Checking In On The Carson Case
This post checks in on the case commonly referred to as the “Carson” case (even though as indicated in this prior post, last month Stuart and Hong Carson pleaded guilty). This post summarizes the recent superceding information against Paul Cosgrove and his guilty plea. David Edmonds remains a defendant in the case and is scheduled to go to trial in late June. This post ends by linking to briefs in connection with the DOJ’s motion to exclude Edmond’s designated experts, including myself, from testifying at trial.
Cosgrove Information and Plea
In April 2009, Paul Cosgrove was criminally charged, along with other defendants who were also former employees of Control Components Inc. (CCI), in a criminal indictment (here) for engaging in ”a conspiracy to secure contracts by paying bribes to officials of foreign state-owned companies as well as officers and employees of foreign and domestic private companies.”
As to Cosgrove, the indictment alleged as follows. “From in or around 2003 through in or around 2007, defendant Cosgrove caused [CCI’s] employees and agents to make corrupt payments totaling approximately $1.9 million to officers and employees of state- owned companies, and corrupt payments totaling approximately $300,000 to officers and employees of private companies.” “[CCI’s] state-owned customers included, but were not limited to, Jiangsu Nuclear Power Corporation (“JNPC”) (China), Guohua Electric Power (China), China Petroleum Materials and Equipment Corporation (“CPMEC”), PetroChina, Dongfang Electric Corporation (China), China National Offshore Oil Corporation (“CNOOC”), Korea Hydro and Nuclear Power (“KHNP”), Petronas (Malaysia), and National Petroleum Construction Company (“NPCC”) (United Arab Emirates). Each of these state-owned entities was a department, agency, and instrumentality of a foreign government, within the meaning of the FCPA. The officers and employees of these entities, including the Vice-Presidents, Engineering Managers, General Managers, Procurement Managers, and Purchasing Officers, were “foreign officials” within the meaning of the FCPA.”
As noted in the DOJ release (here), Cosgrove was charged with one count of conspiracy to violate the FCPA and the Travel Act, six counts of violating the FCPA and one count of violating the Travel Act.
Shortly thereafter, CCI resolved an FCPA enforcement action based on the same core set of conduct alleged in the above indictment. (See here for the prior post). I noted then, as I had since launching this website in July 2009, that the DOJ’s position that employees of state-owned companies, regardless of position, are “foreign officials” under the FCPA is an unchallenged and untested legal theory – and one I believe is ripe for challenge.
In February 2011 (as noted in this prior post), for the first time in FCPA history, a federal court judge, with the benefit of a detailed and complete overview of the FCPA’s extensive legislative history on the “foreign official” element, was asked to rule on the DOJ’s interpretation that employees of alleged state-owned or state-controlled enterprises are “foreign officials” under the FCPA. My declaration on the FCPA’s legislative history relevant to “foreign official” (here) was used in the “foreign official” motion to dismiss.
In May 2011 (as noted in this prior post), Judge James Selna denied the “foreign official” motion to dismiss and concluded that “the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.” The “foreign official” issue thus moved to the jury instructions (as noted in this prior post).
In February 2012 (as noted in this prior post), Judge Selna issued certain jury instructions. Not surprisingly, Judge Selna carried forward his previous “instrumentality” analysis into the “instrumentality” jury instruction. Yet, in a significant development in terms of the future of the case, Judge Selna issued an instruction titled “knowledge of status of foreign official.” In pertinent part, the instruction stated as follows.
[…..]
“(4) The defendant offered, paid, promised to pay, or authorized the payment of money, or offered, gave, promised to give, or authorized the giving of anything of value to a foreign official;
(5) The payment or gift at issue in element 4 was to (a) a person the defendant knew or believed was a foreign official or (b) any person and the defendant knew that all or a portion of such money or thing of value would be offered, given, or promised (directly or indirectly) to a person the defendant knew or believed to be a foreign official. Belief that an individual was a foreign official does not satisfy this element if the individual was not in fact a foreign official.”
In his order, Judge Selna stated as follows.
“The Government proposes to add the following paragraph to element 5:”
The government need not prove that the defendant knew the legal definition of “foreign official” under the FCPA or knew that the intended recipient of the payment or gift fell within the legal definition. The defendant need not know in what specific official capacity the intended recipient was acting, but the defendant must have known or believed that the intended recipient had authority to act in a certain manner as specified in element 6.”
The Court does not believe that this language is necessary, and it is potentially confusing.”
Earlier this week, the DOJ announced (here) that Cosgrove “pleaded guilty … before U.S. District Judge James V. Selna in Santa Ana, Calif., to a one-count superseding information charging him with making a corrupt payment to a foreign government official in China in violation of the FCPA.”
