Former SEC Enforcement Official Throws The Red Challenge Flag
Today’s post is from Russ Ryan (Partner, King & Spalding). Prior to joining King & Spalding, Ryan spent ten years in the SEC’s Division of Enforcement, including his last three years as Assistant Director of the Division.
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Sometimes you see something in a Foreign Corrupt Practices Act case that’s so inexplicable you wish someone would throw the red challenge flag and have the play reviewed under the hood or up in the booth. Unfortunately, in the largely-overlooked wind-down phase of the SEC’s FCPA case against several former Siemens executives, the last of the defendants defaulted, so nobody was around to throw the challenge flag – and as a result the SEC seems to have gotten away with a doozy of a blown call.
Recall that this is the same 7-defendant case in which only one – Herbert Steffen – actively contested the SEC’s charges. Of the other six defendants, the SEC voluntarily dismissed one (Carlos Sergi), three others settled without admitting or denying any wrongdoing (Bernd Regendantz, Andres Truppel, and Uriel Sharef), and the last two defaulted (Ulrich Bock and Stephan Signer). Steffen, a German citizen and the only defendant who actively contested the charges, was dismissed from the case in February 2013 in a widely-noted decision that found a lack of personal jurisdiction over him. (See here for my prior guest post). None of the other defendants in the case were U.S. citizens either, and few if any appear to have had any significant contacts with the United States; the SEC alleged the familiar sporadic touching of U.S. bank accounts, along with a single meeting in Miami during the decade-long alleged bribery scheme, but proffered little else to support personal jurisdiction over any of these foreign nationals.
You might think the court’s dismissal of the only defendant who actively contested personal jurisdiction might have led the SEC to tread carefully when seeking penalties and other sanctions against the defaulting defendants. Think again.
To the contrary, the SEC took an astonishingly aggressive approach to sanctions against the defaulting defendants, and it got everything it asked for. The overall case raises legal and policy issues too numerous to address here, but two warrant especially close scrutiny. First, the SEC convinced the court to impose more than a half-million dollars in civil penalties against each of the two defaulting defendants, despite alleging only four alleged bribes and despite the FCPA’s statutory limit of $10,000 per violation (increased for the relevant period to $11,000 through the SEC’s periodic inflation adjustment as authorized by statute).
How did the SEC get away with a penalty demand more than ten times this apparent $44,000 statutory limit for each defendant? First, by saying that each of the four alleged bribes should be triple-counted as three separate securities law violations – once as a bribe, again as a books-and-records violation, and yet again as an internal-controls violation – thus artificially multiplying four violations to create twelve. And as the SEC wonks among us well know, books-and-records and internal-controls violations come with their own separate statutory penalty regime. But even here the SEC was super aggressive, taking the position that these classically non-fraud violations involved “reckless disregard” of a regulatory requirement, thus allowing the SEC to demand the maximum $60,000 per violation in “second-tier” penalties rather than the $6,000 per violation in the “first-tier” penalties ordinarily associated with non-fraud violations. (The statutory anomaly that permits dramatically higher civil penalties for books-and-records and internal-controls violations than for bribery violations is another topic beyond the scope of this guest post.)
By triple counting each bribe in this way, the SEC demanded $11,000 + $60,000 + $60,000 ($131,000 total) in penalties against each defaulting defendant, and then multiplied that amount yet again for each of the four alleged bribes in question, arriving at a staggering total penalty of $524,000 per defendant. This penalty for each of the defaulting defendants was much higher than the total penalties paid by all three of the settling defendants combined (which were only $40,000, $80,000, and $275,000 respectively).
But that’s not even the most bizarre aspect of the SEC’s penalty demand. Of the four bribes alleged by the SEC against the defaulting defendants, three unquestionably occurred – according to the SEC’s own complaint and penalty motion papers – more than five years before the lawsuit was filed in December 2011, thus raising the obvious question of how the SEC could lawfully request, and how the court could lawfully impose, any penalty at all for those bribes. By now everyone knows that SEC penalty demands are subject to the 5-year statute of limitations codified at 28 U.S.C. § 2462. Indeed, just last year the Supreme Court unanimously ruled against the SEC in a case that involved the same statute (Gabelli v. SEC), wherein the SEC conceded the statute’s applicability to penalty demands. (See my prior guest posts here and here).
