Too Much Guanxi
“In the end, Garth Peterson, a rising star at Morgan Stanley in China, was undone by his pursuit of “guanxi.” So begins this 2009 Reuters article that details the rise and fall of Peterson, fired by Morgan Stanley in 2008, “amid suspicions” that he had violated the FCPA. According to the article, Morgan Stanley, voluntarily reported the case to U.S. authorities after a nine month internal investigation.
Yesterday the DOJ and SEC announced a joint enforcement against Peterson.
DOJ
In this release, the DOJ announced that Peterson, a former managing director for Morgan Stanley’s real estate business in China, pleaded guilty to a one count criminal information (unavailable at this point) for “conspiring to evade internal accounting controls that Morgan Stanley was required to maintain under the FCPA.”
The release states as follows.
“According to court documents, Morgan Stanley maintained a system of internal controls meant to ensure accountability for its assets and to prevent employees from offering, promising or paying anything of value to foreign government officials. Morgan Stanley’s internal policies, which were updated regularly to reflect regulatory developments and specific risks, prohibited bribery and addressed corruption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, charitable contributions and employment. Morgan Stanley frequently trained its employees on its internal policies, the FCPA and other anti-corruption laws. Between 2002 and 2008, Morgan Stanley trained various groups of Asia-based personnel on anti-corruption policies 54 times. During the same period, Morgan Stanley trained Peterson on the FCPA seven times and reminded him to comply with the FCPA at least 35 times. Morgan Stanley’s compliance personnel regularly monitored transactions, randomly audited particular employees, transactions and business units, and tested to identify illicit payments. Moreover, Morgan Stanley conducted extensive due diligence on all new business partners and imposed stringent controls on payments made to business partners.”
“According to court documents, Peterson conspired with others to circumvent Morgan Stanley’s internal controls in order to transfer a multi-million dollar ownership interest in a Shanghai building to himself and a Chinese public official with whom he had a personal friendship. The corruption scheme began when Peterson encouraged Morgan Stanley to sell an interest in a Shanghai real-estate deal to Shanghai Yongye Enterprise (Group) Co. Ltd., a state-owned and state-controlled entity through which Shanghai’s Luwan District managed its own property and facilitated outside investment in the district. Peterson falsely represented to others within Morgan Stanley that Yongye was purchasing the real-estate interest, when in fact Peterson knew the interest would be conveyed to a shell company controlled by him, a Chinese public official associated with Yongye and a Canadian attorney. After Peterson and his co-conspirators falsely represented to Morgan Stanley that Yongye owned the shell company, Morgan Stanley sold the real-estate interest in 2006 to the shell company at a discount to the interest’s actual 2006 market value. As a result, the conspirators realized an immediate paper profit of more than $2.5 million. Even after the sale, Peterson and his co-conspirators continued to claim falsely that Yongye owned the shell company, which in reality they owned. In the years since Peterson and his co-conspirators gained control of the real-estate interest, they have periodically accepted equity distributions and the real-estate interest has appreciated in value.”
Assistant Attorney General Lanny Breuer stated as follows. “Mr. Peterson admitted today that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official. As a managing director for Morgan Stanley, he had an obligation to adhere to the company’s internal controls; instead, he lied and cheated his way to personal profit. Because of his corrupt conduct, he now faces the prospect of prison time.”
Peterson is to be sentenced on July 17th.
As to Morgan Stanley, the release states as follows.
“After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to Peterson’s conduct. The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation.”
Kudos to the DOJ. Would anything really change with an FCPA compliance defense – see here for “Revisiting a Foreign Corrupt Practices Act Compliance Defense”?
SEC
In this complaint, the SEC alleged in summary as follows.