Unlike the original indictment, the four page superseding information as to Cosgrove (here) focuses solely on Sichuan Chemical Works Group Ltd. (here) and states as follows. “Sichuan Chemical was a department, agency, and instrumentality of a foreign government within the meaning of the FCPA […] the officers and employees of Sichuan Chemical were ‘foreign officials’ within the meaning of the FCPA.” The superseding information states that in July 2003 “Cosgrove corruptly caused an e-mail to be sent authorizing the payment of approximately $7,500 to officials of Sichuan Chemical for the purpose of securing Sichuan Chemical’s business.”
As noted in the DOJ’s release, “at sentencing, Cosgrove, 65, faces up to 15 months in prison.” Sentencing is scheduled for Aug. 27, 2012.
The Cosgrove plea agreement (here) incorporates the substance of Judge Selna’s jury instruction set forth above. In addition, the plea agreement states as follows. “Defendant Cosgrove knew Sichuan Chemical was a Chinese state-owned entity. Defendant Cosgrove understands that at any trial, the government would prove sufficient facts to demonstrate that Sichuan Chemical was a government instrumentality within the meaning of the FCPA … and its employees ‘foreign officials’ within the meaning of the FCPA.” As to the $7,500 payment Cosgrove authorized via e-mail, the plea agreement states as follows. “As a result of this payment, CCI earned profits of approximately $5,625 in connection with the sale of the valve.”
The plea agreement further states as follows. “Although defendant Cosgrove did not actually know that the $7,500 was to be offered, given, or promised to any employees at Sichuan Chemical for the purpose of securing Sichuan Chemical’s business, he was aware of a high probability of this circumstance and failed to make additional inquiries concerning the nature of the commission and the suspected recipient in order to determine whether the proposed commission payment might be made to an employee at Sichuan Chemical for the purpose of securing Sichuan Chemical’s business.” The plea agreement further states as follows. “Although defendant Cosgrove did not know about the prohibitions of the FCPA, defendant Cosgrove was aware that the law would forbid making an undisclosed payment to an employee of a customer for the purpose of securing the customer’s business.”
As set forth in the plea agreement, the advisory Sentencing Guidelines range for the conduct at issue is 10-16 months imprisonment. The plea agreement states as follows. “Defendant and the Department of Justice agree that … an appropriate disposition of this case is that the court impose a sentence of: no more than 15 months imprisonment; three years supervised release …; up to a $20,000 fine; no amount of restitution; and a $100 special assessment. Defendant reserves the right to seek variance or a downward departure in the offense level based upon defendant’s medical condition. At sentencing, defendant will present evidence of his medical condition, to include the following: Defendant has a lengthy history of coronary problems, gastric bleeding, and other serious health issues for which he has received treatment since at least 2003. On August 16, 2010, defendant underwent emergency heart quadruple bypass surgery and has since been under the treatment and care of his cardiologist to ensure defendant remains in stable condition.”
In the plea agreement, Cosgrove waived any statute of limitations defenses.
Some have called the Cosgrove plea a “big win” and a “victory” for the DOJ (see here and here). The conclusions are yours to reach.
Expert Issues
See here for the DOJ’s motion to exclude Edmond’s expert witnesses, here for Edmond’s response, and here for the DOJ’s reply.
Domestic Preference And China’s Accession To The WTO’s GPA: Implications For FCPA Enforcement
Today’s post is from Ken Chan, a Senior Analyst with Beijing Orient Business Investigation Company (here).
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“Given the major role played by the government in Chinese economy, it comes as no surprise that some multinational companies, with inadequate internal control, might fall foul of the Foreign Corrupt Practices Act (“FCPA”) when doing businesses in China. Less understood is the exposure under PRC Government Procurement Law for dealing with local government entities. China’s eventual accession to the WTO’s Agreement on Government Procurement (“GPA” – here), where the US and EU are current signatories, will also have implication for FCPA enforcement in the region.
Enforcement statistics indicate that most FCPA actions concerning conduct in China occur during the course of securing sales contracts from state-owned companies, as well as government entities like hospitals. It should be noted that in the latter case, the PRC Government Procurement Law (promulgated in 2002) is applicable. According to Article 10 of the law, government entities must use domestic goods and services, unless they are not available or cannot be acquired on reasonable commercial terms.
For example, in 2008 Siemens and AGA Medical were subject to FCPA enforcement actions for paying bribes in connection with the sale of medical devices to hospitals in China. And yet, while both companies ran afoul of the US anti-corruption law, they and their peers regularly evade enforcement under the local procurement law. It is unlikely that medical devices supplied by Siemens or AGA Medical fell into the exception categories of Article 10, since suppliers of competitive items are less prone to use bribery means to win contracts.
