From the Dockets
This post details developments as to FCPA or related litigation previously reported.
Haiti Teleco Case
Previous posts (here and here) detailed Joe Esquenazi’s and Carlos Rodriguez’s motion for acquittal or a new trial based on statements made (and then seemingly retracted) by Jean Max Bellerive (Prime Minister of Haiti) concerning the ownership of Haiti Teleco – the entity at the middle of the bribery scheme. In the DOJ’s response (here) to the defendants’ motion, the DOJ argues, among other things, that “the Government did not seek the first Bellerive declaration from the Republic of Haiti, and there is no need for an evidentiary hearing as to when or how the Government obtained it.” As to the second Bellerive declaration, the DOJ stated that “the Government assisted Mr. Bellerive in preparing the declaration” in which Bellerive, as noted in the prior post, stated that the first declaration was strictly for internal purposes and he did not know it was going to be used in criminal legal proceedings in the U.S. or that it was going to be used in support of the argument that Teleco was not part of Public Administration of Haiti.
Substantively, the DOJ argues that the first Bellerive declaration does not “contain newly discovered evidence” because the jury “heard most of” the points addressed in the first Bellerive declaration from Garry Lissade, the DOJ’s expert witness, who testified as to the legal status of Haiti Teleco after “he conducted extensive research, including legal research and interviews, in reaching his conclusions.”
The DOJ’s position in many FCPA enforcement actions concerning state-owned or state-controlled entities seems to be that the ownership structure of the entity at issue should be obvious and easily ascertainable to defendants. If so, why did Lissade (Haiti’s former Minister of Justice) have to “conduct extensive research, including legal research and interviews, in reaching his conclusion” that Teleco was a Haitian public entity?
Africa Sting Case
The second Africa Sting trial involving defendants John Mushriqui, Jeana Mushriqui, R. Patrick Caldwell, Stephen Giordanella, John Godsey, and Marc Morales is set to begin on September 22nd. The second trial will be more narrowly focused than the first Africa Sting trial that resulted in a mistrial (as well as dismissal of certain counts including money laundering conspiracy charges).
Why? Because the DOJ did not oppose defendants’ motion to dismiss the money laundering conspiracy charges. In pre-trial briefing, the DOJ stated as follows. “At the conclusion of the government’s case-in-chief in the first trial, the Court granted a motion for judgment of acquittal on Count Forty-Four of the Superseding Indictment with respect to the defendants in the first trial. The government continues to believe that the Court should not have granted the motion and that Count Forty-Four should have been submitted to the jury. But the government understands the Court’s ruling and will not object to the Defendant’s motion. The government’s position in this filing recognizes the Court’s past ruling, and in no way suggests that the government will not seek to bring similar charges in future cases.”
Siriwan “Foreign Official” Case
A previous post (here) detailed how Juthamas Siriwan and Jittisopa Siriwan (the “foreign officials” in the Green FCPA enforcement action) were fighting back against DOJ criminal charges. As noted in the post, the Siriwans argued as follows. “This is the first judicial challenge to a novel prosecutorial approach the Government recently developed to charge foreign officials allegedly involved in corruption. That approach is aimed at overcoming a fundamental FCPA limitation. The FCPA does not criminalize a foreign public official’s receipt of a bribe. Nor can the Government employ an FCPA conspiracy charge against a foreign public official. Accordingly, these new enforcement initiatives require expansive interpretations [of] “promotion money laundering” [under the Money Laundering Control Act].” The Siriwans further argued as follows. “Congress has extensively amended the FCPA, yet it deliberately has not extended FCPA liability to foreign officials. If the Government wishes to extend U.S. criminal penalties to foreign officials accepting a bribe, it must go back to Congress, rather than employ dubious charging tactics to evade the direct and repeated congressional choice not to apply FCPA criminal liability to such officials.”
