of the Times article include the alleged conduct (or lack thereof) of Wal-Mart and its top executives upon learning of problematic conduct in its Mexican subsidiary.  Even in 2005 and continuing today, most business leaders, audit committees, and boards tend to overreact to FCPA issues and often reflexibly launch broad internal investigations.  However, the payment issues at Wal-Mart Mexico apparently resulted in exactly the opposite at Wal-Mart’s corporate headquarters.  Thus, Wal-Mart is mostly a corporate governance story.

Even so, there are some core and fundamental FCPA issues worthy of exploration.  This [7] previous post noted that Wal-Mart’s FCPA scrutiny raises two distinct and important questions that can be asked about many instances of FCPA scrutiny in this new era.

The first question is whether, given the DOJ and SEC’s current enforcement theories, the Mexican payments at issue – allegedly in connection with permitting, licensing and inspection issues – can expose Wal-Mart to an FCPA enforcement action?  The answer is likely yes and in the past several years the enforcement agencies have brought several FCPA enforcement actions premised on payments to obtain foreign licenses, permits and the like.

The second (and from my perspective more important) question is whether Congress, in passing the FCPA, intended the law to capture payments occurring outside the context of foreign government procurement and involving ministerial and clerical acts by foreign officials.  The answer from the FCPA’s legislative history is no.  The previous post then discussed the enforcement agencies overall losing record when its enforcement theory that payments outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions has been subjected to FCPA scrutiny.

Will any of this matter?  Likely no as discussed in the previous post.  Should Wal-Mart’s FCPA scrutiny impact FCPA reform?  As observed in this [8] prior post, no it should not.  Will it?  Yes, perceptions matters as confirmed by a House lawyer in a recent speech noted in this [9] prior post.

Prior posts also noted that not only will the DOJ and SEC be examining the conduct of Wal-Mart and its executives, but so too will plaintiff firms representing shareholders and that derivative cases and securities fraud actions were likely to follow.  They soon did, approximately a dozen such civil suits, as noted in this [10] previous post.

In late April and early May it was indeed an FCPA world (see here [11] for the prior post).  Instances of FCPA scrutiny regarding well-known companies, particularly a company that seems to generate much passion, is good for the FCPA in that it causes a broad audience to contemplate the FCPA and FCPA enforcement.  Yet at the same time, such instances result in many armchair FCPA commentators (see here [12] for the prior post) resulting in many wanting to indeed live in a cave.

Carson Developments

Q2 saw four guilty pleas in the long-running and closely followed “Carson” enforcement action involving several former employees of Control Components Inc.  In April, husband and wife Stuart and Hong Carson pleaded guilty (see here [13] for the prior post).  In May, Paul Cosgrove pleaded guilty (see here [14] for the prior post).  In June, David Edmonds pleaded guilty (see here [15] for the prior posts).  Each of the pleas were to a fraction of the charges the defendants faced in the original indictment and as to allegations of conduct not included in the original indictment.  Moreover, as noted in the prior posts, the pleas closely followed Judge Selna issuing a jury instruction regarding “knowledge of status of foreign official” that would have been difficult for the DOJ to prove.

The reality of our criminal justice system is that the DOJ can effectively control when its enforcement theories are put to the ultimate burden of proof and defendants (individuals that are parents, individuals with health issues, individuals nearing retirement age) are likely to accept watered-down plea deals rather than test their innocence, put the DOJ to its ultimate burden of proof and risk the trial penalty (see here [16] for the prior post).

SEC Put To Its Burden

Most defendants in an SEC FCPA enforcement action (corporate or individual) settle the SEC’s charges, a decision facilitiated by the SEC’s neither admit or deny settlement policy.  Not Mark Jackson or James Ruehlen.  As noted in this [17] previous post, the former Noble Corporation CEO and current Director and Division Manager of Noble’s subsidiary in Nigeria filed a motion to dismiss the SEC’s charges that are based on the same core set of conduct as the SEC’s enforcement action against Noble Corporation in 2010.  As noted in this [18] previous post, the SEC recently filed its opposition brief.

This matter will be interesting to follow as the SEC is rarely put to its burden of proof and the last time it was in an FCPA enforcement action, it lost  (see here [7] for a prior post discussing the Mattson and Harris enforcement actions in 2002).

Watts Water Technologies Malpractice Claim

As noted in this [19] previous post, Watts Water Technologies recently filed a malpractice complaint against Sidley Austin LLP based on allegations that the firm was negligent in providing M&A due diligence in connection with a China acquisition.  Watts claims that Sidley’s conduct resulted in its October 2011 SEC enforcement action.

The action is believed to be the first instance of a law firm being sued for malpractice in connection with FCPA issues.  On one level this is not all that surprising as most FCPA attorneys tend to do investigate work and assist clients during the FCPA enforcement process where the conduct at issue has already taken place.  However, as FCPA counseling and transactional-based work become more common, it is likely not going to be the last case.  In short, it is reasonable for a company to expect that counsel will conduct complete and thorough due diligence and bring any and all adverse information to the company’s attention so that it can assess the risk of completing the transaction.

U.K. Developments

The second quarter saw a change in leadership at the U.K. Serious Fraud Office.  As noted in this [20] tribute post, Richard Alderman retired and was replaced by David Green.  A hallmark of Alderman’s tenure at the SFO was openness, an issue that have suffered under Green’s leadership as he, unlike Alderman, does not make his speeches public on the SFO’s website.

As noted in this [21] previous post, the U.K. Ministry of Justice recently announced the opening of a consultation process concerning DPAs. As noted in the previous post, kudos to the U.K. for rejecting NPAs – a resolution vehicle that was used to resolve four corporate FCPA enforcement actions in 2011 and four corporate enforcement actions in 2010.  Moreover, even though the U.K. proposed model for DPAs is inspired by the U.S. model, it is clear that U.S. style DPAs is not the goal of the U.K.  As related to Bribery Act prosecutions, I posed the following questions in the previous post.   Why does a law with an adequate procedures defense require the third option of a deferred prosecution agreement – the first two options being prosecute vs. not prosecute?  If a corporate has adequate procedures, but an isolated act of bribery nevertheless occurs within its organization, the corporate presumably would not face prosecution under the Bribery Act.  Seems like a reasonable result.  In other words, no need for the third option in such a case.  On the other hand, if a corporate does not have adequate procedures (i.e. has no committment to anti-bribery compliance) and an act of bribery occurs within its organization, it presumably would face prosecution under the Bribery Act.  Seems like a reasonable result.  Does a third option really need to be created for corporates who do not implement adequate procedures?

Looking ahead to Q3, briefing in the 11th circuit “foreign official” challenge will pick up, the Jackson / Ruehlen motion to dismiss may be decided and the question on everyone’s mind is when will FCPA guidance be released?