So how did the SEC overcome this seemingly insurmountable statute of limitations obstacle? Essentially by ignoring the issue entirely. Of course, it’s possible the SEC got a tolling agreement from these two foreign nationals who later decided to ignore the ensuing lawsuit altogether, but that seems improbable. In any event, neither the SEC’s complaint nor its penalty motion mentioned any tolling agreement. Of the $524,000 in penalties demanded and imposed against each of the defaulting defendants, nearly $400,000 seems obviously barred by the statute of limitations, yet neither the SEC nor the court appears to have acknowledged this issue at all.
One final oddity in this case warrants a separate challenge flag. On top of the $524,000 in penalties imposed against defaulting defendant Bock, the SEC was awarded another $316,000 against him in what the agency euphemistically styled as “disgorgement” of ill-gotten profits from the bribery scheme. But as described by the SEC, this money bore no resemblance to profits derived from any of the alleged bribes. The SEC described it as hush money allegedly paid to Bock (and his wife) to buy his silence and false testimony in two arbitration proceedings that occurred long after he had retired from the company and that, according to the SEC, helped prevent the bribery scheme from being uncovered.
In my recent article, The Equity Façade of SEC Disgorgement, I wrote at length about how disgorgement in SEC cases, as a general matter, is often stretched beyond its proper limits. The default judgment against Bock reflects many of the concerns I raised in that article, but it also reflects an even more fundamental disconnect under settled disgorgement law. Characterizing the kind of hush money allegedly paid to Bock as ill-gotten profits caused by his alleged securities law violations seems a stretch to say the least. The SEC’s theory was that the money was paid to induce and reward Bock’s false testimony in two arbitration proceedings – not as his share of any alleged bribes, not as extra compensation he was paid for his securities law violations, and not as his share of profits earned by Siemens as a result of the bribes. Here too, neither the SEC nor the court addressed the obvious causation issue, and the SEC got the full amount it demanded.
One can only hope that neither the SEC nor the courts will view these default judgments as models for similar treatment of individuals in future FCPA cases. This case illustrates the oft-lamented perils presented by the multitude of SEC cases that are decided each year without any effective advocacy on behalf of the defendant – typically due to the defendant’s default, pro se status, lack of adequate financial resources, or counsel possessing little or no expertise in securities law. The perils run not only to the hapless defendants who invariably get steamrolled in such cases, but sometimes also to the credibility and ultimate enforceability of the resulting judgments.
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See here for original source documents relevant to the above issues.
Friday Roundup
Did you notice?, scrutiny updates, quotable, too narrow, save the date and for the reading and viewing stack. It’s all here in the Friday roundup.
Did You Notice?
This previous post – “Double Dipping” – spotlighted a common trend in issuer FCPA enforcement actions. That is, the company pays twice for the improper conduct. First, to the DOJ because alleged improper gain is a key factor in the advisory U.S. sentencing guidelines which guide criminal fine amounts, and again to the SEC because alleged improper gain often equates to a disgorgement amount.
Did you notice the following in the recent Alcoa enforcement action? In the DOJ’s plea agreement with Alcoa World Alumina LLC the DOJ set forth various factors justifying a reduced criminal fine amount including: “the significant remedy being imposed on the Defendant’s majority shareholder, Alcoa, by the U.S. Securities and Exchange Commission for Alcoa’s conduct in this matter.”
FCPA practitioners would be wise to file this someplace important and the DOJ’s recognition of such “double-dipping” is a welcome development. Time will tell whether it was case specific.
Scrutiny Updates
Companies have different disclosure practices. Some companies disclose specific FCPA internal investigation costs, others do not. When a company falls into the former category, it is a relevant datapoint. Nordion (see this prior post for its initial disclosure) recently disclosed that its “full year expenses associated with [its] investigation was $11.8 million.”
Microsoft, which first became the subject of FCPA scrutiny in March 2013 (see here) – thereby exposing the fallacy of the “good companies, don’t bribe period” position (see here) – “is now requiring its partners to educate their employees on the legal
consequences of bribery and other illegal activity.” So says this recent article in CRN which further states: “A new Microsoft partner program requirement that went into effect this month calls for partners to “provide anti-corruption training to all employees who resell, distribute, or market Microsoft products or services,” Microsoft said in a document sent recently to partners, which was viewed by CRN.”
