Second Circuit – “There Is No Private Right Of Action Under The Antibribery Provisions Of The FCPA”
In a September 18th decision, the Second Circuit concluded in Republic of Iraq v. ABB et al that “there is no private right of action under the antibribery provisions of the FCPA.”
The FCPA issue was a minor component of the Second Circuit’s decision in the long-running civil RICO case in which Iraq sought recovery from a long list of defendants for their “alleged conspiracy with Iraq’s then-president Saddam Hussein and Iraq’s ministries to corrupt and plunder the Oil-for-Food Program, an international humanitarian program administered by the United Nations during the final years of Hussein’s rule.” As to the primary RICO claim, the Second Circuit affirmed the trial court’s dismissal of the claim on the grounds that, among other things, the plaintiff was in pari delicto with defendants.
Notwithstanding the fact that previous FCPA enforcement actions concerning the Oil for Food Program were largely books and records and internal controls cases only because the alleged bribe payments went to the government, not a particular foreign official as required under the anti-bribery provisions, and notwithstanding the fact that Iraq was a unique plaintiff to say the least, it nevertheless brought FCPA claims against the defendants on the theory that the FCPA allowed for a private right of action.
As to this issue, the Second Circuit stated – in full – as follows.
“The Amended Complaint alleged that the surcharges and kickbacks paid by the Vendor and Oil Purchasing Defendants violated the antibribery provisions of the FCPA. The Republic contends that the district court should have recognized an implied private right of action for violations of those provisions despite a consistent line of cases holding to the contrary. The Republic is particularly critical of Lamb v. Phillip Morris, Inc., 915 F.2d 1024 (6th Cir. 1990) (“Lamb”), cert. denied, 498 U.S. 1086 (1991), the leading case declining to recognize such a cause of action. The Republic argues that Lamb erred in its analysis of the legislative history of the FCPA and that that history suggests that the reason Congress did not expressly provide for a private right of action was to avoid creating a “negative inference” that would dissuade judicial recognition of implied private rights of action under other provisions of the Securities Exchange Act of 1934, to which the FCPA was an amendment. We are unpersuaded.
“[P]rivate rights of action to enforce federal law must be created by Congress.” Alexander v. Sandoval, 532 U.S. 275, 286 (2001) (“Sandoval”). A federal statute may create a private right of action either expressly or, more rarely, by implication. In considering whether a statute confers an implied private right of action, “[t]he judicial task is to interpret the statute Congress has passed to determine whether it displays an intent to create not just a private right but also a private remedy.” Id. To discern Congress’s intent, “we look first to the text and structure of the statute.” Lindsay v. Association of Professional Flight Attendants, 581 F.3d 47, 52 (2d Cir. 2009), cert. denied, 11 130 S. Ct. 3513 (2010). To “illuminate” this analysis, id. at 52 n.3, we also consider factors enumerated in Cort v. Ash, 422 U.S. 66 (1975), which include the following:
First, is the plaintiff one of the class for whose especial benefit the statute was enacted, . . . –that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? . . . . Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? Id. at 78 (emphasis in Cort v. Ash) (internal quotation marks omitted). In our analysis, we are mindful that “the Supreme Court has come to view the implication of private remedies in regulatory statutes with increasing disfavor.” Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 286 F.3d 613, 618 (2d Cir. 2002).
The antibribery provisions of the FCPA prohibit certain entities and persons from, inter alia, corruptly making payments to foreign officials for the purpose of influencing official action in order to obtain business. See 15 U.S.C. §§ 78dd-1(a), 78dd-2(a), 78dd-3(a). The text of the statute contains no explicit provision for a private right of action, although it does provide for civil and criminal penalties, see id. §§ 78dd-2(g), 78dd-3(e), 78ff(c), and permits the Attorney General to seek injunctive relief, see id. §§ 78dd-2(d), 78dd-3(d). Because “[t]he express provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others,” Sandoval, 532 U.S. at 290, the structure of the statute, by focusing on public enforcement, tends to indicate the absence of a private remedy.
The Cort v. Ash factors also do not support recognition of a private right. The statute’s prohibitions focus on the regulated entities; the FCPA contains no language expressing solicitude for those who might be victimized by acts of bribery, or for any particular class of persons. “Statutes that focus on the person regulated rather than the individuals protected create no implication of an intent to confer rights on a particular class of persons.” Sandoval, 532 U.S. at 289 (internal quotation marks omitted).
Nor does the legislative history of the FCPA demonstrate an intention on the part of Congress to create a private right of action. As discussed in Lamb, 915 F.2d at 1029, a bill introduced by Senator Church in the 94th Congress included an express right of action for competitors of those who bribed foreign officials, see S. 3379, 94th Cong. § 10, 122 Cong. Rec. 12,605, 12,607 (1976); that provision, however, was deleted by a committee of the Senate, see S. Rep. No. 94-1031, at 13 (1976).
