Friday Roundup
Motion to dismiss filed in the former Magyar Telekom execs case, a noticeable lack of FCPA charges, checking in on recent disclosures, quotable from the current SEC FCPA Unit Chief, quotable regarding FCPA Inc., what’s up with that investigation, I hear you travel alot, there’s an app for that, counter-points, and for the weekend reading stack. It’s all here in the Friday roundup.
Motion to Dismiss Filed in SEC Enforcement Action
This previous post highlighted how former Magyar Telekom executives Elek Straub, Andras Balogh and Tamas Morvai planned to challenge the SEC’s charges against them. Earlier this week, the defendants filed this memorandum in support of their motion to dismiss.
In summary fashion, the memorandum states as follows.
“There are several bases for dismissing the complaint.
First, this Court lacks personal jurisdiction over the defendants. The complaint alleges conduct by foreign national defendants that occurred wholly outside, and with no nexus to, the United States. Nowhere does the complaint allege that defendants purposefully directed their conduct at the United States. Following constitutional due process principles, the defendants lack the requisite minimum contacts with the forum, and it would be inconsistent with traditional notions of fair play and substantial justice to require them to defend this action in the United States. Indeed, the SEC has acknowledged that its jurisdictional position lacks precedent “on all fours factually” and “may be breaking new ground[.]”
“Second, the SEC’s claims are time-barred […] There is no doubt that the complaint was filed outside the five-year period. Specifically, the complaint was filed on December 29, 2011, more than five years after all three defendants had left Magyar Telekom, and more than five years after the alleged conduct occurred. Consequently, the five-year period has expired.”
“Third, with regard to the remaining claims, the complaint fails to adequately state the claims alleged. More specifically, the complaint: (i) fails to adequately plead that the defendants corruptly made use of interstate commerce, as is required to state a claim for bribery and the claims stemming from the alleged bribery under the FCPA (books and records and internal controls violations, falsifying books and records, and lying to auditors); (ii) fails to adequately plead that the intended payment recipients were “foreign official[s]” under the FCPA; (iii) fails to allege sufficient facts supporting the aiding and abetting claims; and (iv) fails to meet the heightened pleading requirements under Rule 9, including allegations of individualized culpable conduct by each defendant. The complaint also merely parrots the statutory language and fails to allege that the defendants profited personally from any of the alleged conduct. For all these reasons, the complaint should be dismissed with prejudice.”
As to “foreign official” the motion states that the complaint’s reference to “officials” “government officials” and other vague allegations represent “mere legal conclusions that the recipients were “foreign officials” under the FCPA. The motion states as follows. “A legal conclusion couched as a ‘factual allegation’ is insufficient to establish the essential element that the intended recipient be a foreign official. Repeated references to “government officials” without underlying facts presents nothing ‘more than labels and conclusions’ that constitute ‘a formulaic recitation of the elements of a cause of action.””
Indeed, in my 2010 article “The Facade of FCPA Enforcement” (here) I noted the frequency in which enforcement agency FCPA pleadings “contain little more than uninformative, bare-bones statement of facts replete with legal conclusions.” I said that the “most common and troubling use of bare-bones, uninformative, legal conclusory statements of facts or allegations is when the enforcement agencies describe the ‘foreign officials’ involved in the alleged conduct giving rising to the FCPA violation.” In the article, I noted that because there is generally no threat that these bare-boned, uninformative facts or legal conclusions will ever be subject to meaningful judicial scrutiny, that the enforcement agencies get away with such practices.
At least until recently.
Noticeable Lack of FCPA Charges
Numerous FCPA enforcement actions have been based on allegations of payments to foreign customs personnel in connection with customs, license, permit type issues.
Thus, the lack of FCPA charges were noticeable in the DOJ’s recent criminal indictment of APEGO Inc., and various of is employees and agents. As noted in this recent DOJ Release (N.D. of Georgia), charges were filed alleging conspiracy and twelve counts of importing notebooks and filler paper from China using false documents.
The indictment (here) includes the following allegations.