“From at least 2004 to 2007, Defendant Garth Peterson, while employed at Morgan Stanley & Co., Inc. ‘s (“Morgan Stanley”) real estate investment and fund advisory business, secretly acquired millions of dollars worth of real estate investments from Morgan Stanley’s funds for himself, the former Chairman of Yongye Enterprise (Group) Co. (“Yongye”) -a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai-and others. Peterson also arranged to have paid to himself and the former Chairman of Yongye (“the Chinese Official”) at least $1.8 million in what he misrepresented were finder’s fees Morgan Stanley’s funds owed to third parties. In exchange for offers and payments from Peterson, the Chinese Official helped Peterson and Morgan Stanley obtain business while personally benefitting from some of these same investments. This self-dealing and misappropriation by Peterson breached the fiduciary duties he and Morgan Stanley owed to their clients.”
Based on the above conduct, the SEC charged Peterson with violating the FCPA’s anti-bribery and internal controls provisions, as well as aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act.
In this release, the SEC noted that Peterson agreed to a settlement of the SEC’s charges “in which he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement, and relinquish his interest in the valuable Shanghai real estate (currently valued at approximately $3.4 million) that he secretly acquired through his misconduct.”
Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows. “Peterson crossed the line not once, but twice. He secretly bribed a government official to illegally win business for his employer and enriched himself in violation of his fiduciary duty to Morgan Stanley’s clients. This case illustrates the SEC’s commitment to holding individuals accountable for FCPA violations, particularly employees who intentionally circumvent their company’s internal controls.”
Kara Novaco Brockmeyer (Chief of the SEC Enforcement Division’s FCPA Unit) stated as follows. “As a rogue employee who took advantage of his firm and its investment advisory clients, Peterson orchestrated a scheme to illegally win business while lining his own pockets and those of an influential Chinese official.”
As to Yongye and the Chinese Official, the complaint states as follows.
“Yongye Enterprise (Group) Co. Ltd. was a large real estate development arm of the Luwan District Government in Shanghai, China. Since its inception in 1994, Yongye held leases for many prime areas in the Luwan District. Yongye’s business was to keep or take a small share in real estate joint ventures, including with Morgan Stanley and its funds, in exchange for helping its joint venture partner obtain the proper licensing from the local government. Yongye owned and developed residential and commercial real property, sold and brokered real estate to Morgan Stanley and its funds, and partnered with Morgan Stanley and its funds in various real estate investments.”
“The Chinese Official was the Chairman of Yongye at all pertinent times until his retirement in September 2006. As Chairman, he exercised control over Y ongye and had the authority to make investment decisions for it. Before Yongye, the Chinese Official worked for the Luwan District government. After his retirement in September 2006, the Chinese Official continued to work with Morgan Stanley as a private real estate developer and broker until approximately the time Peterson was terminated in 2008.”
The complaint contains an entire section titled “Morgan Stanley’s FCPA Compliance Program and Internal Controls” which states as follows.
“Morgan Stanley trained Peterson on the FCPA numerous times during his employment, as follows:
(1) Morgan Stanley trained Peterson on anti-corruption policies and the FCPA at least seven times between 2002 and 2008. In addition to other live and web-based training, Peterson participated in a teleconference training conducted by Morgan Stanley’s Global Head of Litigation and Global Head of Morgan Stanley’s Anti-Corruption Group in June 2006.
(2) Morgan Stanley distributed to Peterson written training materials specifically addressing the FCPA, which Peterson maintained in his office.
(3) A Morgan Stanley compliance officer specifically informed Peterson in 2004 that employees of Yongye, a Chinese state-owned entity, were government officials for purposes of the FCPA.
(4) Peterson received from Morgan Stanley at least thirty five FCPA-compliance reminders. These reminders included FCPA-specific distributions; circulations and reminders of Morgan Stanley’s Code of Conduct, which included policies that directly addressed the FCPA; various reminders concerning Morgan Stanley’s policies on gift-giving and entertainment; the circulation of Morgan Stanley’s Global Anti-Bribery Policy; guidance on the engagement of consultants; and policies addressing specific high-risk events, including the Beijing Olympics.
