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Defamation Claims Increase Costs Of Cooperation With Government Investigations

A guest post today from Jeremy Byrum (McGuireWoods LLP).  The post concerns a civil defamation claim relating to Royal Dutch Shell’s 2010 FCPA enforcement action.  (See here for the prior post regarding the enforcement action).

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Defamation Claims Increase Costs of Cooperation with Government Investigations

Disclosing the results of a company’s internal investigation to government investigators is always fraught with potential problems.  The most obvious is the danger of waiving attorney-client privilege and work product protections that would otherwise shield the internal investigation from discovery in parallel litigation.  But another less heralded danger is the risk of defamation claims by employees identified through the investigation as having participated in illegal activity.  The risk associated with such claims was on display in a recent ruling by a Texas court of appeals, which held that Shell Oil Company was only entitled to a conditional privilege, and not “immunity,” for statements it made in a written report to the Department of Justice (DOJ) regarding alleged violations of the FCPA.

On November 4, 2010, the DOJ announced more than $236 million in civil and criminal penalties from the settlement of alleged FCPA violations in Nigeria.  The settlements followed a lengthy investigation of Panalpina Group, a Swiss logistics company, and several of its oil and gas clients, including Shell.  According to the Texas court of appeals’ decision, the DOJ first requested a meeting to discuss Shell’s business with Panalpina in July 2007.  Following that meeting, Shell agreed to conduct an internal investigation, which eventually culminated in a written report that was submitted to the DOJ in February 2009.

Following the 2010 settlements, a former employee sued Shell for defamation, claiming that Shell’s written report falsely stated that he recommended reimbursement to contractors for payments that he knew were bribes.  The trial court granted summary judgment in favor of Shell, finding that Shell had an absolute privilege (i.e., immunity) for the statements it made to the DOJ.  The Texas court of appeals reversed that finding on June 24, 2013, holding that Shell’s written report was only covered by a conditional privilege.  Consequently, Shell is not immune from suit if the former employee can show that Shell’s actions were motivated by malice.

The key legal issue in the case was whether Shell’s statements were made in the context of an ongoing or proposed judicial or quasi-judicial proceeding.  If so, then the statements would be absolutely privileged.  But the appeals court rejected Shell’s argument that the DOJ’s solicitation and the resulting internal investigation were evidence of a proposed judicial proceeding.  Likewise, the court rejected Shell’s argument that the 2010 settlement was evidence of a proposed judicial proceeding.  In the absence of direct evidence that the DOJ was contemplating a judicial proceeding in February 2009, the court rejected Shell’s absolute privilege claim.

The case is also noteworthy for the policy arguments made in the majority and dissenting opinions.  The dissent takes on the key policy issue—the potential chilling effect of the court’s ruling: “If absolute privilege is not available, a cooperating party runs the risk of defamation actions by anyone identified as having involvement in a potentially prohibited transaction.  This risk creates a disincentive for companies to conduct their own investigations, to make frank assessments of fault, and to communicate findings to DOJ.”  The majority focused on a rival policy argument, however, suggesting that absolute immunity would “discourage, rather than encourage, truth-telling” because companies have a “strong motive to deflect blame.”  The majority concluded that a conditional privilege was sufficient protection to encourage companies to cooperate with law enforcement.

The court’s ruling no doubt raises additional concerns for companies considering the already difficult decision whether to disclose the results of an internal investigation.  As the dissent notes: “A company like Shell is, in the face of a DOJ inquiry, in a quandary: it can provide inculpatory statements regarding actions taken on its behalf by its employees, recognizing that it is exposed to a defamation claim.  Or it can face criminal prosecution or penalization for a failure to comply and cooperate adequately with the DOJ’s investigation.”  But this may be less of a dilemma than the dissent imagines.  A company’s concerns about potential defamation claims ordinarily will pale in comparison to the high stakes risks associated with a criminal investigation by the DOJ.  Thus, the feared chilling effect is likely overstated.

Although the Texas court’s decision increases the potential costs of cooperating with a government investigation, it probably will not alter the level of cooperation in most cases.  In all likelihood, companies will continue to assess the appropriate level of cooperation necessary to avoid or minimize their exposure in a criminal investigation, and will simply accept the possibility of defamation claims as an unfortunate cost of doing business.

