Nexus Technologies Inc. et al. – Part I
Unfortunately, the FCPA enforcement action against Nexus Technologies Inc., a Philadelphia-based export company (“Nexus”), Nam Nguyen (Nexus’s President and Owner), and his siblings and fellow Nexus employees, Kim Nguyen and An Nguyen came to an end yesterday.
As noted in this DOJ release, Nexus pleaded guilty to “a conspiracy to bribe officials of the Vietnamese government in exchange for lucrative contracts to supply equipment and technology to Vietnamese government agencies in violation of the FCPA.” The release also notes that Nam and An Nguyen “pleaded guilty to conspiracy, a substantive FCPA violation, a violation of the Travel Act and money laundering” and that Kim Nguyen “pleaded guilty to conspiracy, a substantive FCPA violation and money laundering.” In June 2009, Joseph Lukas (a former Nexus partner) pleaded guilty to conspiracy and to violating the FCPA (see here).
The DOJ release notes that “in connection with the guilty pleas, Nexus and the Nguyens admitted that from 1999 to 2008 they agreed to pay, and knowingly paid, bribes in excess of $250,000 to Vietnamese government officials in exchange for contracts with the agencies and companies for which the bribe recipients worked” and that the defendants “admitted that the bribes were falsely described as ‘commissions’ in the company’s records.”
The DOJ release further notes that in pleading guilty, “Nexus also acknowledged that, as a company, it operated primarily through criminal means and agreed to cease operations as a condition of the guilty plea.”
Why did this post start with “unfortunately?”
Because, unlike most FCPA defendants (corporate or individual) Nexus and the Nguyens actually mounted a legal defense based on FCPA’s elements, including the key “foreign official” element.
You wouldn’t know it just by reading the above DOJ release, but this enforcement action centered on payments to employees of various commerical arms of Vietnam’s Ministry of Transport, Ministry of Industry, and Ministry of Public Safety.
While the case may not have been the strongest “test case,” Nexus and the Nguyens, in what is believed to be an FCPA first, challenged the DOJ’s interpretation that employees of state-owned or state-controlled enterprises (“SOES”) are “foreign official” under the FCPA. As readers likely know, this issue is a frequent topic of discussion on this blog (see here for prior “foreign official” posts).
The “foreign official” issue was fully briefed and I will explore in a future post (Nexus Technologies Inc. et al. – Part II) the issues raised by the briefs, including the DOJ’s surprising argument that it does not even need to identify specific “foreign officials” to charge an FCPA antibribery violation as well as the DOJ’s thin and misguided justification for its legal theory that employees of SOEs are “foreign officials” under the FCPA.
For the record, the judge in the case, without any comment or analysis, denied the motion to dismiss. Thus, DOJ may claim victory on its “foreign official” interpretation; however, in its brief DOJ specifically argued that a decision on the “foreign official” element was premature and ultimately a jury issue.
For all the talk, including on this blog, about the Africa Sting Case, BAE, Siemens, etc., this little noticed FCPA enforcement action in Philadelphia had the potential to shape the future of FCPA enforcement like no other – considering that over 50% of recent FCPA enforcement actions involve “foreign officials” only under DOJ’s dubious legal interpretation – which still, notwithstanding this resolution, has no judicial support.
In the News
Some interesting news articles to pass along.
The first piece is from today’s New York Times and is titled “Blackwater Said to Pursue Bribes to Iraq After 17 Died” (see here).
The article suggests, based on former company sources, that Blackwater (and its executives) could … well … be in some murky FCPA water in connection with alleged secret payments to Iraqi officials.
According to former company officials, the payments were intended to silence the officials’ “criticism and buy their support after a September 2007 episode in which Blackwater security guards fatally shot 17 Iraqi civilians” an event which generated much media coverage and congressional interest (see here among other sources).
The specific recipients of the payments? According to sources, officials in the Iraqi Interior Ministry who demanded that Blackwater secure an operating license after the September 2007 incident in order to continue doing business in the country.
The FCPA anti-bribery provisions contain an obtain or retain business element.
You ask, does making payments to foreign officials to secure a license satisfy that important element?
This general issue was addressed by the Fifth Circuit in U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) (one of the few instances in which a court has rendered a substantive FCPA decision).
