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Friday Roundup

Roundup

Scrutiny alert, a potential increase FCPA statutory penalty amounts, Second Circuit appeal begins, SEC enforcement chief on whistleblowers, marketing the black hole, of note, and a ripple. It’s all here in the Friday roundup.

Scrutiny Update

VimpelCom was not the only company involved in the Uzbek telecommunications bribery scheme. As highlighted in this prior post, Swedish telecom company (a company with ADRs registered with the SEC) and Russia-based Mobile TeleSystems PJSC (a company with shares traded on the New York Stock Exchange) have also been scrutiny.

Recently, Telia issued this release:

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Issues To Consider From The Johnson Controls Enforcement Action

Issues

Prior posts here and here concerned the Foreign Corrupt Practices Act enforcement action earlier this week against Johnson Controls (JCI). This post continues the analysis by highlighting additional issues to consider.

Timeline

According to the SEC’s Order “JCI self-reported the potential FCPA violations to the SEC staff and DOJ in June 2013.” Thus, from start to finish JCI’s FCPA scrutiny lasted 3 years and 1 month.

If the DOJ/SEC want the public to have confidence in their FCPA enforcement programs, they must resolve instances of FCPA scrutiny much quicker.

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Friday Roundup

Roundup

Scrutiny alerts, noisy exit, double standard, quotable and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts

FIFA-Related

As predicted in this May post about the FIFA-related enforcement action, while the enforcement action was not an FCPA enforcement action it was likely to lead to scrutiny of various companies concerning books and records and internal controls issues.

Sure enough.

Various reports (see here and here for instance) suggest that the SEC is :examining the behavior of several companies with links to FIFA or other soccer bodies caught up in a major corruption scandal to see if there were possible violations of U.S. federal bribery laws, a person with knowledge of the matter said.”  According to the article:

“The civil probe, which is in its early stages and may not lead to any findings of wrongdoing or enforcement action, is being conducted by the U.S. Securities and Exchange Commission.” […] The SEC probe centers on publicly-traded companies who have been involved in soccer contracts, such as athletic shoes and sportswear company Nike Inc, said the source, who asked not to be named because of the non-public nature of the investigation. The exact scope of the probe and the names of other companies being scrutinized could not be learned. An SEC spokeswoman declined to comment.”

GSK

Reuters reports:

“Drugmaker GlaxoSmithKline, which was fined a record 3 billion yuan ($483 million) for corruption in China last year and is examining possible staff misconduct elsewhere, faces new allegations of bribery in Romania. GSK confirmed it was looking into the latest claims of improper payments set out in a whistleblower’s email sent to its top management on Monday. A copy of the email was seen by Reuters. The company is already probing alleged bribery in Poland, the United Arab Emirates, Lebanon, Jordan, Syria and Iraq. The latest allegations say GSK paid Romanian doctors hundreds, and in one cases thousands, of euros between 2009 and 2012 for prescribing its medicines, including prostate treatments Avodart and Duodart and Parkinson’s disease drug Requip. According to the email, the doctors were notionally paid for speaking engagements, but in three out of six cases, including the most highly paid one, they did not give any speech. The other three medics gave only one speech each, despite receiving multiple payments. GSK also provided doctors with many international trips and made payments to them under the guise of participation in advisory boards, the email said. […] The sender of the Romania email said its contents would be passed on to the U.S. Department of Justice and the Securities and Exchange Commission (SEC), which are investigating GSK for possible breaches of the Foreign Corrupt Practices Act.”

Noisy Exit

My article “Foreign Corrupt Practices Act Ripples” chronicles, among other things, how the FCPA is increasingly being used offensively by litigants.  One such example is a “noisy exit” a term coined by FCPA Professor in 2010 to describe an employee alleging unfair employment practices in connection with some aspect of FCPA scrutiny or enforcement.

The latest example is this civil complaint recently filed by Keisha Hall (a certified public accountant, certified fraud examiner and former director of finance for the Latin America region of Teva Pharmaceutical USA, INC.’s (“Teva”).

