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Listening in, for the reading stack, and time served.  It’s all here in the Friday Roundup.

Listening In

This previous post about the $75,000 FCPA enforcement action against Hyperdynamics highlighted that the company spent approximately $12.7 million in pre-enforcement action professional fees and expenses (a shocking 170:1 ratio).

In this recent investor conference call, company executives stated:

“The FCPA investigations restricted our available opportunities to raise capital and significantly increased our legal bills.

[…]

Speaking of legal fees I do want to address the fees we incurred during the FCPA investigation.  As you know, we spent $12 MM from inception to closure of that investigation.  We were unhappily aware that FCPA investigations can take years to conclude but that we only had until September 2016 because of the date for the conclusion of the concession.  We therefore determined that our only option was to do everything in our power to facilitate a resolution of the investigation, and ultimately were able to close the investigations in 20 months. This came at a very heavy legal cost to say the least, but again it was the best option we saw to move forward on the path to drilling the well.”

Dear Hyperdynamics executives and shareholders, you ought to be asking some serious questions about the extent of your pre-enforcement action professional fees and expenses.

To learn more how settlement amounts in an FCPA enforcement action are often only a relatively minor component of the overall financial consequences of FCPA scrutiny and enforcement, see here for “Foreign Corrupt Practices Act Ripples.”

Reading Stack

In 2015, the UC-Davis Law Review and Fordham Law Review both held events focused on bribery and corruption topics. The articles from those events were recently published and are available below.

UC-Davis Law Review

Fordham Law Review

Time Served

In 2013 and 2014 the DOJ brought FCPA and related charges against various individuals associated with broker dealer Direct Access Partners in connection with alleged improper payments to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes, an alleged Venezuelan state-owned banking entity that acted as the financial agent of the state to finance economic development projects).

As recently noted here by Reuters:

“Gonzalez “avoided prison time beyond the 16-1/2 months she already served after admitting that she accepted millions of dollars in bribes from a Wall Street brokerage to which she steered business. Maria de los Angeles Gonzalez de Hernandez, who was a senior official at Caracas-based Banco de Desarrollo Económico y Social de Venezuela, also known as Bandes, was further ordered by U.S. District Judge Denise Cote to forfeit the roughly $5 million she garnered from the scheme. Cote said she was “affected by the degree of remorse” Gonzalez showed in a statement she read to the court through an interpreter. “We’re enormously grateful for the court’s compassion and understanding,” said Jane Moscowitz, Gonzalez’s attorney, after the sentencing.”

Previously in connection with the same core action:

  • Jose Hurtado was sentenced to three years in prison, followed by three years of supervised release, and consented to a $11.9 million forfeiture.
  • Ernesto Lujan was sentenced to two years in prison, followed by three years of supervised release, and consented to a $18.5 million forfeiture.
  • Tomas Clarke was  sentenced to two years in prison, followed by three years of supervised release, and consented to a $5.8 million forfeiture.
  • Benito Chinea was sentenced to four years in prison, followed by three years of supervised release, and consented to a $3.6 million forfeiture; and
  • Joseph DeMeneses was sentenced to four years in prison, followed by three years of supervised release, and consented to a $2.7 million forfeiture.

*****

A good weekend to all.

 

Friday Roundup

Roundup2

Standard Bank roundup, recent FCPA sentences, scrutiny alert, and for the reading stack.  It’s all here in the Friday roundup.

Standard Bank Roundup

A roundup within the Friday roundup.

The development of the month so far was the U.K. (and related) enforcement action against Standard Bank – a first in two regards.

(i) the first use of Section 7 of the Bribery Act (the so-called failure to prevent bribery offense) in a foreign bribery action; and

(ii) the first use of a deferred prosecution agreement in the U.K..