In fact, it is widely known that Article 10 of PRC Government Procurement Law is not strictly enforced. The reasons for this are threefold:
1. The absence of a legal or authoritative definition of the term “domestic”; 2. The absence of penalties for non-compliance; and 3. The absence of implementing regulations to support the statute.
As a result, today foreign companies effectively participate in the government procurement market in China without restrictions. US multinationals, with their well-known brands and superior products, are among the strongest competitors in the information technology, pharmaceutical and industrial equipment sectors.
However, in recent years there has been mounting pressure from local entrepreneurs in China, requesting the government to impose a genuine domestic preference practice in public procurement. It is argued that the same domestic preference practices are currently adopted by other developing countries (e.g. Buy Brazilian Act) and developed countries (e.g. Buy American Act and EU Utilities Directive). As a result, the Chinese government is enacting the Implementing Regulations of PRC Government Procurement Law, with a draft version issued on 11 January 2010.
Domestic forces are not the only ones shaping the government procurement market in China. International pressures are also at work. On 19 June 1997 China began the accession process for the WTO’s Agreement on Government Procurement, a multilateral agreement that today has over 40 signatories. Signatories are obligated to open their government procurement markets to companies from other signatories. China’s third accession offer, submitted on 30 November 2011, places the procurement activities of its central government agencies, as well as selected provincial and municipal agencies, within the GPA’s ambit. Once China becomes a party of GPA, foreign companies from signatory countries will enjoy treatment no less favorable than domestic companies when contracting with specified government agencies.
These developments in government procurement practices present important implications for FCPA enforcement in China. First, if the “buy local” movement has its way, then an increased preference for domestic sources would limit foreign firms’ access to the government procurement market. With fewer multinationals (and, by extension, companies with US anti-corruption law exposure) competing for government business, FCPA violations could fall as a result.
Since GPA accession would allow foreign bidders to take part in some PRC government contracts, it may provide more rooms for FCPA violations. Nonetheless, on the other hand, GPA would impose an obligation on China to implement fair and transparent tendering processes for government contracts. The attendant increase in public scrutiny may reduce the instances of bribe giving, bribe taking and other corruption practices.”
Friday Roundup
Coming attractions, monitor talk, LatinNode related individual sentences, just who are those “gestores,” scholarship of note, and Supreme Court quotables. It’s all here in the Friday roundup.
Coming Attractions
This prior post contained FCPA practitioner Homer Moyer’s discussion of industry sweeps. Industries that have been subjected to industry sweeps or are reportedly in the middle of industry sweeps include: oil and gas, pharmaceutical / medical devices, and financial services.
Add Hollywood film studies to the list.
Reuters reports (here) that the SEC “has sent letters of inquiry to at least five movie studios in the past two months, including News Corp’s 20th Century Fox, Disney, and DreamWorks Animation” that “ask for information about potential inappropriate payments and how the companies dealt with certain government officials in China.”
The New York Times (here) also reported on the letters of inquiry and stated that the SEC “has begun an investigation into whether some of Hollywood’s biggest movie studios have made illegal payments to officials in China to gain the right to film and show movies there.”
In other disclosure news, Turkcell Iletisim Hizmetleri A.S. (Turkcell), Turkey’s only New York Stock Exchange listed company, recently disclosed in an SEC filing (here) as follows. “Some of [the countries the company operates in] also suffer from relatively high rates of fraud and corruption. For example, allegations have been made regarding improper payments relating to the operations of KCell, a mobile operator in Kazakhstan and 51% subsidiary of Fintur Holdings B.V., in which we hold a 41.45% stake, while TeliaSonera holds the remainder. The allegations were discussed by Turkcell’s Board of Directors, which requested an independent investigation of the allegations made. TeliaSonera initiated an independent investigation as agreed by the Fintur Board. The Turkcell Board has been informed that to date there has not been substantiated any such allegations and the Fintur Board informs us that it has completed its own investigation. Since no assurance can be given that there will not be further requests for investigation, we remain vigilant on this matter.”
In other disclosure news, in October 2006, the SEC informed the Bristol Myers Squibb Company that it had begun a formal inquiry into the activities of certain of the company’s German pharmaceutical subsidiaries and its employees and/or agents. The company previously disclosed that “the SEC’s inquiry encompasses matters formerly under investigation by the German prosecutor in Munich, Germany, which have since been resolved,” that the inquiry concerns potential violations of the FCPA and that “the company is cooperating with the SEC.” Yesterday, in a 10-Q filing, the company stated as follows. “In March, 2012, the Company received a subpoena from the SEC. The subpoena, issued in connection with an investigation under the FCPA, primarily relates to sales and marketing practices in various countries. The Company is cooperating with the government in its investigation of these matters.”
