Category: Carson

Carson “Foreign Official” Challenge Moves To Jury Instructions

On May 18th, U.S. District Court Judge James Selna (C.D. Cal.) denied the Carson “foreign official” challenge and concluded that “the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.” (See here for the prior post).

In connection with his pre-trial ruling, Judge Selna ordered the parties to submit their proposed “instrumentality” jury instructions and legal support by June 30th.

Last Thursday, the Carson defendants and the DOJ filed such proposed jury instructions and legal support. See here and here. This post summarizes the dueling jury instructions.

Defendants

Before proposing jury instructions, defendants stated as follows.

“Defendants respectfully disagree with the Court’s May 18 Order denying their Motion to Dismiss (“the May 18 Order”) and continue to believe, as set forth in their Motion to Dismiss (the “Motion”) and the supporting Declaration of Professor Michael J. Koehler, that the FCPA does not criminalize payments made to employees of state-owned enterprises (“SOEs”). Defendants reserve all of their rights to challenge the May 18 Order, if necessary, on appeal. Were it not for the existence of the Court’s May 18 Order, Defendants would propose a jury instruction that states that “a state-owned enterprise is not a foreign government instrumentality within the meaning of the FCPA, and officers and employees of a state-owned enterprise therefore are not ‘foreign officials’ under the FCPA.” But given the existence of the Court’s May 18 Order, and without waiver of their right to challenge all aspects of that Order on appeal, Defendants herein propose a jury instruction that accepts the Court’s premise that “state-owned companies may be considered ‘instrumentalities’ under the FCPA, but whether such companies qualify as ‘instrumentalities’ is a question of fact.”

In preparing their proposed “instrumentality” jury instruction, defendants were “guided by three overarching principles.”

“First, it will not be sufficient to merely provide the jury with a list of nonexclusive, unweighted factors – none of which is dispositive – and ask the jury to “figure it out,” as the government seems to suggest. That will provide the jury with no real standard for making an “instrumentality” determination and will be tantamount to giving the jury no instruction at all on the “instrumentality” issue.”

“Second, in determining an appropriate jury instruction, the Court should not accept any invitation from the government to borrow wholesale from an “instrumentality” analysis used under another statute – such as the “organ” prong of the Foreign Sovereign Immunities Act (“FSIA”), a provision the government highlighted at the hearing on Defendants’ Motion. […] The FSIA may provide some guidance (indeed, Defendants have had to consult FSIA case law, because the FCPA legislative history is devoid of any discussion of SOEs as “instrumentalities,” much less any discussion of which SOEs qualify and which do not qualify), but because it is a different statute than the FCPA – the FSIA is a civil statute aimed at determining, inter alia, when a foreign entity will be considered to be part of a foreign government for purposes of sovereign immunity – its applicability to interpreting the “instrumentality” provision of the FCPA, a criminal statute that by definition must be strictly construed, is necessarily limited.”

“Third, in determining the correct “instrumentality” jury instruction, the goals and structure of the FCPA must be considered. The FCPA is aimed at combating foreign bribery, but it is not a general commercial anti-bribery statute. Rather, the FCPA is aimed at preventing the special harm caused by the bribery of foreign government officials. Accordingly, Congress criminalized payments only to a “foreign official,” a term expressly and narrowly defined in pertinent part as an “officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The Court should provide the jury with an “instrumentality” instruction that accurately reflects Congress’s desire to criminalize payments made to foreign government officials, not payments made to employees of a company that is not, in both form and substance, actually part of the foreign government.”

The proposed jury instruction then states, in full, as follows.

“The FCPA does not criminalize all payments made to foreign nationals, but only corrupt payments made to a “foreign official.” Therefore, in order for a defendant to be found guilty of an FCPA violation, the government must, among other things, prove beyond a reasonable doubt that the intended recipient of the corrupt payment at issue was a “foreign official” at the time of the alleged payment.

The term “foreign official” means any officer or employee of a foreign government (or any department, agency, or instrumentality thereof), or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality.