“It was further part of the conspiracy that [certain individuals] paid bribes to Taiwanese customs officials on behalf of defendants APEGO and Gung to allow U.S.-bound lined paper products made by the Watanabe Group in China but lacking required country of origin labels, or mislabeled ‘Made in Taiwan,’ to enter Taiwan from China and clear Taiwanese customs.”
Elsewhere, the indictment alleges: (i) that in December 2006 various bribes were paid to Taiwanese customs officials which “allowed defendant APEGO to transship these products from Taiwan to the United States more quickly and less expensively by limiting the need to ‘rework’ the products and cartons (i.e. relable ‘Made in Taiwan’) in Taiwan”; (ii) that in March 2007 when customs officials at a certain Taiwan port no longer accepted bribes, the company arranged for its shipments to be processed through another port in a different part of the country where bribes were paid for the same purpose
Recent Disclosures
Owens-Illinois
Owens-Illinois, Inc. (an Ohio based company that describes itself as the world’s largest glass container manufacturer and preferred partner for many of the world’s leading food and beverage brands) recently disclosed as follows.
“The Company is conducting an internal investigation into conduct in certain of its overseas operations that may have violated the antibribery provisions of the United States Foreign Corrupt Practices Act (FCPA), the FCPA’s books and records and internal controls provisions, the Company’s own internal policies, and various local laws. In October 2012, the Company voluntarily disclosed these matters to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). The Company intends to cooperate with any investigation by the DOJ and the SEC. The Company is presently unable to predict the duration, scope or result of its internal investigation, of any investigations by the DOJ or the SEC or whether either agency will commence any legal action. The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, fines, penalties, and modifications to business practices. The Company also could be subject to investigation and sanctions outside the United States. While the Company is currently unable to quantify the impact of any potential sanctions or remedial measures, it does not expect such actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition.”
Given the recent FCPA scrutiny of the beverage industry (Diageo, Beam Inc., and Central European Distribution Company) one might wonder whether Owens-Illinois’s recent disclosure is connected to those developments.
Barclays
This previous post detailed how Barclays PLC’s relationship with Qatar’s sovereign-wealth fund was under scrutiny by U.K. authorities.
The company recently disclosed (here) as follows. “Subsequent to reporting the investigations of the Financial Services Authority and Serious Fraud Office in July and August 2012 respectively, Barclays has been informed by the US Department of Justice (DOJ) and US Securities and Exchange Commission (SEC) that they are undertaking an investigation into whether the Group’s relationships with third parties who assist Barclays to win or retain business are compliant with the United States Foreign Corrupt Practices Act. Barclays is investigating and fully co-operating with the DOJ and SEC.”
According to this article in the Wall Street Journal, the focus is “on Barclay’s use of external brokers who facilitated meetings between bank officials and powerful Middle Eastern families.” The article further notes that “Barclays recently started conducting an internal investigation, with the help of an outside law firm, to figure out whether it or its Middle Eastern introducers might have run afoul” of the FCPA.
Schlumberger
The company recently disclosed as follows.
“In 2007, Schlumberger received an inquiry from the United States Department of Justice (“DOJ”) related to the DOJ’s investigation of whether certain freight forwarding and customs clearance services of Panalpina, Inc., and other companies provided to oil and oilfield service companies, including Schlumberger, violated the Foreign Corrupt Practices Act. In October 2012, Schlumberger was advised by the DOJ that it has closed its inquiry as it relates to Schlumberger.”
For more on the numerous Panalpina-related enforcement actions – what I’ve termed CustomsGate – see here.
The company’s recent disclosure would seem not to address the issues previously the focus of a front-page Wall Street Journal article in October 2010 concerning alleged conduct in Yemen. (See here for the prior post).
Quotable
In this recent Reuters article, current SEC FCPA Unit Chief Kara Brockmeyer stated as follows.
“I would hate to think the companies view [FCPA] enforcement actions as the cost of doing business. If we find that out, it will certainly increase the size of the penalty.”
One thing that is becoming increasingly clear in this new era of FCPA enforcement is that investors do appear to view FCPA scrutiny and enforcement actions as a cost of doing business and akin to a regulatory violation.