In the 95th Congress, which finally enacted the FCPA, a committee of the House of Representatives, in reporting out a bill that did not provide expressly for a private right of action, made a statement that the House “Committee intends that the courts shall recognize a private cause of action based on this legislation . . . on behalf of persons who suffer injury as a result of prohibited corporate bribery,” H.R. Rep. No. 95-640, at 10 (1977). We have three main problems with the Republic’s reliance on this statement, and other aspects of the FCPA’s legislative history, as justification for judicial implication of a private right of action in its favor
First, the House committee’s statement was not repeated (and no endorsement of its substance was in any way suggested) in the reports of either the Senate committee considering the FCPA or the conference committee that reconciled the views of the House and Senate to produce the language of the FCPA as it was ultimately enacted. See S. Rep. No. 95-114 (1977); H.R. Rep. 95-831 (1977). Indeed, in the debate on the conference committee report, one conferee stated that the question of whether “courts will recognize [an] implied private right of action . . . . was not considered in the Senate or during the conference, and thus [it] cannot be said that any intent is expressed at all on this issue.” 123 Cong. Rec. 38,601, 38,602 (1977) (statement of Sen. Tower) (emphasis added).
Second, although the legislative history contains additional references to the desirability of a private right of action, they do not provide any clear indication of congressional intent to create one. See generally Siegel, The Implication Doctrine and the Foreign Corrupt Practices Act, 79 Colum. L. Rev. 1085, 1105-12 (1979) (canvassing the legislative history in detail and finding “no conclusive evidence of congressional intent to grant private actions”).
Third, we note that this case illustrates the wisdom of Lamb, which avoids the question of what class of parties the FCPA was designed to protect. Although we agree that the statute was “primarily designed to protect the integrity of American foreign policy and domestic markets,” Lamb, 915 F.3d at 1029, one might argue that it is principally the foreign governments whose processes might be corrupted. The Republic’s claim highlights the obvious problem with the latter concern here: The foreign government supposedly to be “protect[ed]” by the FCPA was the entity that demanded the bribes in the first place.
Finally, we note that although it has been nearly a quarter of a century since Lamb was decided, and although Congress has more recently amended the FCPA, see International Anti-Bribery and Fair Competition Act of 1998, Pub. L. No. 105-366, 112 Stat. 3302 (1998), Congress has not chosen to override Lamb. We conclude that there is no private right of action under the antibribery provisions of the FCPA and that the district court did not err in dismissing the Republic’s FCPA claims.”
As indicated in the Second Circuit’s decision, there have been previous appellate court decisions addressing whether the FCPA has a private right of action. As highlighted in this prior post, the Sixth Circuit addressed the issue in Lamb v. Phillip Morris Inc., 915 F.2d 1024 (6th Cir. 1990). The primary reason articulated by the court for declining a private right of action was something that never happened – at least until 2012 when the DOJ/SEC issued FCPA Guidance. The Sixth Circuit stated:
“Recognition of the plaintiffs’ proposed private right of action, in our view, would directly contravene the carefully tailored FCPA scheme presently in place. Congress recently expanded the Attorney General’s responsibilities to include facilitating compliance with the FCPA. See 15 U.S.C. §§ 78dd-1(e), 78dd-2(f). Specifically, the Attorney General must ‘establish a procedure to provide responses to specific inquiries’ by issuers of securities and other domestic concerns regarding ‘conformance of their conduct with the Department of Justice’s [FCPA] enforcement policy….’ 15 U.S.C. §§ 78dd-1(e)(1), 78dd-2(f)(1). Moreover, the Attorney General must furnish ‘timely guidance concerning the Department of Justice’s [FCPA] enforcement policy … to potential exporters and small businesses that are unable to obtain specialized counsel on issues pertaining to [FCPA] provisions.’ 15 U.S.C. §§ 78dd-1(e)(4), 78dd-2(f)(4). Because this legislative action clearly evinces a preference for compliance in lieu of prosecution, the introduction of private plaintiffs interested solely in post-violation enforcement, rather than pre-violation compliance, most assuredly would hinder congressional efforts to protect companies and their employees concerned about FCPA liability.”
Prior to Lamb, the Fifth Circuit addressed a private right of action, albeit in dicta, in McLean v. Int’l Harvester Co., 817 F.2d 1214 (5th Cir. 1987). The court stated: “we find it inappropriate to imply a private cause of action from the statute. The statute on its face shows no congressional intent to create a private action. Moreover, no legislative history exists referring to such an intent.” This last sentence is obviously false given the legislative history discussed in the recent Second Circuit opinion.