Quotable
Homer Moyer (Miller & Chevalier and a dean of the FCPA) steps up to the plate and hits another one out of the park. In this recent article he states:
“One reality is the [FCPA] enforcement agencies’ views on issues and enforcement policies, positions on which they are rarely challenged in court. The other is what knowledgeable counsel believe the government could sustain in court, should their interpretations or positions be challenged. The two may not be the same. The operative rules of the game are the agencies’ views unless a company is prepared to go to court or to mount a serious challenge within the agencies.”
Spot-on.
While the decision of one risk-averse business organization to settle an FCPA enforcement action may seem case specific, the long-term effects of such a decision affect not only the settling company, but other business organizations subject to increasingly aggressive FCPA enforcement theories. (See here for a previous guest post titled “Prosecutorial Common Law”).
As former Attorney General Alberto Gonzales rightly noted:
“In an ironic twist, the more that American companies elect to settle and not force the DOJ to defend its aggressive interpretation of the [FCPA], the more aggressive DOJ has become in its interpretation of the law and its prosecution decisions.”
Too Narrow
See here, and here for the Truth in Settlements Act recently introduced by Senator Elizabeth Warren (D-MA) and Tom Coburn (R-OK). As stated here:
“Federal agencies are charged with holding companies and individuals accountable when they break the law, and their investigations regularly end in settlement agreements rather than public trials. All too often, the critical details of these agreements are hidden from the public.”
The bill is too narrow. The rule of law would be better advanced and transparency achieved by abolishing non-prosecution and deferred prosecution agreements.
Save the Date
On January 29th, Fordham Law School in New York City and the Chinese Business Lawyers Association will jointly host a panel titled “China and the Foreign Corrupt Practices Act: Challenges for the 21st Century.” The event will be held from 6:00–7:30 p.m. in the Law School’s McNally Amphitheatre. Speaker include:
Ohio State University Professor Daniel Chow, author of China Under the Foreign Corrupt Practices Act; Nathaniel Edmonds, Partner at Paul Hastings and Former Assistant Chief of the FCPA Unit of the Department of Justice; and Thomas O. Gorman, Partner at Dorsey & Whitney and Former Senior Counsel, Division of Enforcement, Securities and Exchange Commission.
To learn more and to register see here.
For the Reading and Viewing Stack
It would not be a major sporting event without FCPA Inc. marketing material. But then again, certain FCPA enforcement actions in recent years have included such allegations.
For the latest on JPMorgan’s hiring scrutiny in China, see here from Bloomberg which reports that a former “regional chief who expanded the bank’s business in Asia … was met by FBI agents while traveling through a New York-area airport late last year and then interviewed.”
For the latest on the FCPA related case against Frederic Cilins, see here from Bloomberg. As noted in the article, Cilins “won approval from [the judge] to run forensic tests on contracts that were sought by a grand jury probing claims of bribes paid to win mining rights in Guinea.”
Multimedia content here from down under questioning the lack of Australia bribery related enforcement actions. (An interesting view, even if the program begins with a false statement).
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A good weekend to all.
Friday Roundup
“Scurrilous and hypocritical,” scrutiny alerts and updates, a foreign official brain teaser, quotable, and for the reading stack. It’s all here in the Friday roundup.
“Scurrilous and Hypocritical”
As I have highlighted for years (see approximately 25 separate posts under the subject matter heading double standard), there is a double standard concerning corporate interaction with “foreign officials” under the FCPA and corporate interaction with U.S. officials under other U.S. laws – specifically 18 U.S.C. 201.
Commenting on JPMorgan’s current FCPA scrutiny concerning its alleged hiring practices in China, former SEC Commissioner Arthur Levitt writes, in pertinent part, in this Wall Street Journal opinion piece as follows.
“[A]ccording to financial regulators now looking into the hiring practices of major U.S. banks and multinationals in China—some of which have employed members of influential Chinese families—anyone who once hired me [Levitt’s father was the New York state comptroller] might have been violating ethical and legal standards. Securities and Exchange Commission regulators now suggest that such hiring overseas is a form of untoward influence, akin to bribing foreign officials to win business.
The accusation is scurrilous and hypocritical. If you walk the halls of any institution in the U.S.—Congress, federal courthouses, large corporations, the White House, American embassies and even the offices of the SEC—you are likely to run into friends and family members of powerful and wealthy people.
[…]
Whether this is right or wrong, unfair or fair, is not the point. It is hypocritical of financial regulators to criticize—even penalize—practices abroad that are commonplace in Washington, New York and other seats of political and economic power.
