Judge Selna Appears Ready To Deny Carson Travel Act Challenge
Last Friday prior to oral argument on the motion, Judge James Selna (C.D. of Cal.) – as is often his custom – publicly released (here) his tenative ruling on the Carson defendants’ Travel Act motion to dismiss. As detailed in this prior post, the defendants, among other things, argued that the Travel Act does not apply extraterritorially. As detailed in this post, the DOJ in opposition argued, among other things, that because the majority of defendants’ unlawful conduct was based in the U.S. resort to extraterritorial application was not necessary and even if it was the plain language of the Travel Act, the legislative history, and case law all indicate that the Travel Act does apply extraterritorially.
In his tenative ruling, Judge Selna denied defendants’ motion to dismiss. In sum, Judge Selna tenatively concluded that: (1) “an extraterritorial analysis is unnecessary because the criminal offense was completed domestically, and (2) even if an extraterritorial analysis is implicated, the Travel Act counts are proper.” As to (1), Judge Selna stated as follows. “All the elements under the Travel Act were allegedly satisfied in California even if the target of Defendants’ commercial bribery scheme was overseas” thus making an extraterritorial analysis “unnecessary.”
As to (2) above, an issue of greater big picture importance, Judge Selna stated as follows. “… [C]riminal statutes may apply extraterritorially even without an explicit Congressional statement. In deciding whether criminal statutes apply extraterritorially, courts ‘must consider the language and function of the prohibition.’ […] The Court agrees with the Government that ‘plain language of the Travel Act demonstrates Congress’s desire to reach conduct overseas.'”
As to defendants’ position that “the subsequent enactment of the FCPA provides a clear inference that the Travel Act was not intended to apply extraterritorially,” Judge Selna disagreed and stated that “multiple criminal statutes can often be applied to the same criminal conduct” and he did “not discern any conflict between the Travel Act and the FCPA.” Judge Selna also rejected defendants’ void-for-vagueness challenge.
ICE Appeal Receives Chilly Reception At 11th Circuit
It is one of the FCPA’s most bizarre issues.
If bribery is not a victimless crime, then why do Foreign Corrupt Practices Act fines and penalties simply go directly into the U.S. Treasury? Why are there no efforts to identify the victims of FCPA violations and to compensate those victims?
As detailed in this prior post, in May Instituto Constarricense de Electricidad (“ICE”) of Costa Rica petitioned “for protection of its rights as a victim” of Alcatel-Lucent’s bribery scheme. (See here for a prior analysis of the December 2010 enforcement action).
In early June, Judge Marcia Cooke (Southern District of Florida) denied ICE’s petition.
On June 15th, ICE filed this petition in the 11th Circuit for a writ of mandamus “directing the District Court to recognize ICE is a ‘crime victim’ under the Crime Victims’ Rights Act of [Alcatel-Lucent’s] crimes and to afford it all rights the CVRA guarantees to crime victims, including restitution.”
The two issues presented on appeal were: (i) whether the district court erred by denying ICE victim status under the CVRA; and (ii) whether the district court erred in denying ICE restitution.
Last Friday, in a short 3-page decision (here), the 11th Circuit denied ICE’s petition.
After noting the clearly erroneous standard of review, the 11th Circuit held that “the district court did not clearly err in finding that [ICE] actually functioned as the offenders’ coconspirator” and that the district court did not “err in finding that ICE failed to establish that it was directly and proximately harmed by the offenders’ criminal conduct.”
The petition for victim status was factually difficult from the start and it is not surprising that ICE did not prevail. Yet, the ICE petition did succeed in raising the victim issue and causing those interested in bribery and corruption issues to ponder the valid and legitimate question of victims a bit more closely.
Carson Defendants Move To Dismiss Travel Act Counts
The Foreign Corrupt Practices Act is not the only tool the DOJ has used to charge alleged bribery schemes. The FCPA, after all, requires a “foreign official.”