A “state-owned” business enterprise may, under certain circumstances, qualify as an “instrumentality” of a foreign government. On the other hand, not all “state-owned” business enterprises qualify as “instrumentalities” of a foreign government. It is up to you to determine, weighing all of the evidence, whether a particular business enterprise is or is not an “instrumentality” of a foreign government, and whether the officers and employees of that enterprise therefore are – or are not –“foreign officials” under the statute.

To conclude that a business enterprise is an “instrumentality” of a foreign government, you must conclude beyond a reasonable doubt that the business enterprise is part of the foreign government itself. In order to conclude that a business enterprise is part of the foreign government itself, you must find that the government has established, beyond a reasonable doubt, each of the following four elements:

First, the foreign government itself directly owns at least a majority of the business enterprise’s shares.

Second, the foreign government itself controls the day-to-day operations of the business enterprise, including the appointment of key officers and directors (who themselves may be government officials); the hiring and firing of employees; the financing of the enterprise through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties; and the approval of contract specifications and the awarding of contracts.

Third, the business enterprise exists for the sole and exclusive purpose of performing a public function traditionally carried out by the government. A “public function” is a function that benefits only the foreign government (and its citizens), not private shareholders. A business enterprise that exists to maximize profits rather than pursue public objectives does not perform a public function and therefore is not a foreign government instrumentality.

Fourth, employees of the business enterprise are considered to be public employees or civil servants under the law of the foreign country.

If the government fails to prove each of these four elements beyond a reasonable doubt for the “state-owned” business enterprise at issue in a particular count, and therefore fails to prove that the intended recipient of the alleged corrupt payment was a “foreign official,” you must find the defendant “not guilty” on that count.

A business enterprise is not a foreign government instrumentality if it is a mere subsidiary of a state-owned company. To qualify as a foreign government instrumentality, the business enterprise must, as set forth above, be directly and majority owned by the foreign government itself. Therefore, an employee of a business enterprise that is merely a subsidiary of another entity that is majority owned by the foreign government is not an employee of a foreign government instrumentality and is not a “foreign official.”

A business enterprise that operates on a normal commercial basis in the relevant market, i.e., on a basis which is substantially equivalent to that of a private enterprise, is not a foreign government instrumentality, and its employees therefore are not “foreign officials.”

DOJ

The DOJ’s proposed jury instruction states, in full, as follows.

“The term “foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.

An “instrumentality” of a foreign government is any entity through which a foreign government achieves an end or purpose, and can include state-owned entities. In determining whether an entity is an instrumentality of a foreign government, you should consider the following:

(1) the circumstances surrounding the entity’s creation;

(2) the foreign government’s characterization of the entity and the entity’s employees, and whether the entity is widely perceived and understood to be performing official (i.e., governmental) functions;

(3) the foreign government’s control over the entity, including the foreign government’s power to appoint key directors or officers of the entity;

(4) the purpose of the entity’s activities, including whether the entity provides a service to the citizens of the jurisdiction;

(5) the entity’s obligations and privileges under the foreign country’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;

(6) the extent of the foreign government’s ownership of the entity, including the level of financial support by the foreign government (e.g., subsidies, special tax treatment, and loans)

These factors are not exclusive, and no single factor is dispositive. In addition, in order to conclude that an entity is an instrumentality of a foreign government, you need not find that all of the factors listed above weigh in favor of such a determination.”

Carson Defendants Move To Dismiss Travel Act Counts

The Foreign Corrupt Practices Act is not the only tool the DOJ has used to charge alleged bribery schemes. The FCPA, after all, requires a “foreign official.”

With increasing frequency, the DOJ – often in conjunction with FCPA charges – charges Travel Act violations when the conduct at issue is missing a “foreign official” yet concerns allegations of commercial bribery. For a useful overview of the Travel Act and its relevance to FCPA enforcement (broadly speaking), see this recent post from the FCPA Blog.

The DOJ’s use of the Travel Act is being challenged in the Carson matter pending in the Central District of California. This is the same case in which “foreign official” was and is being challenged. (See here and here for the prior posts).