Were the SEC to be completely consistent in its approach, it would have to come down hard on the same practices here in the U.S. And the agency would have a field day. Members of Congress and the executive branch regularly hire the children of major donors. Regulators would find scores of examples of men and women, occupying internships and entry-level positions in U.S. corporations, who were hired on the say-so of someone much higher up in the organization.
[…]
[I]f we were to deny multinational companies the ability to hire locally recommended talent, where do we draw the line? Are spouses of influential officials off-limits, but not their children? What about siblings? If not siblings, what about cousins, uncles, nephews? And then there is the issue of friends: How can a financial regulator know whether a friend of someone in power received a job offer in good faith or as a form of influence peddling?
I would hate to imagine what would happen if we applied the same kind of sliding scale to the many people who have received job offers by way of their familial relationships. If that happened, there aren’t many people in finance who would escape the accusation that their hiring was the byproduct of influence peddling.”
Scrutiny Alerts and Updates
This Macau Business Daily report notes the timing of a $10 million pledge by Nasdaq-listed Melco Crown Entertainment for a cultural project in collaboration with the Tokyo University of the Arts. As noted in the article, the company needs various government permissions to increase its presence in Japan. As noted in this prior post, among others, casino operators including Wynn Resorts have been the subject of FCPA scrutiny based on similar charitable contributions.
This previous post highlighted how Transparency International urged the DOJ to investigate the conduct of Walters Power International (an Oklahoma based company that supplies, develops, services and manages electrical generation power plants around the world) in connection with power plant projects in Pakistan. This recent article in The News International reports that Walters Power has “been cleared of any misconduct by the US Department of Justice.” The article notes:
“Following [TI’s] complaint, the US Department of Justice launched a lengthy inquiry against WPIL […]. On Oct 31, 2012, it informed WPIL’s […] lawyers in the US that the inquiry was being closed as no evidence of wrongdoing could be found against the companies. The clearance letter, a copy of which is available with The News, said: “Over the past several months, your client, Walters Power International Ltd., has responded to a number of inquires by the Department of Justice, Criminal Division, Fraud Section, into possible violations of the Foreign Corrupt Practices Act. You have also responded to inquiries on behalf of Pakistan Power Resources, LLC, and Walters Power International, LLC. As you are aware, the Supreme Court of Pakistan issued an order on March 30, 2012, that declared the country’s rental power plant contracts void ab initio. Our review of that order and related pleadings has revealed no allegations of bribery in connection with those contracts. In addition, on July 24, 2012, Pakistan’s National Accountability Bureau closed its case regarding Walters Power noting that “there remains no basis for further proceedings about the Company.” Finally, Transparency International Pakistan, which publicly referred this matter to the US Department of Justice, has provided no evidence of bribery in connection with the RPP contracts in response to our request for further information. Based upon our investigation and the information that has been made available to us to date, we presently do not intend to take any enforcement action and are closing our inquiry into this matter. If, however, additional information or evidence should be made available to us in the future, we may reopen our inquiry.”
The article concludes as follows.
“Interestingly, WPIL […] sat on this letter issued by the US Department of Justice for over a year. When asked why this letter had not been made public for so long, a spokesman for WPIL said: “We cooperated unreservedly with the impartial and unimpeachable investigation of the US Department of Justice and are satisfied with the results. The findings of the US Department of Justice were shared with all shareholders and financial institutions but not made public for fear that this might be misconstrued as a rebuke by the now former chief justice of Pakistan.” He added that the Washington inquiry found no evidence of wrongdoing on the part of either company, contrary to popular misconceptions within Pakistan.”
“Foreign Official” Brain Teaser
As noted in this recent Wall Street Journal article, China State Construction Engineering Corp. (the largest home builder in the world), “is making its first acquisition in the U.S. market through its American subsidiary, as the company continues its aggressive push into overseas markets. China Construction America, the U.S. subsidiary, … agreed to acquire Manhattan-based Plaza Construction for an undisclosed sum.” As noted in the article, “Plaza Construction mainly provides construction management and consulting services in places including New York, Florida, California and Washington, D.C.”
Congress never intended for employees of state-owned or state-controlled enterprises (SOEs) to be “foreign officials” under the FCPA – see here for my “foreign official” declaration – but given the DOJ and SEC’s “foreign official” interpretations, post-acquisition are Plaza Construction employees now Chinese “foreign officials?”