In its opposition brief (here) filed last week, the DOJ stated as follows. “Upon analysis of defendants’ arguments, it is quickly evident that, in support of their positions, defendants routinely conflate and confuse multiple statutes, interpret and argue the elements of uncharged statutes, and ignore case law relevant to the statutes actually charged.” Among other things, the DOJ stated as follows. “That foreign officials cannot face liability for FCPA offenses does not give foreign officials a free pass to commit other, entirely separate, crimes.” The DOJ noted that the Siriwans are not charged with accepting a bribe, or conspiring to violate the FCPA, but rather with “the separate, and entirely analytically distinct, crime of international transportation money laundering to promote the Greens’ violation of the FCPA.” The DOJ noted that just because Siriwan “was a foreign official at the time of these offenses, and therefore, not charged under the FCPA does not change the analysis.”
As reported by Samuel Rubenfeld at Wall Street Journal Corruption Currents, a hearing on Siriwans’ motion to dismiss is scheduled for Oct. 20.
A “Foreign Official” Fights Back
The Foreign Corrupt Practices Act addresses the payment of bribes, not the receipt of bribes.
For instance, in U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991), the court was called upon to consider whether “foreign officials” who are excluded from prosecution under the FCPA itself, could nevertheless be prosecuted under the general conspiracy statute (18 USC 371) for conspiring to violate the FCPA. The court held that “foreign officials” could not be prosecuted for conspiring to violate the FCPA and adopted the rationale set forth in the trial court opinion (see 741 F.Supp. 116). That rationale was that Congress, in passing the FCPA, only chose to punish one party to the bribe agreement and the DOJ could not therefore “override the Congressional intent not to prosecute foreign officials for their participation in the prohibited acts” through use of the conspiracy statute. The trial court stated as follows. “The drafters of the [FCPA] knew that they could, consistently with international law, reach foreign officials in certain circumstances. But they were equally well aware of, and actively considered, the ‘inherent jurisdictional, enforcement, and diplomatic difficulties’ raised by the application of the bill to non-citizens of the United States.” The trial court observed that prosecution and punishment of “foreign officials” (in the Castle case alleged Canadian “foreign officials”) “will be accomplished by the government which most directly suffered the abuses allegedly perpetrated by its own officials, and there is no need to contravene Congress’ desire to avoid such prosecutions by the United States.” For those of you scoring at home, Castle represents a DOJ loss in a contested FCPA matter.
In recent years, however, the DOJ has used other laws in an attempt to reach “foreign officials.” This trend has been profiled here and here. For instance, in January 2010, in connection with the Gerald and Patricia Green FCPA enforcement action, a criminal indictment was unsealed against Juthamas Siriwan and Jittisopa Siriwan. According to the indictment, Juthamas “was the senior government officer of the Tourism Authority of Thailand (TAT)” and she is the “foreign official” the Greens were convicted of bribing. Jittisopa is the daughter of the “foreign official” and also alleged to be an “employee of Thailand Privilege Card Co. Ltd.” an entity controlled by TAT and an alleged “instrumentality of the Thai government.” The charges against the Siriwans were not FCPA charges, but largely conspiracy to money launder and “transporting funds to promote unlawful activity.”
As detailed in this Wall Street Journal Corruption Currents story by Joe Palazzolo, the Siriwans are fighting back. On behalf of the Siriwans, lawyers at Kelley Drye & Warren LLP recently field this motion to dismiss to the indictment.
In summary, the Siriwans state as follows. “This is the first judicial challenge to a novel prosecutorial approach the Government recently developed to charge foreign officials allegedly involved in corruption. That approach is aimed at overcoming a fundamental FCPA limitation. The FCPA does not criminalize a foreign public official’s receipt of a bribe. Nor can the Government employ an FCPA conspiracy charge against a foreign public official. Accordingly, these new enforcement initiatives require expansive interpretations [of] “promotion money laundering” [under the Money Laundering Control Act].” The Siriwans state as follows. “Congress has extensively amended the FCPA, yet it deliberately has not extended FCPA liability to foreign officials. If the Government wishes to extend U.S. criminal penalties to foreign officials accepting a bribe, it must go back to Congress, rather than employ dubious charging tactics to evade the direct and repeated congressional choice not to apply FCPA criminal liability to such officials.”