News Corp’s Possible Settlement Amount – Not The Media’s Finest Moment

Before Wal-Mart’s FCPA scrutiny dominated the news cycle in April 2012, there was News Corp.

In July 2011, the U.K. Guardian reported that “up to five U.K. police officers were paid between them a total of at least £100,000 in cash from the News of the World” and the next day the Guardian, based on my comments and those of others, made the link between these payments and the Foreign Corrupt Practices Act.

What followed over the next 10 days was the most intense worldwide media coverage of the FCPA in its history.  (See here for the prior post detailing News Corp.’s FCPA scrutiny).

Like Wal-Mart’s FCPA scrutiny, News Corp.’s continued FCPA scrutiny continues to generate much media attention and some of it is completely off-base.

For instance, earlier this week on his media and modern life column in the Guardian (see here)  Michael Wolff wrote that a possible settlement of FCPA charges by News Corp. “could be as high as $850 million” and “could go as high as billions.”

Anything of course is possible, but Wolff’s reporting (he is also the author of the book “The Man Who Owns the News:  Inside the Secret World of Rupert Murdoch”) should have been met with skepticism by anyone knowledgeable about FCPA enforcement.

The largest FCPA settlement in history is the $800 million enforcement action against Siemens in 2008.   All of the top FCPA enforcement actions involve foreign procurement.  No FCPA enforcement action outside the context of foreign procurement (such as payments to secure foreign licenses, permits, etc.)  has topped $100 million.

News Corp.’s FCPA scrutiny is not based on payments in connection with foreign procurement.  Given the nature of the allegations against it and the type of company News Corp.  is, a record-setting – or even top – FCPA enforcement action is unlikely.

Moreover, even though every company has different disclosure practices, none of the common data-points suggesting an imminent FCPA settlement have been disclosed by News Corp.

Nevertheless, Wolff’s report spread like wild-fire around the internet and among various news organizations and was also carried forward by several websites devoted to the FCPA.

Similar to Las Vegas Sands FCPA reporting in March (see here for the prior post), news of News Corp.’s possible settlement amount was likewise not the media’s finest FCPA moment.

In an analyst call on June 11th, after publication of Wolff’s column, the following exchange occurred between an analyst and Murdoch.

Julie Tanner

Good morning. Julie Tanner with Christian Brothers Investment Services. […]  And my question’s related to the settlement with the Department of Justice, if the board could comment on that? And if so, how much is that? […]

Rupert Murdoch

So let me start with your first question. Nice to see you again. I suspect your question is triggered by an article that was published in the Guardian, which is testimony to the fact, the old adage, that those who are talking don’t know, and those who know aren’t talking. The reality is that there is no settlement that’s been arranged with the Department of Justice. There have been no discussions of amounts. There have been no discussions of fines, period. We have an ongoing cooperative relations with the Department of Justice. That is where things stand. […]

Murdoch’s statements to the market are actionable under the securities laws for any material misrepresentation or omission.  Thus, those interested in following News Corp.’s FCPA scrutiny should place a greater emphasis on his statements than a media and modern life column.

Was The DOJ Duped Again?

There have been two known instances of recent Foreign Corrupt Practices Act enforcement actions in which the Department of Justice has given the corporate defendant resolving the action a pass on paying potential fine and penalty amounts based on the company’s claimed inability to pay.

The first occurred in 2010 in the Innospec enforcement action.  As detailed in this prior post, in March 2010 Innospec agreed to resolve a DOJ and SEC enforcement action by paying $25.3 million in combined fines and penalties after pleading guilty to FCPA and other offenses based largely on conduct in Iraq and Indonesia.  The total amount of fines and penalties could have been much higher as the minimum U.S. Sentencing Guidelines amount was $101.5 million and the SEC ordered the company to pay approximately $60 million.