With increasing frequency, the DOJ – often in conjunction with FCPA charges – charges Travel Act violations when the conduct at issue is missing a “foreign official” yet concerns allegations of commercial bribery. For a useful overview of the Travel Act and its relevance to FCPA enforcement (broadly speaking), see this recent post from the FCPA Blog.
The DOJ’s use of the Travel Act is being challenged in the Carson matter pending in the Central District of California. This is the same case in which “foreign official” was and is being challenged. (See here and here for the prior posts).
Earlier this week, in a significant FCPA-related event, certain of the Carson defendants filed a motion to dismiss the Travel Act charges. As noted in the brief (here), in addition to FCPA charges, the moving defendants were charged with Travel Act violations based on alleged bribes to employees of private companies located in China and Russia.
In sum, the Carson defendants argue as follows.
“In Morrison v. Nat’l Australia Bank Ltd., 130 S. Ct. 2869, 2878 (2010), the Supreme Court explained that unless Congress has clearly indicated that a statute applies extraterritorially, it does not. The Travel Act criminalizes “bribery . . . in violation of the law of the state in which committed,” i.e., domestic bribery. Travel Act application to the foreign bribery alleged in this case violates Morrison’spresumption against the extraterritoriality of United States (“U.S.”) laws.”
“While the face of the Travel Act, considered with Morrison’s presumption against extraterritoriality, shows that the Travel Act has no foreign application, the statute’s legislative history confirms it. Consideration of the Travel Act in conjunction with the subsequently enacted FCPA also demonstrates that Congress did not intend that the Travel Act extend to foreign bribery.”
“Further, the Travel Act Counts are predicated upon California’s commercial bribery statute, Cal. Penal Code § 641.3 (“PC 641.3”), so the applicability of that statute to Defendants’ conduct is essential to the government’s case. PC 641.3 has never been applied to foreign commercial bribery and its legislative history shows its foreign application was never considered.”
“Application of the Travel Act and PC 641.3 would also be unconstitutionally vague. Defendants had no notice that either the Travel Act or PC 641.3 would reach the alleged conduct. The government’s recent application of this fifty-year old statute against foreign commercial bribery, in the face of strong skepticism that it even applies, shows the enforcement of this statute is arbitrary.”
“Additionally, the Travel Act allegations are simply defective. The Travel Act prohibits travel or the use of a facility in interstate or foreign commerce with the intent to promote unlawful activity (i.e., state-law bribery), followed by an act to promote the bribery. But the Travel Act Counts fail to allege the essential element of an act following the travel or use of a facility in interstate commerce to promote the alleged bribery. So too, Counts Twelve and Fourteen fail to adequately allege the jurisdictional element of travel or use of a facility in interstate or foreign commerce. Because the Travel Act Counts omit necessary elements, they fail.”
“Finally, the Court cannot guess whether the Grand Jury would have even indicted Defendants for conspiracy had it known that the Travel Act did not apply to Defendants’ alleged conduct. Because the defective Travel Act allegations infect the entire conspiracy count, Count One must be dismissed in its entirety.”
Significant dd-3 Development in Africa Sting Case
When listing reasons why FCPA enforcement has increased, the 78dd-3 prong of the FCPA’s anti-bribery provisions should be on the list.
The FCPA, since its inception in 1977, always applied to “issuers” and “domestic concerns”, but the 1998 amendments added a third prong providing jurisdiction as to “persons other than issuers or domestic concerns.”
As to this class of persons, the FCPA provides the following jurisdictional requirement: “while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value …”. (emphasis added).
Several recent FCPA enforcement actions have been based on the dd-3 prong of the statute including the actions against the Daimler subsidiaries (see here, here, and here); SSI International Far East (see here); and others.