The issue in Kay was whether payments to Haitian officials for the purpose of avoiding custom duties and sales taxes in Haiti could satisfy the FCPA’s obtain or retain business element.
Concluding that the obtain or retain business element was vague, the court analyzed the FCPA’s legislative history and concluded that such payments (even though they do not lead to specific government contracts) could nevertheless provide an unfair advantage to the payor over competitors and thereby assist the payor in obtaining and retaining business.
The court did not hold that ALL such payments could satisfy the FCPA’s obtain or retain business element, only that such payments COULD satisfy this key element if, for instance (as in the Kay case), the payments were intended to lower the company’s cost of doing business in the foreign country.
Post-Kay there has been an explosion in FCPA enforcement actions involving payments made to secure foreign government licenses, permits, and certifications or otherwise involving custom duties and the like. Because these enforcement actions have not been contested, it remains an open question as to whether all such payments can indeed satisfy the FCPA’s obtain or retain business element and under what circumstances.
Blackwater (now called Xe Services), through a spokeswomen, dismissed the allegations as baseless.
Nevertheless, some juicy stuff here – the U.S. military’s then prime security contractor in Iraq (and a company which did classified work for the CIA) making bribe payments in a war zone.
One wonders who knew what within official Washington.
Will this alleged conduct be pursued by the DOJ or put on the backshelf due to national security / foreign policy issues?
To my knowledge, this angle of Blackwater’s activities in Iraq has never been disclosed and, if so, the piece would seem to represent a dandy piece of investigative journalism.
The second article, titled “A Morgan Stanley Star Falls In China,” is from Reuters (see here).
The piece examines the rise and fall of Garth Peterson, a U.S. citizen, who joined Morgan Stanley’s Hong Kong office earlier this decade and quickly rose through the ranks of V.P., executive director, and ultimately managing director of Morgan Stanley’s real estate investment operation in China.
Peterson was fired by Morgan Stanley last December over concerns that he may have violated the FCPA.
Morgan Stanley disclosed the results of its internal investigation into Peterson’s conduct to both the DOJ and the SEC. Here is the company’s February 2009 8-K filing.
What did Peterson do that may have violated the FCPA?
The article suggests that Peterson’s relationship with Shanghai Yongye Group (a real estate developer) and its former Chairman, Wu Yonghua, and his daughter, Linda Wu, are at issue. Also relevant, it appears, is Shanghai Dragon Investment Co.
I hate to be the one always bringing up this issue, but if employees of Shanghai Yongye Group and Shanghai Dragon Investment Co., are somehow being considered “foreign officials” under the FCPA, I would sure love to see that legal analysis.
Anyway, back to the story.
The article is an interesting read on a number of fronts and provides an insight into one company’s handling of an FCPA issue.
First, the article notes that Morgan Stanley sent Peterson to an FCPA workshop. Given that this occured in 2008, it is debatable whether this was “too little too late.”
Second, comes an internal review, which from the article, appears to have been done in the ordinary course of business. The ordinary internal review uncovers some extraordinary issues.
Next, the company initiates an internal investigation to look into the suspicious issues. And what an internal investigation it was. According to the article, more than 7.4 million pages of e-mails were reviewed. According to the article, the investigation “found that in a discrete number of instances, investment assets were used for improper purposes not authorized by senior management” an occurrence which would seem to violate, at the very least, the FCPA’s internal control provisions which require, among other things, that an issuer like Morgan Stanley devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; and (ii) access to assets is permitted only in accordance with management’s general or specific authorization.
Next, comes the corrective measures, in this case, Peterson was fired.
Next, comes the disclosure (see above).
The article closes by saying that even if found guilty Peterson is “unlikely to be jailed as he and the firm are expected to pay damages and fees, possibly through a deferred prosecution agreement.”
Spot-on with the company likely entering into a deferred prosecution agreement.
However, the authors (and their sources) apparently have never heard the names of Frederic Bourke, Albert Jack Stanley, Steven Ott, Roger Michael Young (and many others) who are currently living in a federal prison (or waiting to check in) for violating or conspiring to violate the FCPA.
According to article, Peterson currently lives in Singapore.