However, Innospec received a pass on approximately $135 million in fines and penalties based on its claimed inability to pay.  The DOJ’s sentencing memorandum (here) stated as follows.  “Innospec has represented that it is unable to pay, and, even with the use of a reasonable installment schedule, is not likely to be able to pay, a $101.5 million fine. Over the course of nearly a year, Innospec has provided the Department, the SEC [and other U.S. and non-U.S. authorities] with detailed presentations regarding its current financial condition and available assets. Those representations have been analyzed in detail by qualified accounting professionals within the SEC […]. Innospec has represented that, were the company to pay more than the amount agreed, the continued viability of the company would be threatened, as follows: (1) Innospec would breach the limits of its credit facilities; (2) Innospec would be unable to make up a deficit in funding its pension plan, resulting in an $85 million shortfall; (3) Innospec would be unable to remediate certain environmental damage caused by its manufacturing facility in the United Kingdom; (4) Innospec would be unable to invest sufficiently in research and development; and (5) Innospec would be forced to close facilities around the world, resulting in dozens of employees losing their jobs.”  I then highlighted in a series of posts (here, here, and here) that Innospec, despite receiving a substantial pass based on inability to pay, thereafter consistently reported positive financial results.  In addition, Innospec settled a civil case connected to the FCPA enforcement action by agreeing to make an immediate $25 million cash payment to the plaintiff, as well as a committment to pay an additional $15 million in installments.

Based on the above facts and figures, it appears that the DOJ was duped.

The second known instance of a recent FCPA enforcement action in which the Department of Justice has given the corporate defendant resolving the action a pass on paying potential fine and penalty amounts based on the company’s claimed inability to pay occurred in the July 2012 NORDAM Group enforcement action.

As detailed in this prior post, the Tulsa, Oklahoma based privately held provider of aircraft maintenance, repair and overhaul services agreed to enter into a non-prosecution agreement and pay a $2 million penalty “to resolve violations of FCPA” concerning business conduct in China.

As noted in the prior post, the NPA “recognizes that a fine below the standard range under the U.S. Sentencing Guidelines is appropriate because NORDAM fully demonstrated to the department, and an independent accounting expert retained by the department verified, that a fine exceeding $2 million would substantially jeopardize the company’s continued viability.”  As to the fine reduction, the NPA further states as follows.  “This discount recognizes that, over a period of months, the Company fully cooperated with the Department and with an independent accounting expert that the Department retained to review the Company’s financial condition.  Following that review, the Department and its independent expert both concluded that this discount was appropriate under the Sentencing Guidelines.”

Unlike Innospec, NORDAM Group is not publicly held, so it is difficult to assess the true nature of its financial condition.  However, NORDAM Group’s federal government contracts are in the public domain and a simple internet search indicates that in the 90 days after resolving its FCPA enforcement action (in which the company received a pass on larger fine and penalty amounts because such larger amounts could jeopardize the company’s continued viability), NORDAM group has racked in approximately $24.4 million in federal government contracts.

On August 9th, the company was awarded a $187,500 contract by the U.S. Army Contracting Command, Huntsville, AL.

On September 18th, the company was awarded a $90,200 contract by the Defense Supply Center, Richmond, VA.

On September 27th, the company was awarded a $82,000 contract by the Defense Supply Center, Richmond, VA.

On September 28th, the company was awarded a $19,274,726 contract by a Department of Logistics Agency in Ogden, UT.

On September 28th, the company was awarded a $4,761,726 contract by a Department of Logistics Agency in Ogden, UT.

Was the DOJ duped again?

A Wide-Ranging Interview

The FCPA Report is an online publication that contains articles on a variety of FCPA topics to assist lawyers in relevant practice areas, in-house counsel,  and risk and compliance managers stay ahead of the curve.  It launched this June and features thematic sourced and researched by primarily lawyers, as well as contributed articles by experts in the field, interviews with leading figures, and reports on important developments. It is available to subscribers and trial subscribers at www.fcpareport.com.

I was pleased to do a telephone interview with the FCPA Report in mid-August.  Today’s post sends you to the wide-ranging Q&A previously published, in two parts, in the FCPA Report and linked to here with permission.

Topics covered in the Q&A include the following:  statute of limitations, judicial scrutiny, the duration of FCPA scrutiny, voluntary disclosure, Wal-Mart’s FCPA scrutiny, facilitation payments, obtain or retain business, foreign official, corporate fines, victims issues, a private right of action, FCPA Inc. and the revolving door, the three buckets of FCPA financial exposure and Foreign Corrupt Practices Act reform.

Noteworthy Supreme Court Case, But Will It Even Matter?

In Southern Union Co. v. U.S., the Supreme Court, in a decision authored by Justice Sotomayor, recently held that the rule of Apprendi (that the Sixth Amendment reserves to juries the determination of any fact, other than the fact of a prior conviction, that increases a criminal defendant’s maximum potential sentence) applies to the imposition of criminal fines.