According to the complaint,  Teva allegedly fired Hall after she “began cooperating in a Securities and Exchange Commission/Department of Justice investigation into potential violations of the Foreign Corrupt Practices Act (“FCPA”) and the Sarbanes-Oxley Act (“SOX”), stemming from, among other things, allegations of bribery of government officials in the region.”

As highlighted in this prior post, Teva has been under FCPA scrutiny since July 2012.

Double Standard

A few weeks after an official is sworn in to a high-ranking government position, the official asserts herself into a pending government investigation against a corporation and brokers a settlement (an unusual task given the official’s position).

From that point forward, the corporation significantly increases its contributions to a charitable organization set up by the official’s family and pays the official’s spouse $1.5 million to participate in a series of question and answer sessions with the corporation’s CEO.

A prudent FCPA practitioner would immediately see numerous red flags and recommend an internal investigation.

But wait, the official is not a foreign official, it’s a U.S. official and once again it is Hillary Clinton.  (See here for the Wall Street Journal’s recent article “Clinton’s Complicated UBS Ties.”)

*****

On the other side of the Presidential ticket is Donald Trump.  Regardless of what you think of “The Donald” he is blunt.  In this recent Wall Street Journal article, Trump explains why he previously donated to Hillary Clinton’s 2008 presidential campaign and other political campaigns.

“As a businessman, [Trump] needed to curry favor with an influential senator from his home state. In turn, he said, [Clinton] had incentive to court him as a campaign donor. “As a businessman and a very substantial donor to very important people, when you give, they do whatever the hell you want them to do,” Mr. Trump said. “As a businessman, I need that.”

Quotable

In this recent Law360 article “FCPA Challenges Make for Spotty Trial Record for DOJ,” Michael Levy (Paul Hastings) states:

“We’ve seen several trials in which the judges have been skeptical, if not outwardly hostile, to some of the government’s more aggressive interpretations of the FCPA. While those trials may have fallen apart for other reasons, that skepticism still played, I believe, a substantial role.”

“Without the development of the law through judicial decisions, it’s very unclear what judges believe the FCPA means compared to what the DOJ think the FCPA means.”

(See here for Levy’s FCPA Professor guest post titled “Prosecutorial Common Law”).

In the same article, George Terwilliger (McGuireWoods and a former high-ranking DOJ official) states:

“It is fundamental to due process that a person of ordinary intelligence should be able to read a law and understand what is required or prohibited, as the case may be. Many people of great intelligence on both sides of an FCPA question debate just such issues.”

“That does not produce the fair warning that those subject to the law deserve to have.”

For the Reading Stack

An informative article here by Jon N. Eisenberg (K&L Gates) titled “Are Public Companies Required to Disclose Government Investigations.”  While not FCPA-specific, the article is FCPA relevant and begins as follows.

“For many public companies, the first issue they have to confront after they receive a government subpoena or Civil Investigative Demand (“CID”) is whether to disclose publicly that they are under investigation. Curiously, the standards for disclosure of investigations are more muddled than one would expect. As a result, disclosure practices vary—investigations are sometimes disclosed upon receipt of a subpoena or CID, sometimes when the staff advises a company that it has tentatively decided to recommend an enforcement action, sometimes not until the end of the process, and sometimes at other intermediate stages along the way. In many cases, differences in the timing of disclosure may reflect different approaches to disclosure. We discuss below the standards that govern the disclosure decision and practical considerations. We then provide five representative examples of language that companies used when they disclosed investigations at an early stage.”

Friday Roundup

In the classroom, what if, scrutiny alerts and updates, and for the reading stack.  It’s all here in the Friday roundup.

In the Classroom

I am pleased to share this release concerning a new Foreign Corrupt Practices Act class I am teaching this semester at Southern Illinois University School of Law.  As noted in the release, the course is believed to be one of the first specific FCPA law school classes offered that is exclusively devoted to the FCPA, FCPA enforcement and FCPA compliance.

