Did “Foreign Official” Impact The O’Shea Acquittal?
From a “foreign official” standpoint, must of the attention in 2011 was on the challenges in the Carson and Lindsey Manufacturing enforcement actions (see here and here for previous posts). Another “foreign official” challenge occurred in the John O’Shea case in the Southern District of Texas in which O’Shea was charged in connection with alleged bribe payments to officials of Comision Federal de Electricidad (“CFE”), a Mexican utility and the same entity at issue in the Lindsey matter.
As noted in this previous post, on the eve of trial, U.S. District Court Judge Lynn Hughes, without issuing a written decision, denied O’Shea’s motion to dismiss the indictment based on O’Shea’s argument that employees of CFE were not “foreign officials” under the FCPA. This previous post links to the briefing on the issue.
As noted in this previous post, in January 2012, Judge Hughes granted O’Shea’s motion for acquittal and found him not guilty of all substantive FCPA charges. The motion was granted at the close of the DOJ’s case and the jury was dismissed.
To be sure, there were several deficiencies in the DOJ’s case against O’Shea prompting Judge Hughes to grant the motion for acquittal. What impact, though, if any, did O’Shea’s “foreign official” challenge and the attention to this issue, have on the ultimate outcome of the case?
This post reviews information from the case record and transcripts and concludes with comments from O’Shea’s attorneys as to the question – “what impact, if any, did ‘foreign official’ have on the ultimate result in the case?”
During the trial, Judge Hughes held an evidentiary hearing concerning testimony Professor Hans Baade (here) intended to offer on behalf of O’Shea concerning the status of CFE under Mexican law. Judge Hughes indicated that his purpose in the hearing was “to find out whether the testimony would be admissible or whether the information is helpful to me in crafting [jury] instructions.” During the hearing, Professor Baade discussed the OECD Convention and its commentaries, specifically Commentaries 14 and 15 which state as follows.
14. A “public enterprise” is any enterprise, regardless of its legal form, over which a government, or governments, may, directly or indirectly, exercise a dominant influence. This is deemed to be the case, inter alia, when the government or governments hold the majority of the enterprise‟s subscribed capital, control the majority of votes attaching to shares issued by the enterprise or can appoint a majority of the members of the enterprise‟s administrative or managerial body or supervisory board.
15. An official of a public enterprise shall be deemed to perform a public function unless the enterprise operates on a normal commercial basis in the relevant market,i.e., on a basis which is substantially equivalent to that of a private enterprise, without preferential subsidies or other privileges.]
Professor Baade spoke at great length of the Mexican electricity sector and that electricity generation in Mexico was open to private and foreign competition. He stated that more than 50% of energy in Mexico is produced by private producers. During the hearing, Professor Baade also testified that CFE had no regulatory powers and that Mexican courts have concluded that CFE does not have any other public powers. Moreover, Professor Baade stated that CFE’s contracts with Mexican households are treated as consumer contracts. During the hearing, O’Shea’s counsel presented a decision from the high court of Mexico which held that in a dispute over the cutting off of electricity to a consumer, there was no jurisdiction in Mexico’s Amparo courts because there was no state action. According to Professor Baade, CFE did not receive any protection or immunity from suit in Mexico. He then described how CFE pays taxes in Mexico, receives no subsidies (rather the government subsidizes the household consumer), how CFE is subject to consumer protection laws, and how CFE’s employees are subject to labor laws.
Professor Baade’s testimony ended with the following Q&A between Sarah Frazier (O’Shea’s counsel who conducted the hearing) and Professor Baade.
Q: “Given your testimony that you have given so far, do you have an opinion as to whether CFE functions on a normal commercial basis.”
A: “Well, I would say at the market in which foreign companies and private companies are interested, it is a competitive enterprise.”
On cross-examination, the DOJ attempted to undermine Professor Baade’s testimony regarding the OECD Convention and its commentaries by, among other questions, asking as follows. “Professor, would you agree […], talking about the OECD Convention, that the convention sets a floor and not a ceiling for how much a country can criminalize international bribery?” The DOJ further asked “so, countries can have higher standards than what the OECD requires.” As to this line of questioning, Judge Hughes interjected as follows. “The Government can’t say the convention is part of American law; but when we don’t like it, we are going to ignore it. It has to bind the Government, or it can’t.” Judge Hughes further stated as follows. “[The DOJ] can’t rely on the convention as authoritative interpretations of those non-convention laws. That’s the ruling.”