  • This post highlighted “what” was resolved – an alleged violation of Sec. 7 of the Bribery Act for failure to prevent bribery.
  • This post highlighted “how” the enforcement action was resolved – the U.K.’s first deferred prosecution agreement.
  • This post highlighted the creativity of the SEC in also bringing an enforcement action against Standard Bank.
  • This post highlighted the thoughts of others about the enforcement action.

Recent FCPA Sentences

In 2013 and 2014 the DOJ brought FCPA and related charges against various individuals associated with broker dealer Direct Access Partners in connection with alleged improper payments to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes, an alleged Venezuelan state-owned banking entity that acted as the financial agent of the state to finance economic development projects).

Recently, Tomas Clarke and Ernesto Lujan were sentenced after pleading guilty to FCPA and related offenses.

Lujan was sentenced to two years in prison, followed by three years of supervised release, and consented to a $18.5 million forfeiture “representing the proceeds and property involved in the commission of the offenses alleged.”

Clarke was also sentenced to two years in prison, followed by three years of supervised release, and consented to a $5.8 million forfeiture “representing the proceeds and property involved in the commission of the offenses alleged.”

Previously, Benito Chinea and Joseph DeMeneses were sentenced to four years in prison and consented to $3.6 million and $2.7 million forfeiture.

Scrutiny Alert

Analogic

The company which has been under FCPA scrutiny since 2011 recently disclosed:

“As initially disclosed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2011, we identified certain transactions involving our Danish subsidiary BK Medical ApS, or BK Medical, and certain of its foreign distributors, with respect to which we have raised questions concerning compliance with law, including Danish law and the U.S. Foreign Corrupt Practices Act, and our business policies. These have included transactions in which the distributors paid BK Medical amounts in excess of amounts owed and BK Medical transferred the excess amounts, at the direction of the distributors, to third parties identified by the distributors. We have terminated the employment of certain BK Medical employees and also terminated our relationships with the BK Medical distributors that were involved in the transactions. We have concluded that the transactions identified to date have been properly accounted for in our reported financial statements in all material respects. However, we have been unable to ascertain with certainty the ultimate beneficiaries or the purpose of these transfers. We have voluntarily disclosed this matter to the Danish Government, the U.S. Department of Justice, or DOJ, and the SEC, and are cooperating with inquiries by the Danish Government, the DOJ and the SEC. We believe that the SEC, DOJ, and Danish Government have substantially completed their investigation into the transactions at issue. We are continuing our discussions with the SEC and have commenced discussions with the DOJ and Danish Government concerning a possible resolution of these matters. During the three months ended July 31, 2015, we accrued a $1.6 million charge in connection with a settlement proposal that we made to the SEC, which proposal was rejected by the SEC. In the first quarter of fiscal 2016, the SEC and DOJ made separate settlement proposals that would include payments in the aggregate amount of approximately $15 million. We are uncertain whether the Danish Government will seek to impose sanctions or penalties against us. We further believe that, under Danish law, amounts paid to the SEC and/or the DOJ would be taken into account in determining penalties that may be sought by the Danish Government. There can be no assurance that we will enter into any settlement with the SEC, the DOJ or the Danish Government, and the cost of any settlements or other resolutions of these matters could materially exceed our accruals. During the three months ended October 31, 2015 and 2014, we incurred inquiry-related costs of approximately $0.03 million and $0.8 million, respectively, in connection with this matter.”

Reading Stack

This Law360 article by Gerry Zack (Managing Director in BDO’s global forensics practice) titled “Implicit Bias – the Hidden Investigation Killer” caught my eye.

“Everyone carries a variety of biases around with them on a daily basis. Yet, many people are confident they can set their biases aside when it comes time to perform a workplace investigation, even referring to the final product as an “unbiased investigation.” But science has repeatedly proven that we aren’t nearly as good at setting our biases aside as we’d like to think  …”

The article touches upon affinity bias, confirmation bias, and priming.