Earlier this week, in a significant FCPA-related event, certain of the Carson defendants filed a motion to dismiss the Travel Act charges. As noted in the brief (here), in addition to FCPA charges, the moving defendants were charged with Travel Act violations based on alleged bribes to employees of private companies located in China and Russia.

In sum, the Carson defendants argue as follows.

“In Morrison v. Nat’l Australia Bank Ltd., 130 S. Ct. 2869, 2878 (2010), the Supreme Court explained that unless Congress has clearly indicated that a statute applies extraterritorially, it does not. The Travel Act criminalizes “bribery . . . in violation of the law of the state in which committed,” i.e., domestic bribery. Travel Act application to the foreign bribery alleged in this case violates Morrison’spresumption against the extraterritoriality of United States (“U.S.”) laws.”

“While the face of the Travel Act, considered with Morrison’s presumption against extraterritoriality, shows that the Travel Act has no foreign application, the statute’s legislative history confirms it. Consideration of the Travel Act in conjunction with the subsequently enacted FCPA also demonstrates that Congress did not intend that the Travel Act extend to foreign bribery.”

“Further, the Travel Act Counts are predicated upon California’s commercial bribery statute, Cal. Penal Code § 641.3 (“PC 641.3”), so the applicability of that statute to Defendants’ conduct is essential to the government’s case. PC 641.3 has never been applied to foreign commercial bribery and its legislative history shows its foreign application was never considered.”

“Application of the Travel Act and PC 641.3 would also be unconstitutionally vague. Defendants had no notice that either the Travel Act or PC 641.3 would reach the alleged conduct. The government’s recent application of this fifty-year old statute against foreign commercial bribery, in the face of strong skepticism that it even applies, shows the enforcement of this statute is arbitrary.”

“Additionally, the Travel Act allegations are simply defective. The Travel Act prohibits travel or the use of a facility in interstate or foreign commerce with the intent to promote unlawful activity (i.e., state-law bribery), followed by an act to promote the bribery. But the Travel Act Counts fail to allege the essential element of an act following the travel or use of a facility in interstate commerce to promote the alleged bribery. So too, Counts Twelve and Fourteen fail to adequately allege the jurisdictional element of travel or use of a facility in interstate or foreign commerce. Because the Travel Act Counts omit necessary elements, they fail.”

“Finally, the Court cannot guess whether the Grand Jury would have even indicted Defendants for conspiracy had it known that the Travel Act did not apply to Defendants’ alleged conduct. Because the defective Travel Act allegations infect the entire conspiracy count, Count One must be dismissed in its entirety.”

Friday Roundup

Another FCPA hearing on Capital Hill next week, news regarding Goldmann Sachs, questioning the use of NPAs and DPAs, an informative read regarding India, and something for your “foreign official” file.

Its all here in the Friday roundup.

House Hearing

Next Tuesday, June 14th, the Subcommittee on Crime, Terrorism and Homeland Security of the House Judiciary Committee will hold a hearing titled “Foreign Corrupt Practices Act.” According to this report by Christopher Matthews of Main Justice the hearing is expected to focus on the following issues: successor liability, a potential compliance defense, “foreign official,” and corporate mens rea issues.

The witness list for the hearing is as follows (see here).

Hon. Michael Mukasey (Former Attorney General, Partner, Debevoise & Plimpton LLP – see here); Mr. Greg Andres (Deputy Assistant Attorney General, Criminal Division, U.S. Department of Justice); Mr. George Terwilliger (Partner, White & Case LLP – see here); and Ms. Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers – see here).

Predictably, some are blasting the very existence of the hearing. For instance, Political Correction, a project of Media Matters Action Network (a self-described progressive research and information center dedicated to analyzing and correcting conservative misinformation in the U.S. media), describes the hearing here as “Rep. Lamar Smith’s Fight to Make Bribery Easier For Big Business.”

The House hearing follows a November 30th Senate hearing titled “Examining Enforcement of the Foreign Corrupt Practices Act.” See here for a prior post.