During the hearing, the DOJ candidly stated that it was unprepared by Professor Baade’s testimony concerning the status of CFE.
Judge Hughes “foreign official” jury instructions included the following.
“A foreign official is an officer or employee of the government of a country other than the United States. The Commission is not an integral part of a foreign government’s public function merely because it is government owned. It must be exercising a public governmental function. An official of a public agency does not perform a governmental function when his agency operates in his area substantially as a private agency — as its private agency competitors do, without preferences, subsidies or other privileges. If you conclude that the Government has proved beyond a reasonable doubt that the Commission is an agency of the Mexican Government, some of its officials may be responsible for operations of the Commission that are not governmental. To the extent that a part of the Commission operates a business on substantially the same terms as private companies, its officers in that part are not public officials. Mexican law excludes private companies from the sale of electricity to households. On the other hand, the Commission — the Constitution statutes and regulations allow for private generation of electricity or self-consumption, cogeneration, export and sale to the Commission for resale, including to households. The Mexican Constitution forbids monopolies, but it has reserved high levels of regulation of ownership in a few areas, like oil and electricity. Although the Commission receives no protection as to subsidies, it has to sell power for household use at a rate set by the government. If the Commission loses money on those sales, the Government allows it to deduct those losses from the charge it owes for the use of Mexico’s capital. The Commission may be sued under normal civil jurisdiction in the Mexican courts. Its contracts with household customers are governed by the Mexican commercial and civil law and by Mexican Consumer Protection Commission. The Commission’s board of directors includes government officers and three members of the Electricians Union. The Commission has no regulatory powers. The Electrical Regulatory Commission (in Spanish C.R.E.) issues licenses and permits in Mexico for the generation, transmission and supply of electricity in Mexico. The Secretary of Energy established tariffs for categories of users.”
During the hearing on O’Shea’s motion for acquittal, it is clear that Judge Hughes was troubled by the DOJ’s “foreign official” position and its lack of preparation as to the unique attributes of CFE. During the hearing, Judge Hughes stated that the DOJ “is supposed to know before it brings the indictment that it can prove that it is a governmental entity … in fact you should have to convince the grand jury of it.” Judge Hughes further commented that “it does trouble me, although I don’t think it’s relevant to this motion, that the Government did not present evidence on governmental status on which a reasonable grand jury could have relied.”
The following exchange between the DOJ’s Chuck Duross and Judge Hughes then followed.
DUROSS: I believe, Your Honor, that we presented evidence that it was a state owned company.
COURT: The statue is more subtle than that. I’m not saying you couldn’t have done it or they wouldn’t have indicted him.
DUROSS: The statute says an instrumentality of a foreign government. I think in fairness, Your Honor, it is not a stretch to think that a company that is created by, owned by and operated by a foreign government, could be considered an instrumentality. I think in the sharps relief of a trial in which we are going to be challenged on those issues, we needed to have been more prepared and we were not.
COURT: I don’t know what was presented to the Grand Jury, but as I observed several days ago, the Government should have been prepared before they brought the charges to the Grand Jury. It’s something you have to prove. And you shouldn’t indict people on stuff you can’t prove.
DUROSS: Understood, Your Honor.”
I posed the following question to O’Shea’s counsel Sarah Frazier (Berg & Androphy – here) “what impact, if any, did ‘foreign official’ have on the ultimate result in the case” and her response is as follows.
“What impact did our foreign official challenge have on the result of the case? As you mention, Judge Hughes categorized the challenge as not relevant to our Rule 29 motion, and I have to take his statement at face value – there were more than sufficient grounds for relief without it. I do think that by re-thinking the presumptions that the Government has consistently forwarded regarding the foreign official element, such as that all state-owned entities’ employees must be foreign officials, and taking this new factual tack that involves really understanding the industry and the government’s role in it, we earned the Court’s respect and took the Government out of its comfort zone. I’ve often wondered whether the challenge would have swayed the jury. I doubt they had the chance to understand the relevance of it during the Government’s case, but I think we could have guided them through it with Professor Baade. And I suspect that if the jury decided they liked Mr. O’Shea (we did expect he would testify), the foreign official challenge might have been an avenue they might seek out in order to acquit him.”