As noted in Palazzolo’s article, the DOJ has yet to respond to Siriwans’ motion and U.S. District Judge George Wu (C.D. of California) has scheduled a hearing on the motion for October 20th.
In a development that goes straight to a point raised by the Castle court, Thailand’s National Counter-Corruption Commission (NCCC) has reportedly found sufficient grounds to believe that Juthamas Siriwan received money from the Greens and that Jittisopa Siriwan was an accomplice in the bribery case. The NCCC has reportedly forwarded its conclusion to the Thai Attorney-General for legal action against the Siriwans. For more, see here from the Bangkok Post.
The Siriwan’s challenge is the latest in “this year of FCPA judicial scrutiny.” Previously this year, there was the first judicial challenge to the DOJ’s “foreign official” interpretation that made extensive use of the FCPA’s legislative history (see here); the first dd-3 judicial challenge (see here); the first victim petition under the FCPA (see here); and the first Travel Act judicial challenge (see here).
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In a related development (see here), the DOJ has dropped its appeal of Gerald and Patricia Green’s sentence. As detailed in this prior post, in September 2009, Gerald and Patricia Green were found guilty by a federal jury of substantive FCPA violations, conspiracy to violate the FCPA, and other charges. After several sentencing delays, in August 2010 (see here), Judge Wu rejected the DOJ’s 10 year sentencing request for both Gerald and Patricia Green and sentenced the Greens to six months in prison, followed by three years probation. In its sentencing brief, the DOJ urged the court to “disregard defendants’ efforts to obscure the landscape of FCPA sentencing, which generally reflects significant prison terms for convicted individuals.” I asked at the time whether the “landscape of FCPA sentencing” truly reflected “significant prison terms” as stated by the DOJ – a statement even more true now (see the FCPA Sentences tab under the Search page).
I was surprised to learn that the DOJ was appealing the Green sentences and I am thus not surprised to learn that the DOJ has dropped its appeal. In short, do you think the DOJ wants anything FCPA related before the 9th Circuit?
The Final Act In The BAE Circus?
Last week, the State Department announced (here) that “BAE Systems plc of the United Kingdom (BAES), including its businesses, units, subsidiaries, and operating divisions and their assignees and successors, except BAE Systems, Inc. and its subsidiaries, entered into a civil settlement with the Department of State for alleged violations of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR).” The release states that “under the four-year term of the Consent Agreement, BAES will pay in fines and in remedial compliance measures an aggregate civil penalty of $79 million, the largest civil penalty in Department history.”
The State Department action follows the March 1, 2010 guilty plea of BAE Systems plc. (see here for the prior post). BAE pleaded guilty to “conspiring to defraud the United States by impairing and impeding its lawful functions, to make false statements about its FCPA compliance program, and to violate the Arms Export Control Act and International Traffic in Arms Regulations.” In that DOJ enforcement action, BAE Systems plc agreed to pay a $400 million criminal fine.
I previously called (here) the BAE “bribery, yet no bribery” enforcement action one that contributes to the “facade of FCPA enforcement” (see here) and was asked several questions about the enforcement action by former Senator Arlen Specter (see here).
Like the DOJ enforcement action, the State Department action specifically notes that BAE Systems, Inc. was not involved in the conduct giving rise to the enforcement actions. BAE Systems Inc. is “the U.S.-based segment of BAE Systems plc” and “is responsible for relationships with the U.S. Government…”. (See here).
The State Department action involved BAE Systems plc entering into a consent decree (see here for the relevant documents) “to settle 2,591 violations of the AECA and ITAR in connection with the unauthorized brokering of U.S. defense articles and services, failure to register as a broker, failure to file annual broker reports, causing unauthorized brokering, failure to report the payment of fees or commissions, and failure to maintain records involving ITAR-controlled transactions.”
Certain of the improper conduct identified in the State Department documents relate to the lease and lease/sale of Gripen aircraft to the Ministries of Defence in the Czech Republic and Hungary – conduct also at issue in the DOJ’s prosecution of BAE (see here for the criminal information).
