Two Scoops Of Opaqueness
As noted in this previous post, in 2010 Digi International had a quick and strange disappearing act.
In a July 22, 2010 SEC filing, the company disclosed as follows.
“As previously reported, after receiving allegations regarding possible violations of our gifts, travel and entertainment policy for activities in the Asia Pacific region by a few employees, we initiated an investigation of these policy and corresponding internal control issues, and any possible related violations of applicable law, including the Foreign Corrupt Practices Act (FCPA). We voluntarily disclosed the allegations to the United States Department of Justice (DOJ) and the United States Securities and Exchange Commission (SEC). The investigation has been under the direction of the Audit Committee, comprised solely of independent directors, utilizing outside counsel, and focused on the APAC region. For completeness purposes, the investigation reviewed certain other foreign regions where no allegations have been made. We believe the investigation is substantially complete, pending the input from the DOJ and SEC. We have been providing the DOJ and SEC with updates and our proposed remediation plan. We will continue to cooperate fully with the SEC and DOJ process, which could include additional investigative procedures. This investigation found violations of company policy and internal controls that primarily involved three individuals in Hong Kong and our Chief Financial Officer. All four individuals have either been terminated or resigned from the company. The investigation also identified certain books and records and related internal controls issues under the FCPA. The ultimate impact and outcome of the DOJ and SEC process is unknown at this time. ” (emphasis added).
The prior post noted that SEC filings are carefully crafted, tightly worded documents created by in-house specialists and often vetted by outside professionals. In short, words matter in SEC filings and given the above italicized words, it would seem reasonable to conclude that Digi (with the assistance and input from outside counsel) identified conduct that implicated the FCPA. Why else would the disclosure contain the clause “under the FCPA”?
However, as noted in the previous post, approximately ten days after its SEC filing, Digi (a leading supplier of multifunction communication devices to the U.S. Federal Government) issued a press release (here) stating that: “Digi has now received confirmation through discussions with representatives of the DOJ and the SEC that they will not be initiating any enforcement proceedings against Digi.”
It was quite the disappearing act and a quick one at that. I highlighted in the previous post that FCPA enforcement (or lack of enforcement) is already largely an opaque process and Digi’s curious disappearing act served as another example for why transparency and accountability in FCPA enforcement is needed.
Digi’s 2010 disappearing act was merely the first scoop of opaqueness.
The second scoop was added last month when the SEC charged Digi’s former Chief Financial Officer Subramanian Krishnan.
The SEC’s complaint (here) alleges in summary form, among other things, that Krishnan “in his role as Chief Financial Officer […] engaged in certain actions and inactions, a result of which corporate funds were used to pay for unauthorized expenses” and that he “authorized such expenses for Digi employees, resulting in the filing of inaccurate expense reports, caused the Company to file inaccurate reports, failed to enforce Digi’s internal controls, demonstrated a lack of management integrity, failed to act to reveal inaccurate reports and wrongly certified the effectiveness of Digi’s internal controls and disclosed they were effective.” As to certain of the expenses, the complaint alleges as follows. “Krishnan approved corporate travel and entertainment expenses which appeared to have marginal, if any, business purpose.” Based on these allegations, and others in the complaint, the SEC charged Krishnan with aiding and abetting violations of the FCPA’s books and records provisions and substantive FCPA internal controls violations. As noted in this SEC release, without admitting or denying the SEC’s allegations, Krishnan consented to a final judgment permanently enjoining him from future securities law violations and to a bar from serving as an officer or director of any issuer. As noted in the release, the duration of the bar, and the amount of disgorgement and the civil penalty will be determined at a later date.
The FCPA provisions at issue in the Krishnan enforcement action of course are generic and can be implicated as to conduct that does not involve payments to individuals deemed “foreign officials” by the enforcement agencies. Yet it would seem unusual for a company to voluntarily disclose, as Digi did, violations of its gifts, travel and entertainment policy for activities in the Asia Pacific region that did not involve expenditures made to, or on behalf of, “foreign officials.” Indeed, several FCPA enforcement actions have been based in whole or in part on excessive travel and entertainment expenses made to or on behalf of “foreign officials” in the Asia Pacific region.
What type of FCPA issues did Digi disclose in 2010? Why did Digi’s FCPA scrutiny quickly and strangely disappear? What sort of travel and entertainment expenses that had marginal business purpose did Digi’s CFO approve?
Because of the lack of transparency surrounding most things FCPA related, we are left to wonder. All the public has to nibble on is two scoops of opaqueness and it leaves us hungry for more.
Friday Roundup
The sting may be over but it effects are not, Orthofix information unsealed, checking in on Wal-Mart, a pipeline report, a safe assumption, and the alternative reality. It’s all here in the Friday roundup.
The manufactured Africa Sting case may be over, but it effects are still being felt.
Allied Defense Group (“ADG”) employed Mark Frederick Morales, one of the individuals charged in the case. The company stated in its recent quarterly filing (here) as follows.