Richard Shine’s 1982 Lecture – “Enforcement Of The FCPA By The Department Of Justice”
Before Charles Duross, Mark Mendelsohn and others headed the DOJ’s FCPA unit, there was Richard Shine. The year was 1982 and Shine was Chief, Multinational Fraud Branch, Criminal Division, U.S. Department of Justice (the name given to the DOJ’s then de facto FCPA Unit). Shine gave a lecture titled “Enforcement of the FCPA by the Department of Justice” at Syracuse University that was published by the Syracuse Journal of International Law & Commerce – see 9 Syr. J. Int’l L. & Com. 283 (1982).
Three things stand out from Shine’s lecture.
First, the lecture is populated with references to the FCPA’s legislative history. On one level, this is not surprising given that in 1982 the DOJ was likely still finding its way as to the FCPA and its enforcement and it is logical that the legislative history which evidences Congressional intent would be a guide.
Yet the passage of time should make the FCPA’s legislative history and the Congressional intent it represents no less relevant today.
Second, under the heading “Enforcement Policies of the Justice Department,” Shine’s lecture evidences DOJ’s recognition and understanding of the primary foreign policy motivation Congress had in enacting the FCPA and how FCPA inquiries focused on the conduct of foreign governments and thus presented national security issues. Shine stated as follows. “Because of the obvious sensitivity both from a national security point of view and a foreign policy point of view, the Department has administered the enforcement of this statute quite differently than the enforcement of most of the provisions of Title 18 of the United States Code. Administration of the enforcement effort has been highly centralized. Generally, FCPA cases, by the terms of the United States Attorney’s Manual, are not investigated and prosecuted by the ninety-four United States Attorney’s Offices around the country. They are primarily investigated and prosecuted by the Multinational Fraud Branch in the Criminal Division at the Justice Department. Among other reasons, that is being done to make sure that there is a nationally uniform enforcement policy. Moreover, virtually any step that is taken in the investigative process, even more than in the post-indictment process, has potentially significant foreign policy and national security implications.” In speaking of “Investigative Procedures,” Shine stated as follows. “When an informant or an insider tells us that there is a bribe in process or that a bribe of a foreign government official has already occurred, we do not immediately notify the foreign government. As you can well imagine, if we started to communicate to a foreign government every unsupported and uncorroborated allegation of bribery of its officials, there would be worldwide foreign relations turmoil …”. Only after we have concluded, as a result of our initial investigation, that indeed there is a significant reason to believe a bribe was paid or offered to a foreign government official, do we notify the foreign government.”
With numerous FCPA enforcement actions in this new era based on alleged payments to alleged state-owned or state-controlled enterprises with many attributes of private commercial enterprises and with numerous FCPA enforcement actions also based on foreign licenses, customs, and certification issues, can it truly be said that in this new era most FCPA enforcement actions present “significant foreign policy and national security implications.” If the answer is no, what does it say about these numerous enforcement actions?
Third, Shine discusses the identity of the foreign official allegedly bribed. Shine stated as follows. “In our public pleadings, whether we are bringing an indictment or filing a civil complaint, generally we will not agree to withhold the identity of the foreign country or of the foreign official.”
As highlighted in this recent post concerning the SEC’s response to the Jackson and Ruehlen motion to dismiss, the SEC argues that “the name, title or exact position of the official need not be pleaded or proved” and the DOJ has likewise argued the same in other actions.
*****
I first learned of Shine’s lecture and published article this past March when Duross participated in “The FCPA at Thirty-Five and Its Impact on Global Business” symposium at The Ohio State University Moritz College of Law (see here for the prior post). Duross referenced the article in stating that the DOJ’s FCPA enforcement practices and policies have been consistent over time and that even though the FCPA is approaching its 35th year, not much has changed in terms of DOJ practices and policies. To be sure, Duross is correct in part. Yet, as the above excerpts from Shine’s 1982 lecture demonstrate, when viewed in the context of the FCPA’s new era, there are some things that have changed.