Having conducted numerous internal investigations around the world (in the FCPA context and otherwise), I think there is merit to the issues discussed in the article – issues that contribute to the divide between the DOJ and SEC “processing” corporate FCPA internal investigations and the general struggles of the enforcement agencies proving FCPA offenses in the context of an adversarial proceeding.

*****

From outgoing SEC Commissioner Luis Aguilar – “Commissioner Aguilar’s (Hopefully) Helpful Tips for New SEC Commissioners.”

*****

A good weekend to all.

Friday Roundup

Roundup2

Is this appropriate, sentenced, scrutiny alerts and updates, quotable, a future foreign official teaser?, Brazil update, and for the reading stack.

It’s all here in the Friday roundup.

Is This Appropriate?

If this truly is an event, “Drinks With an FBI Agent – Inside Stories From the Foreign Corrupt Practices Act,” is it appropriate?

Sentenced

Chinea and DeMeneses Sentences

The DOJ announced

“Benito Chinea and Joseph DeMeneses, the former chief executive officer and former managing director of a broker-dealer Direct Access Partner “were sentenced to prison … for their roles in a scheme to pay bribes to a senior official in Venezuela’s state economic development bank, Banco de Desarrollo Económico y Social de Venezuela (Bandes), in return for trading business that generated more than $60 million in commissions.”

Chinea and DeMeneses were each sentenced to four years in prison.  They were also ordered to pay $3,636,432 and $2,670,612 in forfeiture, respectively, which amounts represent their earnings from the bribery scheme.  On Dec. 17, 2014, both defendants pleaded guilty to one count of conspiracy to violate the Foreign Corrupt Practices Act and the Travel Act.”

In the release, Assistant Attorney General Leslie Caldwell stated:

“These Wall Street executives orchestrated a massive bribery scheme with a corrupt official in Venezuela to illegally secure tens of millions of dollars in business for their firm. The convictions and prison sentences of the CEO and Managing Director of a sophisticated Wall Street broker-dealer demonstrate that the Department of Justice will hold individuals accountable for violations of the FCPA and will pursue executives no matter where they are on the corporate ladder.”

U.S. Attorney Preet Bharara of the Southern District of New York stated:

“Benito Chinea and Joseph DeMeneses paid bribes to an officer of a state-run development bank in exchange for lucrative business she steered to their firm. Chinea and DeMeneses profited for a time from the corrupt arrangement, but that profit has turned into prison and now they must forfeit their millions of dollars in ill-gotten gains as well as their liberty.”

Elgawhary Sentence

This previous post highlighted the DOJ enforcement action against Asem Elgawhary, a former principal vice president of Bechtel Corporation and general manager of a joint venture operated by Bechtel and an Egyptian utility company, for allegedly accepting $5.2 million in kickbacks to manipulate the competitive bidding process for state-run power contracts in Egypt.

The DOJ recently announced that Elgawhary was sentenced to 42 months in federal prison.

When the Alstom enforcement action was announced in December 2014 (see here and here for prior posts), Elgawhary was described as an Egyptian “foreign official.”

So what was Elgawhary?

A former principal vice president of Bechtel Corporation and general manager of a joint venture operated by Bechtel and an Egyptian utility company or a Egyptian “foreign official?”

Can the DOJ have it both ways?

Scrutiny Alerts and Updates

Anheuser-Busch InBev

Anheuser-Busch InBev recently disclosed in its annual report:

“We have been informed by the U.S. Securities and Exchange Commission and the U.S. Department of Justice that they are conducting investigations into our affiliates in India, including a non-consolidated Indian joint venture that we previously owned, ABInBev India Private Limited, and whether certain relationships of agents and employees were compliant with the FCPA. We are investigating the conduct in question and are cooperating with the U.S. Securities and Exchange Commission and the U.S. Department of Justice.”

Bilfinger

As highlighted in this previous post, in December 2013 German-based Bilfinger paid approximately $32 million to resolve an FCPA enforcement action concerning alleged conduct in Nigeria.  The enforcement action was resolved via a three-year deferred prosecution agreement.

