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A Case Study In Risk Aversion Or What Happens When Defendants Fight Back

[This post is part of a periodic series regarding “old” FCPA enforcement actions]

Previous posts here [1] and here [2] highlighted the 2001 DOJ/SEC FCPA enforcement action against KPMG Siddharta Siddharta & Harsono (KPMG-SSH) and Sonny Harsono and Baker Hughes regarding alleged improper payments in connection with an Indonesia tax assessment. All of the defendants resolved the enforcement actions without putting the DOJ/SEC to its burden of proof (the risk aversion portion of this post).

However, also in 2001 the SEC charged Eric Mattson (the former CFO of Baker Hughes) and James Harris (the former Controller of Baker Hughes) with Foreign Corrupt Practices Act offenses based on the same substantive allegations. Unlike the other defendants, as highlighted in this post, Mattson and Harris fought back – a process that resulted in a federal court judge dismissing the FCPA charges against them.

As summarized in this SEC release [3], the charges against Mattson and Harris were based on the same core conduct alleged in the prior KPMG / Baker Hughes enforcement action.

“The Commission’s complaint alleges that Mattson and Harris authorized the payment of a bribe of $75,000, through KPMG-Siddharta Siddharta & Harsono (“KPMG-SSH”), Baker Hughes’ agent and accountant in Indonesia, to a local government official in Indonesia. Mattson and Harris directed that this payment be made while knowing that KPMG-SSH would pass all or part of the payment along to an Indonesian tax official for the purpose of influencing him to reduce a tax assessment from $3.2 million to $270,000 for PT Eastman Christensen (“PTEC”), an Indonesian company beneficially owned by Baker Hughes. This improper payment was authorized in violation of the antibribery provisions of the Foreign Corrupt Practices Act (“FCPA”)

The complaint alleges that on March 9, 1999, Harris was told that an Indonesian tax official was demanding a $75,000 payment, in exchange for which he would reduce PTEC’s tax assessment. Harris learned that KPMG-SSH had offered to make the improper payment on PTEC’s behalf using PTEC’s funds, and then issue an inflated invoice that would conceal the payment. The complaint further alleges that Baker Hughes’ FCPA advisor advised Harris that any such payment to an Indonesian tax official would violate the FCPA. On March 10, 1999, Harris told Baker Hughes’ General Counsel and Mattson of the Indonesian tax official’s demand for an improper payment. During this meeting, the General Counsel stated that the Indonesian tax official’s demands raised FCPA concerns and under no circumstances should Harris or Mattson enter into any transaction that could potentially violate the FCPA. On the evening of March 10, 1999, disregarding the FCPA advisor’s instructions, and acting contrary to the advice of the General Counsel, defendants Mattson and Harris authorized the payment of the bribe to the Indonesian tax official.”

[4]

If your only source of FCPA information is the SEC’s FCPA website [5], you would be completely in the dark about what happened next because there is absolutely no mention of what happened next on the website.

What happened next is that Mattson and Harris fought back and forced the SEC to prove it case by filing a motion to dismiss.

As stated in this September 6, 2002 opinion [6] by U.S. District Court Judge Kenneth Hoyt (S.D. Tex.) granting in part and denying in part the motion to dismiss:

“The SEC makes three overriding contentions. First, the SEC contends that Mattson and Harris violated the anti-bribery provisions of the FCPA when they authorized KPMG to pay a $75,000 goodwill payment to an Indonesian government official for the purpose of reducing a tax assessment. In addition, the SEC alleges that Mattson and Harris violated the books and records and internal accounting controls provisions of the FCPA when they allowed PT Eastman to book the good payment as “professional services rendered.” This, the SEC claims, was an attempt to conceal an improper payment and constituted a false entry on PT Eastman’s books and records. Finally, the SEC asserts that Mattson failed to implement a system of internal accounting controls consistent with FCPA requirements.

Mattson and Harris assert that they did not violate the FCPA in any respect. Specifically, they contend that the plain language of the FCPA and its legislative history reveal that paying a foreign official to reduce a tax assessment is not a violation of the FCPA’s anti-bribery provisions. They argue that the clear language of the FCPA prohibits only payments made to a foreign official to “obtain, retain, or direct business.” A payment to a governmental official to reduce a tax assessment did not help PT Eastman or Baker Hughes obtain, retain, or direct business, and, therefore was not a violation of the FCPA.