In so holding, the court saw no principled basis under Apprendi for treating criminal fines differently because Apprendi’s “core concern” is to reserve to the jury “the determination of facts that warrant punishment for a specific statutory offense.”  The court observed that criminal fines are frequently imposed “especially upon organizational defendants who cannot be imprisoned” and “the amount of a fine, like the maximum term of imprisonment or eligibility for the death penalty, is often calculated by reference to particular facts.”  Thus, the Court reasoned, “requiring juries to find beyond a reasonable doubt facts that determine the fine’s maximum amount is necessary to implement Apprendi’s ‘animating principle’ – the ‘preservation of the jury’s historic role as a bulwark between the State and the accused at the trial for an alleged offense.”

The government objected to Apprendi being extended to criminal fines because fines are “less onerous than incarceration and the death sentence.”  However, Justice Sotomayor noted that “the federal twice-the-gain-or-loss statute, in particular, see 18 U. S. C. §3571(d), has been used to obtain substantial judgments against organizational defendants” and she specifically cited, among other cases, the approximate $450 million fine against Siemens for violations of the FCPA.

What does the Southern Union decision mean in terms of FCPA criminal fine amounts?

For starters dig deep into most FCPA fine calculations and you will see reference to “facts” which increase the fine amount under the Sentencing Guidelines.  For instance, in the recent Data Systems & Solutions DPA (here) the offense level was increased because of “multiple bribes” and because the “value of the benefit received was more than $2.5 million.”  In addition, the company’s culpability score was increased because “an individual within high-level personnel of the organization participated in, condoned, or was willfully ignorant of the offense.”

Under the ruling in Southern Union any fact (such as those mentioned above in connection with Data Systems & Solutions) that substantially increases a criminal defendant’s fine amount must be provable to a jury beyond a reasonable doubt.

This is all great in theory, but will it even matter?  It is rare for anything connected to a corporate FCPA enforcement action to be provable to a jury beyond a reasonable doubt.  Indeed, in the FCPA’s 35 year history, only two corporate defendants are believed to have put the DOJ to its high burden of proof at trial.  (The DOJ’s ultimate record in those cases is 0-2).

Professor Ellen Podgor over at the White Collar Crime Prof Blog asked here as follows.  “The real question here is whether this decision will matter. As noted by the dissent, 97% of federal convictions result from guilty plea.  But what went unnoticed is that very few companies – the object of many fines – go to trial.  Often these cases are resolved with non-prosecution and deferred prosecution agreements.  So will it really make any difference that juries can determine these fines, when the corporation in a post Arthur Andersen LLP world will seldom be going to trial.”

Yet, Southern Union may indeed have an impact in the negotiation stage of resolving corporate criminal enforcement actions, including in the FCPA context.

This Vinson & Elkins publication states as follows.  “It is frequently the case that the government — with significant bargaining power over corporate entities seeking to avoid criminal convictions — takes overly aggressive positions concerning the amount of gain or loss that supposedly resulted from activity under investigation. Since gain or loss can be difficult to prove specifically, the new decision could alter the nature of negotiations with the U.S. Department of Justice in both contested matters and negotiated resolutions.”

This Perkins Coie update states as follows.  “Southern Union has the potential to become a significant authority for any defendant facing government enforcement actions.  Although Southern Union arose in the context of a criminal prosecution for violation of [the Resource Conservation and Recovery Act], its holding will apply to all criminal actions arising in a variety of contexts with heavy governmental regulation, including other environmental statutes, antitrust, healthcare, food and drug, labor, securities, and other white collar offenses.”

Foley & Lardner noted in this piece as follows.  “The Southern Union case will no doubt add another level to the plea negotiation process by forcing the government, when seeking stiff criminal monetary penalties against corporate defendants, to establish the full amount of loss or financial wrongdoing by a defendant in the early part of a prosecution. This is typically a difficult and time-consuming undertaking, and the Court’s decision will likely restrict or hinder the leverage of prosecutors to obtain higher criminal penalties, at least in the plea bargain process.”

Whatever its ultimate impact, Southern Union’s holding should be included in the talking points memo of company counsel when resolving corporate enforcement actions with the DOJ, including in the FCPA context.

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