In the Daimler actions, the jurisdictional statements in the charging documents are as follows. “wire transfers … sent from Daimler accounts in Germany to financial institutions in the United States and elsewhere, via international and interstate wires, in furtherance of corrupt payments to Russian government officials;” “payments to third party agents, including shell companies established in the United States knowing that such payments would be passed on in whole or in part to Russian government officials;” ” “wire transfers … sent from Daimler accounts in Germany to financial institutions in the United States and elsewhere, via international and interstate wires, in furtherance of corrupt payments to Chinese government officials;” and “enter[ing] into sham consulting contracts with shell companies incorporated in Delaware and Wyoming for the purpose of making improper payments to Croatian government officials.”
In SSI, the jurisdictional statement in the charging document is as follows. SSI ” transmitted requests to the United States for approval and wire transfer of funds for payment to managers of Schnitzer Steel’s customers in South Korea and China in connection with sales of scrap metal to those customers. Accordingly, defendant SSI acted within the territorial jurisdiction of the United States.”
In my recent Q&A with Homer Moyer (here) he stated as follow: “To be sure, in enforcing the FCPA, the government tries to overreach from time to time — exercising anti-bribery jurisdiction over foreign subsidiaries and aggressive applications of dd-3 jurisdictional on the grounds that some step in the process took place “in the territory of the United States” come to mind as occasional examples. When enforcement agencies overreach, they should be challenged.”
Yet, as with most things FCPA related, these aggressive jurisdictional theories have generally escaped judicial scrutiny.
Until now.
In what is believed to be the first judicial ruling on the jurisdictional prong of the dd-3 prong of the FCPA, earlier this week, Judge Richard Leon (presiding judge in the Africa Sting cases) granted defendant Pankesh Patel’s Rule 29 acquittal motion at the end of the DOJ’s as to an FCPA substantive charge premised on his sending a DHL package – containing a purchase agreement in furtherance of the alleged corrupt scheme – from the U.K. to the U.S.
Pankesh Patel is among the first group of four defendants currently on trial and he is described in the indictment as follows. “[A] citizen of the United Kingdom and […] a “person” other than an issuer or a domestic concern as that term was defined in the FCPA. 15 U.S.C. § 78dd-3(f)(1). Patel was the Managing Director of Company A, a United Kingdom company that acted as a sales agent for companies in the law enforcement and military products industries. As a company that maintained its place of business in the United Kingdom, Company A was a “person” other than an issuer or domestic concern as that term was defined in the FCPA. 15 U.S.C. § 78dd-3(f)(1).”
Among the charges against Patel was Count 3 – that Patel violated the FCPA’s anti-bribery provisions by sending, on October 13, 2009, a DHL package from the U.K. to Washington D.C. “containing one original copy of the purchase agreements for the corrupt Phase Two deal.”
At the close of the DOJ’s case earlier this week, Patel’s attorney, Eric Bruce (Kobre & Kim LLP – see here) moved, as did the other defendants as to other charges, pursuant to Rule 29 for a judgement of acquittal.
Judge Leon did not request briefing as to the Rule 29 motions and his decision and reasoning was not reduced to writing – thus what follows are quotes from the hearing transcript.
As to Count 3, Bruce stated that the DOJ “charged Mr. Patel in Count 3 with something that cannot be a crime under U.S. law. And here’s what I mean by that. As we saw in the FCPA statute with which he’s charged, 78dd-3, because he’s a U.K. citizen, operating a U.K. company, he’s not a domestic concern under the statute, he can only be liable under the FCPA statute for conduct “while in the territory of the United States.” And that’s required by statute. That’s their sort of jurisdictional hook on him. And what they’ve done in Count 3, if you look at the language, if you go back to the indictment, Your Honor –.”
At this point, the following exchange occurred.
“Judge Leon: Sending it DHL?
Bruce: Yeah from London. So in Count 3 it says on the face of the indictment, DHL from the United Kingdom to Washington, D.C., containing one original copy of the purchase agreement for the corrupt phase 2 deal. So literally they’ve charged him with being in London and dropping a DHL package in the mail as a substantive FCPA violation, while the statute very clearly requires that he can only be liable for something while in the territory of the United States.”