According to my tally, over the past two months, approximately 15 companies have newly disclosed, or been linked to, FCPA scrutiny. See here for the prior post “The Sun Rose, a Dog Barked, and a Company Disclosed FCPA Scrutiny.” (And no, Wal-Mart is not included in this list, the company disclosed its FCPA scrutiny in December 2011).
Hercules Offshore disclosed better news in its 10-Q filing yesterday. The company stated as follows. “On April 4, 2011, the Company received a subpoena issued by the Securities and Exchange Commission (“SEC”) requesting the delivery of certain documents to the SEC in connection with its investigation into possible violations of the securities laws, including possible violations of the Foreign Corrupt Practices Act (“FCPA”) in certain international jurisdictions where the Company conducts operations. The Company was also notified by the Department of Justice (“DOJ”) on April 5, 2011, that certain of the Company’s activities were under review by the DOJ. On April 24, 2012, the Company received a letter from the DOJ notifying the Company that the DOJ has closed its inquiry into the Company regarding possible violations of the FCPA and does not intend to pursue enforcement action against the Company. The DOJ indicated that its decision to close the matter was based on, among other factors, the thorough investigation conducted by the Company’s special counsel and the Company’s compliance program. The Company, through the Audit Committee of the Board of Directors, intends to continue to cooperate with the SEC in its investigation. At this time, it is not possible to predict the outcome of the SEC’s investigation, the expenses the Company will incur associated with this matter, or the impact on the price of the Company’s common stock or other securities as a result of this investigation.”
For the second straight day, I say kudos to the DOJ. Yet, I also ask on consecutive days – would anything really change with an FCPA compliance defense? As I note in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here) the DOJ already recognizes a de facto FCPA compliance defense albeit in opaque, inconsistent and unpredictable ways. Thus, an FCPA compliance defense accomplishes, among other things, the policy goal of removing factors relevant to corporate criminal liability from the opaque, inconsistent, and unpredictable world of DOJ decision making towards a more transparent, consistent, and predictable model best accomplished through a compliance defense amendment to the FCPA.
Monitor Talk
As discussed in this prior post, in March Biomet resolved an FCPA enforcement action involving $22.8 million in combined fines and penalties ($17.3 million via a DOJ deferred prosecution agreement, and $5.5 million via a settled SEC civil complaint). Pursuant to the DPA, Biomet agreed to engage an independent compliance monitor “for a period of not less than 18 months” and to provide periodic reports to the DOJ regarding remediation and implementation of the enhanced compliance measures as described in an attachment to the DPA.
As evidence that investor concern regarding FCPA issues does not end on enforcement action day, during a recent earnings conference call, an analyst asked Biomet CEO Jeff Binder the following question.
“I guess just with regard to the DOJ settlement that was announced for the FCPA potential violations, I’m just wondering — I guess you’re going to have an 18-month monitoring period. So I assume that would only apply to your international business? And then maybe even within the international business, would that only apply to certain regions where there have been problems found? And then what sort of a pricing — sorry, not pricing, but cost impact do you expect from that monitoring? Is it something material or not?”
Binder responded as follows. “Yes. You’re correct that the monitorship will apply to our businesses outside the United States, but the monitors purview is broad outside the United States. The monitor has the ability to take a look at our businesses across the world. The monitor will do a risk assessment upfront. They’ll understand where our issues have been and they’ll take a look at our processes. They’ll develop that risk assessment. They’ll come up with a work plan that’s based on that risk assessment. And we’ll take it from there. We don’t expect that additional expenses for the monitor will be material to the business. DOJ and SEC require the candidates for the monitorship to submit budgets of the projected services for their work. And I’d just say that the amounts that were set forth in those budgets are not material, and we don’t anticipate significant internal expenses associated with the monitorship.”
LatiNode Individual Sentences
As noted in this DOJ release, in April 2009 LatiNode, a privately held Florida corporation, pleaded guilty to violating the Foreign Corrupt Practices Act in connection with improper payments in Honduras and Yemen and agreed to pay a $2 million criminal penalty. Thereafter, several of its former executives – Jorge Granados, Manuel Caceres, Manuel Salvoch, and Juan Vasquez were criminally charged and pleaded guility.
Earlier this week Caceres (former vice president of business development at LatiNode) and Vasquez (a former senior commercial executive at LatiNode) were sentenced. U.S. District Court Judge Joan Lenard (S.D. of Fl.) sentenced Caceres to 23 months followed by 1 year supervised release – the DOJ sought a 36 month sentence. U.S. District Court Judge Patrricia Seitz (S.D. of Fl.) sentenced Vasquez to 3 years probation, community service, home detention and monitoring and ordered him to pay a $7,500 criminal fine – the DOJ originally sought a 36 month sentence and recently stated that it “would not oppose a sentence for Vasquez that was less than the sentence for Caceres and Salvoch [who is yet to be sentenced].”