This post, prior to the 2010 hearing provided some guiding words, and if those were not enough, how about this statement from William Brock, U.S. Trade Representative, on April 18, 1983 during a hearing before the House Subcommittee on International Economic Policy and Trade of the Committee on Foreign Affairs.

“Mr. Chairman, no one minimizes the complexity of the issue before you today. Just because the Foreign Corrupt Practices Act spotlights a sensitive subject, some people wish to turn a ‘blind eye’ to its shortcomings rather than risk being accused of being ‘soft on bribery.’ That is too easy a way out. Retreating from controversy will not cure the law’s deficiencies. Such inaction will no more eliminate the need for FCPA reforms today than it can eliminate the criticism of the Act brought over the past several years. After five and on half years experience with this law, after legitimate problems have been identified and examined, we have a responsibility to respond. Is there any U.S. law that ought to be above such review and clarification – especially one as complex as the FCPA.”

Well said.

Goldman Inquiry

Yesterday, the Wall Street Journal reported – “Eyes on Goldman-Libya Dealings” – that the SEC is “examining whether Goldman Sachs Group Inc. and other financial firms might have violated bribery laws in dealings with Libya’s sovereign wealth fund.” The inquiry appears to be focused on a “$50 million fee Goldman initially agreed to pay [but one that was never paid to] the Libyan sovereign-wealth fund as part of a proposal … to help the fund recoup losses.”

A Goldman spokesman is quoted as follows. “We are confident that nothing we did or proposed was or could have been a breach of any rule or regulation. We retained outside counsel, as is our normal practice for any transaction to ensure that we were compliant with all applicable rules.”

Can the FCPA be implicated by payments never made?

Yes. The anti-bribery provisions prohibit “an offer, payment, promise to pay, or authorization of payment …”.

What about payments to foreign governments?

No. The anti-bribery provisions only apply to offers, payments, promises of payment, or authorizations of payments to “foreign officials.”

However, according to the WSJ article the inquiry appears to focus on whether the contemplated payment would have been passed on to an outside adviser firm “run at the time by the son-in-law of the head of Libya’s state-owned oil company.”

For more on the Goldman inquiry, see here from Ashby Jones (WSJ Law Blog) and here from Samuel Rubenfeld (WSJ Corruption Currents).

NPAs / DPAs

Non-prosecution and deferred prosecution agreements ought to be abolished. I’ve argued here and in other places that these agreements have traded one negative externality of white collar prosecution (the much over-hyped Arthur Anderson effect) for a host of others, including the alarming lack of any meaningful judicial scrutiny to ensure that NPAs and DPAs are truly based on facts and appropriate legal theories to support the charges “alleged.”

Mark Mendelsohn, the former head of the DOJ’s FCPA unit during its era of resurgence, stated in a September 2010 interview with Corporate Crime Reporter, that a “danger” with NPAs and DPAs “is that it is tempting” for the DOJ “to seek to resolve cases through DPAs or NPAs that don‟t actually constitute violations of the law.”

Asked directly – if the DOJ “did not have the choice of deferred or non prosecution agreements, what would happen to the number of FCPA settlements every year,” Mendelsohn stated as follows: “if the Department only had the option of bringing a criminal case or declining to bring a case, you would certainly bring fewer cases.”

Add W. Neil Eggleston, a former DOJ enforcement attorney currently a partner at Debevoise (here), to the growing list of former DOJ enforcement attorneys critical of these alternative resolution vehicles.

In this recent interview with Corporate Crime Reporter, Eggleston stated as follows. “I worry that [NPAs and DPAs] will become a substitute for a prosecutor deciding – this is not an appropriate case to bring – there is no reason to subject this corporation to corporate criminal liability. In the old days, they would have dropped the case. Now, they have the back up of seeking a deferred or non prosecution agreement, when in fact the case should not have been pursued at all. That’s what I’m worried about – an easy out.”

Well said.

India

If India is a country of concern or focus of yours, you will want to check out the most recent quarterly newsletter of the India Committee of the ABA Section of International Law. (See here).