As noted in the previous post, Bilfinger’s CEO described the conduct at issue as “events from the distant past.”

From the not-so distant past, Bilfinger recently announced:

“Bilfinger received internal information last year indicating that there may have been violations of the Group’s compliance regulations in connection with orders for the supply of monitor walls for security control centres in several large municipalities in Brazil. The company immediately launched a comprehensive investigation. The allegation relates to suspected bribery payments from employees of a Bilfinger company in Brazil to public officials and employees of state companies.”

See here for a follow-up announcement from the company.

As a foreign company, Bilfinger is only subject to the FCPA’s anti-bribery violations to the extent the payment scheme involves a U.S. nexus (as was alleged in the prior Bilfinger FCPA enforcement action).

IBM

Canadian media reports:

“Seven people, including Revenue Quebec employees and officials with computer companies IBM and EBR, were [recently] arrested … in connection with an alleged corruption scheme aimed at obtaining a government IT contract worth $24 million.Two Revenue Quebec employees, Hamid Iatmanene and Jamal El Khaiat, stand accused of providing privileged information about an upcoming government contract to a consortium made up of IBM and Quebec company Informatique EBR Inc.”

As highlighted here, in 2000 IBM resolved an FCPA enforcement action.

As highlighted here, in 2011 IBM resolved another FCPA enforcement action.  This enforcement action was filed in federal court (back in the day when the SEC actually filed FCPA enforcement actions in federal court vs. its preferred in-house method now) and Judge Richard Leon was concerned about the settlement process.  As highlighted here, Judge Leon approved the settlement, but his July 2013 final order states, among other things:

“[For a two year period IBM is required to submit annual reports] to the Commission and this Court describing its efforts to comply with the Foreign Corrupt Practices Act (“FCPA”), and to report to the Commission and this Court immediately upon learning it is reasonably likely that IBM has violated the FCPA in connection with either improper payments to foreign officials to obtain or retain business or any fraudulent books and records entries …””

According to media reports, Judge Leon stated: “if there’s another violation over the next two years, it won’t be a happy day.”

Quotable

In this Law360 article, Richard Grime (former Assistant Director of Enforcement at the SEC and current partner at Gibson Dunn) states regarding recent alleged FCPA violations.

“It’s not that you couldn’t intellectually [conceive of] the violation. It’s that the government is sort of probing every area where there is an interaction with government officials and then working backwards from there to see if there is a violation, as opposed to starting out with the statute … and what it prohibits.”

Given that most SEC FCPA enforcement actions are the result of voluntary disclosures, it is a curious statement.  Perhaps its companies, at the urging of FCPA Inc., that are probing every area where there is an interaction with government officials and then working backwards?

*****

As reported here:

“Greek authorities [recently] indicted 64 people to stand trial over years-old allegations of bribery involving Siemens AG, the German engineering giant … A probe of corporate dealings from 1992 to 2006 allegedly found that Greece had lost about 70 million euros in the sale of equipment from Siemens to Greek telephone operator Hellenic Telecommunications also known as OTE, which was still owned by the state at the beginning of that period … A panel of judges decided that those indicted, including both Greek and German nationals, should stand trial for bribery or money laundering. The list of suspects includes former Siemens and OTE officials.”

As noted here, Joe Kaeser (President and CEO of Siemens) reportedly stated:

“I really believe the country (Greece) can move to the future, rather than trying to find the solutions in the past.” He added that his company had a “dark history,” mentioning compliance issues. But he said it was not a “black and white story” when asked whether the indictments had been politically motivated by the current friction between the German and Greek governments. “Looking at the past doesn’t help the future because the past is the past.”

If the U.S. brings FCPA enforcement actions based on conduct that in some instances is 10 – 15 years old, it is not surprising that Greece is doing the same.  Yet is this right?