As noted in this prior post, in September 2011, Granados was sentenced to 46 months in prison.
“Gestores”
The New York Times article suggested that many of the Wal-Mart Mexican payments at issue were routed through Mexican gestores. Just who are those “gestores.”? I found this article from CBS of interest. The article states as follows. “A visit to any government office is likely to bring the sighting of a well-dressed man carrying reams of documents who will glide past the long lines, shake hands with the official behind the counter and get ushered into a backroom, where his affairs presumably get a fast-track service. The suspicion is these go-betweens funnel a portion of the fees they charge clients to corrupt officials to smooth the issuance of permits, approvals and other government stamps. In a country where laws on zoning rules, construction codes and building permits are vague or laxly enforced, the difference between opening a store quickly and having it held up for months may depend on using a gestor.”
Scholarship of Note
Pre-Wal-Mart, the FCPA conversation of the spring focused on charitable contributions in the context of the Wynn-Okada dispute. See here, here and here for the prior posts. Other posts have noted (see here) that, strange as it may sound, the FCPA’s anti-bribery provisions are only implicated when something of value is provided, directly or indirectly, to a foreign official to influence the official in obtaining or retaining business. The FCPA’s anti-bribery provisions are not implicated when the thing of value is provided to a foreign government itself. Other prior posts (here and here) have discussed Dodd-Frank Act Section 1504’s Resource Extraction Disclosure Provisions.
Given my prior writings on these issues, I was pleased when Emory University School of Law student Francesca Pisano sent me the student comment “Anti-Corruption Law & Corporate Philanthropy: Rethinking the Regulations” (here) selected for publication in a forthcoming issue of the Emory Law Journal.
The abstract states as follows.
“When the 2010 earthquake hit Port-au-Prince, Haiti, U.S. companies donated over $146.8 million to the relief effort. Despite this impressive display of global engagement, commentators suggested that the US anti-corruption laws had discouraged corporations from greater involvement. Even with the laws in force, however, reports of corruption in the relief effort soon surfaced, derailing Haiti’s recovery. Foreign aid that feeds corruption will never achieve sustainable growth, but development efforts will similarly fail if U.S. anti-corruption laws discourage corporate philanthropy. This comment analyzes the application of two U.S. anti-corruption laws, the Foreign Corrupt Practices Act (“FCPA”) and the Dodd-Frank Section 1504, to international corporate charity. It shows how the FCPA’s ambiguous nature has the unfortunate effect of being both over- and under-inclusive, discouraging bona fide charity while at the same time failing to capture corrupt donations. The recently-enacted Dodd-Frank Section 1504 has great potential, but the SEC’s proposed rules have created a loophole to allow corruption to continue if hidden in corporate charity. This comment proposes a modification to FCPA enforcement: creating a Safe Harbor Option. This will offer businesses the opportunity to “buy” a rebuttable presumption of legitimacy for their charitable donations by publically disclosing the payments, projects, and recipients of their philanthropy. Granting a presumption of legitimacy to disclosed donations will ameliorate many of the over-inclusive aspects of the FCPA. The increased disclosure will allow the public to monitor corporate charity and question suspicious gifts, ameliorating the under-inclusive aspects of FCPA enforcement. This comment also argues that Section 1504 should be defined expansively to prevent charity from being used to circumvent the congressional goals of increasing transparency and combating corruption. If properly defined, Section 1504 is an excellent example of regulation through disclosure and transparency, rather than prohibitions.”
Supreme Court Quotable
This recent post discussed non-FCPA caselaw that touched upon issues relevant to the recent “foreign official” challenges. Last week, the Supreme Court issued its opinion (here) in Mohamad v. Palestinian Authority concerning the scope of the Torture Victim Protection Act. The Court, in an opinion authored by Justice Sotomayor held that the term “individual” in the TVPA encompasses only natural persons, and thus the law does not impose liability against corporatons. In her opinion, Justice Sotomayor’s stated, among other things, as follows.
“Congress remains free, as always, to give the word [individual] a broader or different meaning. But before we will assume it has done so, there must be some indication Congress intended such a result.”
“We add only that Congress appeared well aware of the limited nature of the cause of action it established in the Act.”
“The text of the TVPA convinces us that Congress did not extend liability to organizations, sovereign or not. There are no doubt valid arguments for such an extension. But Congress has seen fit to proceed in more modest steps in the Act, and it is not the province of this Branch to do otherwise.”