“In February and March, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. Since this time, the Company’s FCPA counsel has had several discussions with the DOJ and SEC regarding the agencies’ respective inquiries. Based upon these discussions, it appears likely that resolution of these inquiries will involve a payment by the Company to at least one of these government agencies in connection with at least one transaction involving the former employee of Mecar USA. At this point, the amount of this payment is undeterminable.”
As noted in this previous post, in January 2010, ADG agreed to be acquired by Chemring Group PLC.
Another publicly traded company that employed an Africa Sting defendant, Amaro Goncalves, is Smith & Wesson. The company disclosed in its most recent quarterly filing (here) as follows.
“On February 21, 2012, the DOJ filed a motion to dismiss with prejudice the indictments of the remaining defendants who are pending trial, including our former Vice President-Sales, International & U.S. Law Enforcement. On February 24, 2012, the district court granted the motion to dismiss. We cannot predict, however, when the investigation will be completed or its final outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.”
Even though the individual Africa Sting cases are over, the case provided a point of entry into several companies and an entire industry and its effects are still being felt as demonstrated by the above disclosures.
Orthofix
This previous post discussed the July enforcement action against Orthofix International. As noted in the post, the specifics of the DOJ’s allegations were not known as the information against Orthofix was filed under seal. The information (here) was recently unsealed. In summary fashion, the DOJ alleged as follows under the heading “corrupt conduct.” “From [2003 through March 2010], with the knowledge of Orthofix Executive A [a citizen of Peru and legal permanent resident in the U.S. who was a senior manager of Orthofix Inc. (an indirectly wholly owned subsidiary) and responsible for sales operations in Latin America], Promeca [an entity incorporated and headquartered in Mexico and an indirectly wholly owned subsidiary of Orthofix International] and its employees paid approximately $300,000 to Mexican officials, in return for agreements with IMSS and its hospitals to purchase millions of dollars in Orthofix International products.”
IMSS is a social service agency of the Mexican government that provided public services to Mexican workers and their families and the Mexican Officials identified in the information are as follows.
Mexican Official 1 – a deputy administrator of Magdelena de las Salinas (a hospital in Mexico City that IMSS owned and controlled)
Mexican Official 2 – the purchasing director of Magdelena de las Salinas
Mexican Official 3 – the purchasing director of Lomas Verdes (a hospital in the State of Mexico that IMSS owned and controlled)
Mexican Official 4 – a sub-director of IMSS
According to the information, “Executive A knew of the payments and things of value [provided to the Mexican Officials] but failed to stop the scheme or report the scheme to Orthofix Interntional or Orthofix’s Inc.’s compliance department.”
Under the heading “Internal Controls” the information alleges, among other things, as follows. “Orthofix International,which grew its direct distribution footprint in part by purchasing existing companies, often in high-risk markets, failed to engage in any serious form of corruption-related diligence before it purchased Promeca. Although Orthofix International promulgated its own anti-corruption policy, that policy was neither translated into Spanish nor implemented at Promeca. Orthofix International failed to provide any FCPA-related traning to many of its personnel, including Executive A. Orthofix also failed to train Promeca personnel for years on the FCPA, to test regularly or audit particular transactions, or to ensure that subsidiary maintained controls sufficient to detect, deter or prevent illicit payments to government officials.”
The information charges one count of violating the FCPA’s internal control provisions.
Checking In On Wal-Mart
During the media feeding frenzy after the New York Times Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV. At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.
Spitzer of course was right.
During its second quarter earnings call (see here for the transcript) Wal-Mart executives stated as follows. “Within core corporate, we incurred approximately $34 million in expenses related to third-party advisors reviewing matters involving the Foreign Corrupt Practices Act and we expect these expenses to continue through the rest of the year.” Later in the call, the following was said. “We also expect to incur approximately $35 to $40 million in expenses for the review of matters relating to the Foreign Corrupt Practices Act during each of the remaining quarters for this fiscal year.”
In other news, on the civil litigation front, as noted in this Reuters article “an Indiana union pension fund that owns shares in Wal-Mart Stores Inc has sued the company to gain access to thousands of internal documents related to allegations that a Wal-Mart subsidiary bribed Mexican government officials.” According to the report, the lawsuit, filed in Delaware’s Chancery Court, alleges the “company had made a ‘woefully deficient’ production of documents following an earlier out-of-court demand and that hat documents were produced were ‘so heavily redacted,’ or blacked out, they were nearly worthless.”
Turning to Capital Hill, several prior posts have chronicled efforts by Representative Elijah Cummings and Henry Waxman to conduct a shadow investigation of Wal-Mart in the aftermath of the New York Times article (see here for the previous post). As indicated in this recent press release and this recent letter the lawmakers are growing impatient. In pertinent part, the letter to Wal-Mart CEO Michael Duke stated as follows.
“We are writing to give you a final opportunity to respond to our requests for information about allegations that your company violated the Foreign Corrupt Practices Act. Although you have stated on multiple occasions that you intend to cooperate with our investigation, you have failed to provide the documents we requested, and you continue to deny us access to key witnesses. Your actions are preventing us from assessing the thoroughness of your internal investigation and from identifying potential remedial actions.