In short, the three appellate court decisions that address an FCPA private right of action are either: (1) based on a false premise (McLean); (2) based on a false premise at the time (Lamb); or (3) involved a unique and odd plaintiff.
An FCPA private right of action does warrant further consideration.
At the very least, this much should be undisputed: if there was an FCPA private right of action, there would be substantially more case law of precedent concerning the FCPA’s provisions than currently exists and that, I submit, would be a good thing.
Contrary to the Second Circuit’s statement, courts have inferred private rights of action in several provisions of the ’34 Act (see e.g., J.I. Case v. Borak, 377 U.S. 426 (1964)) and the FCPA is after all part of the ’34 Act. Moreover, several of the Cort v. Ash factors for implying a private of right would seem to be met in the FCPA context. Among the reasons Congress passed the FCPA was to level the playing field given how the discovered foreign corporate payments distorted free and fair competition. Moreover, the SEC itself has said on numerous occasions that FCPA enforcement is central to its mission of investor protection. An FCPA private right of action would further seem to be consistent with the underlying premise of the FCPA which is to reduce foreign bribery. Finally, “regulation of bribery directed at foreign officials cannot be characterized as a matter traditionally relegated to state control,” as even the Lamb court recognized.
As highlighted in prior posts here, here and here, for several years U.S. Representative Ed Perlmutter (D-CO) consistently introduced the “Foreign Business Bribery Prohibition Act” which would have provided for a limited private right of action under the FCPA. The bills never made it out of committee.
Friday Roundup
The FCPA in the hallways, Super Bowl bribery, no FCPA charges, quotable, survey says, FCPA reform advocate nominated to the federal bench, interesting homework assignment, scrutiny alert, and for the reading stack. It’s all here in the Friday roundup.
FCPA in the Hallways
Avon’s FCPA scrutiny brought the FCPA to main street. News Corp.’s and Wal-Mart’s FCPA scrutiny generated world-wide media coverage. Will the FCPA next become the topic of discussion in middle school and high school hallways across America?
According to this TMZ report:
“A Canadian border official has been fired for allegedly accepting a $10,000 bribe in return for allowing members of Justin Bieber’s entourage with criminal records to enter Canada. Bieber’s camp reportedly gave a female officer at the Niagara Falls border thousands of dollars in backstage passes to get members of his posse into the country while he performed. Canada has a strict policy on not allowing people with certain types of criminal records to enter. It’s unclear when the alleged bribes went down … but Justin performed 2 shows in Toronto last year. The accusations surfaced after more of Bieber’s friends allegedly showed up at the border looking for the same special treatment — and the officers on duty blew the whistle. The Canada Border Services agency reportedly circulated an internal memo reminding officers not to take bribes … and to rat out anyone who does.”
In case you are wondering, there have been several FCPA enforcement actions in recent years concerning alleged payments to customs, immigration and other regulatory officials in connection with a business purpose broadly speaking.
Super Bowl Bribery?
Providing money or other things of value to a person or entity to influence the discretionary acts of that person or entity in connection with a business purpose is bribery … is it not?
Yet, according to this Wall Street Journal article, the above may determine which artist receives the coveted Super Bowl half-time performance slot. According to the article, the NFL “has asked artists under consideration for the high-profile gig to pay to play” including whether the artists “would be willing to contribute a portion of their post-Super Bowl tour income to the league, or if they would make some other type of financial contribution, in exchange for the halftime gig.”
According to the article, the NFL’s only goal is to “put on the best possible show.”
No FCPA Charges
It is sometimes perplexing why certain alleged conduct results in Foreign Corrupt Practices Act charges, whereas other alleged conduct – clearly implicating the FCPA – does not result in FCPA charges.
Case in point, the recent DOJ prosecution of Alisa Bivens, a U.S. citizen and former foreign program director of International Adoption Guides Inc. (IAG – a South Carolina company). (See here for the DOJ release). Bivens recently pleaded guilty to defrauding the U.S. in violation of 18 U.S.C. 317. As noted in the DOJ release:
“Bivens admitted as part of her plea that she and her co-conspirators submitted fraudulent documents to the State Department to facilitate adoptions of Ethiopian children by U.S. parents from 2006 until 2009. In support of U.S. visa applications for the Ethiopian children, Bivens and others submitted false documentation, including contracts of adoption signed by orphanages that could not properly give the children up for adoption because, for example, the child in question was never cared for or never resided at the orphanage.”