As the U.S. Supreme Court recently stated in Gabelli:

“Statute of limitations are intended to ‘promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.  They provide ‘security and stability to human affairs.  [They] are ‘vital to the welfare of society [and] ‘even wrongdoers are entitled to assume that their sins may be forgotten.’ […] It ‘would be utterly repugnant to the genius of our laws if actions for penalties could ‘be brought at any distance of time.’”

****

Since day one, I called Morgan-Stanley’s so-called declination politically motivated.  (See here and here).

I am glad to see that FCPA commentator Michael Volkov recently joined the club.  Writing on the Garth Peterson / Morgan Stanley so-called declination, Volkov states:  “my intelligence on the case indicated that … [the] DOJ apparently wanted to demonstrate for political reasons that it could recognize a company’s compliance program to decline a case against a company.

A Future Foreign Official Teaser?

As recently reported by the Wall Street,

“China’s leadership is preparing to radically consolidate the country’s bloated state-owned sector, telling thousands of enterprises they need to rely less on state life support and get ready to list on public markets. […] Communist Party leaders plan to release broad guidelines in the next months for restructuring the country’s more than 100,000 state-owned enterprises, according to government officials and advisers with knowledge of the deliberations. […]  Strategically important industries such as energy, resources and telecommunications are marked for consolidation, the officials and advisers say. The merged entities would then be reorganized as asset-investment firms, with a mandate to make sure they run more like commercial operations than arms of the government. Upper management will be under orders to maximize returns and prepare many of the companies for eventual listing on stock markets, these people say.”

In U.S. v. Esquenazi, the 11th Circuit concluded that  an “instrumentality” under the FCPA is an “entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” The Court recognized that what “constitutes control and what constitutes a function the government treats as its own are fact-bound questions” and, without seeking to list all “factors that might prove relevant,” the court did list “some factors that may be relevant” in deciding issues of control and function.

As to control, the 11th Circuit listed the following factors:

“[whether] the foreign government’s formal designation of that entity; whether the government has a majority interest in the entity; the government’s ability to hire and fire the entity’s principals; the extent to which the entity’s profits, if any, go directly into the governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.”

As to function, the 11th Circuit listed the following factors:

“whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.”

Have fun applying this test should China’s proposed changes go forward.

Brazil Update

My own cents regarding Brazil’s recent implementation of regulations regarding certain features of its Clean Companies Act (a law which provides for only civil and administrative liability of corporate entities for alleged acts of bribery) is that the regulations are a yawner for any company that is already acting consistent with FCPA best practices.

Yet, if you feel the urge to read up on Brazil’s recent regulations, comprehensive coverage can be found here from Debevoise & Plimpton and here from FCPAmericas.

For the Reading Stack

A thoughtful article here from Alexandra Wrage (President of Trace) regarding the “cult of the imperfect.”  It states:

“Sir Robert Alexander Watson-Watt is credited with saving thousands of lives in Britain during the worst days of World War II after developing Chain Home, a low-frequency radar system able to detect aircraft from about 90 miles away. He openly encouraged what he called the “cult of the imperfect” among his team. He knew that Britain didn’t need the best possible radar system in five years; the country needed a viable radar system urgently. Immediately. Watson-Watt, who was knighted shortly after the Battle of Britain, is said to have instructed his team to strive for the third-best option, because “the second-best comes too late . . . the best never comes.

[…]

Perfect due diligence risk assessments never come. And even second-best may come too late. Just get started. You’ll see more protections and benefits from good (for now) than perfect (some day, maybe . . .).”

Sound advice that I agree with and completely consistent with Congressional intent in enacting the FCPA’s internal controls provisions and even prior enforcement agency guidance.

Problem is, the DOJ and SEC wear rose-colored glasses, including as to conduct years ago, and if a company is acting consistent with FCPA best practices 99% of the time, that means 1% of the time they are not.

*****

A good weekend to all. On Wisconsin!