During the course of our investigation, we have learned that Wal-Mart’s concerns about potential violations of the Foreign Corrupt Practices Act are not limited to operations in Mexico, but are global in nature. Your outside counsel informed us that, before allegations of bribery in Mexico became public, Wal-Mart retained attorneys to conduct a broad review of the company’s anti-corruption policies. This review identified five “first tier” countries “where risk was the greatest.” Wal-Mart then conducted a worldwide assessment of the company’s anti-corruption policies, culminating in a series of recommendations and policy changes based on those findings.
In addition, we have obtained internal company documents, including internal audit reports, from other sources suggesting that Wal-Mart may have had compliance issues relating not only to bribery, but also to “questionable financial behavior” including tax evasion and money laundering in Mexico.”
Pipeline Report
Add NCR Corporation and Expro International to the list of companies under FCPA scrutiny.
NCR
Global technology company NCR Corp. recently disclosed here as follows.
This previous post regarding the recent Pfizer enforcement action raised the following question(s).
Does anyone truly believe that the only reason Chinese doctors prescribed Pfizer products was because under the “point programs” the physician would receive a tea set? Does anyone truly believe that the only reason Czech doctors prescribed Pfizer products was because the company sponsored educational weekend took place at an Austrian ski resort? Does anyone truly believe that the only reason Pakistani doctors offered Wyeth nutritional products to new mothers was because the company provided office equipment to the physicians?
The questions were asked in the context of disgorgement remedies, but can also be asked in the context of product safety. One can safely assume that if the enforcement agencies had any evidence to suggest that the products at issue jeopardized public safety, the enforcement agencies would have alleged such facts, as they occasionally do in FCPA enforcement actions (see Innospec for instance).
The absence of such allegations make this recent article by Online Pharmacy Safety foolishly speculative. The article states as follows.
“[The conduct at issue in the enforcement action] puts the safety of consumers at risk. If large companies are able to bribe their way to getting more business, and anticipate government officials to turn a blind eye, the wrong products could be getting into the hands of consumers worldwide. The Pfizer products approved by foreign governments and prescribed by doctors may not have been the best product available, which could endanger consumers. Doctors put selfishness at the expense of patients, and the company was putting profits ahead of its public safety.”
Harvey Silverglate (author of Three Felonies a Day: How the Feds Target the Innocent) hit the ball out of the park with this recent Wall Street Jouranl op-ed. Referring to the recent Gibson Guitar Lacey Act enforcement action and how the resolution documents muzzle the company (as is typical in FCPA NPAs and DPAs), Silverglate wrote as follows.
“Through these and myriad other techniques, federal investigator and prosecutors create an alternative reality that favors their own institutional interests, regardless of the truth or of justce. All citizens and companies become subject to the Justice Department’s essentially unfettered power. Remedying this problem cannot be left to the victims of this governmental extortion, because their risks are too high if they fight; nor will their lawyers likely blow the whistle, since the bar makes a tidy living by playing the game. It is up to the rest of civil society to let the Justice Department emperor know that we see he is not wearing clothes.”
*****
A good weekend to all.
Judge (Again) Significantly Rejects DOJ’s Recommendation In Sentencing Garth Peterson, Peterson Goes On Offense And Says The DOJ Is Lying About Morgan Stanley’s FCPA Compliance Procedures
While FCPA enforcement is largely devoid of judicial scrutiny, sentencing of individual FCPA defendants remains a judicial function and provides an opportunity for someone other than the DOJ to have input on some aspect of the DOJ’s positions when it comes to FCPA enforcement.
While there are a few examples of federal court judges harshly sentencing defendants consistent with DOJ sentencing recommendations (the majority of those sentences have been issued by Judge Jose Martinez in the S.D. of Florida), the clear trend is for judges to significantly reject the DOJ’s FCPA sentencing recommendations. See here, here, here and here for previous posts among others.
Given this trend, it is not surprising that last week Judge Jack Weinsten (E.D.N.Y.) significantly rejected the DOJ’s sentencing recommendation of 51-60 months in sentencing Garth Peterson to 9 months in prison. See here for the Reuters article. See here for the previous post discussing the April 2012 DOJ and SEC enforcement action against Peterson.
Of note, in its sentencing memo (here), the DOJ accused Peterson of making several misrepresentations in his sentencing submission. The DOJ stated as follows. “Peterson’s efforts to mislead the Court concerning the genesis of his crime – a crime fundamentally based upon deceit – call into serious question his assertion that he understands the gravity of the crime he committed, that he is unlikly to engage in such deception in the future, and that he accepts responsibiity for his wrongful conduct. Peterson should be sentenced within the advisory guidelines because he circumvented Morgan Stanley’s internal controls to bribe an official of the Chinese government – an action that has serious consequences for the United States and for American companies transacting business in China.”