SEC Files Opposition Brief To Jackson and Ruehlen’s Motion To Dismiss
This previous post discussed the February 2012 SEC FCPA enforcement action against Mark Jackson (former Noble Corporation CEO) and James Ruehlen (current Director and Division Manager of Noble’s subsidiary in Nigeria). The enforcement action is based on the same core set of facts alleged in the 2010 Noble Corporation enforcement action (see here for the prior post). The February 2012 post noted that unlike the vast majority of FCPA defendants (corporate and individual) charged in an SEC enforcement action, Jackson and Ruehlen appeared poised to launch a defense.
This previous post discussed Jackson’s and Ruehlen’s May 2012 motion to dismiss and noted the significance of the event in terms of the SEC’s FCPA enforcement program as the SEC is rarely put to its burden of proof in FCPA enforcement actions. To my knowledge, the Jackson and Ruehlen enforcement action represents the first time since the SEC lost the Mattson and Harris individual enforcement actions in 2002 (see here for a prior post discussing the case) that the Commission will be put to its burden of proof in an FCPA enforcement action.
Last Friday the SEC filed its opposition to the motion to dismiss (here) and in summary fashion the SEC’s opposition brief states as follows.
“The Complaint charges defendants Jackson and Ruehlen, a former and current senior officer of Noble Corporation (“Noble”), respectively, with multiple violations of the anti-bribery and accounting provisions of the Foreign Corrupt Practices Act (“FCPA”), 15 U.S.C. § 78dd-1, and other violations of the federal securities laws. Noble, an international oil drilling company, used for years an intermediary “customs agent” to pay bribes to government officials of the Nigerian Customs Service and other Nigerian government officials. Jackson and Ruehlen were intimately involved in arranging, approving, falsely booking, and concealing Noble’s bribe payments to foreign officials. Together, the defendants participated in paying hundreds of thousands of dollars in bribes to improperly obtain approximately eight illegitimate duty exemptions, known as temporary import permits (“TIPs”), and twenty-two TIP extensions. These TIPs and extensions were obtained illicitly so that Noble’s oil rigs offshore in Nigeria could continue to operate under lucrative drilling contracts. Jackson approved the payments and concealed the payments from Noble’s audit committee and auditors. Ruehlen prepared false documents as to the movement of the rigs, sought approval for the payments from Jackson and others at Noble, and processed and paid the bribe money to the intermediary customs agent.
Defendants contend that the Commission has failed to state a claim upon which relief may be granted pursuant to FRCP 12(b)(6). They attack the sufficiency of the Complaint in scattershot fashion, but their arguments distilled to their essence advance six primary arguments for dismissal:
First, the defendants argue that the SEC must allege the “specific identity” of Nigerian officials for whom the defendants authorized the payment of bribes. This line of argument finds no support in the text, legislative history, case law, or purposes of the FCPA. Defendants authorized bribes to foreign officials through intermediaries. The Complaint identifies the officials by country and government agency and alleges defendants’ corrupt intent to improperly influence those officials through the payment of money. Neither the FCPA nor the notice pleading standards of Federal Rule of Civil Procedure 8(a) require anything more. As the language, text, legislative history and policies of the FCPA confirm, a violation of its provisions rests with the intent of the person authorizing the bribes, not with the identity or role of the official targeted for bribery. The name, title or exact position of the official need not be pleaded or proved, as confirmed by decisions under analogous domestic bribery statutes.
Second, the defendants argue that the Complaint fails to allege facts to support the inference that their payments fell outside of the FCPA’s statutory “routine governmental action” (a.k.a. “facilitating payments”) exception. Yet, the SEC is not required to plead preemptively around a statutory exception that a defendant might invoke. For over a century, including in the securities context, the Supreme Court has held that a pleading based on a general provision that defines the elements of a statutory violation need not negate an exception made by proviso or otherwise to those elements. The “facilitating payments” exception fits that rule. Thus, the defendants, not the SEC, must raise the exception’s application in the pleadings and prove its applicability at trial. Moreover, the Complaint satisfies any purported need to “plead around” the exception. The well-pled facts, such as that the bribes were paid to induce foreign officials to falsely certify facts and accept false paperwork, indicate that defendants’ bribes were not “facilitating payments,” i.e., payments authorized to expedite or secure the performance of an ordinarily or commonly performed official act.