I am grateful for the media coverage the class has attracted.  See here from Corporate Counsel, here from Main Justice, and here from Corporate Crime Reporter.

What If?

As highlighted in this previous post concerning JPMorgan’s scrutiny in China,  the conduct at issue in the front-page New York Times article was disclosed (sort of) in the company’s August 7th quarterly filing.  That filing identified, under the heading “Regulatory Developments” the following.

“A request from the SEC Division of Enforcement seeking information and documents relating to, among other matters, the Firm’s employment of certain former employees in Hong Kong and its business relationships with certain clients.”

In the disclosure context, it has been noted by various courts that once a company “speaks” on an issue, its statements to the market can not be so incomplete as to be misleading.  Was JPMorgan’s August 7th disclosure misleading?  If not misleading, a bit “too cute?”  If JPMorgan’s August 7th disclosure mentioned the reason for the SEC’s request for information and that the request was in connection with an FCPA inquiry, would there even have been a front-page article in the NY Times on August 18th?  And if there was no front-page NY Times article would JPMorgan’s FCPA scrutiny have dominated the news this week?

Scrutiny Alerts and Updates

Entertainment Gaming Asia

Entertainment Gaming Asia, Inc., a company with shares listed on NASDAQ, is the focus of this article in the Cambodia Daily which states:

“Venturing into Cambodia’s casino market in May 2011, Macau-backed gambling firm Entertainment Gaming Asia (EGA) promised tens of thousands of dollars to the wife of Pailin’s provincial governor in order to lease land for the construction of a new casino … […]   There is no suggestion that the land lease arrangement breaks any laws.  But EGA’s registration with the SEC means the company is subject to the U.S. Foreign Corrupt Practices Act (FCPA). […] EGA senior vice president Traci Mangini declined to comment on the land-lease arrangement.“We are not available for comment,” Ms. Mangini said in an email. Contacted this week, Mr. Chhean [who has held the powerful local position of governor in Pailin for more than a decade] insisted there was nothing improper about the land being rented from his wife. “It is correct that they hire the land [from my wife], they have hired it for two years already,” he said. He said the casino was fully approved by the government in Phnom Penh, and that he had no role in the licensing decision. Mr. Chhean said there was nothing inappropriate about the wife of a governor having business interests.”

Microsoft

This March 2013 post highlighted Microsoft’s FCPA scrutiny and how the DOJ and SEC “are examining kickback allegations made by a former Microsoft representative in China, as well as the company’s relationship with certain resellers and consultants in Romania and Italy.”  Add Pakistan and Russia to the list.  As reported in this Wall Street Journal article:

“In Russia, an anonymous tipster told Microsoft that resellers of its software allegedly funneled kickbacks to executives of a state-owned company to win a deal, the people familiar with the matter said. In Pakistan, a tipster alleged that Microsoft authorized a consulting firm to pay for a five day trip to Egypt for a government official and his wife in order to win a tender, the people familiar with the matter said. The two contacted Microsoft directly in the last eight months, the people said.”

Eli Lilly

In December 2012, Eli Lilly agreed to pay $29 million to resolve an SEC FCPA enforcement action concerning alleged conduct in China, Brazil, Poland and Russia (see here for the prior post).

Lilly is again under scrutiny.  As referenced here by Reuters:

“U.S. drugmaker Eli Lilly and Co said it was ‘deeply concerned’ about allegations published in a Chinese newspaper that it spent more than 30 million yuan ($4.90 million) to bribe doctors in China to prescribe the firm’s medicines instead of rival products. A former senior manager for the company, identified by the pseudonym Wang Wei, told the 21st Century Business Herald that bribery and illegal payments at Eli Lilly’s China operations were widespread. […] Eli Lilly said in an emailed statement to Reuters that it was looking into the matter. ‘Although we have not been able to verify these allegations, we take them seriously, and we are continuing our investigation,’ the statement said. The U.S. firm said it had been made aware of “similar allegations” of kickbacks in 2012 by a former sales manager. It said the firm had opened an investigation at that time involving staff interviews, e-mail monitoring and expense report audits.”