The sentencing memos of both parties (see here for Peterson’s sentencing submission and here for his reply) also shed light on additional information relevant to Morgan Stanley’s so-called declination (see here for the prior post). In its submission, the DOJ stated that Peterson “repeatedly and consistently lied to his Moran Stanley supervisors and c0-workers” concerning the conduct at issue and that “each of Peterson’s [Morgan Stanley required FCPA certifications] was but another lie that lulled his employer in trusting Peterson.” In his sentencing submission, Peterson stated as follows concerning the Chinese Official he had a relationship with prior to joining Morgan Stanely. “The Chinese Official was a close friend of Peterson’s – in many ways a father figure to him – and Peterson helped him in order to repay the help that the Chinese Official had given him through his career.” Peterson also asserts that his attempt to influence the “father figure” Chinese Official in the investment project giving rise to the enforcement action was an attempt to recoup an investment for this mother.
*****
On the eve of his sentence, Peterson sat for an exclusive interview on CNBC. See here a video clip, here for the transcript.
In the interview, Peterson stated as follows concerning the investment at issue in the enforcement action.
“The government hasn’t released some important background about that. I made that investment before I joined Morgan Stanley. When I joined, I declared it to Morgan Stanley. Then, Morgan Stanley became familiar with that deal, and decided they wanted to buy in as well. So, I helped them to do that. Then, in– two– about a year and a half after that– essentially, just to make it very simple, Morgan Stanley forced me out of that deal. And I felt that was unfair, because it had been something I’d had before. Then, I brought them in, and then they were forcing me out. And so, about a year after that, I found a way to buy back in at the same price that I’d been forced out at. That’s still—a wrong action. When Morgan Stanley forced me out of the deal, I should’ve either quit, and thereby kept the investment, or I should’ve just accepted that they didn’t want me to be involved in the deal as long as the company was involved. But I don’t believe that that should be characterized as a, “web of deceit,” and whatever, to– you know, to take things from Morgan Stanley.”
The following exchange occurred between Scott Cohn (CNBC) and Peterson as to his decision to plead guilty.
COHN: So, why did you plead guilty to anything?
PETERSON: You know, it’s– I think, hopefully most people will never be in the position I had to be in. But when you’re an individual against the weight of the U.S. Government– and the U.S. Government, the Department of Justice, the SEC, perhaps it’s their way of doing things. They can have—a heavy stick, you know. That if you don’t cooperate with us, you’ll– you know, we’re going to do all these other things. And so, I just cooperated. You know, everybody’s different. Some people are fighters. I guess I’m not.
COHN: But, I mean, you– you’re giving away a lot. You’re– potentially giving away your freedom for a number of years?
PETERSON: In some sense, they took that away a long time ago in reality. Because once I started to cooperate– when they wanted to speak to me, I had to go speak to them. They were– literally, the SEC was harassing my family for years. But– at the end of the day, like I said, I agreed to cooperate, and so, I took that path.
In the interview Peterson criticized Morgan Stanley’s FCPA procedures and said the DOJ is lying to the public.
COHN: Do you– do you– do you feel like Morgan Stanley threw you overboard?
PETERSON: Yeah. Look, I did things wrong. I deserved to get fired. I never bribed anybody, so it’s still a mystery, a little bit why– you know, this whole case is– has been focused on that. Because as I’ve said, I know what I did. These are the things I did wrong. Morgan Stanley got off scot-free. And I think, you know, I have no– you know, desire for them to be harmed in any way, or you know. So– it’s not that. But what I feel bad about is– the government lying to the– to the public. And– saying that– they had this wonderful compliance– program, when in fact the government knows that it wasn’t getting into people’s heads. Which is what really matters.
Friday Roundup
Add a few to the list, take a few off, a word on guest posts, take a deep breath, whose fault is it, once again nobody was charged. It’s all here in the Friday roundup.
Add Another
Most companies bury FCPA disclosures deep in SEC filings. Not so with Nordion Inc. (here – a Canadian based health sciences company with shares traded in the U.S). It took the open and direct route by issuing a release (here) specifically devoted to the topic. The release states as follows.
“[The company] disclosed that it is conducting an internal inquiry and investigation of a foreign supplier and related parties focusing on compliance with the Canadian Corruption of Foreign Public Officials Act (CFPOA) and the U.S. Foreign Corrupt Practices Act (FCPA). Through the Company’s own internal review as part of its CFPOA compliance program, Nordion discovered potential compliance irregularities. As a result, the Company recently commenced an internal investigation of the possible compliance issues. These issues relate to potential improper payments and other related financial irregularities in connection with the supply of materials and services to the Company. The investigation is being conducted by outside legal counsel and external forensic and accounting firms who are experts in such compliance. These external advisors are reporting regularly to a special Committee of the Board constituted to deal with this matter. Nordion has voluntarily contacted the regulatory and enforcement authorities, including the Canadian and U.S. Department of Justice, the Royal Canadian Mounted Police (RCMP), the U.S. Securities and Exchange Commission (SEC) and the Public Prosecution Service of Canada, to provide details of the matter and advise that an internal investigation is underway. The internal investigation is in its early stages and the Company’s external advisors have met with these authorities and will continue to provide reports to them as the investigation progresses.Nordion is committed to the highest standards of integrity and diligence in its business dealings and to the ethical and legally compliant business conduct by its employees, representatives and suppliers. The Company reviews its compliance programs on a regular basis to assess and align them with emerging trends and business practices. Corrupt or fraudulent business conduct is in direct conflict with the Company’s Global Business Practice Standards and corporate policies. The Company will continue to investigate this matter and cooperate with regulatory and enforcement authorities with a view to an expedient resolution.”