The Reuters article also stated that there has yet to be a repeat FCPA prosecution. This is a false statement. Companies that have resolved more than one FCPA enforcement action over time include: Tyco, ABB, Baker Hughes and General Electric.
Quotable
On his Corruption, Crime & Compliance site (here) Michael Volkov recently observed as follows.
“The FCPA Paparazzi has done a great disservice to the business community. Call it a complete lack of credibility. Legal marketing has become confused in this day and age – marketing has now been turned into the “Fear Factor,” meaning that lawyers need to scare potential clients into hiring them. That is flat out wrong. Each week, new client alerts, client warnings and other cries of impending disaster are transmitted through the Internet to businesses. If I were a general counsel, I would have them on “auto delete.” Talk about a waste of time and effort.”
What’s Up With That Investigation?
One of the many FCPA industry sweeps reportedly underway concerns Hollywood movie industry in China. (See here for the prior post). This recent post on the New York Times Media Decoder blog highlights the “powerful gatekeeper of China’s rapidly growing film world, the China Film Group chairman Han Sanping who was recently in the U.S. to receive a China Entertainment Visionary of the Year award, and asks what’s up with the investigation.
I Hear You Travel Alot
My frequent searches for FCPA content often turn up interesting content. Such as this thread from top-law-schools.com which asks what type of attorneys get to travel the most? One response was as follows. “From what I hear, FCPA is the way to go for travel to other countries because you have lots of interviews of foreign employees.”
The FCPA is certainly the reason for the majority of stamps in my passport.
Counter-Points
Alexandra Wrage (President of Trace International) made some observations recently in her Corporate Counsel column (here) about FCPA enforcement in various Presidential administrations. While interesting to think about, the actual stats have little substantive value. Instances of FCPA scrutiny tend to last between 2-4 years (and thus straddle administrations) and various instances of FCPA scrutiny (for instance Pfizer) can last approximately 8 years. Moreover, rather than “aggressively enforce the FCPA,” as the article notes, what the enforcement agencies more often than not actually do (as evidenced by statistics demonstrating which enforcement actions resulted from voluntary disclosures) is process corporate voluntary disclosures.
There’s An App for That
Law firm O’Melveny & Myers announced (here) the “launch of its FCPA app, the first multi-functional mobile application (app) created by a law firm.” Richard Grime, partner and head of O’Melveny’s FCPA practice stated as follows. “We understand the complexities our clients and colleagues face in achieving their business goals in the global marketplace, and thus, have created this mobile application as a fast, yet informative, way for them to remain current with the evolving statutes and provisions imposed by the FCPA and other anti-corruption laws.”
Weekend Reading
Sidley & Austin recently released its Anti-Corruption Quarterly (here). Among other articles is one focused on the new “sheriff in town.”
The article states as follows.
“Investigating potential violations of the FCPA historically has been the purview of the SEC and the DOJ, but recently, Congress has entered the fray. Two House committees, the House Oversight and House Energy committees, recently instituted an independent FCPA investigation of Wal-Mart, after a New York Times article reported on an alleged massive bribery campaign at Wal-Mart’s Mexican affiliate. These House investigations mean that companies now have to consider the possibility of facing a congressional investigation—in addition to investigations by the SEC and the DOJ—when FCPA violations have occurred.”
The article further states as follows.
“Although congressional committees routinely investigate companies, the current congressional investigation into Wal-Mart is the first investigation in the FCPA context and it may signal the beginning of a trend: high-profile companies or companies that are drawn into political fights (often unwillingly) may find themselves the target of a congressional inquiry if their FCPA problems become public. Whatever effect the congressional investigation may have on Wal-Mart, the possibility of such an investigation is a factor that high-profile companies facing FCPA concerns should weigh.”
For more on Wal-Mart’s FCPA scrutiny, see my recent article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure” (here).
Miller Chevalier also recently released its FCPA Autumn Review – see here.
Morrison Foerster also recently released its End of Summer Round-Up – see here.