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I went to Walmart last night. After completing my purchase and before exiting the store, I stopped, looked around, and thought, wow, what a week!
A good weekend to all.
Too Much Guanxi
“In the end, Garth Peterson, a rising star at Morgan Stanley in China, was undone by his pursuit of “guanxi.” So begins this 2009 Reuters article that details the rise and fall of Peterson, fired by Morgan Stanley in 2008, “amid suspicions” that he had violated the FCPA. According to the article, Morgan Stanley, voluntarily reported the case to U.S. authorities after a nine month internal investigation.
Yesterday the DOJ and SEC announced a joint enforcement against Peterson.
DOJ
In this release, the DOJ announced that Peterson, a former managing director for Morgan Stanley’s real estate business in China, pleaded guilty to a one count criminal information (unavailable at this point) for “conspiring to evade internal accounting controls that Morgan Stanley was required to maintain under the FCPA.”
The release states as follows.
“According to court documents, Morgan Stanley maintained a system of internal controls meant to ensure accountability for its assets and to prevent employees from offering, promising or paying anything of value to foreign government officials. Morgan Stanley’s internal policies, which were updated regularly to reflect regulatory developments and specific risks, prohibited bribery and addressed corruption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, charitable contributions and employment. Morgan Stanley frequently trained its employees on its internal policies, the FCPA and other anti-corruption laws. Between 2002 and 2008, Morgan Stanley trained various groups of Asia-based personnel on anti-corruption policies 54 times. During the same period, Morgan Stanley trained Peterson on the FCPA seven times and reminded him to comply with the FCPA at least 35 times. Morgan Stanley’s compliance personnel regularly monitored transactions, randomly audited particular employees, transactions and business units, and tested to identify illicit payments. Moreover, Morgan Stanley conducted extensive due diligence on all new business partners and imposed stringent controls on payments made to business partners.”
“According to court documents, Peterson conspired with others to circumvent Morgan Stanley’s internal controls in order to transfer a multi-million dollar ownership interest in a Shanghai building to himself and a Chinese public official with whom he had a personal friendship. The corruption scheme began when Peterson encouraged Morgan Stanley to sell an interest in a Shanghai real-estate deal to Shanghai Yongye Enterprise (Group) Co. Ltd., a state-owned and state-controlled entity through which Shanghai’s Luwan District managed its own property and facilitated outside investment in the district. Peterson falsely represented to others within Morgan Stanley that Yongye was purchasing the real-estate interest, when in fact Peterson knew the interest would be conveyed to a shell company controlled by him, a Chinese public official associated with Yongye and a Canadian attorney. After Peterson and his co-conspirators falsely represented to Morgan Stanley that Yongye owned the shell company, Morgan Stanley sold the real-estate interest in 2006 to the shell company at a discount to the interest’s actual 2006 market value. As a result, the conspirators realized an immediate paper profit of more than $2.5 million. Even after the sale, Peterson and his co-conspirators continued to claim falsely that Yongye owned the shell company, which in reality they owned. In the years since Peterson and his co-conspirators gained control of the real-estate interest, they have periodically accepted equity distributions and the real-estate interest has appreciated in value.”
Assistant Attorney General Lanny Breuer stated as follows. “Mr. Peterson admitted today that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official. As a managing director for Morgan Stanley, he had an obligation to adhere to the company’s internal controls; instead, he lied and cheated his way to personal profit. Because of his corrupt conduct, he now faces the prospect of prison time.”
Peterson is to be sentenced on July 17th.
As to Morgan Stanley, the release states 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.”
Kudos to the DOJ. Would anything really change with an FCPA compliance defense – see here for “Revisiting a Foreign Corrupt Practices Act Compliance Defense”?
SEC
In this complaint, the SEC alleged in summary as follows.
“From at least 2004 to 2007, Defendant Garth Peterson, while employed at Morgan Stanley & Co., Inc. ‘s (“Morgan Stanley”) real estate investment and fund advisory business, secretly acquired millions of dollars worth of real estate investments from Morgan Stanley’s funds for himself, the former Chairman of Yongye Enterprise (Group) Co. (“Yongye”) -a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai-and others. Peterson also arranged to have paid to himself and the former Chairman of Yongye (“the Chinese Official”) at least $1.8 million in what he misrepresented were finder’s fees Morgan Stanley’s funds owed to third parties. In exchange for offers and payments from Peterson, the Chinese Official helped Peterson and Morgan Stanley obtain business while personally benefitting from some of these same investments. This self-dealing and misappropriation by Peterson breached the fiduciary duties he and Morgan Stanley owed to their clients.”