By my estimation, in the past four months, approximately twenty companies have become subject to FCPA scrutiny (whether through disclosures or FCPA-related civil complaints). In addition, industry sweeps as to the Hollywood movie industry and retail industry have reportedly been launched. See here for a prior post titled “The Sun Rose, A Dog Barked, and a Company Disclosed FCPA Scrutiny.”
Academi, Inc., formerly known as Xe Services, formerly known as Blackwater was also in the news this week. As noted in this FBI release, pursuant to a deferred prosecution agreement (here) the company admitted to certain facts and agreed to a $7.5 million fine in connection with certain export controls and firearms law violations. As noted in the release, the DPA “also acknowledges and references a $42 million settlement between the company and the Department of State as part of a settlement of violations of the Arms Export Control Act and the International Trafficking in Arms Regulations.” As noted in this previous post, Blackwater has been under investigation for FCPA violations in Iraq (and Sudan as noted in the FBI release). The above DPA specifically states however that “this agreement does not apply to the Foreign Corrupt Practices Act investigation independently under investigation by the DOJ.” As noted in this previous post, Blackwater’s FCPA scrutiny in Iraq inspired Representative Peter Welch to introduce H.R. 5366, the “Overseas Contractor Reform Act,” an impotent debarment bill that passed the House in September 2010 (see here).
There are also developments to report on the other side of the Atlantic as the U.K. Serious Fraud Office announced hereas follows. “The Director of the Serious Fraud Office has decided to open a criminal investigation into allegations concerning GPT and aspects of the conduct of their business in the Kingdom of Saudi Arabia.” As noted in this Bloomberg piece, GPT is a unit of European Aeronautic Defence & Space Co. (EADS), and the investigation involved suspected payments to win a telecommunications deal with Saudi Arabia’s royal family. The Financial Times stated that the “Serious Fraud Office’s criminal inquiry is a step-change for the agency after it said in March that it was happy with an internal investigation the company was conducting.”
Although he is no longer in Congress, former Representative Todd Tiahrt is probably delighted by this news. See here for the prior post.
Take a Few Off
Huntsman Corporation recently disclosed as follows in a SEC filing (here).
“During the third quarter of 2010, we completed an internal investigation of the operations of Petro Araldite Pvt. Ltd. (“PAPL”), our majority owned joint venture in India. PAPL manufactures base liquid resins, base solid resins and formulated products in India. The investigation initially focused on allegations of illegal disposal of hazardous waste and waste water discharge and related reporting irregularities. Based upon preliminary findings, the investigation was expanded to include a review of the production and off-book sales of certain products and waste products. The investigation included the legality under Indian law and U.S. law, including the U.S. Foreign Corrupt Practices Act, of certain payments made by employees of the joint venture to government officials in India. Records at the facility covering nine months in 2009 and early 2010 show that less than $11,000 in payments were made to officials for that period; in addition, payments in unknown amounts may have been made by individuals from the facility in previous years. […] Also in May 2010, we voluntarily contacted the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) to advise them of our investigation and that we intend to cooperate fully with each of them. We met with the SEC and the DOJ in October 2010 to discuss this matter and we continue to cooperate with these agencies. Steps have been taken to halt all known illegal or improper activity, including the termination of employment of management employees as appropriate. In May 2012, the SEC and DOJ notified us that they would not recommend any enforcement action be taken against our Company in this matter.”
Since August 2010 (see here for the prior post), I have proposed that when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC, and when the DOJ and/or SEC decline enforcement, the DOJ and/or the SEC should publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.
In the meantime, we can only speculate as to why the enforcement agencies did not bring an enforcement action against Hunstman. Of note, in the DOJ’s written declination responses after the June 2011 House hearing (see here), the DOJ stated that it has declined matters when, among other circumstances, “the improper payments involved minimal funds compared to the overall business revenue.”
As noted in this previous post, in April Hercules Offshore disclosed 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.”
Earlier this week, the company updated its disclosure as follows. “On August 7, 2012, Hercules Offshore, Inc. (the “Company”) received a letter from the Securities and Exchange Commission (“SEC”) notifying the Company that the SEC staff has completed its investigation into the Company regarding possible violations of the Foreign Corrupt Practices Act (“FCPA”) and does not intend to pursue enforcement action against the Company. As previously disclosed, the Company was notified by the SEC and the Department of Justice (“DOJ”) in April 2011, that certain of the Company’s activities were under review by the SEC and DOJ with respect to possible violations of the FCPA in certain international jurisdictions where the Company conducts operations. The Company previously disclosed that it received a letter from the DOJ on April 24, 2012, 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 noted that it terminated its investigation ‘…based on a number of factors, including, but not limited to, the thorough investigation undertaken by Hercules and the steps that Hercules has taken in the past and continues to take to enhance its compliance program, including efforts to ensure compliance with the FCPA.’ As a result of the termination by the SEC and the prior termination by the DOJ, there are no open FCPA investigations against the Company.”