Mattson and Harris also claim that there was no violation of the books and records and internal controls provisions of the FCPA because the good will payment was not a violation of the FCPA. Thus, authorizing PT Eastman to book the goodwill payment as a “success fee” was not a violation of the FCPA. Alternatively the defendants argue that the good payment was entered onto PT Eastman’s books in “reasonable” detail. Thus, there are insufficient facts to support a finding of a “knowing” violation of the books and records provision. Moreover, they argue, assuming a violation, the violation did not involve the “transactions … of the assets of an issuer.” Separately, Mattson claims that in the absence of factual allegations supporting its alleged “internal accounting controls” violation, the SEC’s claims must be dismissed.”

As stated by the court:

“The issue before the Court is whether the plain language of the FCPA prohibits goodwill payments for the purpose of reducing a tax assessment.”

The court determined “that PT Eastman’s payment to the Indonesian official did not violate the FCPA because it did not help PT Eastman or Baker Hughes “obtain or retain business.”

As to the books and records and internal controls charges, the court stated:

“We next explore the allegations that Mattson and Harris violated the “books and records” and “internal controls” provisions of the FCPA. The SEC contends that Mattson and Harris, acting knowingly or recklessly, aided and abetted PT Eastman’s violations of the books and records and internal controls provisions of the Exchange Act.

[…]

Harris makes three arguments in response to the SEC claims. First, because there was no illegal payment, there can be no aiding and abetting of any act. In other words, because the booking of the goodwill payment onto PT Eastman’s books as “professional services rendered” was for a legitimate act, not an attempt to conceal an illicit bribe, Harris did not aid or abet the concealment of a bribe. Second, the goodwill payment was entered onto PT Eastman’s books in “reasonable detail, accurately and fairly reflecting the transaction.” And finally, Harris maintains that the FCPA accounting provisions are unconstitutionally vague.

The SEC responds, stating that even assuming arguendo that the goodwill payment was not a violation of the anti-bribery provision of the FCPA, the SEC has sufficiently pleaded a violation of the record-keeping provision of the FCPA because the goodwill payment was falsely recorded. The SEC contends that the record-keeping provisions of the FCPA are applicable to all issuers and that falsely recording a payment is just as illegal as concealing a bribe.

Mattson argues that in order to prove a books and records violation against him, the SEC must first show that the books and records allegations reflect the “transactions and dispositions of the assets of the issuer,” and that Mattson “knowingly” violated the provisions. Lastly, Mattson claims that in absence of factual allegations supporting his alleged “internal accounting controls” violation, the SEC’s claims must be dismissed.

The SEC contends otherwise, citing Rule 12(b)(6), that it is entitled to all reasonable inferences that can be drawn from the facts alleged in the complaint. This court, however, construes the statements in the complaint as conclusory, bare-bone allegations which ordinarily should be dismissed. However, the SEC finds safe harbor in that the proper remedy is to require the SEC to amend its pleadings, if it can do so.

It must be noted, though, that the legislative history of the FCPA reveals that a goodwill payment to a foreign official to reduce a tax assessment is not in violation of any anti-bribery provision of the FCPA. However, the fact that the goodwill payment was not illegal does not resolve the issue of concealment. Thus, the questions of interest and knowledge concerning the manner of keeping the books and records and internal controls of Baker Hughes and PT Eastman remain motion.”

Shortly after the decision, the SEC did file an amended complaint, the defendants once again filed a motion to dismiss, and while the motion to dismiss was pending the court granted an order of dismissal on January 6, 2003. Pursuant to the order of dismissal, the SEC’s claims alleging violations of the FCPA’s books and records and internal controls provisions and aiding and abetting violations of those provisions were dismissed with prejudice.

In short, the separate prongs of the FCPA enforcement action against KPMG-SSH, Harsono, Baker Hughes, and Mattson and Harris all alleged the same conduct. Three of the defendants took the path of least resistance and settled. Mattson and Harris subjected the same enforcement theory to judicial scrutiny and prevailed.

For a related post, see here [7] “When a Company Pleads Guilty, But Individual Criminal Charges Fail.”

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