The State Department documents also relate to BAE’s use of advisers for defense transactions and proposed defense transactions involving U.S. defense articles and services without obtaining authorization from the State Department.
One of the advisors identified is Alfons Mensdorff-Pouilly. As noted in this previous post, the U.K. Serious Fraud Office (“SFO”) originally charged Alfons Mensdorff-Pouilly with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to unknown officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.” Within days, the SFO dropped the charges. As noted in this previous post, the SFO explained that BAE would not agree to the SFO plea (watered down as it was) without the SFO agreeing to drop the charges against Count Mensdorff.
As to debarment, the State Department consent agreement states (at page 20) that the State “Department has determined to impose a statutory debarment of BAE Systems plc pursuant to section 127 of the ITAR [see here], based on the criminal charges [in the previous DOJ enforcement action].
Yet, the next sentence of the consent decree states as follows. “However, based on the foregoing and additional information provided by Respondent, and request for reinstatement by BAE Systems plc, the Assistant Secretary of State for Political-Military Affairs has determined under Section 38(g)(4) of the AECA [see here] that Respondent has taken appropriate steps to address the causes of the violations and to mitigate law enforcement concerns. Accordingly, BAE Systems plc shall be reinstated.”
The consent decree did however “place under a policy of denial” BAE Systems CS&S International, Red Diamond Trading Ltd. and Poseidon Trading Investments Ltd. Per the consent decree, this means that there will be “an initial presumption of denial during the case-by-case review of all licenses and other authorizations” involving these subsidiaries even though the consent decree states that “Transaction Exceptions” may be granted by the State Department. Furthermore, the consent decree states that all licenses, agreements, and other authorizations involving these subsidiaries previously issued “are not affected and are not revoked.”
The most recent annual report on BAE’s website states as follows regarding CS&S International. “The operating group’s CS&S International business predominantly acts as prime contractor for the UK government-to government defence agreement with Saudi Arabia and has a major in-country presence. Its main activities include operational capability support to both the Royal Saudi Air Force and Royal Saudi Naval Force and, more recently, the commencement of supply of 72 Typhoon aircraft.” Neither Red Diamond Trading Ltd. nor Poseidon Trading Investments Ltd. are mentioned in the 190 page annual report.
According to this U.K. Guardian article “BAE’s Secret Money Machine,” “in February 1998 Red Diamond Trading Ltd was anonymously incorporated in the British Virgin Islands and was used to channel payments all over the world, via Red Diamond accounts in London, Switzerland and New York.” As to Poseidon Trading, the same article states as follows. “BAE set up a second front company, purely to handle the Saudi commission payments for al-Yamamah. Poseidon Trading Investments Ltd was incorporated in the British Virgin Islands on June 25 1999.”
The DOJ’s criminal information contains various allegations regarding Saudi Arabia – without specifically mentioning the al-Yamamah contract. For more on the al-Yamamah contract see here -a PBS Frontline documentary titled Black Money.
The State Department’s recent $79 million enforcement action against BAE is in addition to the DOJ’s $400 million enforcement action against BAE from 2010. However, as Dru Stevenson (Professor of Law, South Texas College of Law) and Nick Wagoner (a law student at South Texas College of Law) explored in this recent post, in the 365 days that followed the 2010 DOJ enforcement action, BAE was awarded U.S. contracts in excess of $58 billion dollars.
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Speaking of debarment (or lack thereof) Senator Al Franken continues to lead on this issue. Earlier this month, during a Senate Judiciary Committee hearing, Franken questioned Attorney General Eric Holder why, over the past three years, hundreds of billions of dollars have been awarded to defense contractors who have previously been convicted of fraud. See here for the video. Senator Franken similarly questioned Assistant Attorney General Lanny Breuer during a January Senate Judiciary Committee hearing. See here for the video.
In connection with the Senate’s November 2010 hearing “Examining Enforcement of the Foreign Corrupt Practices Act” the DOJ was asked whether it favored “mandatory, conduct-based, debarment remedy for companies that engage in egregious bribery.” See here for the prior post including the DOJ’s response.