This recent Jones Day publication concerning upcoming FCPA Guidance contains the following paragraph that should be read by those who simply label companies that have resolved FCPA enforcement actions or are the subject of FCPA scrutiny as bad or corrupt companies.
“It is the job of a prosecutor to make charging decisions and to decide in the first instance what does and does not violate the law. As prosecutors and enforcement attorneys assess the facts to make charging decisions, they are compelled to view the world, therefore, in binary terms: black and white, right and wrong. As defense counsel, settlement discussions with our counterparts in the DOJ and SEC frequently hinge on which side of the line the conduct sits. Particularly for those of us who served as prosecutors, we acknowledge in these discussions the difficult mission of the enforcement officials to draw and defend lines. The world of business, however, frequently operates in territory that is somewhat grey: a world in which business persons strive to grow the company ethically in situations where the application of the existing rules are not entirely clear. For instance, in the current era of FCPA enforcement, international businesses struggle with their responsibilities to monitor and control the conduct of third parties with whom they do business: distributors and sub-distributors, joint venture partners, dealers, and resellers. Even for companies that are firmly dedicated to compliance with the FCPA, is not always clear when a third party amounts to an agent whose improper conduct might someday be ascribed to the company and its employees. Good and ethical companies struggle, every day, with the concept of defining an agent of the company as opposed to an independent customer who engages in an arm’s-length transaction to purchase the company’s products.”
*****
A good weekend to all.
Friday Roundup
Briefing complete, an isn’t it ironic follow-up, and going for the gold. It’s all here in the Friday roundup.
Briefing Complete In Historic “Foreign Official” Challenge
This previous post highlighted the appeal of Carlos Rodriguez and Joel Esquenazi to the 11th Circuit on a host of issues, including whether the trial court erred as a matter of law in its jury instruction regarding what constitutes an “instrumentality” of a foreign government – and thus who are “foreign officials” under the FCPA. As noted in the post, this is a historic appeal, the first time in the FCPA’s history that “foreign official” will be squarely before an appellate court. This previous post highlighted the DOJ’s response brief.
Yesterday lawyers for Rodriguez and Esquenazi filed reply briefs here and here.
Among other things, Rodriguez’s brief argues as follows. “This Court should reject the Government’s assertion that the OECD Anti-Bribery Convention requires that this Court affirm the jury instruction incorporating the government function interpretation. […] Before the United States adopted the OECD 1997 Convention on Combating Bribery in 1998, the United States had no obligation to prohibit foreign bribery. Thus, the law of nations sheds no light on what Congress intended when it adopted the relevant definition of foreign official in 1977. In 1998, when Congress amended the FCPA in light of the OECD’s Convention, Congress did not add “public enterprise” to the definition of foreign official. This Court should not apply terms from the Convention that Congress chose not to adopt into the FCPA.”
Among other things, Esquenazi’s brief argues that the “government’s untethered definition of instrumentality cannot stand,” “the government engages in a selective and misleading reading of the FCPA’s legislative history,” and that the “government’s vehemence proves too much.” As to the later point, the brief states as follows. “The Government spends a significant part of its brief arguing that its broad (and fatally flawed) definition of “instrumentality” is crystal clear. First, few statutory terms have received such extensive governmental resuscitation efforts. Second, there is a difficult-to-ignore, growing consensus among observers (including two former United States Attorneys General) that the Government is misreading “instrumentality.”
Regarding my “foreign official” declaration (here) that the DOJ is seeking to exclude from the record, the brief states as follows. “The Government protests Esquenazi’s citation to Professor Michael J. Koehler’s declaration addressing the legislative history of the FCPA, which was filed in United States v. Carson. Aside from the analysis contained in the Koehler declaration, the substance of the declaration is the legislative history of the FCPA. The Court can surely take notice of legislative history, and evaluate the utility and accuracy of Professor Koehler’s declaration for itself. But the Government’s claim that the declaration of a professor filed in another criminal proceeding and under penalty of perjury is somehow of lower status than a law review article reviewed by law students strains credulity.”