As evident from the disclosures, unlike Huntsman, the FCPA scrutiny of Hercules was not based on a voluntary disclosure, but inquiries from the SEC and DOJ. Whether this represents a declination or a dud is the question.
Guest Posts
Part of the mission of FCPA Professor is to facilitate a forum for discussion and analysis of FCPA and related issues among FCPA practitioners, business and compliance professionals, scholars and students, and other interested persons. Given this mission, I frequently publish guest posts (see here for approximately 60 such posts). In publishing guest posts, it should not be assumed in all cases that I agree in whole or in part with the content of such posts. Rather, providing the forum for delivery into the marketplace of ideas is what I hope to facilitate and I encourage all who want to make their voice heard on the issues to consider submitting a guest post.
A Deep Breath
The FCPA is a unique statute, with unique and difficult to manage risks.
Nevertheless , it was refreshing to see this piece by Pamela Marple (Chabourne & Park – here) in the NACD Director Advisory titled “The FCPA: A New Bear in the Woods?” Marple begins as follows. “Over the past five years, the Foreign Corrupt Practices Act has solidified itself as an industry brimming with expert forums, company departments and substantial news coverage. Is this statute really the bear in the woods some say it is?” Marple states as follows. “The existence of the FCPA industry (and professionals who are available to conduct internal investigations at a high price) does not mean that this reaction is what is always required. What is required first and foremost is reasonable judgment exercised by directors and professionals who seek both compliance and solutions—without assuming a bear is present at every turn.”
As I previously commented (here) to Corporate Board Member, corporate directors need to keep a proper perspective. There’s a whole industry out there that’s trying to sell the steroids version of FCPA compliance. But directors should not get their undies in a bundle over this. This is an issue, just like any other risk area, that directors need to have on their radar screen. Corporate directors should not panic when it comes to FCPA compliance.
Whose Fault is It?
Do FCPA violations occur because companies subject to the law go into foreign markets intent on engaging in bribery or because the companies are confronted by corrupt foreign officials seeking to line their own pockets?
Circumstances vary of course, but this recent article in the African Globe includes comments from human rights lawyer and Senior Advocate of Nigeria Femi Falana who focused on the former. The article stated as follows. “In order to cover up the involvement of western governments and corporations in the promotion of corruption, terrorism and drug abuse in Africa, the impression is often created by top public officials of some foreign governments that Africans are the most corrupt people in the world,” Falana observed noting that only last week, the US Secretary of State, Mrs. Hillary Clinton, kicked off her 11-day tour of some African states in Senegal by condemning corruption in Africa and urging African leaders to fight it in order to get good governance in the continent. He said it was also the kernel of President Barack Obama’s message to Africans when he made a brief stopover in Ghana three years ago. “While we do not condone corruption, it is high time the Obama administration was told to stop blaming the victims of grand corruption promoted and fuelled by western countries led by Switzerland, France, United Kingdom and United States,” Falana said.”
Nobody Was Charged
A recent New York Times article (here) once again raises the issue of why few corporate fraud enforcement actions result in individual charges. The article states as follows. “The Justice Department has collected $8.6 billion over the last three years, more than in any similar period in history, but relatively few prosecutions of individuals have come from the biggest settlements.”
A reason?
In the FCPA context, I submit and stated during my 2010 Senate testimony (here), involves the quality of the corporate enforcement action. Given the prevalence of NPAs and DPAs in the FCPA context and the ease in which DOJ offers these alternative resolution vehicles to companies subject to an FCPA inquiry, companies often agree to enter into such resolution vehicles regardless of the DOJ’s legal theories or the existence of valid and legitimate defenses. It is simply easier, more cost efficient, and more certain for a company to agree to a NPA or DPA than it is to be criminally indicted and mount a valid legal defense even if the DOJ theory of prosecution is questionable. (See here for my scholarship “The Facade of FCPA Enforcement). Individuals, on the other hand, face a deprivation of personal liberty, and are more likely to force the DOJ to satisfy its high burden of proof as to all FCPA elements.
A telling statistic?
As noted in this prior post, since alternative resolution vehicles were first used in the FCPA context (December 2004) there have been 61 “core” corporate DOJ FCPA enforcement actions. 47 of the 61 ”core” corporate DOJ FCPA enforcement actions (77%) have been resolved via an NPA (19 instances) or a DPA (28 instances). In these 47 “core” corporate DOJ FCPA enforcement actions, only 7 enforcement actions (15%) have resulted in any individual FCPA criminal charges against company employees. In other words, when the DOJ resolves an FCPA enforcement action via a NPA or DPA, there is only a 15% likelihood that individual criminal charges will be filed against any company employee or those affiliated with the company. [Note: the above statistics were calculated in Sept. 2011]
For previous posts on this very same issue see here.
*****
A good weekend to all.