Guest editor James Parkinson of BuckleySandler (here) provides the following articles, among others, in the newsletter: one devoted to the FCPA risks of doing business in India; another devoted to India’s demand-side statute – the Prevention of Corruption Act; another focused on reducing corruption risks in India through compliance programs; and another calling for India to join the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

“Foreign Official”

And finally, because your “foreign official” file would be incomplete without it, here is a transcript of the May 9th oral argument in the Carson “foreign official” challenge. See here and here for previous posts.

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A good weekend to all.

Judge Selna Concludes “The Question of Whether State-Owned Companies Qualify as Instrumentalities Under the FCPA is a Question of Fact”

Yesterday, U.S. District Court Judge James Selna denied the Carson “foreign official” challenge. See here for his written decision.

Judge Selna concluded that “the question of whether state-owned companies qualify as instrumentalties under the FCPA is a question of fact.”

Judge Selna stated that “several factors bear on the question of whether a business entity constitutes a government instrumentality” including the following.

• The foreign state’s characterization of the entity and its employees;

• The foreign state’s degree of control over the entity;

• The purpose of the entity’s activities;

• The entity’s obligations and privileges under the foreign state’s law,
including whether the entity exercises exclusive or controlling power to
administer its designated functions;

• The circumstances surrounding the entity’s creation; and

• The foreign state’s extent of ownership of the entity, including the level of
financial support by the state (e.g., subsidies, special tax treatment, and
loans).

[In April, Judge Howard Matz (C.D. of Cal.), in denying the Lindsey “foreign official” challenge (see here for the prior post) identified the following “non-exclusive list” of “various characteristics of government agencies and departments” that fall within the description of instrumentality:

• The entity is widely perceived and understood to be performing official (i.e., governmental) functions]

Judge Selna stated that his above-listed “factors are not exclusive, and no single factor is dispositive.” “As applicable here, their chief utility is simply to point out that several types of evidence are relevant when determining whether a state-owned company constitutes an ‘instrumentality’ under the FCPA – with state ownership being only one of several considerations. Accordingly, for these reasons and those discussed in more detail below, Defendants’ Motion is not entirely segregable from the evidence to be presented at trial, and therefore must be denied.”

Later in the opinion, Judge Selna stated as follows. “Admittedly, a mere monetary investment in a business entity by the government may not be sufficient to transform that entity into a governmental instrumentality. But when a monetary investment is combined with additional factors that objectively indicate the entity is being used as an instrument to carry out governmental objectives, that business would qualify as a governmental instrumentality.”

Judge Selna found that the “meaning of the statutory text is clear,” “that the meaning of instrumentality should be considered both within the context of the preceding terms of the FCPA [departments and agencies] and in view of the FCPA as a whole,” and that the “use of the term instrumentality in the FCPA produces no such crisp exclusion of a state-owned entity.” Judge Selna stated: “to the contrary, a state-owned entity – just like an agency or department – is a modality through which a government may conduct its business.”

Judge Selna then noted that “the fact that corporations have long been used in this country to carry out governmental objectives supports the conclusion that state-owned companies could be considered an instrumentality.” He stated that “given this country’s long history of using corporations to carry out governmental objectives, the Court rejects the idea that governmental and commercial actions are necessarily incompatible.”

Judge Selna also noted as follows. “The fact that Congress passed FSIA a year before the FCPA, and defined instrumentality to include state-owned companies, ultimately supports the Court’s conclusions that an instrumentality could include such entities under the FCPA.”

Judge Selna found “that the statutory language of the FCPA is clear, that the statutory scheme is coherent and consistent, and that resort to the legislative history of the FCPA is unnecessary.”

Under the heading “Conclusion for Statutory Construction,” Judge Selna stated as follows. “The Court concludes that some business entities may be considered an instrumentality but this is a fact-specific question that depends on the nature and characteristics of the business entity.” Elsewhere, Judge Selna similarly stated as follows. “state-owned companies may be considered instrumentalities under the FCPA, but whether such companies qualify as instrumentalities is a question of fact.”

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Earlier this week, Judge Selna issued an “Order Regarding Briefing Schedule and Hearing Date.”