FCPA Related Auditor – Client Disputes

Knowledge of the Foreign Corrupt Practices Act is a fundamental skill set for a variety of lawyers as well as accountants.

But what about auditors?  How does the FCPA impact the day-to-day job functions of auditors including relationships with clients?

This post highlights two recent examples of FCPA related auditor – client disputes.

Kallo Inc.

The FCPA, with increasing frequency, is popping up in all sorts of corporate disclosures.  Yet, Kallo Inc.’s recent FCPA related disclosure is downright strange.  Last week the healthcare delivery services company with corporate headquarters in Canada and shares traded on U.S. exchanges disclosed in an SEC filing as follows.

“On June 3, 2014, we terminated Schwartz Levitsky Feldman LLP […] as our independent registered accounting firm.  The decision to dismiss Schwartz Levitsky Feldman LLP as our independent registered public accounting firm was approved by our board of directors on June 3, 2014.  Except as noted in the paragraph immediately below, the reports of Schwartz Levitsky Feldman LLP’s financial statements for the years ended December 31, 2012 and 2011 and for the period January 1, 2013 through March 31, 2014 did not contain an adverse opinion or disclaimer of opinion, and such reports were not qualified or modified as to uncertainty, audit scope, or accounting principle.

The reports of Schwartz Levitsky Feldman LLP on our financial statements as of and for the years ended December 31, 2012 and 2011 and for the period January 1, 2013 through March 31, 2014 contained an explanatory paragraph which noted that there was substantial doubt as to our ability to continue as a going concern as we had suffered negative working capital, had experienced negative cash flows from continuing operating activities and also due to uncertainty with respect to our ability to meet short-term cash requirements.

During the years ended December 31, 2012 and 2011 and for the period January 1, 2013 through March 31, 2014 and through June 3, 2014,  we have not had any disagreements with Schwartz Levitsky Feldman LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to Schwartz Levitsky Feldman LLP’s satisfaction, would have caused it to make reference to the subject matter of the disagreements in its reports on our consolidated financial statements for such years or in connection with its reports in any subsequent interim period through the date of dismissal with the exception of the following:

Schwartz Levitsky Feldman LLP failed to timely audit our financial statements for the period ended December 31, 2013.  The auditor requested an opinion to the affect that there were no violations of the Foreign Corrupt Practices Act.  We complied and had our securities attorney issue an opinion that there were no violations of the Foreign Corrupt Practices Act.  Then, after receiving the requested opinion, the auditor decided that it would require a second opinion from an “independent” attorney.  Again, we complied having retained a law firm in New York City, which specialized in the Foreign Corrupt Practices Act.   Again, the opinion reflected there was no violation of the Foreign Corrupt Practices Act.  After that, the auditor wanted the opinion from the New York City firm to contain additional language, which the independent lawyer felt that Schwartz Levitsky Feldman LLP was trying to influence the attorney’s independent opinion.  By this time, we were frantic.  The auditor could not give us a definitive date or specific conditions which would result in the issuance of its audit opinion of the December 31, 2013 financial statements.

Under the circumstances we had no choice but to obtain the services of a new auditor.  After retaining MaloneBailey LLP, MaloneBailey LLP was able to render an unqualified audit opinion.  We have authorized Schwartz Levitsky Feldman LLP to respond fully to the inquiries of MaloneBailey LLP concerning the disagreement.  Schwartz Levitsky Feldman LLP alleged that it did not receive an unqualified opinion by independent legal counsel to confirm that that there were no violations of the Foreign Corrupt Practices Act.  However, Schwartz Levitsky Feldman LLP fail[ed] to disclose that in fact it received two opinions from two law firms that there were no violations.  Further, Schwartz Levitsky Feldman LLP did not conduct any independent investigation or retain their own counsel with respect to the matter.