David Simon (Foley & Lardner – here) leads the appellate team for Rodriguez. Markus Funk (Perkins Coie – here) leads the appellate team for Esquenazi.
Isn’t It Ironic Follow-Up
In this prior post, I asked isn’t it ironic, don’t you think, that while the U.S. is bringing enforcement actions against companies for conduct that includes providing $600 bottles of wine, Cartier watches, cameras, kitchen appliances, business suits, and executive education classes to individuals deemed “foreign officials,” the U.S. has legitimized corporate influence over government in this country? I noted that this uncomfortable truth will be clear on display as the elections unfold.
Sure enough, earlier this week, the Wall Street Journal had a page one article “Movie Mogul’s Starring Role in Raising Funds for Obama” (here) detailing Jeffrey Katzenberg’s extensive political contributions and close ties to President Obama. Hosting a dinner that raised $15 million for President Obama. Check. Writing a $2 million check to jump start a super PAC supporting President Obama. Check. A planned $40,000 per person dinner with President Obama. Check.
The WSJ article notes that “Mr. Katzenberg’s fundraising prowess has earned him access and a role as the informal liaison between Hollywood and the White House, as the industry continues seeking government help against online piracy” among other issues.
If President Obama was a foreign official and expensive wine was served at the dinner, such allegations might very well find their way into an FCPA enforcement action … and have already. If the super PAC was a charitable donation and President Obama a foreign official, such allegations might very well find their way into an FCPA enforcement action … and have already.
Isn’t it ironic don’t you think?
But the irony does not stop there.
As noted in the article, among the access that Katzenberg had was attending a State Department lunch during the recent U.S. visit of China’s presumed future leader Xi Jinping. The lunch occurred in the context of Hollywood’s eagerness to tap into the lucrative Chinese market.
As noted in this previous post, it was widely reported this past spring that the SEC has sent letters of inquiry to several Hollywood studios, including Katzenberg’s DreamWorks Animation, seeking information about potential inappropriate payments and how the companies interact with certain government officials in China.
Isn’t it ironic don’t you think?
Going for the Gold
It’s interesting to witness the lengths FCPA Inc. will go to market its compliance services. After dozens of London Olympic, Bribery Act, FCPA, are you prepared type pieces, up next is the Winter Olympics in Sochi, Russia, and with that a marketing opportunity. This recent law firm piece states as follows. “With the conclusion of the 2012 Summer Olympics in London, the world’s eyes will soon turn to Sochi, the Black Sea resort city in Russia, which will host the 2014 Winter Olympics. In addition to serving as the backdrop for the usual feats of athletic prowess and national pride, the Sochi games may also be fertile ground for prosecutions under the United States’ Foreign Corrupt Practices Act (FCPA). The U.S. government’s actions in this setting will serve as a signal to any company doing business abroad that it must be proactive in ensuring compliance with the FCPA.”
As Above the Law recently observed here, the FCPA “freak-out session is entertaining to watch.”
*****
A good weekend to all.
FCPA-Palooza
I first began using the term FCPA Inc. in April 2010 (see here).
I then coupled FCPA Inc. with Business of Bribery in this February 2012 post to describe a presentation I gave at Indiana University Robert H. McKinney School of Law regarding a work in progress of the same title.
I am glad to see that the terms have caught on as yesterday the Wall Street Journal ran a series of FCPA related articles, an FCPA-Palooza of sorts, including a lead article titled “FCPA Inc.: The Business of Bribery” (see here).
The article is spot-on and contains the following quotes from industry participants. “It’s one of the few sort of crown-jewel practices right now.” “When you get these situations and you have a young enforcement attorney…telling you to look under every rock, you do it.” “If you get two of these [FCPA investigations] a year as a partner, you’re pretty much set.”