The DOJ release further states:
“In entering her guilty plea, Bivens also admitted that she and others paid bribes to two Ethiopian officials so that those officials would help with the fraudulent adoptions. The first of these two foreign officials, an audiologist and teacher at a government school, accepted money and other valuables in exchange for providing non-public medical information and social history information for potential adoptees to the conspirators. The second foreign official, the head of a regional ministry for women’s and children’s affairs, received money and all-expenses-paid travel in exchange for approving IAG’s applications for intercountry adoptions and for ignoring IAG’s failure to maintain a properly licensed adoption facility.”
Quotable
U.S. Ambassador to China Max Baucus recently delivered this speech to the APEC Network of Anti-Corruption Authorities and Law Enforcement Agencies. Ambassador Baucus stated:
“The Obama Administration takes a firm stand against American and foreign companies that engage in bribing foreign officials to obtain or retain business. Other economies here do this as well. In the United States, one of the most effective tools we use to combat corruption is enforcement of the Foreign Corrupt Practices Act. We pursue corruption at many levels:
- corporations, both big and small;
- everyone from sales agents to CEOs;
- U.S. and foreign companies;
- citizens and foreign nationals; and
- direct payers and intermediaries.
Since 2009, the U.S. Department of Justice has taken in $3.4 billion from criminal fines, penalties and forfeitures. And the U.S. Securities and Exchange Commission has seized another $1 billion of profits obtained by illegal or unethical acts over the last ten years. As a result, more American companies have changed the way they do business. Companies are now more willing to voluntarily disclose corrupt behavior and report on solicitations for bribes.”
The last sentence of course is debatable.
Even so, what is not debatable is the following from Ambassador Baucus – “we need to adopt international best practices of transparency and rule of law” in the fight against corruption.
U.S. officials preach this virtue abroad, yet the reality is we need to work on these virtues here at home as well.
As to the rule of law, and as noted in this speech by former Federal Reserve Chairman Paul Volcker who was the keynote speaker at the International Bar Association’s annual conference:
“There is frank recognition that the combination of a weak rule of law and corruption is not only economically debilitating, but threatening the political health of both new and old democracies. I do not exclude the United States. We think of ourselves as exemplars of the rule of law. We are certainly world champions in the extent of legislation and regulation governing bribery, conflicts of interest, procurement procedures, campaign financing, protection of human rights and most of all, transparency. All of these are ingredients of what some think of as the rule of law. But we still face the sad fact that in the United States itself, only a quarter of Americans believe that corruption is not widespread in our country. My feeling is that the impression of serious corruption has increased further, a reflection largely of the concern that campaign financing has come to gravely distort the political process. Should we be satisfied that we live with a really effective rule of law, when the perceived need for heavy campaign spending has come to dominate our political process? We let those financing practices infringe in a very basic way upon the rule of law, with its sense of even-handedness and openness. Does it not breed behaviour that is accomplished by any reasonable definition of corruption?”
Survey Says
PwC’s 2014 State of Compliance Survey asked: “Please select your top 3 areas in terms of current perceived level of risk to your business.” The most popular responses from survey participants were:
- Industry-specific regulations – 31%
- Privacy and confidentiality – 25%
- Bribery/corruption – 22%
FCPA Reform Advocate Nominated to the Federal Bench
Earlier this week, President Obama announced his intent to nominate Haywood Stirling Gilliam, Jr. (Vice-Chair of Covington & Burling’s White Collar Defense and Investigations practice group) to serve on the United States District Court for the Northern District of California.
As noted in this previous post, in a 2013 Law360 Q&A Gilliam was asked “what aspects of your practice area are in need of reform and why?” and he stated:
“Foreign Corrupt Practices Act enforcement stands out as an area in need of further reform. Over the past several years, FCPA enforcement has been characterized by the U.S. Department of Justice and U.S. Securities and Exchange Commission advancing aggressive enforcement theories, but there have been limited opportunities for courts to scrutinize those theories. Most FCPA enforcement cases end in negotiated resolutions such as deferred prosecution or nonprosecution agreements. In that context, regulators often insist that the settling company or individual accept the government’s expansive theories as a condition of resolving the case. For example, the DOJ has extracted penalties from non-U.S. based, non-U.S. traded companies not covered under the four corners of the statute by asserting broad theories such as aiding and abetting or conspiracy — even when the foreign entity has not taken any action in the U.S. As a practical matter, that could be a hard case to prove at trial — but the government almost never has to. The result of this trend has been to enshrine the government’s aggressive enforcement positions as quasi-precedent: The law means what the DOJ and SEC say it means, and defendants (especially publicly traded companies) seldom have a realistic opportunity to push back in court, given the financial and practical costs of fighting a contested enforcement action. Relatively recently, district courts have begun to weigh in on these theories, which is a positive development, but there still is a dearth of FCPA case law as compared to other areas of criminal law. This absence of settled law makes it challenging for companies to decide how to handle thorny FCPA compliance issues. For example, companies routinely face a difficult choice in deciding whether to self-report potential violations to the government, as opposed to thoroughly investigating and remediating the issues internally. While regulators insist that they will give “meaningful credit” to companies that self-report, the tangible benefits of doing so are far from clear. The recent FCPA resource guide issued by the DOJ and SEC says that the agencies place a “high premium” on self-reporting, but does not give concrete guidance as to how the government weighs self-reporting in deciding whether to charge a case, as opposed to offering a deferred prosecution or nonprosecution agreement, or declining the case outright. While the resource guide is a start, companies and their counsel would benefit from more specific guidance when they are weighing the potential, but uncertain, benefits of disclosure against the cost and distraction that can result from voluntarily handing the government a case that otherwise might not have come to its attention.”