Third, Ruehlen claims that the FCPA’s routine government action exception is unconstitutionally vague as applied to him. Claims of this nature have been soundly rejected by the courts, including by the Fifth Circuit. Also, the Complaint abundantly alleges that Ruehlen sought and obtained authorizations to pay bribes that cannot be understood reasonably as anything other than crossing the line of prohibited conduct.
Fourth, the defendants contend that the Complaint does not allege facts giving rise to the inference that they acted “corruptly.” This attack on the Complaint ignores the well-pled facts and misconstrues the law. The legislative history of the FCPA and the decisions in the Fifth Circuit and elsewhere reject defendants’ definition of “corruptly.” Defendants also overlook that states of mind, such as intent and purposes, may be alleged generally. The Complaint alleges defendants’ corrupt intent, and the allegations are supported by ample facts.
Fifth, the defendants seek to dismiss the Complaint as insufficiently pleading alleged securities violations other than bribery. Defendants, for example, argue that the SEC fails to specify the books and records that were falsified and the internal controls that they evaded. Defendants’ line of arguments directed to these issues are, first, largely premised on their attack on the Commission’s bribery claims – an attack that this Court should reject. In addition, the defendants simply ignore the facts actually pled in the Complaint. The allegations set forth in great detail what Jackson and Ruehlen claim not to find in the Complaint, including identifying the books and records falsified and the internal controls evaded or not implemented.
Sixth, the defendants argue that the Complaint is untimely because the applicable statute of limitations permits relief only for conduct occurring five years before the filing of the Complaint on February 24, 2012. Yet buried in footnotes in their briefs, the defendants admit that they signed tolling agreements extending the statute of limitations. The Complaint alleges violative conduct within the limitations period even absent the tolling agreement. What is more, various equitable doctrines would apply to toll the statute. And the statute of limitations does not apply to claims for equitable relief such as injunctions.
Finally, throughout each of their briefs, defendants intermittently challenge facts asserted in the Complaint, advance facts not alleged in the Complaint but purportedly reflected elsewhere, and argue for inferences favorable to them. At the pleadings stage, these arguments are not a proper basis for granting a motion to dismiss and must be rejected. The Commission has stated a claim upon which relief may be granted for each of Claims One through Seven, and defendants’ motions to dismiss should be denied.”
Data Systems & Solutions LLC Resolves FCPA Enforcement Action
Earlier this week, Data Systems & Solutions LLC (“DS&S”), a wholly-owned subsidiary of Rolls Royce Holdings and based in Reston Virginia, resolved a DOJ FCPA enforcement action. The total fine was $8.82 million.
DS&S’s business includes the design, installation, and maintenance of instrumentation and controls systems at nuclear power plants, fossil fuel power plants, and other critical infrastructure facilities. According to the information, “DS&S’s instrumentation and controls business customers included state-owned nuclear power plants in Eastern Europe.” The charged conduct focuses on DS&S’s business with Ignalina Nuclear Power Plant (“INPP”) described as a “state-owned nuclear power plant in Lithuania and an ‘agency’ and ‘instrumentality’ of a foreign government, as that term is used in the FCPA.” For more on INPP, see its website here.
According to the charging documents, payments were made by DS&S to various INPP employees primarily through subcontractors. The INPP employees are described as follows. Official 1 (the Deputy Head of the Instrumentation & Controls Department at INPP with influence over the award of contracts); Official 2 (the Head of Instrumentation & Controls Department at INPP with influence over the award of contracts); Official 3 (the Director General at INPP with influence over the award of contracts); Official 4 (the Head of International Projects Department at INPP with influence over the award of contracts); and Official A (the lead software engineer at INPP with influence over the award of contracts). All officials are alleged to “foreign officials as that term is used in the FCPA.”
The DOJ enforcement action involved a criminal information (here) against DS&S resolved through a deferred prosecution agreement (here).
Criminal Information
The information charges conspiracy to violate the FCPA’s anti-bribery provisions and one substantive FCPA anti-bribery violation. As to the conspiracy charge, the information alleges that between 1999 to 2004, DS&S and others conspired to “obtain and retain contracts for DS&S from INPP to design, install, and maintain INPP’s instrumentation and controls systems through the promise and payment of bribes to foreign officials employed by INPP.”