Quotable
World Bank Group President Jim Yong Kim recently stated as follows:
“I’d like to make clear why fighting corruption is a critical priority for me personally, and for the entire World Bank Group: Every dollar that a corrupt official or a corrupt business person puts in their pocket is a dollar stolen from a pregnant woman who needs health care; or from a girl or a boy who deserves an education; or from communities that need water, roads, and schools. Every dollar is critical if we are to reach our goals to end extreme poverty by 2030 and to boost shared prosperity. Let’s not mince words: In the developing world, corruption is public enemy number one. We will never tolerate corruption, and I pledge to do all in our power to build upon our strong fight against it.”
Reading Stack
The most recent edition of the always-informative Debevoise & Plimpton FCPA Update is here. As to the recent Weatherford settlement, the Update states as follows.
“The $152 million in fines and penalties paid by Weatherford make it the eighth largest FCPA settlement in history. Although the monetary resolution is objectively large, comparing it to the monetary resolution in another recent enforcement action points to the difficulty of ascertainting the logic of penalty determinations.
[…]
Beyond the lack of transparency in the calculations that led to the financial resolution – a recurring feature of settled FCPA matters – the Weatherford settlement, like other recent settlements, is a disposition in which facts are included in the allegations or information without an explanation as to why they are relevant, potentially creating even more confusion as to what is or is not acceptable from the enforcement agencies’ point of view.”
For the recent post titled “FCPA Settlements Have Come a Long Way In a Short Amount of Time,” see here.
As to the recent Corruption Perception Index scores recently released by Transparency International (see here for the prior post), the FCPA Update rightly notes as follows.
“[W]hile companies subject to the FCPA, the UKBA, or other transnational anti-bribery regimes should continue to pay heed to the CPI, those seeking most efficiently to assess compliance risks also need to assess such matters as: (1) sector risk; (2) business model risk (including the degree to which the firm relies on third parties and the nature of controls over their activities); and (3) the nature and scope of government interactions, not only in connection with winning sales from government customers but also in obtaining zoning and building permits, tax clearances, customs rulings, currency transaction permissions, investment and financing approvals, and a range of other daily decisions from government actors. Firms with business risks associated with non-compliance such as expiring patents, excess capacity, disproportionate sales-based compensation, and limited oversight over sales and supply chain personnel, may well have significant corruption risks even in nations ranked highly in the CPI.”
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A good weekend to all.
Of Note From The Bilfinger Enforcement Action
This previous post went long and deep as to the Bilfinger enforcement action. This post continues the analysis by highlighting additional notable issues.
Comprehensive “Core” Enforcement Action
The Bilfinger enforcement action of course was not a new action (although it is likely to be counted as such in FCPA Inc. statistics).
Rather, the enforcement action is directly related to several other previous enforcement actions and thus part of one “core” enforcement action. As alluded to in the previous post, the core conduct at issue in the Bilfinger enforcement action – involving the Eastern Gas Gathering System (EGGS) project in Nigeria – has also been the focus, in whole or in part, in the following enforcement actions: Willbros Group (2008), James Tillery and Paul Novak (2008), Jason Steph (2007), and Jim Brown (2006).
This makes the “core” EGGS FCPA enforcement action stand out in terms of its comprehensive nature in that the action targeted two joint venture participants (Bilfinger and Willbros), Willbros employees (Tillery, Brown and Steph) and Willbros’s consultant (Novak). Another FCPA enforcement action involving conduct in connection with the Bonny Island, Nigeria project was similarly broad in its scope (see here), but few FCPA enforcement actions are.
The question remains, why did it take approximately 5.5 years from the 2008 Willbros enforcement action for the Bilfinger enforcement action to occur? After all, Bilfinger was mentioned in the Willbros enforcement action as “a German construction company, a subsidiary or affiliate of a multinational construction services company based in Mannheim, Germany.”
Repeat – FCPA Settlements Have Come a Long Way in a Short Amount of Time
This recent post highlighted how FCPA settlement amounts have come a long way in a short amount of time and posed the question – have FCPA settlement amounts increased … just because?
Consider that the Bilfinger and 2008 Willbros enforcement action involved the same EGGS project.
The DOJ’s DPA in Willbros does not set forth a detailed advisory Sentencing Guidelines calculation as is the norm in most current FCPA DPAs, including the Bilfinger DPA, but the DOJ settlement amount in Willbros was $22 million. This $22 million settlement amount was in connection with not only the EGGS project, but also DOJ allegations that “certain Willbros employees based in South America agreed to make approximately $300,000 in corrupt payments to Ecuadoran government officials of the state-owned oil company PetroEcuador and its subsidiary, PetroComercial, to assist in obtaining the Santo Domingo project, which involved the rehabilitation of approximately sixteen kilometers of a gas pipeline in Ecuador, running from Santo Domingo to El Beaterio.”