Interesting Homework Assignment
Professors are supposed to give homework, not receive homework.
Yet, as highlighted in this Corporate Crime Reporter article, Professor Brandon Garrett (UVA) recently received a homework assignment from a federal court judge.
The assignment: “to appear in [a] case as an amicus curiae for the limited purpose of providing the Court with advocacy on questions regarding the scope of the Court’s authority, if any, to consider the fairness and reasonableness of a deferred prosecution in deciding whether to accept or reject such an agreement.”
As noted in the Corporate Crime Reporter article, the DPA is between the DOJ and Saena Tech, a defense contractor and grew out of a domestic bribery investigation.
To say the least, I look forward to reviewing Professor Garrett’s homework and so should you.
Scrutiny Alerts
Och-Ziff
Bloomberg goes in-depth in this article “The Hedge Fund and the Despot” concerning Och-Ziff’s relationships in Zimbabwe and the company’s overall scrutiny.
Barclays
Previous posts (here) have detailed Barclay’s scrutiny on both sides of the Atlantic regarding its business relationships with various Middle Eastern investors.
Reuters reports
“Britain’s fraud prosecutor could decide as soon as next month whether to charge former Barclays executives over undisclosed payments the bank made to Qatari investors in 2008.”
According to the article, “U.S. authorities are also investigating the same Barclays’ Qatari commercial agreements and whether third-party relationships breached anti-bribery rules.”
Reading Stack
From Bloomberg, an in-depth look at the Libyan Investment Authority (LIA) and its relationships with various companies in the financial services industry which has resulted in FCPA scrutiny.
Informative article here titled “Land of Confusion: Insurance Coverage for Pre-Suit FCPA Investigation Costs Under D&O Liability Policies.”
An interesting front-page read here from the Wall Street Journal regarding China’s anti-corruption crackdown.
*****
A good weekend to all.
FCPA Related Auditor – Client Disputes
Knowledge of the Foreign Corrupt Practices Act is a fundamental skill set for a variety of lawyers as well as accountants.
But what about auditors? How does the FCPA impact the day-to-day job functions of auditors including relationships with clients?
This post highlights two recent examples of FCPA related auditor – client disputes.
Kallo Inc.
The FCPA, with increasing frequency, is popping up in all sorts of corporate disclosures. Yet, Kallo Inc.’s recent FCPA related disclosure is downright strange. Last week the healthcare delivery services company with corporate headquarters in Canada and shares traded on U.S. exchanges disclosed in an SEC filing as follows.
“On June 3, 2014, we terminated Schwartz Levitsky Feldman LLP […] as our independent registered accounting firm. The decision to dismiss Schwartz Levitsky Feldman LLP as our independent registered public accounting firm was approved by our board of directors on June 3, 2014. Except as noted in the paragraph immediately below, the reports of Schwartz Levitsky Feldman LLP’s financial statements for the years ended December 31, 2012 and 2011 and for the period January 1, 2013 through March 31, 2014 did not contain an adverse opinion or disclaimer of opinion, and such reports were not qualified or modified as to uncertainty, audit scope, or accounting principle.
The reports of Schwartz Levitsky Feldman LLP on our financial statements as of and for the years ended December 31, 2012 and 2011 and for the period January 1, 2013 through March 31, 2014 contained an explanatory paragraph which noted that there was substantial doubt as to our ability to continue as a going concern as we had suffered negative working capital, had experienced negative cash flows from continuing operating activities and also due to uncertainty with respect to our ability to meet short-term cash requirements.