(5) Morgan Stanley required Peterson on multiple occasions to certify his compliance with the FCPA. These written certifications were maintained in Peterson’s permanent employment record.
Morgan Stanley required each of its employees, including Peterson, annually to certify adherence to Morgan Stanley’s Code of Conduct, which included a portion specifically addressing corruption risks and activities that would violate the FCPA. Morgan Stanley required its employees, including Peterson, annually to disclose their outside business interests. Morgan Stanley had policies to conduct due diligence on its foreign business partners, conducted due diligence on the Chinese Official and Yongye before initially conducting business with them, and generally imposed an approval process for payments made in the course of its real estate investments. Both were meant to ensure, among other things, that transactions were conducted in accordance with management’s authorization and to prevent improper payments, including the transfer of things of value to officials of foreign governments.”
Checking In On The Carson Case
In April 2009, Stuart and Hong Carson (husband and wife) were criminally charged, along with other defendants who were also former employees of Control Components Inc. (CCI), in a criminal indictment (here) for engaging in “a conspiracy to secure contracts by paying bribes to officials of foreign state-owned companies as well as officers and employees of foreign and domestic private companies.”
The indictment alleged as follows.
“Company A’s state-owned customers included, but were not limited to, Jiangsu Nuclear Power Corporation (“JNPC”) (China), Guohua Electric Power (China), China Petroleum Materials and Equipment Corporation (“CPMEC”), PetroChina, Dongfang Electric Corporation (China), China National Offshore Oil Corporation (“CNOOC”), Korea Hydro and Nuclear Power (“KHNP”), Petronas (Malaysia), and National Petroleum Construction Company (“NPCC”) (United Arab Emirates). Each of these state-owned entities was a department, agency, and instrumentality of a foreign government, within the meaning of the FCPA. The officers and employees of these entities, including the Vice-Presidents, Engineering Managers, General Managers, Procurement Managers, and Purchasing Officers, were “foreign officials” within the meaning of the FCPA.”
As noted in the DOJ release (here), Stuart Carson was charged with one count of conspiracy to violate the FCPA and the Travel Act, and two counts of violating the FCPA. Hong Carson was charged with one count of conspiracy to violate the FCPA and the Travel Act, five counts of violating the FCPA, and one count of destruction of records in connection with a matter within the jurisdiction of a department or agency of the United States. This latter charge was ultimately dismissed by the DOJ. As stated in the DOJ release, “in the period from 2003 through 2007, the defendants caused the valve company to pay approximately $4.9 million in bribes, in violation of the Foreign Corrupt Practices Act (FCPA), to officials of foreign state-owned companies …”.
Shortly thereafter, Control Components Inc. resolved an FCPA enforcement action based on the same core set of conduct alleged in the above indictment. (See here for the prior post). I noted, then, as I had since launching this website in July 2009, that DOJ’s position that employees of state-owned companies, regardless of position, are “foreign officials” under the FCPA is an unchallenged and untested legal theory – and one I believe is ripe for challenge.
In February 2011 (as noted in this prior post), for the first time in FCPA history, a federal court judge, with the benefit of a detailed and complete overview of the FCPA’s extensive legislative history on the “foreign official” element, was asked to rule on the DOJ’s interpretation that employees of alleged state-owned or state-controlled enterprises are “foreign officials” under the FCPA. My declaration on the FCPA’s legislative history relevant to “foreign official” (here) was used in the “foreign official” motion to dismiss.
In May 2011 (as noted in this prior post), Judge James Selna denied the “foreign official” motion to dismiss and concluded that “the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.” The “foreign official” issue thus moved to the jury instructions (as noted in this prior post).
In February 2012 (as noted in this prior post), Judge Selna issued certain jury instructions. Not surprisingly, Judge Selna carried forward his previous “instrumentality” analysis into the “instrumentality” jury instruction. Yet, in a significant development in terms of the future of the case, Judge Selna issued an instruction titled “knowledge of status of foreign official.” In pertinent part, the instruction stated as follows.
[…..]