Among other things, Judge Selna ordered that “the parties shall submit their proposed jury instructions and legal support for the “instrumentality” and scienter instructions on June 30, 2011. Objections to disputed instructions shall be filed no later than July 25, 2011.” “The hearing to address the “instrumentality” and scienter jury instructions, Defendants’ motion to dismiss the Travel Act charges, and Defendants’ Grand Jury motions, shall be scheduled for August 12, 2011 at 1:30 p.m.”

Oral Argument in Carson “Foreign Official” Challenge

Jaime Guerrero (Foley & Lardner – here) provides a first-hand account of yesterday’s oral arguments in the Carson “foreign official” challenge.

See here for a prior post, including links to the briefs.

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On Monday afternoon, May 9, 2011, United States District Judge James V. Selna heard oral arguments on defendants’ motion to dismiss the indictment on the “foreign official” issue in the Carson case in the Central District of California. In their moving papers, the defendants made three separate arguments in support of their motion to dismiss Counts One through Ten of the Indictment. Specifically, the defendants argued that: first, as a matter of statutory interpretation, employees of the state-owned companies identified in the indictment fall beyond the scope of the FCPA’s definition of “foreign official;” second, to the extent there is an ambiguity in the statute, the rule of lenity mandates that the motion be resolved in defendants’ favor; and third, to the extent the FCPA could be construed to proscribe payments made or promised to employees of state-owned companies, the statute is unconstitutionally vague as applied to defendants.

During the hearing, counsel for the defendants focused the majority of their arguments on the FCPA’s purported lack of definition for “instrumentality” within the term “foreign official.” Defendants noted that Congress did not define “instrumentality” within the statute and that the government’s position created a definition that was unworkable and overbroad. Moreover, the defendants argued that it was impractical to wait for the trial to decide the factors that the jury would consider to determine whether the employees of state-owned companies were “foreign officials.” The defendants also argued that the Supreme Court’s recent decision in Skilling v. United States, 561 U.S. ___, 130 S. Ct. 2896, 2933 (2010), was the proper framework for deciding the FCPA “foreign official” challenge. Thereafter, the defendants argued that the FCPA statute was “vague as applied,” as there was no way for the individual defendants to have done anything more to determine if a state-owned entity was an “instrumentality.” The defendants argued that there was no rhyme or reason to the government’s determination of whether a state-owned entity was an “instrumentality,” and, as such, the statute was vague. Finally, the defendants argued that the rule of lenity mandated that the Court dismiss the indictment, as the statute was unconstitutionally ambiguous and that, if it was a tie between the government’s position and the defendants’ position, that the tie should go to the defendants.

The government responded first by noting that the defendants’ ignored the standards the Court had to apply when deciding a motion to dismiss the indictment, as the issues presented in the motion raised factual issues that had to be resolved by a jury. Citing Hagner v. United States, 285 U.S. 427 (1932), the government argued that because there were factual issues outstanding related to whether the state-owned entities were “instrumentalities,” the Court could not grant the motion to dismiss. The government also argued that the statute was not void for vagueness, as the statute’s mens rea or scienter requirement served to defeat the defendants’ claim that they did not know what they were doing was wrong. In particular, however, the government noted that the statute did not require a specific intent, but instead the government need only prove that the defendants knew that what they were doing was wrong.

District Judge Selna permitted the parties to argue their respective positions, interjecting on few occasions. During the defendants’ arguments that the definition of “instrumentality” in the Foreign Sovereign Immunities Act (FSIA) could not be used as a reference point, or definition, for “instrumentality” in the FCPA statute, District Judge Selna asked whether the Court could infer whether Congress intended for the term “instrumentality” to have the same definition in the FCPA as the FSIA. District Judge Selna also inquired whether a finding that a state-owned entity was an “instrumentality” was self-evident, as the nature of the entity would be before the jury.

Ultimately, after hearing all arguments on defendants’ motion to dismiss, District Judge Selna took the motion under submission and reserved a final ruling on the motion for a later date.