During the years ended December 31, 2012 and 2011 and for the period January 1, 2013 through March 31, 2014 and through June 3, 2014, we have not had any disagreements with Schwartz Levitsky Feldman LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to Schwartz Levitsky Feldman LLP’s satisfaction, would have caused it to make reference to the subject matter of the disagreements in its reports on our consolidated financial statements for such years or in connection with its reports in any subsequent interim period through the date of dismissal with the exception of the following:
Schwartz Levitsky Feldman LLP failed to timely audit our financial statements for the period ended December 31, 2013. The auditor requested an opinion to the affect that there were no violations of the Foreign Corrupt Practices Act. We complied and had our securities attorney issue an opinion that there were no violations of the Foreign Corrupt Practices Act. Then, after receiving the requested opinion, the auditor decided that it would require a second opinion from an “independent” attorney. Again, we complied having retained a law firm in New York City, which specialized in the Foreign Corrupt Practices Act. Again, the opinion reflected there was no violation of the Foreign Corrupt Practices Act. After that, the auditor wanted the opinion from the New York City firm to contain additional language, which the independent lawyer felt that Schwartz Levitsky Feldman LLP was trying to influence the attorney’s independent opinion. By this time, we were frantic. The auditor could not give us a definitive date or specific conditions which would result in the issuance of its audit opinion of the December 31, 2013 financial statements.
Under the circumstances we had no choice but to obtain the services of a new auditor. After retaining MaloneBailey LLP, MaloneBailey LLP was able to render an unqualified audit opinion. We have authorized Schwartz Levitsky Feldman LLP to respond fully to the inquiries of MaloneBailey LLP concerning the disagreement. Schwartz Levitsky Feldman LLP alleged that it did not receive an unqualified opinion by independent legal counsel to confirm that that there were no violations of the Foreign Corrupt Practices Act. However, Schwartz Levitsky Feldman LLP fail[ed] to disclose that in fact it received two opinions from two law firms that there were no violations. Further, Schwartz Levitsky Feldman LLP did not conduct any independent investigation or retain their own counsel with respect to the matter.
Thereafter, Malone Bailey issued an unqualified audit opinion after having access to the same information that Schwartz Levitsky Feldman had access to and audited our financial statements for the year ended December 31, 2013 and reviewed our Form 10-Q for the period ended March 31, 2014.”
“We are the former independent auditors for Kallo Inc. (the “Company”). We have read the Company’s disclosure … dated August 8, 2014. Insofar as it pertains to our firm, we have to advise as follows:
During the conduct of our audit of the Company’s financial statements for the year ended December 31, 2013, we expressed concerns to the Company related to certain acts and transactions that may have violated the U.S. Foreign Corrupt Practices Act (“FCPA”).
As a necessary component of alleviating our concerns and completing the Company’s audit and issuing an opinion on the Company’s financial statements for the year ended December 31, 2013 and for the subsequent period through March 31, 2014, we requested that the Company provide us with an unqualified opinion by independent legal counsel, which confirmed that the acts and transactions in question did not violate the FCPA.
In response to our request, the Company provided a two page legal opinion that concluded that the acts and transactions in question did not violate the FCPA. This initial response was insufficient to alleviate our concerns, in part because the issuing attorney was not sufficiently independent.
Thereafter, the Company provided us with a letter from a New York-based law firm. Although this letter was issued by an apparently independent attorney, the letter did not contain an unqualified legal opinion that the acts and transactions in question did not violate the FCPA. Upon receipt of this letter, we once again requested an unqualified opinion by independent legal counsel that confirmed that the acts and transactions in question did not violate the FCPA.
After following up numerous times as to the status of this opinion, the Company indicated that the New York-based firm was conducting an investigation of the facts and circumstances that would allow it to issue the requested opinion. To date of our termination, the Company had not provided us with this unqualified opinion by an independent legal counsel stating that the acts and transactions in question did not violate the FCPA, despite their numerous assurances that they would do so.
We had not received such an opinion and as a result, we were unable to alleviate our concerns of a potential violation of the FCPA and the potential liability in respect thereof.
In view of our inability to satisfy ourselves, as to this issue we were not, on the date of our termination, in a position to release our audit report on the Company’s financial statements for the year ended December 31, 2013.”
To say the least, it will be interesting to follow Kallo’s alleged or perceived FCPA issues.
DAP Partners
As highlighted in this previous post, in May 2013 various executives of broker-dealer Direct Access Partners (“DAP”) were criminally and civilly charged in connection with an alleged bribery scheme involving an official of an alleged Venezuelan state-owned banking entity that acted as the financial agent of the state to finance economic development projects. Thereafter, as highlighted here and here, additional individuals associated with DAP were also charged, certain defendants pleaded guilty, and the firm went defunct.
In connection with its demise, DAP filed a civil lawsuit in New Jersey state court alleging that its auditor (Rothstein Kass & Co – an entity recently acquired by KPMG) was negligent due to its failure to spot the alleged conduct at issue. In summarizing DAP’s complaint, this recent Law360 article states:
“DAP accused Rothstein Kass of deviating from general accounting standards and principles during its dealings with the company, leading to multiple missed chances to uncover the scheme. Among the specific allegations DAP asserts is that Rothstein failed to dedicate adequate resources to its audits, delegated critical responsibilities to inexperienced staff members and failed to conduct mandatory analytical procedures in order to meet deadlines, thus exposing the brokerage to the fraud.”