Assistant Attorney General Lanny Breuer On ….
Earlier this week, Assistant Attorney General Lanny Breuer spoke at the 3rd Russia and Commonwealth of Independent States Summit on Anti-Corruption. See here for his remarks.
Breuer’s remarks touched upon a number of topics including the following as excerpted below.
On Corruption Generally
“Corruption affects countries rich and poor, large and small, and it has particularly harmful effects on emerging economies. When a developing country’s public officials routinely abuse their power for personal gain, its people suffer. Roads are not built, schools lie in ruin, and basic public services go unprovided. And when corruption takes hold in any nation, its political institutions tend to lose legitimacy, threatening democratic stability and the rule of law. Corruption undermines the health of international markets, stifling competition and repelling foreign investment. Moreover, corruption is a ‘gateway crime, allowing money laundering, gang violence, terrorism and other crimes to thrive.”
On the FCPA’s Legislative History
“The FCPA was the first effort of any nation to specifically criminalize the act of bribing foreign officials. The statute was enacted in the wake of the “Watergate” scandal in the United States, which led to the resignation of President Richard Nixon in 1974 and resulted in a dramatic plunge in Americans’ overall trust in government. In 1976, following certain prosecutions for illegal use of corporate funds arising out of the Watergate scandal, the U.S. Securities and Exchange Commission, or S.E.C., which regulates the securities industry in the United States, issued a “Report on Questionable and Illegal Corporate Payments and Practices.” In its report, the S.E.C. determined that foreign bribery by U.S. corporations was “serious and sufficiently widespread to be a cause for deep concern.” S.E.C. investigations revealed that hundreds of U.S. companies had made corrupt foreign payments involving hundreds of millions of dollars. With this background, the U.S. Senate Banking Committee concluded that there was a strong need for anti-bribery legislation in the United States. “Corporate bribery is bad business,” the committee said in its Report. “In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet.””
“As the U.S. House of Representatives’ Report on the FCPA put it, a strong anti-bribery law can “help U.S. corporations resist corrupt demands.” In the words of the former chairman of a major oil company, quoted in the report, “If we could cite our law which says we just may not do it, we would be in a better position to resist” the pressure that sometimes comes from foreign officials. That was true in 1977, and it’s true now.”
On FCPA Enforcement
“The passage of the FCPA was a milestone. But the Act did not become a strong enforcement mechanism overnight. Indeed, in the first decades immediately following the law’s enactment, many saw the FCPA as a slumbering statute. That is no longer the case. In recent years, the Criminal Division has dramatically increased its FCPA enforcement efforts. To give you a sense: in 2004, we charged two individuals under the FCPA and collected around $11 million in criminal fines. In 2005, we charged five individuals and collected around $16.5 million. By contrast, in 2009 and 2010 combined, we charged over 50 individuals and collected nearly $2 billion.”
“The FCPA is a strong enforcement mechanism, and we are not shy about using it.”
On Holding Non-U.S. Actors Accountable
“We have traditionally also pursued foreign executives who work for U.S. corporations or for foreign corporations that trade on U.S. exchanges, as well as the foreign corporations themselves. For example, in 2007, Christian Sapsizian, a French citizen and former executive at Alcatel, pleaded guilty to two counts of violating the FCPA, and in 2008 he was sentenced to 30 months in prison on those charges. In addition, we recently resolved a wide-ranging investigation against the Swiss-based freight-forwarding company Panalpina World Transport (Holding) Ltd., its U.S. subsidiary, and several foreign and domestic oil and gas service providers. Thus, as the Sapsizian and Panalpina cases show, any Russian citizen working for an American company in Russia or for a Russian company that trades on an American exchange, as well as any Russian company that trades on such an exchange, are also within our reach.”