Thereafter, Malone Bailey issued an unqualified audit opinion after having access to the same information that Schwartz Levitsky Feldman had access to and audited our financial statements for the year ended December 31, 2013 and reviewed our Form 10-Q for the period ended March 31, 2014.”

Most recently in this strange auditor – client dispute, Kallo included in an SEC filing earlier this week this response from Schwartz Levitsky Feldman LLP which states:

“We are the former independent auditors for Kallo Inc. (the “Company”). We have read the Company’s disclosure … dated August 8, 2014. Insofar as it pertains to our firm, we have to advise as follows:

During the conduct of our audit of the Company’s financial statements for the year ended December 31, 2013, we expressed concerns to the Company related to certain acts and transactions that may have violated the U.S. Foreign Corrupt Practices Act (“FCPA”).

As a necessary component of alleviating our concerns and completing the Company’s audit and issuing an opinion on the Company’s financial statements for the year ended December 31, 2013 and for the subsequent period through March 31, 2014, we requested that the Company provide us with an unqualified opinion by independent legal counsel, which confirmed that the acts and transactions in question did not violate the FCPA.

In response to our request, the Company provided a two page legal opinion that concluded that the acts and transactions in question did not violate the FCPA. This initial response was insufficient to alleviate our concerns, in part because the issuing attorney was not sufficiently independent.

Thereafter, the Company provided us with a letter from a New York-based law firm. Although this letter was issued by an apparently independent attorney, the letter did not contain an unqualified legal opinion that the acts and transactions in question did not violate the FCPA. Upon receipt of this letter, we once again requested an unqualified opinion by independent legal counsel that confirmed that the acts and transactions in question did not violate the FCPA.

After following up numerous times as to the status of this opinion, the Company indicated that the New York-based firm was conducting an investigation of the facts and circumstances that would allow it to issue the requested opinion. To date of our termination, the Company had not provided us with this unqualified opinion by an independent legal counsel stating that the acts and transactions in question did not violate the FCPA, despite their numerous assurances that they would do so.

We had not received such an opinion and as a result, we were unable to alleviate our concerns of a potential violation of the FCPA and the potential liability in respect thereof.

In view of our inability to satisfy ourselves, as to this issue we were not, on the date of our termination, in a position to release our audit report on the Company’s financial statements for the year ended December 31, 2013.”

To say the least, it will be interesting to follow Kallo’s alleged or perceived FCPA issues.

DAP Partners

As highlighted in this previous post, in May 2013 various executives of broker-dealer Direct Access Partners (“DAP”) were criminally and civilly charged in connection with an alleged bribery scheme involving an official of an alleged Venezuelan state-owned banking entity that acted as the financial agent of the state to finance economic development projects.  Thereafter, as highlighted here and here, additional individuals associated with DAP were also charged, certain defendants pleaded guilty, and the firm went defunct.

In connection with its demise, DAP filed a civil lawsuit in New Jersey state court alleging that its auditor (Rothstein Kass & Co – an entity recently acquired by KPMG) was negligent due to its failure to spot the alleged conduct at issue.  In summarizing DAP’s complaint, this recent Law360 article states:

“DAP accused Rothstein Kass of deviating from general accounting standards and principles during its dealings with the company, leading to multiple missed chances to uncover the scheme. Among the specific allegations DAP asserts is that Rothstein failed to dedicate adequate resources to its audits, delegated critical responsibilities to inexperienced staff members and failed to conduct mandatory analytical procedures in order to meet deadlines, thus exposing the brokerage to the fraud.”
As highlighted in the same Law360 article, Rothstein Kass recently filed a motion to dismiss and the article states as follows.
“To state claims … DAP is required to do more than simply allege that RK audited DAP and DAP suffered damages as a result of a bribery and kickback scheme perpetrated by its own senior executives,” Rothstein Kass’s brief said. “DAP, however, has not done so. Instead, DAP offers only incomplete, conclusory and factually unsupported allegations that fail to state any actionable claims against RK, for several reasons.” Defending its work, Rothstein Kass — which acted as DAP’s auditor for 2009, 2010 and 2011 — said evidence now suggests that it was provided with false and fraudulent documents to hide the alleged scheme. However, the claims themselves have other flaws, the Roseland, New Jersey-based firm contends. Because DAP’s senior executives, managers and principal employees carried out the scheme, the fraud can be attributed to DAP and its claims fall victim to the doctrine of in pari delicto, according to Rothstein Kass. That doctrine bars courts from resolving disputes between two wrongdoers and should prevent DAP from recovering for its own officers’ misconduct, the firm said …”.
*****