Friday Roundup
Add two more companies to the list, a reply to a retort, Avon developments, Total S.A. perhaps nears a top-5 settlement, the reason for those empty Olympic seats, another FCPA-inspired derivative action is dismissed, Sensata Technologies and more on the meaning of “declination,” one of my favorite reads and additional material for the weekend reading stack. It’s all here in the Friday roundup.
Recent Disclosures
As noted in this Wall Street Journal Corruption Currents post “German healthcare firm Fresenius Medical Care AG has opened an internal investigation into potential violations” of the FCPA. The company’s recent SEC filing (here) states as follows.
“The Company has received communications alleging certain conduct that may violate the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-bribery laws. In response to the allegations, the Audit and Corporate Governance Committee of the Company’s Supervisory Board is conducting an internal review with the assistance of counsel retained for such purpose. The Company has voluntarily advised the U.S. Securities and Exchange Commission and the U.S. Department of Justice that allegations have been made and of the Company’s internal review. The Company is fully committed to FCPA compliance. It cannot predict the outcome of its review.”
In addition, as noted in this Wall Street Journal Corruption Currents post, “the Securities and Exchange Commission is investigating Teva Pharmaceutical Industries Ltd, the world’s largest manufacturer of generic drugs, for possible violations” of the FCPA. The Israel based company recently stated in an SEC filing (here) as follows.
“Teva received a subpoena dated July 9, 2012 from the SEC to produce documents with respect to compliance with the Foreign Corrupt Practice Act (“FCPA”) in Latin America. Teva is cooperating with the government. Teva is also conducting a voluntary investigation into certain business practices which may have FCPA implications and has engaged independent counsel to assist in its investigation. These matters are in their early stages and no conclusion can be drawn at this time as to any likely outcomes.”
U.K. DPAs
In this previous post, I discussed my letter to the U.K. Ministry of Justice urging the MoJ to just say no to deferred prosecution agreements. Over at thebriberyact.com (a site that has lead discussion of the issue) the authors disagree with me (see here). That’s all fine and dandy and healthy to the discussion, but the substance of the retort is not persuasive.
The retort is basically that the SFO “frequently has to fight its corner in court” and that “sometimes it loses” whereas in the U.S. “the accepted wisdom [is] that an FCPA investigation would result in a corporate settlement” and the “DOJ simply [does] not have to test its legal theories in court.” In short, the authors state “statistically in the US corporates and their counsel often fold in the face of a DOJ investigation” but “in the UK this is not so.”
Contrary to the suggestion in the retort, I did not ignore the Bribery Act’s Section 7 offense – rather it is all the more reason to reject DPAs.
The retort closes as follows. “Sadly, as it stands, the UK enforcement agencies do not have equality of arms when it comes to their enforcement toolkit. Put another way the DOJ can end run UK enforcement agencies because it does have the potential to enter into DPA’s. This reason alone is justification enough for putting in place a system which delivers a similar result to the US system.”
This confirms in my mind that the UK’s desire for DPAs has little to do with justice and deterring improper conduct, but more to do with enforcement statistics and posturing in an emerging “global arms race” when it comes to “prosecuting” corruption and bribery offenses.
Avon Developments
Avon was in the news quite a bit this week.
On Monday, the Wall Street Journal reported (here) that “federal prosecutors looking into possible bribery of foreign officials by Avon have asked to speak to Andrea Jung, the former chief executive and current full-time chairman.”
On Wednesday, the company filed its quarterly report and stated, among other things, as follows. “We are in discussions with the SEC and DOJ regarding mutually resolving the government investigations. There can be no assurance that a settlement will be reached or, if a settlement is reached, the timing of any such settlement or that the terms of any such settlement would not have a material adverse effect on us.” During the Q2 earnings call, company CEO Sheri McCoy stated as follows. “We are in discussion with the SEC and DOJ regarding mutually resolving the government investigations.”
On Thursday, the Wall Street Journal reported (here) that McCoy “frustrated with the pace of Avon’s internal probe, has pushed to bring in a second law firm for advice on the progress of the investigation. The company has held discussions with law firm Allen & Overy LLP for that role.” Arnold & Porter has been leading Avon’s investigation. According to the article, Avon’s “probe has turned up millions of dollars of payments in Brazil and France made to consultants hired to assist with Avon’s tax bills in those countries.”
What to make of the above information?
It is unusual for the enforcement agencies to want to speak to a former CEO and current chairman in connection with an FCPA inquiry. But then again, prosecutors have reportedly spoken to several other Avon executives in connection with the probe. Given Avon’s disclosure that it has begun settlement discussions, this would suggest that the factual portion of the enforcement agencies investigation is over.
Avon’s FCPA scrutiny has perhaps been most notable for the amount of pre-enforcement action professional fees and expenses – approximately $280 million. Thus, yesterday’s report that the company is considering bringing in a second law firm nearly four years into the investigation is interesting and unusual.
Even though Avon has disclosed it is in settlement talks, an enforcement action in 2012 is not certain. In many cases, companies have disclosed the existence of FCPA settlement discussions, but the actual enforcement action did not happen for 6-12 months (or longer).