Joey Lipton, on behalf of the DOJ, then stated as follow. “And under the FCPA, as long as he’s taking an act as someone who’s not a domestic concern, as Mr. Patel is a U.K. citizen, he falls under section 78dd-3, which Mr. Bruce said. He actually has to do less than a U.S. citizen really, because a U.S. citizen has to make use of the mails or interstate commerce. And Mr. Patel just has to take an act, any act, while he’s in the United States. Doesn’t have to be an illegal act, doesn’t have to be anything related to the deal going forward. He has to take any act in the United States, which he clearly does. First of all, he flies over from the U.K. to the United States, which we established through his travel records. And then he meets with the fictitious official and receives a purchase agreement. He then later takes that purchase agreement and sends it back. So the deal’s not done at that point, contrary to what Mr. Bruce said. But he’s already taken the act, he’s here in the United States, he sends it. With regard to Count 3 — and you don’t have to prove all of the elements of the offense while he’s in the United States. Doesn’t have to be counts or elements 1 through 6 of the FCPA while he actually travels here and does all that stuff. He just has to take an act while he’s in the United States. He did take an act. In Count 3 he then sends back the purchase agreement that he gets from the official, from Mahmadou, and he’s able — and that falls under the FCPA because he’s already taken an act here when he’s done that. So that independently can be its own act. It doesn’t have to be that each substantive count is an act while he’s in the United States, as long as he takes an act while he’s here. So his burden actually as a U.K. citizen is even less than what the other defendants have to do in terms of using the mail or traveling and the like.”
The following exchange then occurred between Lipton and Judge Leon.
“Judge Leon: Help me understand why it doesn’t have to be an act while in the territory of the United States for Count 3, whereas Count 2 [a substantive FCPA offense against Patel based on his attendance at a Washington D.C. meeting to discuss the allegedly corrupt deal], sounds like you admit that that’s the case in Count 2. In Count 3, I think your rationale is since he’s already taken one act within the United States, the subsequent act of mailing doesn’t have to be within the United States, right?
Lipton: Correct, Judge.
Judge Leon: All right. So what’s the rationale for that? Why doesn’t the second act have to be within the United States too? I’m not sure I understand that.
Lipton: Well, as long as he takes an act here, then we’re allowed to charge him with other acts, like a mailing or a travel that goes to the FCPA substantive offense. So it doesn’t have to be that each individual act is the one act while he’s in the United States that he’s taking. As long as he’s taking one act, he can have multiple substantive violations for other acts he’s taking as long as —
Judge Leon: Outside the United States?
Lipton: Outside the United States. Correct, Judge.
Judge Leon: Has the Supreme Court said that?
Lipton: Judge, no.
Judge Leon: Has the D.C. Circuit said that?
Lipton: No.
Judge Leon: How about the 2nd Circuit, where you used to prosecute?
Lipton: Judge, there’s not a lot of case law on the FCPA, as Your Honor I think is well aware.
Judge Leon: So is this a novel interpretation you want me to take?
Lipton: I don’t know if it’s a novel interpretation. I think it’s an interpretation that’s grounded in the law that’s out there.
Judge Leon: Is it grounded in the legislative record?
Lipton: We can go back and we can get Your Honor more particulars about the legislative history if Your Honor wants that.
Judge Leon: I would think the more cautious, conservative interpretation would be that each act has to be while in the territory of the United States, wouldn’t it?
Lipton: Well, Judge, if you read the statute, the way that I understand it and the way it’s been interpreted is that you just have to take an act. And if he’s traveling or if he’s mailing something from outside that comes into the United States, that that on its own would be sufficient. And I also believe Mr. Patel’s charged with an aiding and abetting theory as well, so, I haven’t fleshed that out, but there may be an argument to be made that even less has to be done on an aiding and abetting theory. Also, there’s a Pinkerton theory, which if he knows as a conspirator that acts are being taken by his codefendants or himself in furtherance of the conspiracy, then anything that’s reasonably foreseeable can also be an act, a substantive count. But, Your Honor, I can go back and we can get more details and particulars. Frankly, I don’t have the case law or the legislative history to the extent that that’s going to be helpful. That goes to that point.”