“We have on more than one occasion brought charges against foreign officials under U.S. money laundering statutes, alleging that those officials laundered the proceeds of foreign bribery through U.S. financial institutions. In 2009, for example, we indicted two former Haitian government officials on money laundering charges for their alleged roles in a scheme to bribe officials of Haiti’s state-owned national telecommunications company. Thus, as the Haiti Teleco case shows, Russian officials who launder the proceeds of foreign bribes through U.S. financial institutions could also be liable for FCPA-related offenses.”
On the Kleptocracy Asset Recovery Initiative
“… Last year our Asset Forfeiture and Money Laundering Section initiated a Kleptocracy Asset Recovery Initiative, which is designed to target and recover the proceeds of foreign official corruption that have been laundered into or through the United States. In November of 2009, at the Global Forum on Fighting Corruption and Safeguarding Integrity, in Qatar, Attorney General Holder pledged to redouble the United States’ commitment to recovering foreign corruption proceeds. The Kleptocracy Initiative represents a concrete step toward fulfilling that commitment; and once the initiative is fully implemented, it will allow the Justice Department to recover assets on behalf of countries victimized by high-level corruption.”
Maxwell Technologies is the First Corporate Enforcement Action of 2011
In early January, Maxwell Technologies Inc. (“Maxwell”), announced that the U.S. Department of Defense awarded the company a $1.7 million contract (here), “for the initial phase of a multi-phase program to develop a lighter, longer-lasting, energy source for field radios and other portable electronic equipment carried by military personnel.”
On January 31st, Maxwell became the first company in 2011 to settle an FCPA enforcement action.
The Maxwell enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $14.4 million ($8 million criminal fine via a DOJ deferred prosecution agreement; $6.4 million in disgorgement and prejudgment interest via a SEC settled complaint).
Maxwell previously disclosed (see here) that “discussions with the SEC and DOJ have resulted in an estimate of potential settlement of up to $20.0 million – representing the combined first offer of settlement put forth by the SEC and DOJ.” Presumably, the company’s disclosure of the government’s settlement offer did not sit well with the DOJ and on July 30, 2009, Maxwell issued this strange press release.
As set forth more fully below, the alleged recipients of the bribe payments at issue were all employees of alleged Chinese state-owned or state-controlled enterprises. Also of note, the SEC’s charges include disclosure violations not often seen in FCPA enforcement actions, based on allegation that Maxwell’s bribe payments allowed the company to offset losses and fund product expansions that are now a source of revenue for the company.
DOJ
The DOJ enforcement action involved a criminal information (here) against Maxwell resolved through a deferred prosecution agreement (here).
Criminal Information
The criminal information, a short eight pages, alleges that “from at least July 2002 through in or about May 2009, Maxwell and its subsidiaries paid approximately $2,789,131 to Agent 1 [a Chinese national, third-party agent responsible for Maxwell S.A.’s (a wholly-owned subsidiary of Maxwell) high voltage capacitor sales to Chinese customers] to be distributed to Chinese foreign officials, in return for securing contracts that profited Maxwell.”
The Chinese foreign officials?
You guessed it, employees of alleged state-owned entities such as:
“Pinggao Group Co. Ltd. [formerly Pingdingshan High Voltage Switchgear Works) … a state owned manufacturer of electric-utility infrastructure in Henan Province, China” (see here for the company’s website)
“New Northeast Electric Shenyang HV Switchgear Co., Ltd. … a state-owned manufacturer of electric-utility infrastructure in Liaoning Province, China” (see here for company information) and
“Xi-an XD High Voltage Apparatus Co., Ltd., … a state-owned manufacturer of electric-utility infrastructure in Shaanxi Province, China” (see here for the company’s website).
According to the information, “Maxwell and its subsidiaries accomplished [the bribe] payments by using Agent 1 to market and sell Maxwell’s high voltage capacitors to Chinese consumers … substantially all of which were Chinese state-owned entities.” The information alleges that Agent 1 “requested quotes from Maxwell S.A. on behalf of prospective Chinese state-owned entities” and that “upon Agent 1’s instruction, Maxwell S.A. added an extra 20 percent to the quoted amounts to arrive at a higher price for Maxwell S.A.’s high-voltage equipment.” The information alleges that Agent 1 then distributed the extra amount “to officials at the Chinese state-owned entities” including employees of the above referenced companies.