As highlighted by the two examples above, the FCPA intersects a variety of professional disciplines and auditors, as well as other obvious professionals, need a pair of FCPA goggles in going about their daily tasks.

Moreover, in terms of FCPA ripples (see here for my recent article of the same name), FCPA related auditor-client disputes are yet another example of the many ripples that result from FCPA scrutiny or enforcement.

Further To The Clustering Phenomenon

Earlier this week, the DOJ announced that two additional individual defendants have been added to the Foreign Corrupt Practices Act (and related) enforcement action against individuals associated with broker dealer Direct Access Partners.  (See here for the original May 2013 enforcement action against Jose Hurtado and Tomas Clarke and here for an additional individual, Ernesto Lujan, being added to the enforcement action in June 2013).

Like in the previous enforcement actions, the additional defendants (Benito Chinea and Joseph DeMeneses, the Chief Executive Officer and a managing partner, respectively of Direct Access Partners) were criminally charged in connection with alleged improper payments to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes, an alleged Venezuelan state-owned banking entity that acted as the financial agent of the state to finance economic development projects).

As noted in the DOJ’s release, Chinea and DeMeneses were each charged with one count of conspiracy to violate the FCPA and the Travel Act, five counts of violating the FCPA, and five counts of violating of the Travel Act. Chinea and DeMeneses were also charged with one count of conspiracy to commit money laundering and three counts of money laundering. DeMeneses was further charged with one count of conspiracy to obstruct justice.  (See here for the SEC’s announcement of a related enforcement action against Chinea and DeMeneses.  Like the SEC’s prior enforcement actions against the other individuals, Chinea and DeMeneses are charged with various securities law violations, but not FCPA offenses as the individuals – while associated with a broker dealer –  are not associated with an issuer).

As noted in the DOJ’s release, in August 2013 Lujan, Hurtado and Clarke each pleaded guilty to conspiring to violate the FCPA, to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses.

The DOJ’s enforcement action against Chinea and DeMeneses is further to the curious clustering phenomenon clearly observable in FCPA enforcement.

As highlighted in this previous post (with statistics calculated through the end of 2013), 53% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just four cases and 75% of the individuals charged by the DOJ since 2008 have been in just nine cases.

Of further note (and again with statistics calculated through the end of 2013), of the 89 individuals charged by the DOJ with FCPA criminal offenses since 2008, 61 of the individuals (69%) were employees or otherwise affiliated with private business entities (for instance – Haiti Teleco related enforcement actions, Control Components Inc. Latin Node, Nexus Technologies, BizJet, not to mention failed prosecutions against various Africa Sting defendants and individuals associated with Lindsey Manufacturing).

This is a striking statistic given that 48 of the 60 corporate DOJ FCPA enforcement actions since 2008 (80%) (again using statistics calculated through the end of 2013) were against publicly traded corporations.  In short, a private entity DOJ FCPA enforcement is approximately three times more likely to have a related DOJ FCPA criminal prosecution of an individual than a public entity DOJ FCPA enforcement action.

Thus far in 2014, the trends have been further magnified.  In addition to this week’s action:

  • 5 individuals associated with private company Group DF were charged with FCPA offenses (see here); and
  • 3 individuals associated with private company PetroTiger Ltd. were charged with FCPA offenses (see here)

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