Based on the above conduct, the SEC charged Peterson with violating the FCPA’s anti-bribery and internal controls provisions, as well as aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act.
In this release, the SEC noted that Peterson agreed to a settlement of the SEC’s charges “in which he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement, and relinquish his interest in the valuable Shanghai real estate (currently valued at approximately $3.4 million) that he secretly acquired through his misconduct.”
Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows. “Peterson crossed the line not once, but twice. He secretly bribed a government official to illegally win business for his employer and enriched himself in violation of his fiduciary duty to Morgan Stanley’s clients. This case illustrates the SEC’s commitment to holding individuals accountable for FCPA violations, particularly employees who intentionally circumvent their company’s internal controls.”
Kara Novaco Brockmeyer (Chief of the SEC Enforcement Division’s FCPA Unit) stated as follows. “As a rogue employee who took advantage of his firm and its investment advisory clients, Peterson orchestrated a scheme to illegally win business while lining his own pockets and those of an influential Chinese official.”
As to Yongye and the Chinese Official, the complaint states as follows.
“Yongye Enterprise (Group) Co. Ltd. was a large real estate development arm of the Luwan District Government in Shanghai, China. Since its inception in 1994, Yongye held leases for many prime areas in the Luwan District. Yongye’s business was to keep or take a small share in real estate joint ventures, including with Morgan Stanley and its funds, in exchange for helping its joint venture partner obtain the proper licensing from the local government. Yongye owned and developed residential and commercial real property, sold and brokered real estate to Morgan Stanley and its funds, and partnered with Morgan Stanley and its funds in various real estate investments.”
“The Chinese Official was the Chairman of Yongye at all pertinent times until his retirement in September 2006. As Chairman, he exercised control over Y ongye and had the authority to make investment decisions for it. Before Yongye, the Chinese Official worked for the Luwan District government. After his retirement in September 2006, the Chinese Official continued to work with Morgan Stanley as a private real estate developer and broker until approximately the time Peterson was terminated in 2008.”
The complaint contains an entire section titled “Morgan Stanley’s FCPA Compliance Program and Internal Controls” which states as follows.
“Morgan Stanley trained Peterson on the FCPA numerous times during his employment, as follows:
(1) Morgan Stanley trained Peterson on anti-corruption policies and the FCPA at least seven times between 2002 and 2008. In addition to other live and web-based training, Peterson participated in a teleconference training conducted by Morgan Stanley’s Global Head of Litigation and Global Head of Morgan Stanley’s Anti-Corruption Group in June 2006.
(2) Morgan Stanley distributed to Peterson written training materials specifically addressing the FCPA, which Peterson maintained in his office.
(3) A Morgan Stanley compliance officer specifically informed Peterson in 2004 that employees of Yongye, a Chinese state-owned entity, were government officials for purposes of the FCPA.
(4) Peterson received from Morgan Stanley at least thirty five FCPA-compliance reminders. These reminders included FCPA-specific distributions; circulations and reminders of Morgan Stanley’s Code of Conduct, which included policies that directly addressed the FCPA; various reminders concerning Morgan Stanley’s policies on gift-giving and entertainment; the circulation of Morgan Stanley’s Global Anti-Bribery Policy; guidance on the engagement of consultants; and policies addressing specific high-risk events, including the Beijing Olympics.
(5) Morgan Stanley required Peterson on multiple occasions to certify his compliance with the FCPA. These written certifications were maintained in Peterson’s permanent employment record.
Morgan Stanley required each of its employees, including Peterson, annually to certify adherence to Morgan Stanley’s Code of Conduct, which included a portion specifically addressing corruption risks and activities that would violate the FCPA. Morgan Stanley required its employees, including Peterson, annually to disclose their outside business interests. Morgan Stanley had policies to conduct due diligence on its foreign business partners, conducted due diligence on the Chinese Official and Yongye before initially conducting business with them, and generally imposed an approval process for payments made in the course of its real estate investments. Both were meant to ensure, among other things, that transactions were conducted in accordance with management’s authorization and to prevent improper payments, including the transfer of things of value to officials of foreign governments.”
A Focus On China SOEs
Perhaps it was the recent U.S. visit by China’s Vice President Xi Jinping, who is expected to become China’s President later this year. In any event, there has been much focus on Chinese state-owned or state-controlled enterprises (“SOEs”) of late. If you have an interest in Chinese SOEs (and every FCPA practitioner should given current enforcement theories), this post is for you.