The DOJ settlement amount in Bilfinger was $32 million and this action involved only the EGGS project.
Misc.
As a foreign company, the FCPA’s anti-bribery provisions apply to Bilfinger only to the extent a “means or instrumentality of interstate commerce” is used in connection with a bribery scheme. Of note, in the Bilfinger information, the “means and instrumentality” used to support one substantive FCPA anti-bribery charge was a “flight from Houston, TX, to Boston, MA to discuss promised bribe payments.”
As a foreign non-issuer company, the most logical section of the FCPA anti-bribery provisions that Bilfinger would be subject to is dd-3 – “prohibited trade practices by persons other than issuers or domestic concerns.”
Yet, the DOJ information charges Bilfinger under dd-1 applicable to issuers and dd-2 applicable to domestic concerns.
For more on this aspect of the Bilfinger enforcement action, see here.
FCPA Settlement Amounts Have Come A Long Way In A Short Amount Of Time
Many of the critiques of this new era of Foreign Corrupt Practices Act enforcement – including my own – have focused on enforcement theories, non-prosecution and deferred prosecution agreements, and other DOJ or SEC policies and procedures.
While there has been attention and focus on fine, penalty and disgorgement amounts (see here, here, here and here for prior posts including my own), more attention needs to be paid to such issues.
The reason is simple.
FCPA settlement amounts have come a long way in a short amount of time. To be sure, historical issues with certain foreign issuers (i.e. Siemens, Total, and Daimiler) mostly account for this dynamic, as does the $6 billion Bonny Island, Nigeria liquified natural gas plant project that was the focus of 4 out of the top 10 FCPA enforcement actions of all time.
But consider this.
In 2007 – that is a mere six years ago – Baker Hughes resolved the largest FCPA enforcement action of all-time by agreeing to pay $44 million in combined DOJ and SEC settlements. According to the criminal information, the company made approximately $4.1 million in improper payments – via an agent – in connection with the Karachaganak Project in Kazakhstan – a “giant gas and oil field” – according to the DOJ. According to the DOJ’s sentencing guidelines calculation, the “benefit received or to be received [from the alleged improper conduct was] approximately $19 million.”
The SEC enforcement action against Baker Hughes was based on the same core set of conduct and the SEC stated in this release as follows:
“Baker Hughes paid approximately $5.2 million to two agents while knowing that some or all of the money was intended to bribe government officials, specifically officials of State-owned companies, in Kazakhstan. […] Baker Hughes engaged the agent and was awarded an oil services contract in the Karachaganak oil field in Kazakhstan that generated more than $219 million in gross revenues from 2001 through 2006.”
In addition, the SEC release stated:
- from 1998 to 2004, Baker Hughes authorized commission payments of nearly $5.3 million to an agent (who worked in Kazakhstan, Russia and Uzbekistan) under circumstances in which the company failed to determine whether such payments were, in part, to be funneled to government officials in violation of the FCPA;
- in Indonesia, between 2000 and 2003, Baker Hughes paid certain freight forwarders to import equipment into Indonesia using a “door-to-door” process under circumstances in which the company failed to adequately assure itself that such payments were not being passed on, in part, to Indonesian customs officials;
- in Nigeria, between at least 2001 and 2005, Baker Hughes authorized payments to certain customs brokers to facilitate the resolution of alleged customs deficiencies under circumstances in which the company failed to adequately assure itself that such payments were not being passed on, in part, to Nigerian customs officials; and
- in Angola, from 1998 to 2003, Baker Hughes paid an agent more than $10.3 million in commissions under circumstances in which the company failed to adequately assure itself that such payments were not being passed on to employees of Sonangol, Angola’s state-owned oil company, to obtain or retain business in Angola.
The record-setting 2007 Baker Hughes FCPA enforcement was then.
In October, the DOJ and SEC announced an FCPA enforcement action against Diebold.