“(4) The defendant offered, paid, promised to pay, or authorized the payment of money, or offered, gave, promised to give, or authorized the giving of anything of value to a foreign official;
(5) The payment or gift at issue in element 4 was to (a) a person the defendant knew or believed was a foreign official or (b) any person and the defendant knew that all or a portion of such money or thing of value would be offered, given, or promised (directly or indirectly) to a person the defendant knew or believed to be a foreign official. Belief that an individual was a foreign official does not satisfy this element if the individual was not in fact a foreign official.”
In his order, Judge Selna stated as follows.
“The Government proposes to add the following paragraph to element 5:”
The government need not prove that the defendant knew the legal definition of “foreign official” under the FCPA or knew that the intended recipient of the payment or gift fell within the legal definition. The defendant need not know in what specific official capacity the intended recipient was acting, but the defendant must have known or believed that the intended recipient had authority to act in a certain manner as specified in element 6.”
The Court does not believe that this language is necessary, and it is potentially confusing.”
Earlier this week, the DOJ announced (here) that Stuart Carson and Hong Carson “each pleaded guilty … before U.S. District Judge James V. Selna in Santa Ana, Calif., to separate one-count superseding informations charging them with making a corrupt payment to a foreign government official in violation of the FCPA.”
Unlike the original indictment, the four page superseding information as to Stuart Carson (here) focuses solely on Turow Power Plant in Poland and states as follows. “Turow was a department, agency, and instrumentality of a foreign government, within the meaning of the FCPA, […]. The officers and employees of Turow were “foreign officials” within the meaning of the FCPA.” The superseding information states that on March 8, 2000, Stuart Carson “corruptly caused an e-mail to be sent authorizing the payment of approximately $16,000 to officials of Turow for the purpose of securing Turow’s business.”
Unlike the original indictment, the four page superseding information as to Hong Carson (here) focuses solely on Kuosheng Nuclear Power Plant in Taiwan and states as follows. “Kuoshen was a department, agency, and instrumentality of a foreign government, within the meaning of the FCPA, […]. The officers and employees of Kuosheng were “foreign officials” within the meaning of the FCPA. The superseding information states that on August 14, 2002, Hong Carson “corruptly caused an e-mail to be sent authorizing the payment of $40,000 to officials of Kuosheng for the purposes of securing Kuosheng’s business.”
As noted in the DOJ’s release, “at sentencing (Oct. 15, 2012), Stuart Carson, 73, faces up to 10 months in prison. Rose Carson, 48, faces a sentence of three years probation, which may include up to six months of home confinement.”
The conclusions are yours to reach.
Paul Cosgrove and David Edmonds remain defendants in the case and their trial is scheduled for June.
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Previous posts here and here discussed the motion to suppress filed by Cosgrove and Edmonds (joined by Hong Carson) to suppress certain statements made by the individuals to CCI and its counsel (Steptoe & Johnson) on the basis that its counsel were de facto public actors and that CCI’s actions in compelling their statements were “fairly attributable to the government” and ought to be suppressed.
Earlier this week, Judge Selna, whose practice is to issue tentative rulings, tentatively ruled (here), in connection with a subpoena to Steptoe & Johnson, that production must be made as to the following. “All communications exchanged between Steptoe, IMI, and/or CCI on the one hand, and the United States Department of Justice, on the other hand during the period August 10 through August 25 2007 which relate to interviews of CCI employees, taken or to be taken, for the purpose of investigating actual or suspected violations of the [FCPA and Travel Act]. This includes but is not limited to all e-mails exchanged between Patrick Norton (Steptoe & Johnson) and Mark Mendelsohn (former DOJ FCPA unit chief). Judge Selna noted that such information “could yield admissible evidence under the defendants’ Government-actor theory of agreements or understanding between Steptoe that would render Steptoe lawyers agents of the Government, specifically the Department of Justice, at the time the interviews of defendants were conducted.”