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In, “China’s Money Trail, In the Heart of the Rust Belt, Chinese Funds Provide the Grease,” Wall Street Journal, (Feb. 11, 2012), it was noted that Nexteer Automotive, the largest remaining industrial employer in Saginaw, Michigan, is owned by Pacific Century Motors, which in turn is controlled by Aviation Industry Corp. of China and Beijing E-town International Investment Co., an investment arm of the city of Beijing. The article details how Chinese SOEs (and private enterprises) “are pouring investment money into the U.S. into industries such as auto parts, real estate, and oil and gas.” Many Midwestern states are courting Chinese investment. The article contains a graphic detailing Chinese SOE (and private enterprise) investment in the U.S. 2003 – Q3 2011. Of the 292 deals, the “ownership” of 24% was government, of the $15.9 billion value of the deals 62% was government.
“China Foothold In U.S. Energy,” Wall Street Journal (March 6, 2012), noted as follows. Since 2010, Chinese companies have invested more than $17 bilion into oil and gas deals in the U.S. and Canada according to data provider Dealgoic. Leading the push has been Fu Chengyu (first as chairman of China National Offshore Oil Corp., known as Cnooc) then as chairman of China Petrochemical Corp. (Sinopec). The North American energy push is part of a wave of investment money from Chinese state-owned and private enterprises into the U.S. and other Western nations.
The recent report “China 2030” (here by the World Bank) notes, under the heading. “Private sector development and state enterprise reforms” as follows. Going forward, a vibrant corporate sector will be critical for sustaining relatively fast growth. China’s rapid growth, particularly since 2003, benefited from SOE restructuring and expansion of the private sector. Many small and medium-sized SOEs became privately owned. In line with these developments, the new policy direction has been to diversify the ownership of state enterprises. Indeed, many large state enterprises have been “corporatized” and some of the biggest (including those directly monitored by the central government) are now not only listed on stock exchanges but have also improved their governance structure, managerial professionalism, and profitability.”
In February, the Senate U.S. – China Economic and Security Review Commission held a hearing titled “Chinese State-Owned and State-Controlled Enterprises” (see here for the prepared statements and testimony).
Representative Peter Visclosky (D-IN ) stated as follows. “I am concerned that China’s state-owned enterprises will only continue to gain influence in our country and around the world in the future, and it is my hope that through hearings and discussions such as the one that you are holding today, we can begin to develop the appropriate policies that ensure American workers and American companies can fairly compete in a world with Chinese state-owned enterprises.”
Hearing testimony and statements addressed among, other things, the following topics: how much of the Chinese economy is state owned or state controlled; how many SOEs and non-central SOEs there are; what is the difference between SOEs and other entities with state “involvement”; what kinds of government support do SOEs receive; SOE procurement and contracting practices; can SOEs be considered “commercial” and, if so, in what respects; does the CCP choose or influence the choice of directors and top management of SOEs; China’s “going abroad” policy and increasing Chinese SOE investment in the United States; are SOEs in the United States and other foreign markets primarily expected to turn a profit or to gain market share or to pursue other non-commercial goals.
As noted in submitted statements “SOEs are now gigantic on a global scale.” Three of the top 10 companies in the Fortune 500 are Chinese SOEs.
In March, the House Committee on Foreign Affairs, Subcommittee on Africa, Global Health, and Human Rights held a hearing titled “Assessing China’s Role and Influence in Africa” (see here).
In testimony (here), Principal Deputy Assistant Secretary Don Yamamoto (The Bureau of African Affairs, State Department) noted that China has emerged as the clear leader in trade and investment in Africa. Assistant Secretary Yamamoto noted however that”China’s practices have in some cases undermined efforts to promote progressive business practices, democracy, and good governance in Africa.” Among others, he stated as follows. “Although China enacted legislation criminalizing bribery of foreign public officials in 2011, some Chinese companies continue to undermine accountability and good governance by engaging in corrupt practices to win contracts and bids in Africa. Corrupt activity by Chinese companies also disadvantages U.S. companies who compete on the merits and do not engage in such illegal behavior (which is prohibited under domestic bribery laws in Africa as well as under the U.S. Foreign Corrupt Practices Act). The United States encourages China to rigorously enforce its anti-bribery laws, accede to the OECD Anti-Bribery Convention, and subscribe to international development practices.”
At the hearing, Carolyn Bartholomew (Commissioner, U.S.-China Economic and Security Review Commission) noted (here) as follows. “The deal-making [by Chinese companies in Africa] is often done between corrupt government officials. The public has no access to information about those deals. The Chinese government’s support for its state-owned and state-connected enterprises, its deep pockets, and its willingness to bring to the table a wide range of incentives, has created barriers for U.S. business participation in countries across the continent. Corruption is a serious problem. We should be proud of the standard set by the Foreign Corrupt Practices Act (FCPA). Yet, when Chinese partners are willing and able to offer new palaces, military equipment, sports arenas, and a host of other “gifts,” American companies cannot compete.”