Whenever the enforcement action occurs, and whatever the ultimate fine and penalty is, Avon’s greatest financial hit has likely already occured – its pre-enforcement action professional fees and expenses. For instance, assuming a settlement amount would match the $280 million, this would be the sixth largest FCPA settlement of all time, and none of the enforcement actions in the top 5 were outside the context of foreign “government” procurement.
Total Settlement Near?
For some time, there has been speculation that Total S.A. (you better sit down for this) would actually mount a defense and put the DOJ and SEC to its burden of proof in an enforcement action. Information in a recent company press release suggests that this is unlikely to occur. In this recent release, Total stated as follows. “Total has been cooperating with the … SEC and DOJ in connection with an investigation concerning gas contracts awarded in Iran in the 1990’s. Total, the SEC, and the DOJ have conducted discussions to resolve issues arising from the investigation. In light of recent progess in these discussions, Total has provisioned 316 million euros [$389 million] in its accounts in the second quarter of 2012.”
A $389 million settlement would be a top five FCPA settlement in terms of fine and penalty amounts. For additional coverage, see here from Reuters.
Empty Olympic Seats
A reason, perhaps, for those empty Olympic seats? According to a recent study (see here) by the Society for Corporate Compliance and Ethics “tighter than anticipated corporate entertainment and gift policies.”
Smith & Wesson Derivative Action Dismissed
Even against the backdrop of generally frivolous plaintiff derivative claims in the FCPA context, the action against Smith & Wesson (“S&W”) stood out. After S&W employee Amaro Goncalves was criminally indicted in the manufactured Africa Sting case, certain investors filed a derivative claim in U.S. District Court in Massachusetts suing members of the board of S&W and company officers derivatively on behalf of the corporation for failing to have effective FCPA controls and oversight, thereby breaching their duty of care.
In dismissing the complaint (see here for the decision) Judge Michael Ponsor characterized the complaint as follows. “[I]n essence, that the company enjoyed an increase in international sales and then had an employee indicted for FCPA violations. This indictment, later dropped, supposedly evidenced a failure to implement proper controls.”
For another recent dismissal of an FCPA inspired derivative claim against Tidewater, see this prior post. See also this recent post from Kevin LaCroix at The D&O Diary blog.
Sensata Technologies
In October 2010, Sensata Technologies disclosed in a quarterly report (here) as follows.
“An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review.”
In its most recent quarterly report (here), the company disclosed as follows.
“During 2012, the DOJ informed us that it has closed its inquiry into the matter but indicated that it could reopen its inquiry in the future in the event it were to receive additional information or evidence. We have not received an update from the SEC concerning the status of its inquiry.”
Did Sensata “win a declination” as the FCPA Blog suggested here?
Since August 2010 (see here for the prior post) I have proposed that when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC, and when the DOJ and/or SEC decline enforcement, the DOJ and/or the SEC should publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.
Perhaps then we would know if the DOJ concluded it could prove beyond a reasonable doubt all the necessary elements of an FCPA charge, yet decided not to pursue Sensata – which is my definition of declination as noted in this prior post. Anything else, is what the law commands, not a declination.
Favorite Read
One of my favorite reads is always Shearman & Sterling’s “Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act.” See here for the most recent edition.
As to “foreign official,” the report states as follows. “[T]he government does not appear to have been deterred by the [foreign official] debate. In most of the cases brought in 2012, the relevant government officials were employed by “instrumentalities” such as state health insurance plans (Orthofix), a state-owned nuclear plant (Data Systems & Solutions), government hospitals (Biomet and Smith & Nephew), a state-owned real estate development company (Peterson) a state-owned oil company (Marubeni), and state-owned airlines (NORDAM).”
As to FCPA guidance, the report states as follows. “We understand that this guidance will be issued before October, when the US is scheduled to issue a written progress report on its implementation of the OECD Working Group on Bribery’s recommendations.”
A final kudos – Shearman & Sterling keeps its FCPA enforcement statistics the best way. As it explains – “we count all actions against a corporate “family” as one action. Thus, if the DOJ charges a subsidiary and the SEC charges a parent issuer, that counts as one action.” This is consistent with my “core” approach (see here), but unlike many others in the industry.
Weekend Reading Stack
An interesting and informative article (here) in Fortune about the Alba-Alcoa tussle and the role of Victor Dahdaleh. For more on the underlying civil suit between Alba and Alcoa see this recent Wall Street Journal Corruption Currents post.
SOX’s executive certification requirements were supposed to be a panacea for corporate fraud. It has not happened. See here from Alison Frankel (Reuters) and here from Michael Rapoport (Wall Street Journal). As noted in this prior post concerning the Paul Jennings (former CFO and CEO of Innospec) enforcement action, SOX certification charges were among the charges the SEC filed against Jennings. Then SEC FCPA Unit Chief Cheryl Scarboro stated, “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.” Speaking of Jennings, as noted in this recent U.K. Serious Fraud Office, Jennings recently pleaded guilty to one charge of conspiracy to corrupt Iraqi public officials and other agents of the Government of Iraq.
*****
A good weekend to all.