Under the heading, “Knowledge Within Maxwell’s U.S. Management,” the information alleges that “Maxwell’s management within the United States discovered, tactitly approved, concealed and caused to be concealed the bribery scheme.” According to the information, following discovery of the payments by Maxwell senior management in the U.S. including by Executive A, Executive B, and Executive C (all U.S. citizens), under Executive E’s (a Swiss citizen and Maxwell S.A’s Vice President and General Manager) oversight and supervision, the payments at issue to Agent 1 actually increased from approximately $165,000 in 2002 to nearly $1.1 million in 2008.
According to the information, Maxwell’s financial statements and reports described the bribe payments as “sales-commission expenses.”
Based on the above allegations, the information charges Maxwell with FCPA anti-bribery violations and knowingly violating the FCPA’s books and records provisions.
DPA
The DOJ’s charges against Maxwell were resolved via a deferred prosecution agreement.
Pursuant to the DPA, Maxwell admitted, accepted and acknowledged that it was responsible for the acts of its officers, employees, subsidiaries, and agents as set forth above.
The term of the DPA is three years and it states that the DOJ entered into the agreement “based on the individual facts and circumstances” of the case and Maxwell.
Among the factors stated are the following.
(a) Maxwell voluntarily disclosed its FCPA violations to both the DOJ and the SEC;
(b) Maxwell cooperated with the Department’s investigation of Maxwell and others;
(c) Maxwell undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures …;
(d) Maxwell agreed to cooperate with the Department in any ongoing investigation of the conduct of Maxwell and its employees, agents, consultants, contractors, subcontractors, subsidiaries, and others relating to violations of the FCPA; and
(e) the impact on Maxwell, including collateral consequences, of a guilty plea or criminal conviction.
As stated in the DPA, the fine range for the above described conduct under the U.S. Sentencing Guidelines was $10.5 million to $21 million. Pursuant to the DPA, Maxwell agreed to pay a monetary penalty of $8 million (25% below the minimum amount suggested by the guidelines).
Pursuant to the DPA, Maxwell agreed to self-report to the DOJ “periodically, at no less than 12-month intervals” during the term of the DPA “regarding remediation and implementation of the compliance program and internal controls, policies, and procedures” described in the DPA.
As is standard in FCPA DPAs, Maxwell agreed not to make any public statement “contradicting the acceptance of responsibility” by Maxwell as set forth in the DPA and Maxwell further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.
As to debarment issues, paragraph 22 of the DPA states as follows:
“The Department agrees to bring to the attention of governmental and other debarment authorities the facts and circumstances relating to the nature of the conduct underlying this Agreement, including the nature and quality of Maxwell’s cooperation and remediation. By agreeing to provide this information to debarment authorities, the Department is not agreeing to advocate on Maxwell’s behalf, but rather is providing facts to be evaluated independently by the debarment authorities.”
See here for the DOJ release.
SEC
The SEC’s civil complaint (here) alleges, in summary, as follows.
“From 2002 through May 2009, Maxwell violated the anti-bribery, books and records and internal control provisions of the Foreign Corrupt Practices Act (“FCPA”) when it repeatedly paid bribes to Chinese officials in order to obtain and retain sales contracts for high voltage capacitors from several Chinese state-owned entities. Maxwell engaged in bribery to maintain its high-voltage capacitor business in China, which accounted for material revenue and profits during the relevant time period.”
According to the complaint, “the illicit payments were made with the knowledge and tacit approval of certain former Maxwell officers and Maxwell failed to accurately record these payments on its books and records, and failed to implement or maintain a system of effective internal accounting controls to detect or prevent the payments.”
The complaint alleges that “the improper payments generated nearly $15.4 million in sales contracts, from which Maxwell realized profits ofover $5.6 million.”