“To state claims … DAP is required to do more than simply allege that RK audited DAP and DAP suffered damages as a result of a bribery and kickback scheme perpetrated by its own senior executives,” Rothstein Kass’s brief said. “DAP, however, has not done so. Instead, DAP offers only incomplete, conclusory and factually unsupported allegations that fail to state any actionable claims against RK, for several reasons.” Defending its work, Rothstein Kass — which acted as DAP’s auditor for 2009, 2010 and 2011 — said evidence now suggests that it was provided with false and fraudulent documents to hide the alleged scheme. However, the claims themselves have other flaws, the Roseland, New Jersey-based firm contends. Because DAP’s senior executives, managers and principal employees carried out the scheme, the fraud can be attributed to DAP and its claims fall victim to the doctrine of in pari delicto, according to Rothstein Kass. That doctrine bars courts from resolving disputes between two wrongdoers and should prevent DAP from recovering for its own officers’ misconduct, the firm said …”.
As highlighted by the two examples above, the FCPA intersects a variety of professional disciplines and auditors, as well as other obvious professionals, need a pair of FCPA goggles in going about their daily tasks.
Moreover, in terms of FCPA ripples (see here for my recent article of the same name), FCPA related auditor-client disputes are yet another example of the many ripples that result from FCPA scrutiny or enforcement.
Bribery Of A Foreign Official On U.S. Soil
[This post is part of a periodic series regarding “old” FCPA enforcement actions]
The core enforcement action described below highlights a rare instance of FCPA violations being charged along with violations of the U.S. domestic bribery statute. The enforcement action is also a rare instance of the United States being the location where the foreign official was allegedly bribed.
Control Systems Specialist / Darrold Crites
In this 1998 criminal information, the DOJ alleged that Control Systems Specialist, Inc. (“Control Systems” a company engaged in the purchase, repair, and resale of surplus military equipment) and its President Darrold Crites made improper payments to a Brazilian Air Force Lt. Colonel (“Col. Z”) stationed at Wright Patterson Air Force Based in Ohio. The information describes Col. Z as follows.
“Col. Z was the Foreign Liaison Officer for the Air Force of the Republic of Brazil … and was authorized to make purchases of military equipment on behalf of the Brazilian Aeronautical Commission (“BAC”), the purchasing agent of the Brazilian Air Force. The BAC was an “instrumentality” of the Government of Brazil.”
The DOJ alleged that Crites met with a civilian employee of the United States Air Force who worked at Wright Patterson Air Force Base as the Command Country Manager (“Country Manager”) for Brazil and was responsible for representing the United States Air Force in dealings with Col. Z.
According to the DOJ, “Country Manager agreed to provide Crites with surplus part numbers, model numbers, and U.S. military sources of surplus parts in exchange for the promise of payments of money, using information he would obtain through his position as a civilian employee of the United States Air Force.”
In turn, the DOJ alleged that “Crites would thereafter purchase the surplus equipment identified by the Country Manager, recondition it, and resell the same to the BAC.” According to the DOJ, Col. Z would approve the BAC’s purchase from Control Systems in exchange for payments of money. Specifically, the DOJ alleged that Crites paid Col. Z “a series of bribes, disguised as ‘consultant fees,’ for each bid accepted by Col. Z on behalf of the BAC.”
The DOJ also alleged that Crites formed a separate company (“Company Y”) with the assistance of an Ohio businessman (“Businessman X”) to pay bribes to Col. Z “in exchange for his approval of Company Y’s bids to sell surplus U.S. military equipment to the BAC.”
According to the DOJ, Crites and Businessman X, as officers of Company Y “arranged not less than forty-four purchases of surplus U.S. military equipment for repair and resale to the BAC.” The DOJ alleged as follows.
“Some of the surplus equipment was obtained by the BAC through the Defense Reutilization and Marketing Service (DRMS) under the Foreign Military Sales (FMS) program and then provided to Control Systems for repair. Other equipment was purchased directly by Control Systems or Company Y, repaired, and then sold to the BAC. In all cases, after each purchase was effected, Col. Z was paid for his approval of the transactions.”
According to the DOJ, Crites, Control Systems and others “paid a total of $99,000 to the Country Manager and a total of $257,139 to Col. Z.”
Based on the above allegations, the DOJ charged Control Systems and Crites with conspiracy to violate the FCPA’s anti-bribery provisions and a substantive violation of the FCPA’s anti-bribery provision. Based on the allegations involving the Country Manager, the DOJ also charged Control Systems and Crites with violating 18 USC 201, the domestic bribery statute.