Assistant Attorney General Breuer is quoted in the article as follows. “We absolutely need companies through their firms to provide us with their investigations.” The article states that “prosecutors test information they receive from the companies and conduct parallel investigations” with Breuer stating that “we’re not simply relying on what the companies give us.” Many FCPA practitioners (including this former one) are likely to disagree with this statement. In representing corporate clients in an FCPA inquiry, it is common for counsel to hand over to the enforcement agencies witness interview memos, key documents in chronological order, and investigative reports (if done). While it is difficult to assess what the DOJ and/or SEC did after that, I never once got the sense that the enforcement agencies tested the information or conducted a parallel investigation.
The Wall Street Journal FCPA-Palooza also included an article (here) concerning compliance costs, an article (here) concerning prosecution of individuals, and an article (here) regarding the FCPA’s history and certain reasons for the increase in enforcement.
The WSJ compliance article notes that as “part of the corporate cost for stepped-up enforcement of the Foreign Corrupt Practices Act over the last several years has been the creation of new compliance structures at companies that hope to avoid indictments and million-dollar fines under the U.S. antibribery law.” Of course, not even the most robust, state-of-the-art FCPA compliance program will allow a company to avoid indictment as a matter of law. Such programs merely best position companies for leniency as determined by the enforcement agencies behind closed doors in Washington D.C. This needs to change and I have set forth the reasons for an FCPA compliance defense in my recent scholarship “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here).
The WSJ individual prosecutions article notes the absence of individual prosecutions in most corporate FCPA enforcement actions, the DOJ’s difficulty of extraditing foreign nationals charged with FCPA offenses, and the string of recent DOJ losses in individual enforcement actions when it is put to its burden of proof. For more on this last issue, see my recent article “What Percentage of DOJ FCPA Losses in Acceptable” (here).
The WSJ Law Blog also contributed to the FCPA feast with this post which asked whether corporate FCPA scrutiny and enforcement actions move markets. In answering the question, the post states as follows. “In general, we found a lot of shrugging on the part of investors. The average change in stock price from the day before to the day after the disclosure of an FCPA investigation was a decrease of 1%. […] It was far easier to study market reaction to FCPA settlements. Companies’ stock prices increased, on average, by 1.1% after enforcement actions were announced.”
The WSJ Law Blog also noted here that “FCPA enforcement shows no signs of cooling.” I agree. As noted in the FCPA 101 feature of my website (here) there are several practical, as well as provocative, reasons for why FCPA enforcement has increased. Among the later is the industry itself.
At least more people are thinking and talking about it now after the Wall Street Journal’s FCPA-Palooza.
Of Note From the Tyco Enforcement Action
[A new job has been posted to the FCPA Professor Jobs Board – see here. If your organization is seeking FCPA or related talent, the Jobs Board is an easy and efficient vehicle to connect with thousands of sophisticated readers.]
Yesterday’s post (here) went long and deep as to the Tyco enforcement action. This post continues the analysis by highlighting additional notable issues.
The Tyco Enforcement Action Should Be An FCPA Practitioners New Best Friend
During the negotiation phase of resolving an FCPA enforcement action with the DOJ and/or the SEC, a topic that often comes up, and an analysis that an FCPA practitioner frequently performs, is comparing the conduct at issue in the current case to prior enforcement actions. The enforcement agencies typically dismiss such comparative efforts by practitioners by saying that every enforcement action (and negotiation) is unique and that what the agencies did in one enforcement action is not binding in another. On the flip side, and a position I think is imminently reasonable, is that the enforcement agencies ought to be bound by some consistency in enforcement approaches.
If so, the Tyco enforcement action should be the FCPA practitioners new best friend.
For starters, this enforcement action involved a company that settled a wide-ranging fraud action in 2006 – one that involved a material FCPA component (see here for the prior SEC action). In that 2006 action, Tyco was permanently enjoined from, among other things, future FCPA violations. (For more on so-called “obey the law injunctions – see this recent guest post and this prior post).
The government bluntly stated in this week’s enforcement action that certain of the misconduct occurred even after the 2006 injunction. In addition, and per the government, the alleged misconduct in this week’s enforcement action was carried out by several different methods, the conduct occurred over a lengthy time period and involved conduct in approximately 25 countries.