According to the SEC:
“Maxwell violated [the FCPA’s anti-bribery provisions] by engaging in widespread bribery of government officials in China in order to sell its high-voltage capacitors to several Chinese state-owned enterprises. Maxwell violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-l, and 13a13 thereunder by failing to disclose in its annual and periodic filings that the material revenues and profits associated with its long-standing bribery scheme enabled Maxwell to better financially position itself until new products could be commercially developed and sold. Maxwell violated [the FCPA’s internal control provisions] by failing to maintain internal controls to prevent or detect the bribes paid to officials at Chinese state owned-entities. Finally, Maxwell violated [the FCPA’s books and records provisions] by failing to accurately reflect the nature of the improper payments in Maxwell’s books, records, and accounts.”
The SEC’s complaint contains an allegation not often seen in FCPA enforcement actions about how the company’s alleged bribery scheme helped offset losses in other areas and helped fund future product development.
According to the SEC:
“Maxwell greatly depended on the revenue from Maxwell SA’s high-voltage capacitor sales to China in order to help fund Maxwell’s expansion into new product lines that are now expected to become Maxwell’s future source of revenue. Maxwell engaged in the bribery scheme because it enabled the company to obtain material revenue needed to financially position itself to help fund the very products that today are sustaining Maxwell’s future growth.”
As to “Discovery of the Illicit Payments” the complaint states as follows.
“Potential FCPA and accounting concerns came to the attention of Maxwell’s finance department in September 2008, during an internal review of Maxwell SA’s commission expenses involving the Chinese Agent. Maxwell’s management team asked about these commission payments after learning of the unusually high Chinese Agent commissions, which included the Extra Amounts. During this review, Executive A informed Maxwell’s finance department that the payments made to the Chinese Agent were recorded as sales commissions. Maxwell’s finance department then sought and obtained a signed FCPA certificate from the Chinese Agent in which he represented that he was familiar with the U.S. FCPA and local laws and regulations regarding corrupt payments” and that he had not in the past and will not in the future make any improper payments.
However, according to the SEC, “after obtaining the representations, Maxwell’s finance department took no further corrective action regarding the commissions and Extra Amounts paid to the Chinese Agent …”.
In February 2009, Maxwell’s new CEO, became aware of the issues with the Chinese Agent and he “immediately notified Maxwell’s audit committee and outside counsel.”
According to the SEC:
“During the relevant period, Maxwell’s controls designed to prevent illicit payments to foreign officials were wholly inadequate. At the time, Maxwell’s Code of Conduct contained a brief section on FCPA issues, but there is no evidence that employees received any FCPA training prior to the company’s remedial steps.”
As to Maxwell’s internal controls failures, the complaint states as follows:
“Maxwell (1) failed to question why the contract prices were artificially inflated by 20% above the bid prices; (2) did not request supporting documentation for the invoices or track where the commission payments ultimately were distributed; (3) performed no due diligence on the agent; (4) did not require FCPA training for all relevant employees; and (5) failed to take any action even though it appears that certain former officers and senior managers of Maxwell had knowledge of the bribes paid by Maxwell SA and its agent since at least November 2002.”
Without admitting or denying the SEC’s allegations, Maxwell agreed to an injunction prohibiting future FCPA violations and agreed to $5,654,576 in disgorgement and $696,314 in prejudgment interest.
In the SEC release (here) Cheryl Scarboro (Chief of the SEC’s FCPA Unit) stated as follows: “Maxwell’s bribery allowed the company to obtain revenue and better financially position itself until new products were commercially developed and sold. This enforcement action shows that corruption can constitute disclosure violations as well as violations of other securities laws.”
Jeffrey Higgins (here) of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP and Jerome Roth (here) of Munger Tolles & Olson LLP represented Maxwell.
Since announcement of the January 31st enforcement action, Maxwell’s shares are up approximately 6%.
As I explored in this recent post, 60% of 2010 corporate FCPA enforcement actions involved (in whole or in part) employees of alleged state-owned or state-controlled enterprises (“SOE”). In these cases, the enforcement agencies generally allege that such enterprises are “instrumentalities” of a foreign government and that such employees are therefore “foreign officials” under the FCPA.
So far in 2011, it’s 100%.