As noted in this previous post, the enforcement action was primarily an excessive travel and entertainment enforcement action focused on conduct in China and Indonesia wherein the DOJ alleged in the criminal information that the company provided various things of value (such as Las Vegas sightseeing, a dance show, a Grand Canyon tour, a Universal Studios tour and a Napa Valley tour) totaling approximately $1.75 million to alleged “foreign officials” over a five year period. (Note: the enforcement action also contained non-specific monetary allegations concerning relationships with private business customers in Russia. However, the DOJ’s sentencing guidelines calculation makes clear that the Russia conduct was a minor factor in determining the fine and penalty amount). As to the core conduct – the China and Indonesia conduct – the DOJ’s sentencing guidelines calculation references a “value of benefit received [from the alleged improper conduct] more than $7 million.”
The SEC enforcement action against Diebold was based on the same core set of conduct and the SEC alleged in this complaint that Diebold subsidiaries in China and Indonesia spent approximately $1.8 million on travel, entertainment, and other improper gifts for senior officials with the ability to influence the banks’ purchasing decisions. The SEC further alleged that Diebold falsified books and records to hide approximately $1.2 million of bribes paid to employees at privately owned banks in Russia.
In short, the recent Diebold enforcement action involved significantly less egregious allegations than the Baker Hughes enforcement action.
Yet the combined fine and penalty in the Diebold action ($48 million) was more than the record-setting $44 million Baker Hughes enforcement action from a mere six years ago.
Of course, factors beyond the core conduct at issue – such as volunatary disclosure, cooperation and a company’s past history – can influence settlement amounts in an FCPA enforcement action. However, the Baker Hughes and Diebold enforcement actions were substantively identical in these regards (i.e. both companies had a past history, both companies voluntarily disclosed and both companies cooperated).
This raises the obvious issue – have FCPA settlement amounts increased … just because?
Perhaps you have noticed this general trend in other areas. Pfizer recently resolved a $2.2 billion enforcement action (and now for the weather), SAC Capital recently resolved a $1.2 billion enforcement action (can you please pass the butter) and JPMorgan recently resolved a $13 billion enforcement action.
In a recent speech SEC Commissioner Daniel Gallagher noted:
“[T]he amounts of the penalties that the SEC imposes against corporations today are eye-popping and likely would have shocked the legislators who voted for the Remedies Act and the Commission that sought penalty authority from Congress.”
As to the JPMorgan action, as noted in this recent Wall Street Journal article, the company’s top lawyer asked at a recent event “at what point does this [record-setting fines] stop.” As Professor Peter Henning noted in this recent New York Times DealBook column regarding the JPMorgan matter:
“A standard part of enforcement actions against companies these days is the multimillion-dollar – or even multibillion-dollar – penalty. What can be perplexing is figuring out how those penalties were determined, and whether they have much if any direct relationship to either the gains realized from the violations or the harm inflicted.”
Indeed, at the same event discussed above, a government official acknowledged that the government’s application of fines in legal settlements “is more art than science.”
Spot-on.
In many cases. there is little rhyme or reason to how FCPA settlement amounts are calculated. As noted in this prior post, in the SEC context some FCPA settlements include a civil penalty, disgorgement and prejudgment interest, whereas other enforcement actions include only disgorgement and prejudgment interest, whereas other enforcement actions include only disgorgement and a civil penalty, whereas other enforcement actions include only disgorgement, whereas other enforcement actions include only a civil penalty.
As noted in this prior post, double-dipping by multiple government enforcement agencies is the norm in corporate FCPA settlements.
When a NPA is used to resolve an FCPA enforcement action, the ultimate fine amount and how it as calculated is not transparent. Even with corporate DPAs and plea agreements, there remains little transparency regarding FCPA criminal fine amounts, particularly as to the value of the benefit allegedly received through the improper payment. The DOJ simply cites a number.
As noted in this prior post, in 2012 the Supreme Court held in Southern Union that any fact that substantially increases a criminal defendant’s fine amount must be provable to a jury beyond a reasonable doubt. As noted in the prior post however, the Supreme Court’s decision was great in theory, but it is rare for anything connected to a corporate FCPA enforcement action to be provable to a jury beyond a reasonable doubt.
The largest FCPA enforcement action of all time is the $800 million action against Siemens in 2008. It is only a matter of time before there is an FCPA enforcement action in the “b” (as in billion) category.
Indeed, as the Baker Hughes and Diebold enforcement actions highlight, FCPA settlement amounts have come a long way in a short amount of time.
If a billion dollar FCPA enforcement action is what the conduct at issue warrants … fine. But if it is just because, this is a problem and a significant public policy concern as even alleged wrongdoers have due process rights.