Even so, against this backdrop of an injunction being violated and widespread misconduct in approximately 25 countries, Tyco was offered a non-prosecution agreement by the DOJ and the government did not require an imposition of a corporate monitor.
Should an FCPA practitioner in the future be faced with anything other than a DOJ NPA or should a monitor be insisted upon by the government, the Tyco enforcement action should be your new best friend.
Assessing Tyco’s Culpability
Yes, as noted above, Tyco is now an FCPA “recidivist.” By my count, it has now joined ABB, Baker Hughes, and General Electric in that category.
Yet in reading the Tyco enforcement action, I am hardly surprised nor shocked. The company is a diversified global company operating in more than 60 countries with more than 100,000 employees worldwide. The vast majority of the conduct at issue in the enforcement actions allegedly occurred between 2000 and 2006.
Furthermore, there is no allegation or suggestion that Tyco (the parent company entity) knew of or participated in the improper conduct. For instance, the closest Tyco connection alleged is in the SEC’s complaint concerning conduct in Turkey. However, even there, the SEC only alleges a dual officer structure between the relevant subsidiary and executive officers while at the same time alleging that there was “no indication that any of these individuals [the dual officers] knew of the illegal conduct.” In other respects, the resolution documents allege or suggest that various indirect subsidiaries took steps to conceal the conduct at issue or circumvent Tyco’s internal controls.
I’ve said before and I will say again (based on nearly a decade of FCPA practice experience conducting FCPA internal investigations around the world) that if every large multi-national company with diverse global business units, with tens of thousands of employees scattered across the world, would hire FCPA counsel to do a complete and thorough world-wide review of the company’s operations, given the current enforcement theories, including the standardless books and records and internal controls theories of enforcement, 95% of companies would find problematic conduct (the other 5% of companies either hired counsel not well versed on the current enforcement theories and/or counsel did not look hard enough).
It Takes A While … Just To Negotiate
As noted in this previous post regarding Pfizer, the gray cloud that is FCPA scrutiny can hang over a company for a long time. On this issue, it is interesting to note that Tyco’s most recently quarterly filing stated that the company began its negotiations with the DOJ and SEC in February 2010.
The FCPA As An M&A Issue
The $26 million in combined fines and penalties will not be borne entirely by Tyco and its shareholders. The FCPA frequently finds its way into corporate divestitures and other transactions.
On this note, Tyco’s most recent quarterly filing stated as follows concerning previously spun off business units and now separate companies. “Covidien and TE Connectivity agreed, in connection with the 2007 Separation, to cooperate with the Company in its responses regarding these matters. Any judgment required to be paid or settlement or other cost incurred by the Company in connection with the FCPA investigation matters would be subject to the liability sharing provisions of the Separation and Distribution Agreement, which assigned liabilities primarily related to the former Healthcare and Electronics businesses of the Company to Covidien and TE Connectivity, respectively, and provides that the Company will retain liabilities primarily related to its continuing operations. Any liabilities not primarily related to a particular segment will be shared equally among the Company, Covidien and TE Connectivity.”
In addition, as noted in the NPA, one of Tyco’s business units is poised to be spun-off to Pentair Inc. later this week. The NPA states as follows. “Tyco agrees that if this separation and merger occur during the term of this Agreement, Tyco shall, for any business entities, operations, or units involved in the conduct [at issue] and included in the spin-off and merger, including provisions in any separation agreement binding the relevant and culpable entities to the [compliance] obligations [set forth in the NPA]. Tyco shall no longer be responsible for ensuring compliance by any separated entities, operations or units with the obligations described in the [NPA].”
More Foreign Healthcare Providers as “Foreign Official”
This recent post traced the origins and prominence of the enforcement theory that employees of certain foreign health care systems are “foreign officials” under the FCPA. Add the Tyco enforcement action to the list as the enforcement action included conduct involving Chinese health care providers, Saudi Arabian health care providers, and Polish health care providers.
With the Tyco action on the list, 5 of the 9 (55%) core corporate enforcement actions this year have been based, in whole or in part, on this theory.