In reply, Bruce stated as follows. “I heard Mr. Lipton say that Mr. Patel only has to do an act in the United States, it doesn’t even have to be illegal. If that’s the government’s position, I’m happy to take that to the D.C. Circuit if there’s a conviction on these points. That is absurd, with all due respect to Mr. Lipton. The statute plainly requires, Your Honor, that while in the territory of the United States he has to corruptly make use of the mails or any means or instrumentality of interstate commerce or do any act in furtherance of an offer, payment, promise to pay or authorization. It’s clear as day.”
After a recess, Judge Leon dismissed Count 3 against Patel.
Judge Leon also dismissed Count 8 (a substantive FCPA violation charge) as to defendant Lee Allen Tolleson; and dismissed Count 10 (money laundering) as to all four defendants. In all other respects, Judge Leon denied the Rule 29 motion.
Judge Leon’s ruling is a significant FCPA development as many FCPA charges (as demonstrated by the above cases) are based on similar “novel” jurisdictional theories under the dd-3 prong of the FCPA.
Customer Reward Programs
At this moment, it is likely that some company operating in China has a customer rewards program whereby customers are awarded points based on the level of purchases.
At this moment, it is likely that some person employed by an entity with some level of state-ownership or control just received an iPad or camera because the individual redeemed points under the program based on the purchase the individual previously authorized.
The SEC is concerned about the customer rewards program and whether it complies with the FCPA and the company is spending hundreds of dollars an hour investigating the program so that it can present its conclusions to the SEC and the DOJ.
Your first response upon reading the above paragraph might be – are you serious or is this paragraph from the Onion (see here), a satire news organization that parodies just about everything.
Nothing make believe about the first paragraph, it is derived from RAE Systems May 12th proxy statement filed with the SEC.
In the filing (here), RAE Systems stated as follows.
“In the course of telephonic discussions between April 15 and 19, 2011, outside counsel for [RAE] was asked by the SEC whether RAE China had adopted a sales program whereby customers are awarded points based on the level of their purchases of RAE products and are then eligible to redeem those points at year-end for gifts such as iPads or cameras, and whether such a program complies with the Foreign Corrupt Practices Act (“FCPA”). We do not believe that any RAE China personnel have been engaging in such a practice. We are conducting a review in response to the SEC’s inquiry, and intend to provide our conclusions to the SEC and Department of Justice.”
In December 2010, RAE Systems resolved a DOJ/SEC enforcement action concerning the acts of its subsidiaries’ joint venture partners in China. See here for the prior post. RAE Systems agreed to pay approximately $2.95million in fines and disgorgement and agreed to a three-year DOJ non-prosecution agreement (here).
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The clock is now ticking to see who will publish (presumably) the first client alert or host the first webinar on “The FCPA Compliance Risks of Customer Rewards Programs.”
In the meantime, there is likely a “foreign official” somewhere with his eye on the six piece stoneware gourmet mixing bowl set (here) available for 2000 points under Coke’s rewards program.
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Interested in reading more about the Harris Corporation enforcement action? As highlighted earlier this week (see here) the recent Lindsey Manufacturing case was not the first instance of a company putting the DOJ to its burden of proof in an FCPA trial. Harris Corporation (and certain of its executives) did just that and prevailed in an FCPA trial. As described in the post, U.S. District Judge Charles A. Legge (N.D. Cal.) directed a verdict of acquittal after the DOJ’s case.
Michael H. Huneke (Hughes Hubbard & Reed – see here) was kind to send the Defendants’ motion for acquittal, the DOJ’s response, and the transcript of oral arguments and Judge Legge’s ruling.
If old FCPA enforcement actions are your thing – here you go! If others have interesting FCPA enforcement documents from … say 1978 – 1995 – send them my way.
A good weekend to all.