For the Reading Stack

Informative posts here and here on the FCPAmericas blog on how Brazil’s new bribery law compares to the FCPA.  Also on the FCPAmericas blog, informative posts here and here regarding the unknows of the law.

In reference to JPMorgan’s FCPA scrutiny over its alleged hiring of family members of alleged “foreign officials,” this article in the Economist states:

“Connections also count in the West, of course. Following initial reports of the SEC’s investigation in the New York Times, a flood of stories have noted the jobs held in politically sensitive American firms by the sprogs of American politicians. Even when offspring are not involved, the revolving door between the public and private sectors raises questions about why people are hired. JPMorgan Chase did not hire Tony Blair as a senior adviser for his knowledge of risk weights, after all. Mary Schapiro, a former head of the SEC, recently joined Promontory, a consultancy packed with ex-regulators used by banks to cope with regulation (she has said she will not lobby any government body in her new role). If it is unfair to cite these names, it is only because there are so many others. If the regulators genuinely fret about why firms make hiring decisions, they may want to extend their inquiries to Washington, DC, and New York as well.”

In the context of GlaxoSmithKline’s scrutiny in China, this Wall Street Journal article highlights “China’s fast-growing but deeply underfunded medical system” where “doctors are widely seen as underpaid, which makes them prime recipients of honorariums, which are
legal, or illegal cuts of sales from drug companies …”.

*****

A good weekend to all.

A Proper Perspective On FCPA Disclosures

Intelligize, Inc., a corporate compliance resource provider, recently released a report titled “Managing Risk Better in 2013.”  The report tracks public company disclosures filed with SEC between January and June of 2013 and compares such disclosures to those filed in the second half of 2012.

Under the heading “Foreign Corrupt Practices Act,” the report states as follows.

“A continuing concern to corporations is the extent to which they discover possible FCPA violations and the timing and extent of their disclosure of FCPA violations in their SEC filings. According to Intelligize’s analysis there have been over 2,000 references to the FCPA in companies’ SEC filings in the past six months.  This represents a 33% increased compared to FCPA references in the previous six-month period.”

An eye-popping number right?

Not really, it is important to understand what these FCPA references represent and what they do not represent.  The vast, vast majority of these disclosures do not represent disclosure of FCPA inquiries, investigations or scrutiny.  Rather, FCPA risk has come to be included in the generic risks companies disclosure to investors pursuant to Item 1A (Risk Factors) required in most SEC filings.

Consider the recent SEC filing of pharmaceutical company Actavis Inc. as a random, yet representative, example.   Under Item 1A, the company disclosed approximately 45 risk factors (such as the loss of key personnel could cause the business to suffer, global economic conditions could harm the business, and currency fluctuations could negatively impact the company).

One of the risk factors disclosed under the heading “our global operations expose us to risks and challenges associated with conducting business internationally” stated as follows.

“We operate on a global basis with offices or activities in Europe, Iceland, Africa, Asia, South America, Australasia and North America. We face several risks inherent in conducting business internationally, including compliance with international and U.S. laws and regulations that apply to our international operations. These laws and regulations include data privacy requirements, labor relations laws, tax laws, anti-competition regulations, import and trade restrictions, export requirements, U.S. laws such as the Foreign Corrupt Practices Act, and other U.S. federal laws and regulations established by the office of Foreign Asset Control, local laws such as the UK Bribery Act 2010 or other local laws which prohibit corrupt payments to governmental officials or certain payments or remunerations to customers. Given the high level of complexity of these laws, however, there is a risk that some provisions may be inadvertently breached by us, for example through fraudulent or negligent behavior of individual employees, our failure to comply with certain formal documentation requirements, or otherwise. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of compliance programs, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Our success depends, in part, on our ability to anticipate these risks and manage these challenges. These factors or any combination of these factors may adversely affect our revenue or our overall financial performance. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Our success depends, in part, on our ability to anticipate these risks and manage these difficulties.”

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