Pursuant to this plea agreement, Crites pleaded guilty to the three charges described above. In the plea agreement, Crites agreed to cooperate with the DOJ. According to the statement of facts in the plea agreement, “Crites and Control Systems received approximately $672,298 as a result of the contracts received from the government of Brazil.” According to a docket entry, Crites was sentenced to three years probation (with the first six months of probation to be spent in home confinement with electronic monitoring with work release privileges) and 150 hours of community service.
Pursuant to this plea agreement, Control Systems also pleaded guilty to the three charges described above. According to a docket entry, Control Systems was ordered to pay a $1,500 fine and was sentenced to one year probation.
International Materials Solutions Corp. / Thomas Qualey
Based on the same core allegations in the Control Systems / Crites enforcement action, in 1999 the DOJ also alleged in this criminal information that International Materials Solutions Corporation (“IMS” – like Control Systems an Ohio company that engaged in the purchase, repair, and resale of surplus military equipment) and Thomas Qualey (the President of IMS) conspired to violate the FCPA’s anti-bribery provisions and violated the FCPA’s anti-bribery provisions. According to the information, IMS and Qualey paid a total of $67,563 to Col. Z to induce the approval by Col. Z of a bid by IMS for the acquisition and repair of ten fork lift trucks.
Pursuant to this plea agreement, Qualey pleaded guilty to the two charges described above. According to the Statement of Facts in the plea agreement, Qualey and IMS “received approximately $392,250 as a result of the contracts received from the Government of Brazil.” According to this judgment, Qualey was sentenced to three years probation ((with the first four months of probation to be spent in home confinement with electronic monitoring with work release privileges) and 150 hours of community service and ordered to pay a $5,000 fine.
Pursuant to this plea agreement, IMS pleaded guilty to the two charges described above. According to this judgment, IMS was ordered to pay a $1,000 fine plus and was sentenced to one year probation.
See this prior post for another FCPA enforcement in connection with the U.S. Foreign Military Sales program.
Further To The Clustering Phenomenon
Earlier this week, the DOJ announced that two additional individual defendants have been added to the Foreign Corrupt Practices Act (and related) enforcement action against individuals associated with broker dealer Direct Access Partners. (See here for the original May 2013 enforcement action against Jose Hurtado and Tomas Clarke and here for an additional individual, Ernesto Lujan, being added to the enforcement action in June 2013).
Like in the previous enforcement actions, the additional defendants (Benito Chinea and Joseph DeMeneses, the Chief Executive Officer and a managing partner, respectively of Direct Access Partners) were criminally charged in connection with alleged improper payments to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes, an alleged Venezuelan state-owned banking entity that acted as the financial agent of the state to finance economic development projects).
As noted in the DOJ’s release, Chinea and DeMeneses were each charged with one count of conspiracy to violate the FCPA and the Travel Act, five counts of violating the FCPA, and five counts of violating of the Travel Act. Chinea and DeMeneses were also charged with one count of conspiracy to commit money laundering and three counts of money laundering. DeMeneses was further charged with one count of conspiracy to obstruct justice. (See here for the SEC’s announcement of a related enforcement action against Chinea and DeMeneses. Like the SEC’s prior enforcement actions against the other individuals, Chinea and DeMeneses are charged with various securities law violations, but not FCPA offenses as the individuals – while associated with a broker dealer – are not associated with an issuer).
As noted in the DOJ’s release, in August 2013 Lujan, Hurtado and Clarke each pleaded guilty to conspiring to violate the FCPA, to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses.
The DOJ’s enforcement action against Chinea and DeMeneses is further to the curious clustering phenomenon clearly observable in FCPA enforcement.
As highlighted in this previous post (with statistics calculated through the end of 2013), 53% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just four cases and 75% of the individuals charged by the DOJ since 2008 have been in just nine cases.
Of further note (and again with statistics calculated through the end of 2013), of the 89 individuals charged by the DOJ with FCPA criminal offenses since 2008, 61 of the individuals (69%) were employees or otherwise affiliated with private business entities (for instance – Haiti Teleco related enforcement actions, Control Components Inc. Latin Node, Nexus Technologies, BizJet, not to mention failed prosecutions against various Africa Sting defendants and individuals associated with Lindsey Manufacturing).
This is a striking statistic given that 48 of the 60 corporate DOJ FCPA enforcement actions since 2008 (80%) (again using statistics calculated through the end of 2013) were against publicly traded corporations. In short, a private entity DOJ FCPA enforcement is approximately three times more likely to have a related DOJ FCPA criminal prosecution of an individual than a public entity DOJ FCPA enforcement action.
Thus far in 2014, the trends have been further magnified. In addition to this week’s action: