Friday Roundup
In the classroom, survey says, a candid statement, on-point, an informative read, patience and a prediction. It’s all here in the Friday roundup.
In The Classroom
I was pleased to learn that my recent article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure” (here) was required reading for the MBA students in Jeffrey Klink’s FCPA-related class at the University of Pittsburgh Joseph S. Katz Graduate School of Business. (See here for a recent profile of the class.) Klink (a former AUSA and current CEO of Klink & Co., a global risk management firm – here) shared the following.
“During our class we discussed your recent article regarding the Wal Mart case at length. Many students opined that it was likely that many of the payments were in fact facilitation payments and especially where permits would definitely be issued. The majority of students, however, believed that probably many payments were not clerical or ministerial, noting that according to the NY Times article, payments caused zoning maps to be changed, and environmental permits were obtained likely without proper process. Students believed that these kinds of payments were not grease or skid payments, but were in fact bribes designed to allow Wal Mart to open new stores without competition, thus gaining new business. All but one of the 41 students (a bright law student held out) present believed that Wal Mart had successfully obtained new business by paying bribes through the $24 million in payments to gestores. We also discussed the significance of an organization’s compliance culture. Wal Mart was viewed very negatively by the students, having been subject to successful discrimination suits regarding gender bias, its poor treatment of vendors, locking its own injured employees inside stores, and the facts of the Mexico bribery case, where, if the NY Times article is correct, it was clear that top officials buried facts, did not pursue an investigation, and promoted corrupt executives to high ranking positions. As geography under the FCPA can also be destiny, I also noted that Mexico is rated #100 by TI, and it doesn’t appear that Wal Mart had a risk plan in place to address its growth in places where corruption and bribery are extremely common and not unexpected. Many students believed that Wal Mart, like other large organizations, likely engaged in, and continues to engage in, cost – benefit thinking where executives conclude that the cost of bribery is not significant compared to the benefits that accrue to the organization through growth and profits.”
Staying on campus and referring to “THE” New York Times article (see here for the prior post) readers may enjoy this webcast of the recent Wal-Mart focused Milbank Tweed Forum at the NYU School of Law. Moderated by Professor Kevin Davis (the author of recent FCPA scholarship – here and here), the panel included David Barstow, the investigative reporter at the New York Times who broke the Wal-Mart story.
Survey Says
Speaking of the significance of the FCPA, a recent boardroom survey conducted by BDO USA (an accounting and consulting firm) reveals as follows. “One-third (33%) of directors cite corruption/bribery as the greatest fraud risk facing their company, compared to approximately one-fifth that identify either revenue recognition (20%) or earnings management (18%). Two-thirds (68%) of directors indicate their companies conduct business in foreign locations or with foreign customers or suppliers. Of those conducting international business, a majority (57%) say they deal with foreign officials and almost one-third (32%) of those believe compliance risks related to bribery of government officials has increased over the past two years, compared to just four percent reporting a decrease.”
The survey, conducted in late August and early September 2012, examined the opinions of 72 corporate directors of public company boards, with revenues ranging from $250 million to $750 million, regarding financial reporting and corporate governance issues. For more, see this BDO release.
Candid Statement
Hank Walther (a former Assistant Chief in the DOJ’s FCPA unit and currently at Jones Day – see here), stated in this recent interview in the Metropolitan Corporate Counsel as follows.
“Most government attorneys realize that a company can take every reasonable step to prevent wrongdoing but ultimately is powerless if somebody really wants to break the law.”
Makes you wonder why the DOJ is steadfast in its opposition to an FCPA compliance defense. But then again the current enforcement environment provides the DOJ maximum leverage. However, for the reasons I articulate in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here), the DOJ should be in favor of a compliance defense.
On-Point
This previous post, “Testing Innocence,” noted that the longest individual FCPA sentences (Joel Esquenazi and Carlos Rodriguez) were issued in enforcement actions where the defendants exercised their constitutional rights to a jury trial. The conduct Esquenazi and Rodriguez allegedly engaged in (and the jury found, although their appeals are pending) paled in comparison to some other FCPA individual prosecutions – such as the individual prosecutions in the Bonny Island Nigeria cases. What did Esquenazi and Rodriguez do that warranted such a long sentence? They tested their innocence.
The FCPA community once again saw the high cost of testing innocence this past spring and summer when the individual defendants in the so-called Carson enforcement action pleaded guilty on the eve of trial. (See here, here, here). The guilty pleas came after the trial court judge issued a pro-defendant jury instruction relating to knowledge of foreign official. (See here). On the brink of the DOJ being put to its ultimate burden of proof on “foreign official” and other elements as well, the DOJ offered plea agreements to substantially reduced charges and the defendants, likely mindful of the high costs of testing their innocence, did what most rationale, risk averse actors in their position would do – agreed to plead guilty.
The Wall Street Journal ran a feature story this week “Federal Guilty Pleas Soar As Bargains Trump Trial” (here) which documented the trend of a “growing number of federal defendants who [plead guilty] often to avoid the lengthy prison sentences that can come with losing at trial.” Among other things, the article noted that “federal [sentencing] guidelines not only toughened punishments but also formalized a system to reward defendants who plead guilty by reducing sentences if they accept responsibility or cooperate with prosecutors, among other things. As part of plea deals, federal prosecutors often drop additional charges that could add years, or decades, to a sentence. Going to trial brings none of those benefits for the accused.”
The WSJ article included research (here) co-authored by my Southern Illinois University School of Law colleague Lucian Dervan (here) which found that 55% of students who were innocent in a control group study pleaded “guilty.” The study showed “a strong compulsion to have the matter resolved even if it meant confessing to something that they really didn’t do.”
Informative Read
Breon Peace and Ryan Becker (Cleary Gottlieb Steen & Hamilton – here and here) recent authored this informative article in Bloomberg Law that touches upon just about everything you would want to know about the FCPA and statute of limitations. The article, written in the context of Wal-Mart’s potential FCPA scrutiny discusses black letter law and judicial decisions, but rightly notes in connection with Wal-Mart as follows.
“Given the facts as reported by the New York Times, Wal-Mart, and individuals involved in the bribery scheme, would have a plausible statute of limitations defense to any FCPA actions—even a potential conspiracy charge. As a practical matter, companies, especially publicly held companies like Wal-Mart, typically make a strategic decision to fully cooperate with a DOJ investigation. Despite the potential success of a statute of limitations defense, a company will often make the judgment that the negative press of a protracted investigation and the uncertainty of the outcome at trial make cooperation the more prudent business judgment. The company’s hope is that it will be given credit for the cooperation and it will achieve a better outcome than if it went to trial (i.e., avoid charges, a deferred prosecution agreement, or a reduced fine).”
Patience
Before Wal-Mart’s potential FCPA scrutiny dominated the headlines, there was News Corp. In July 2011, world-wide media attention focused on the company, not just the phone hacking aspects of the scandal, but the potential FCPA implications as well. See here for the prior post. In the prior Q&A style post, I addressed the issue of how long the FCPA gray cloud will likely hang over News Corp. and said that it would likely be between 2-4 years if the case followed the typical pattern. In February of this year, I noted (here) that the FCPA aspect of News Corp.’s scrutiny was following a typical path.
Eliot Spitzer (former New York Governor, former New York Attorney General and current TV personality) apparently is not aware of the typical path. In this recent Slate article titled “Why Hasn’t Eric Holder Charged News Corp. With Foreign Corrupt Practices?” Spitzer writes as follows.
“[W]here is the inept U.S. Department of Justice in all this? The DOJ has brought many irrelevant and tiny cases against companies for violating the Foreign Corrupt Practices Act, which makes it illegal to bribe either individuals or government officials, even in a company’s overseas operations. The DOJ loves to use the statute to show just how tough it is. Yet now they have the most important case sitting right there in front of them. It’s easy. Even a rookie could field this one. But what are they doing? It’s not clear. If they fail to make this case against News Corp., Eric Holder is a failure as attorney general.”
Patience. And while Sptizer is waiting, he may want to brush up on the FCPA – not sure what he means when he says that the FCPA “makes it illegal to bribe either individuals or government officials.”
Prediction
No, I am not going to predict that the DOJ’s FCPA guidance will be released next week. OK, maybe I will, see here from Compliance Week.
Rather my prediction concerns FCPA risk in India.
The Indian Commerce Ministry recently eased (see here) foreign investment restrictions giving multi-brand retailers greater access to the growing Indian market. Per the new policy, it will be the “prerogative of the states to allow a multi brand store” and “local and state-level regulations which govern shops and establishment are the prerogative of the respective state governments.”
I predict that India’s new FDI policy will be an FCPA compliance headache for relevant companies seeking to expand in India as the new policy facilitates points of contact between a company and state and local officials in regards to license, permit, and land issues. In “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (see here), I highlight how companies subject to the FCPA are often funneled into an arbitrary world of low-paying civil servants who frequently supplement their meager salaries through payments condoned in the host country. I argue that such barriers create the conditions in which harassment bribes flourish and I predict India’s new FDI policy will do just that.
*****
A good weekend to all.
Friday Roundup
A focus on asset recovery, a substantial upgrade to the DOJ’s FCPA website, might Comverse Technologies face a double prosecution, Cosgrove is sentenced to home confinement, and on-point. It’s all here in the Friday roundup.
Asset Recovery
The Arab Forum of Asset Recovery (here) took place earlier this week in Doha, Qatar. President Obama delivered this recorded message. Attorney General Eric Holder delivered this speech at the event and stated as follows. “Corruption has long been recognized as a transnational problem that demands a coordinated, global response. Time and again, we’ve seen its destructive, corrosive effects – hindering development, impeding advancement, and siphoning precious resources away from those in need at a time when they could hardly be more scarce – and when the world economy could hardly be more vulnerable. We’ve come to understand its impact in eroding trust, favoring the interests of a dishonest few over the needs of the hardworking many, and even breeding contempt for the rule of law.” In his speech, Holder provided some highlights of the DOJ’s Kleptocracy Asset Recovery Initiative as well as outlined a U.S. committment to additional resources including two additional Justice Department attorneys to work exclusively on asset recovery and mutual legal assistance issues.
During this speech Holder further stated as follows. “As Attorney General, I’ve consistently worked to ensure that anticorruption remains a top priority for my colleagues at every level of the Justice Department. From our robust enforcement of the Foreign Corrupt Practices Act – an important law under which we have secured more than 30 individual convictions and over 40 corporate resolutions, totaling more than $2.1 billion in penalties, over the last three years alone; to the anticorruption work of our prosecutors stationed both in the United States and overseas – I’m proud to report that we’ve made great strides in our fight against corruption, within – as well as beyond – our borders.”
DOJ FCPA Website
As previously reported by the on-line news site Main Justice (here), the DOJ recently upgraded its FCPA website. Of particular note from a research perspective, the DOJ’s list of enforcement actions now appears to be complete – see here. A link to the DOJ’s FCPA website, as well as numerous other resources, is included on the resources page of this website – here.
Comverse Technology
As noted in this previous post, in 2011 Comverse Technology resolved a DOJ and SEC enforcement action by agreeing to pay $2.8 million (a $1.2 million criminal fine via a DOJ non prosecution agreement; $1.6 million in disgorgement and prejudgment interest via a SEC settled complaint).
The resolution documents contained the standard template clauses.
The two-year NPA (here) stated that for the term of the agreement, Comverse shall “commit no crimes whatsover” and that if the “Department in its sole discretion determines that Comverse has committed any crime after signing this Agreement” that Comverse “shall thereafter be subject to prosecution for any violation of federal law of which the Department has knowledge …”.
The SEC release (here) noted that Comverse consented to a “conduct-based injunction that prohibits Comverse from having books and records that do not accurately reflect, or from having internal controls that do not prevent or detect, any illegal payments made to obtain or retain business.”
Last week in an SEC filing (here) Comverse (CTI) disclosed as follows, after describing its 2011 resolution action and compliance obligations.
“CTI had implemented safeguards in an effort to eliminate improper practices by our employees, consultants, external sales agents and resellers. These safeguards, however, have proven to be ineffective in some instances. In response to the findings of the CTI Audit Committee’s internal investigation, CTI identified a material weakness in our anti-fraud program controls, including those relating to the FCPA, and as part of its remediation our safeguards were modified. However, these modified safeguards, the implementation of these remedial measures and any future improvements may prove to be less than effective, and our employees, consultants, external sales agents or distributors may engage in the future in conduct for which we might be held responsible. Violations of the FCPA and other laws of the United States and other countries may result in significant civil and/or criminal penalties and other sanctions, which could have a material adverse effect on our business, financial condition and results of operations.”
One can look at Comverse’s recent disclosure in two ways. That the company does not have a committment to FCPA compliance and has not taken its post-enforcement action compliance obligations seriously. The other is that even a company under the threat of double prosecution (the first being for conduct at issue in the NPA, the second being the post-enforcement action conduct) can not, despite presumed good faith best efforts, guarantee FCPA compliance across its vast business organization and can not ensure that its numerous employees, consultants, external sales agents and resellers will not engage in problematic conduct.
Cosgrove Sentence
As noted in this previous post, in May Paul Cosgrove (one of the defendants in the so-called Carson case involving former employees of Control Components Inc.) pleaded guilty to a one-count superseding information charging him with making a “corrupt payment to a foreign government official in China in violation of the FCPA.” As noted in the prior post and as detailed in the plea agreement, Cosgrove suffers from significant health issues. The DOJ stated, in its sentencing memo (here) as follows. “Absent defendant’s health condition, the government would recommend a term of incarceration of 15 months. However, to the extent the Court believes that defendant’s health condition warrants a non-incarceratory sentence, the government recommends that the term of home confinement be 15 months.”
As noted in this article from the Orange County Register, yesterday U.S. District Court Judge James Selna sentenced Cosgrove to 13 months home confinement.
On-Point
Russell Ryan (a former assistant director of the SEC’s division of enforcement and currently with King & Spalding – here) had a dandy op-ed (here) recently in the Wall Street Journal concerning the SEC seeking to punish, not just conduct, but an individual being “unrepentant” and “impenitent.” Ryan’s piece reminded me of this prior post in which the DOJ criticized an FCPA corporate defendant for not cooperating “based on jurisdictional issues.” Once again, do the enforcement agencies expect defendants to roll over and play dead?
*****
A good weekend to all.
Shades Of Gray
As noted in other recent posts (here and here), while FCPA enforcement is largely devoid of judicial scrutiny, sentencing of individual FCPA defendants remains a judicial function and provides an opportunity for someone other than the DOJ to have input on some aspect of the DOJ’s positions when it comes to FCPA enforcement. This is what makes FCPA sentencing transcripts such interesting reads. The lawyer comments, and more importantly those of the judge, are unscripted and often telling. I wish I had all FCPA sentencing transcripts to share and perhaps you can assist in that endeavor by sending a transcript my way at fcpaprofessor@gmail.com.
One FCPA sentencing transcript I recently received was the August 2010 transcript from Gerald and Patricia Green’s sentencing hearing.
In terms of background, as noted in this previous post, in September 2009, the Greens were found guilty by a federal jury of conspiracy to violate the FCPA, substantive FCPA violations, and other charges. See here for the DOJ New Release. As noted in the release, evidence introduced at trial showed that “beginning in 2002 and continuing into 2007, the Greens conspired with others to bribe the former governor [Siriwan] of the Tourism Authority of Thailand (TAT) in order to get lucrative film festival contracts as well as other TAT contracts.”
As noted in this previous post, in August 2010 District Court Judge George Wu (Central District of California) rejected the DOJ’s 10 year sentencing recommendation and sentenced both Gerald and Patricia to six months in prison.
The sentencing transcript (here) indicates that Judge Wu believed that the Greens helped make the TAT a success, performed the services it was engaged to perform in a professional manner, and increased revenue for the country.
Wu stated as follows.
“Insofar as the nature of the crimes are concerned, the jury found that the defendants bribed the head official of the TAT in order to obtain contracts to operate the Bangkok International Film Festival between 2002 and 2006. The Court finds that by engaging in that scheme the defendants were not trying to get money from the Thai government without performing the services or even to engage in those services in a slipshod manner. Prior to the Greens’ involvement, the Bangkok International Film Festival was not a particularly successful endeavor in any sense of the word. Through the Greens’ management the Bangkok International Film Festival gained in stature, reputation and increased revenue for the country. The defendants are claiming that the nation of Thailand profited in the sum of 140 million. I find that that figure is somewhat excessive. Although, I do feel that the evidence does show that there was a profit when everything was said and done, including any payments that were made either to the Greens or to Ms. Siriwan. Therefore, the Court would find that the Greens’ efforts and also actually their scheme did not actually cause any monetary loss for the country.”
Elsewhere in the sentencing transcript, Judge Wu and DOJ attorney Jonathan Lopez had the following exchange as to whether the contracts at issue benefited Thailand.
“MR. LOPEZ: […] It’s hard to argue that providing film festivals [provides a substantial benefit to the country].
THE COURT: It depends on the amount of money that’s involved and that’s generated. If it was successful, which it was, that does in turn engender jobs of one sort or another to the tourist industry having films being made in the country and things of that sort.
MR. LOPEZ: Well, their sentencing papers have not established any sort of direct link of that nature, if that argument was even relevant.
THE COURT: I think they proffered the evidence of it. The government may not find that evidence to be substantial, but the defense did proffer it.”
The transcript also indicates that Judge Wu (1) was not persuaded by the DOJ’s position that the reputational harm to Thailand was a proper issue to consider at sentencing; and (2) was troubled by the DOJ’s presumption that the Greens corrupted the Thai official when the opposite could equally be true – that the Thai Official corrupted the Greens.
The following exchange between Judge Wu and DOJ attorneys Jonathan Lopez and Bruce Searby is interesting.
“MR. LOPEZ: One thing that the Court I don’t think is taking — or that I’d like to ask the Court to take into fuller consideration is, setting aside the economic harm, the reputational harm corruption has, that is the reputational harm that comes to a city domestically or internationally or a state internationally where corruption exists. There is a reputational harm to the system, to the people, to the integrity of the government when corruption is not punished swiftly. That is one of the reasons why the FCPA has been enacted is to promote the ending of corruption. Corruption in and of itself is a crime, and these two defendants engaged in pure corruption with the governor in this scheme. Your Honor looks as though he may be confused by something I’m saying.
THE COURT: No. I’m not confused by what you are saying. It’s just that when you were making that argument, I presume you were referring to the United States.
MR. LOPEZ: Well, I’m referring both to the United States and to Thailand. You had mentioned Thailand is not a monetary victim. These defendants victimized Thailand reputationally as well, and I don’t want that point to be lost. I can expand further.
THE COURT: Obviously, when one has a bribe, one has to have the person receiving the bribe. I suppose that that is some sort of reputational harm. But conversely, however, this Court can only decide the issue of punishment as to the defendants it has here insofar as Ms. Siriwan is concerned, and the issue as to whether or not Ms. Siriwan has somehow sullied the reputation of Thailand is something that this Court can’t deal with.
MR. LOPEZ: The government posits that the defendants assisted in the sullying of the reputation of the Thai government system by assisting in corrupting that system through their actions. No other American company was able to bid on these projects. No other Thai company was able to bid on these projects because the defendants had a lock on it, and the statement that contracts should be awarded based on merit and not pay, the jury found that those two defendants paid for all of those contracts. That’s a corruption of the system.
THE COURT: And I understand that they have to suffer the consequences of that, but vis-a-vis the reputation of Thailand, again, the fact that I punish these defendants in one way or another is not going to affect the reputation of Thailand. It’s up to the Thai government to take steps vis-a-vis its own officials as to whether or not it feels that those officials deserve some sort of punishment one way or another.
MR. LOPEZ: I believe you can, Your Honor.
THE COURT: I can only do the punishment insofar as these defendants are concerned. I can’t affect Thailand’s reputation one way or another by my sentencing.
MR. LOPEZ: I believe you can, Your Honor. I believe it sends a message, both domestically and both internationally, that the United States citizens are not going to promote corruption in other countries and add to that. That’s the United States’ side of it.
THE COURT: But, unfortunately, for those persons in Thailand, there might be other countries with other persons who may attempt to do corruption in a similar fashion. They are not governed by United States law. So, therefore, unless the Thai government takes steps in that regard, I don’t understand how the Thai — Country of Thailand’s reputation vis-a-vis corruption or not corruption is affected.
MR. LOPEZ: The fact remains that these two defendants corrupted the Thai system, and they are before this Court.
THE COURT: Or vice versa. It might very well be that Siriwan posed the endeavor to the Greens. There is no evidence one way or the other on that. […] In which case we would have a situation where the Thai high governmental official corrupted two persons whom do not have any criminal convictions prior to this point in time, whose reputation at least amongst the persons who have provided letters to this country was unsullied, and it was that Thai official who corrupted the otherwise incorruptible citizens of this country.
MR. LOPEZ: First of all, Your Honor, I think you are basing your —
THE COURT: I’m using your argument in the same way. Since there is no evidence as to who corrupted who, your presumption is that the defendants corrupted the Thai official. It might have very well been that the Thai official corrupted them.
MR. LOPEZ: Your Honor, I think the Court is confused as to what my argument is. It does not center around whose idea it was. It does not center around that. It centers around the corruption that took place period. From 2002 to 2007 these defendants engaged in a conspiracy, no matter whose idea it was initially, to corrupt the Thai system as well as to sully the reputation of the United States and its businesses that operate out of the United States. I submit to the Court that that is a harm. That is a harm to both Thailand and to both the United States and that these —
THE COURT: I would agree that obviously when bribery becomes a issue there is a reputational harm.
MR. LOPEZ: Yes.
THE COURT: But again, to make a strong point vis-a-vis the sentencing, before I would have any sort of position as to what effect that would have on how I sentence, I would have to know such things as who corrupted who. Otherwise, what difference does it make.
[…]
THE COURT: What I did is to utilize that argument vis-a-vis [Lopez’s] contention that in this particular situation the defendants are somehow to blame because of the bribery situation without placing any equal blame on the part of Ms. Siriwan who was involved as well.
MR. SEARBY: Your Honor, I would happily place equal blame on Governor Siriwan for what has happened, no doubt about it.
THE COURT: All right.
MR. SEARBY: However, the defendants here dived into bribery with both feet because they initially started bribing the governor in one contract.
THE COURT: I understand your position.
MR. SEARBY: Basically, they ran wild in these various other contracts.
THE COURT: I understand your position.
MR. SEARBY: There is no doubt they were willing participants and enthusiastic participants in bribery. In fact, as the evidence came out at trial, they had practically no other revenue other than TAT contracts that they obtained through bribery.
MR. LOPEZ: Your Honor, I want to make sure this point is clear. Of course, the governor has an equal share of blame in this regard, but the governor is not before you. These two defendants are before you. That’s one of the reasons why I’m a little confused as to the government’s emphasis on what’s happening in Thailand. The government submits that this Court’s opinion should not be governed by what Thailand does with its own citizens. That should not be a relevant factor. It’s not the situation where if Thailand doesn’t punish their person we shouldn’t punish our people. Two wrongs don’t make a right. It’s the same type of argument that people have said about foreign bribery; well, that’s what you have to do in that country, so obviously it’s okay. Well, no, that’s not what you have to do in that country. Punishment should not be withheld from one defendant because another defendant is still going through the process. We don’t know what’s going to happen with that other defendant. [See here for a recent post concerning the DOJ’s enforcement action against Siriwan]. There is a process in place. Because we are further along does not mean that, that process is not happening. These are the defendants before you. These defendants have that blame.
THE COURT: I understand. What else from the government?”
*****
Bribery is seldom a black and white issue. There are many shades of gray. However this color often appears only during sentencing of FCPA individual defendants when someone other than the DOJ is defining the colors.
A Focus On Chinese Guanxi
The sentencing memos in the Garth Peterson enforcement action provide an interesting back-and-forth between Peterson and the DOJ concerning the issue of cultural context, specifically the concept of Chinese guanxi.
Peterson’s sentencing memo (here) contains a specific section titled “Cultural Context” and stated as follows (redactions in the original).
“Peterson committed an FCPA offense without stepping foot in the United States while working for a Chinese subsidiary of a United States company. Peterson’s tenuous connection with the United States, despite being a U.S. citizen, makes this case very unusual and makes Chinese cultural considerations relevant. Peterson admitted at his plea hearing that he helped the Chinese Official to invest personally in a Morgan Stanley investment at a beneficial price and that by misleading Morgan Stanley about this fact with another person, he conspired to violate the FCPA. The Chinese Official was a close friend of Peterson’s – in many ways a father figure to him – and Peterson helped him in order to repay the help that the Chinese Official had given him through his career. This type of favor is called ‘guanxi’ in China, a term that describes the exchange of gifts or favors in a professional setting. Guanxi is the traditional way that business relationships are developed in China. [Citations Omitted]. Peterson has spent much of his life living in Asia. He learned Asian cultural traditions, and they are as familiar, if not more familiar to him, than United States cultural traditions. His childhood friend […] wrote about Peterson’s ‘inexperience with the United States’ and his lack of familiarity with U.S. ‘culture, expectations, and walks of U.S. life.’ […] wrote that Peterson ‘seemed to fit in better on the other side of the Pacific’ and ‘thinks more like an Asian than an American.’ As part of Peterson’s Asian cultural understanding, he learned the Chinese business culture of gift giving, or guanxi.” […] We ask the Court to consider … the cultural context of Peterson’s crime when sentencing him.”
The DOJ responded (here) as follows.
“Peterson’s assertion that he gave Chinese Official 1 a $3 million-plus interest in Tower Two [the investment at issue in the enforcement action] as an expression of ‘guanxi’ is also demonstrably false. Peterson says that ‘guanxi’ is ‘a term that describes the exchange of gifts or favors in a professional setting.’ The source upon which Peterson relies, […] describes the parameters of guanxi, which typically involves small tokens: the ‘exchange of gifts, favors, and banquets.’ Here, Peterson stole a $7 million piece of a building and gave a Chinese public official a piece worth more than $3 million. The grant of an ill-gotten, multimillion dollar interest in an apartment building is hardly the type of item one typically exchanges in Chinese culture. Any suggestion to the contrary borders on the offensive. […] Even if Peterson’s […] ‘guanxi’ arguments were based upon a true factual recitation – which they are not – they are legally irrelevant. […] Corrupting a Chinese official in the course of stealing an interest in a building cannot be dismissed as a symptom of Peterson’s affinity for China or its culture. If anything, his actions demonstrate quite the opposite.”
In reply (here), Peterson stated as follows.
“The Government argues that Peterson’s inclusion of the Chinese Official was not an expression of ‘guanxi’ because the value of the Chinese Official’s interest was too great to fit within the technical definition of ‘guanxi.’ Whether the term ‘guanxi’ applies misses the point. Peterson seeks to provide the Court with the full context for his actions, including the cultural and relationship-based motivations for his offense. Peterson acknowledges that the Chinese culture and Peterson’s own desire to build his relationship with the Chinese Official do not justify his offense. Cultural context and motivates, however, can be relevant t a defendant’s character for sentencing purposes, and Peterson asks the Court to consider those factors here.”
*****
The DOJ argues that cultural context is legally irrelevant in FCPA enforcement actions. However, cultural considerations may be one reason for the frequency in which judges sentence below DOJ sentencing recommendations in FCPA cases. For instance, as noted in this prior post, in sentencing Ousama Naaman, Judge Ellen Huvelle’s (D.D.C.) stated that she has “traveled a lot in this world, and it is very complicated to say that our morality is necessarily that of other peoples.” She considered the context of Naaman’s conduct (which occurred in Iraq) and refused to make Naaman “the poster” child that the DOJ wanted.
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See here for a recent article in Newsweek regarding guanxi and the Foreign Corrupt Practices Act scrutiny of Las Vegas Sands.
Judge (Again) Significantly Rejects DOJ’s Recommendation In Sentencing Garth Peterson, Peterson Goes On Offense And Says The DOJ Is Lying About Morgan Stanley’s FCPA Compliance Procedures
While FCPA enforcement is largely devoid of judicial scrutiny, sentencing of individual FCPA defendants remains a judicial function and provides an opportunity for someone other than the DOJ to have input on some aspect of the DOJ’s positions when it comes to FCPA enforcement.
While there are a few examples of federal court judges harshly sentencing defendants consistent with DOJ sentencing recommendations (the majority of those sentences have been issued by Judge Jose Martinez in the S.D. of Florida), the clear trend is for judges to significantly reject the DOJ’s FCPA sentencing recommendations. See here, here, here and here for previous posts among others.
Given this trend, it is not surprising that last week Judge Jack Weinsten (E.D.N.Y.) significantly rejected the DOJ’s sentencing recommendation of 51-60 months in sentencing Garth Peterson to 9 months in prison. See here for the Reuters article. See here for the previous post discussing the April 2012 DOJ and SEC enforcement action against Peterson.
Of note, in its sentencing memo (here), the DOJ accused Peterson of making several misrepresentations in his sentencing submission. The DOJ stated as follows. “Peterson’s efforts to mislead the Court concerning the genesis of his crime – a crime fundamentally based upon deceit – call into serious question his assertion that he understands the gravity of the crime he committed, that he is unlikly to engage in such deception in the future, and that he accepts responsibiity for his wrongful conduct. Peterson should be sentenced within the advisory guidelines because he circumvented Morgan Stanley’s internal controls to bribe an official of the Chinese government – an action that has serious consequences for the United States and for American companies transacting business in China.”
The sentencing memos of both parties (see here for Peterson’s sentencing submission and here for his reply) also shed light on additional information relevant to Morgan Stanley’s so-called declination (see here for the prior post). In its submission, the DOJ stated that Peterson “repeatedly and consistently lied to his Moran Stanley supervisors and c0-workers” concerning the conduct at issue and that “each of Peterson’s [Morgan Stanley required FCPA certifications] was but another lie that lulled his employer in trusting Peterson.” In his sentencing submission, Peterson stated as follows concerning the Chinese Official he had a relationship with prior to joining Morgan Stanely. “The Chinese Official was a close friend of Peterson’s – in many ways a father figure to him – and Peterson helped him in order to repay the help that the Chinese Official had given him through his career.” Peterson also asserts that his attempt to influence the “father figure” Chinese Official in the investment project giving rise to the enforcement action was an attempt to recoup an investment for this mother.
*****
On the eve of his sentence, Peterson sat for an exclusive interview on CNBC. See here a video clip, here for the transcript.
In the interview, Peterson stated as follows concerning the investment at issue in the enforcement action.
“The government hasn’t released some important background about that. I made that investment before I joined Morgan Stanley. When I joined, I declared it to Morgan Stanley. Then, Morgan Stanley became familiar with that deal, and decided they wanted to buy in as well. So, I helped them to do that. Then, in– two– about a year and a half after that– essentially, just to make it very simple, Morgan Stanley forced me out of that deal. And I felt that was unfair, because it had been something I’d had before. Then, I brought them in, and then they were forcing me out. And so, about a year after that, I found a way to buy back in at the same price that I’d been forced out at. That’s still—a wrong action. When Morgan Stanley forced me out of the deal, I should’ve either quit, and thereby kept the investment, or I should’ve just accepted that they didn’t want me to be involved in the deal as long as the company was involved. But I don’t believe that that should be characterized as a, “web of deceit,” and whatever, to– you know, to take things from Morgan Stanley.”
The following exchange occurred between Scott Cohn (CNBC) and Peterson as to his decision to plead guilty.
COHN: So, why did you plead guilty to anything?
PETERSON: You know, it’s– I think, hopefully most people will never be in the position I had to be in. But when you’re an individual against the weight of the U.S. Government– and the U.S. Government, the Department of Justice, the SEC, perhaps it’s their way of doing things. They can have—a heavy stick, you know. That if you don’t cooperate with us, you’ll– you know, we’re going to do all these other things. And so, I just cooperated. You know, everybody’s different. Some people are fighters. I guess I’m not.
COHN: But, I mean, you– you’re giving away a lot. You’re– potentially giving away your freedom for a number of years?
PETERSON: In some sense, they took that away a long time ago in reality. Because once I started to cooperate– when they wanted to speak to me, I had to go speak to them. They were– literally, the SEC was harassing my family for years. But– at the end of the day, like I said, I agreed to cooperate, and so, I took that path.
In the interview Peterson criticized Morgan Stanley’s FCPA procedures and said the DOJ is lying to the public.
COHN: Do you– do you– do you feel like Morgan Stanley threw you overboard?
PETERSON: Yeah. Look, I did things wrong. I deserved to get fired. I never bribed anybody, so it’s still a mystery, a little bit why– you know, this whole case is– has been focused on that. Because as I’ve said, I know what I did. These are the things I did wrong. Morgan Stanley got off scot-free. And I think, you know, I have no– you know, desire for them to be harmed in any way, or you know. So– it’s not that. But what I feel bad about is– the government lying to the– to the public. And– saying that– they had this wonderful compliance– program, when in fact the government knows that it wasn’t getting into people’s heads. Which is what really matters.