According to the information, DS&S would and did attempt to conceal the payments to foreign officials by using Subcontractor A Subcontractor B and Subcontractor C (an alleged U.S. shell company) to funnel bribes from DS&S to INPP officials. The information further alleges that: (i) “Subcontractor A would and did pay bribes to INPP officials on behalf of DS&S by issuing tens of thousands of dollars in checks to INPP officials for deposit into the officials’ bank accounts in the United States”; (ii) DS&S “would and did pay INPP employees who were also employed by Subcontractor B significantly above-market rates for services performed by Subcontractor B in connection with DS&S contracts with INPP in exchange for the INPP employees’ support for the award of contracts to DS&S” and in a manner designed to allow those employees to avoid taxes on the payments from DS&S; (iii) DS&S “would and did provide gifts, travel, and entertainment to employees of INPP in exchange for those foreign officials’ agreements to help DS&S secure contracts with INPP. The travel alleged includes trips to Florida and Hawaii and gifts alleged include a Cartier watch.
Executive A (vice president of marketing and business development at DS&S during the relevant time period responsible for marketing and business development efforts in connection with DS&S’s nuclear services, including power plant customers in Eastern Europe) is alleged to have engaged in a variety of the improper conduct.
DPA
The DOJ’s charges against DS&S were resolved via a deferred prosecution agreement. Pursuant to the DPA, DS&S admitted, accepted and acknowledged that it is responsible for the acts of its officers, directors, employees, and agents as charged in the information.
The term of the DPA is two years and it states that the DOJ entered into the agreement based on the following factors: “(a) following the receipt of subpoenas in connection with the government’s investigation, DS&S initiated an internal investigation and provided real-time reports and updates of its investigation into the conduct described in the Information; (b) DS&S’s cooperation has been extraordinary, including conducting an extensive, thorough, and swift internal investigation; providing to the Department searchable databases of documents downloaded from servers, computers, laptops, and other electronic devices; collecting, analyzing, and organizing voluminous evidence and information to provide to the Department in a comprehensive report; and responding promptly and fully to the Department’s requests; (c) DS&S has engaged in extensive remediation, including terminating the officers and employees responsible for the corrupt payments; dissolving the joint venture and reorganizing and integrating the Company as a subsidiary with a more rigorous compliance program; enhancing its due diligence protocol for third-party agents and subcontractors, including CEO review and approval of the retention of any agent or subcontractor; strengthening its ethics policies, including the appointment of a Company Ethics Representative who reports directly to the CEO and provides regulator reports to the Members Committee at each Committee meeting; providing FCPA training for all agents and subcontractors; and establishing heightened review of most foreign transactions; (d) DS&S has committed to continue to enhance its compliance program and internal controls …; and (e) DS&S has agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of DS&S and its officers, directors, employees, agents and subcontractors relating to violations of the FCPA.
Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $12.6 – $25.2 million. The DPA states as follows. “DS&S agrees to pay a monetary penalty in the amount of $8,820,000, an approximately thirty-percent reduction off the bottom of the fine range […] DS&S and the Department agree that this fine is appropriate given the facts and circumstances of this case, including the nature and extent of DS&S’s extraordinary cooperation and extensive remediation in this matter.”
Pursuant to the DPA, DS&S agreed to report to the DOJ “periodically, at no less than twelve-month intervals during the two-year term, regarding remediation and implementation of the compliance program and internal controls, policies, and procedures” described in an attachment to the DPA. As is customary in FCPA DPA’s, DS&S agreed that it shall not make any public statement contradicting its acceptance of responsibility.
See here for the DOJ’s release. Given the allegation in the information that INPP officials received payments into their bank accounts in the U.S., it will be interesting to see whether the INPP officials are charged with non-FCPA offenses. Such a U.S. nexus was used to prosecute certain of the “foreign officials” in the Haiti Teleco enforcement action (see here for a summary of those actions) as well as the Siriwan’s in connection with the Green matter (see here for the prior post).
Carl Rauh (Hogan Lovells – here) represented DS&S.
“Foreign Official” Podcast
It did not take long to write today’s post, but it is far from short.
Thank you to Brian Kindle at the Association of Certified Financial Crime Specialists for the opportunity to go long and deep in this approximate 35 minute podcast on various “foreign official” issues, including the recent 11th Circuit appeal in the Esquenazi and Rodriguez case (see here for the prior post).