More Chinese Design Institutes
The number of FCPA enforcement actions involving Chinese design institutes (an entity category that has given many an FCPA practitioner a headache trying to figure them out) has grown with the Tyco enforcement action. As noted in this previous post concerning Watts Water Technologies, other enforcement actions that have involved, in whole or in part, Chinese design institutes include the following: Rockwell Automation (here), ITT (here), and Avery Dennison (here).
Nice Pay Day, But What Did You Accomplish?
When I published “The Facade of FCPA Enforcement” in 2010 (see here) the trend of FCPA-inspired tag-a-long private civil suits was in its early stages. Thus, the section of my article – why the facade of FCPA enforcement matters – did not include discussion of such suits.
Now that the trend is clear, add FCPA-inspired private civil suits to the list of reasons why the facade of FCPA enforcement matters.
The game is very predictable. In the days and weeks following an FCPA enforcement action, or even a company disclosing or otherwise being the subject of FCPA scrutiny, the suits and/or “investigations” by plaintiffs firm will start to mount
In this prior post, I asked whether FCPA-inspired civil suits have a purpose or a parasitic. I stated that when a company’s FCPA violations are found to be condoned or encouraged by the board or executive officers, such plaintiff causes of action would seem to be warranted. But these situations are rare in FCPA enforcement actions. This prior post detailed June 2011 Congressional testimony on behalf of the U.S. Chamber Institute for Legal Reform that touched upon FCPA-civil litigation and I generally agree with the criticisms made of this “piggyback-litigation phenomenon.”
Several prior posts (here and here) profile how such derivative claims seldom, if ever, get past the motion to dismiss stage. Yet, several companies make the business judgment to settle such claims for what amounts to nuisance value for the company, but which represents a handsome pay day for plaintiff’s counsel for doing and accomplishing next to nothing.
Two recent Foreicgn Corrupt Practices Act related civil settlements prove this point.
In July, Halliburton announced here that a Texas state court issued an order preliminarily approving the proposed settlement of a derivative claim concerning a variety of misconduct, including Bonny Island, Nigeria conduct giving rise to the previous FCPA enforcement action against Halliburton and its related entities.
Pursuant to the proposed settlement, within 90 days of a final settlement date, Halliburton’s board agreed to implement various corporate governance and internal control revisions. The items most related to FCPA compliance should not be hard to accomplish because pursuant to the 2009 FCPA DOJ/SEC settlement, Halliburton already was under an existing obligation, including through engagement of a compliance monitor, to implement a host of FCPA related compliance enhancements.
Yet pursuant to the proposed settlement agreement, for its innovative work (that is my term), Plaintiffs’ counsel in the derivative action will seek approval of its fees and expenses not to exceed $7 million and Halliburton will not oppose such fees and will pay them through its insurance carriers.
Likewise, Johnson & Johnson recently announced (here) a proposed settlement of a derivative claim concerning a variety of misconduct, including the conduct giving rise to its 2011 FCPA enforcement action. As detailed in this prior post, pursuant to the settlement via a DPA, the company is already subject to enhanced compliance obligations related to the FCPA. The prior post noted that such enhanced compliance obligations were unusual and surprising given the DOJ’s conclusion that J&J already generally had “effective” policies and procedures. In the words of the DOJ “J&J had a pre-existing compliance and ethics program that was effective and the majority of problematic operations globally resulted from insufficient implementation of the J&J compliance and ethics program in acquired companies.”
Yet, along comes the Plaintiffs’ firms with a derivative action and pursuant to the settlement, J&J has agreed to reimburse Plaintiffs’ counsel in an amount not exceeding $10 million and to pay approximately $450,000 in its expenses.
Like many things in this new era of FCPA enforcement, FCPA-civil related suits have, in many cases, spiraled out of control. Yet with many, including now Plaintiffs firms, with a vested financial interest in seeing the status quo prevail, it is doubtful any meaningful change is on the horizon.
Yet the question can be asked, do FCPA civil-related suits accomplish anything? Do such suits serve a purpose or are they parasitic? Is this another reason why the “facade” of FCPA enforcement matters.