Judge Selna also issued another tentative ruling (here) regarding various aspects of the subpoena to Steptoe & Johnson that will be of interest to FCPA practitioners.
A Focus On China SOEs
Perhaps it was the recent U.S. visit by China’s Vice President Xi Jinping, who is expected to become China’s President later this year. In any event, there has been much focus on Chinese state-owned or state-controlled enterprises (“SOEs”) of late. If you have an interest in Chinese SOEs (and every FCPA practitioner should given current enforcement theories), this post is for you.
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In, “China’s Money Trail, In the Heart of the Rust Belt, Chinese Funds Provide the Grease,” Wall Street Journal, (Feb. 11, 2012), it was noted that Nexteer Automotive, the largest remaining industrial employer in Saginaw, Michigan, is owned by Pacific Century Motors, which in turn is controlled by Aviation Industry Corp. of China and Beijing E-town International Investment Co., an investment arm of the city of Beijing. The article details how Chinese SOEs (and private enterprises) “are pouring investment money into the U.S. into industries such as auto parts, real estate, and oil and gas.” Many Midwestern states are courting Chinese investment. The article contains a graphic detailing Chinese SOE (and private enterprise) investment in the U.S. 2003 – Q3 2011. Of the 292 deals, the “ownership” of 24% was government, of the $15.9 billion value of the deals 62% was government.
“China Foothold In U.S. Energy,” Wall Street Journal (March 6, 2012), noted as follows. Since 2010, Chinese companies have invested more than $17 bilion into oil and gas deals in the U.S. and Canada according to data provider Dealgoic. Leading the push has been Fu Chengyu (first as chairman of China National Offshore Oil Corp., known as Cnooc) then as chairman of China Petrochemical Corp. (Sinopec). The North American energy push is part of a wave of investment money from Chinese state-owned and private enterprises into the U.S. and other Western nations.
The recent report “China 2030” (here by the World Bank) notes, under the heading. “Private sector development and state enterprise reforms” as follows. Going forward, a vibrant corporate sector will be critical for sustaining relatively fast growth. China’s rapid growth, particularly since 2003, benefited from SOE restructuring and expansion of the private sector. Many small and medium-sized SOEs became privately owned. In line with these developments, the new policy direction has been to diversify the ownership of state enterprises. Indeed, many large state enterprises have been “corporatized” and some of the biggest (including those directly monitored by the central government) are now not only listed on stock exchanges but have also improved their governance structure, managerial professionalism, and profitability.”
In February, the Senate U.S. – China Economic and Security Review Commission held a hearing titled “Chinese State-Owned and State-Controlled Enterprises” (see here for the prepared statements and testimony).
Representative Peter Visclosky (D-IN ) stated as follows. “I am concerned that China’s state-owned enterprises will only continue to gain influence in our country and around the world in the future, and it is my hope that through hearings and discussions such as the one that you are holding today, we can begin to develop the appropriate policies that ensure American workers and American companies can fairly compete in a world with Chinese state-owned enterprises.”
Hearing testimony and statements addressed among, other things, the following topics: how much of the Chinese economy is state owned or state controlled; how many SOEs and non-central SOEs there are; what is the difference between SOEs and other entities with state “involvement”; what kinds of government support do SOEs receive; SOE procurement and contracting practices; can SOEs be considered “commercial” and, if so, in what respects; does the CCP choose or influence the choice of directors and top management of SOEs; China’s “going abroad” policy and increasing Chinese SOE investment in the United States; are SOEs in the United States and other foreign markets primarily expected to turn a profit or to gain market share or to pursue other non-commercial goals.
As noted in submitted statements “SOEs are now gigantic on a global scale.” Three of the top 10 companies in the Fortune 500 are Chinese SOEs.
In March, the House Committee on Foreign Affairs, Subcommittee on Africa, Global Health, and Human Rights held a hearing titled “Assessing China’s Role and Influence in Africa” (see here).
In testimony (here), Principal Deputy Assistant Secretary Don Yamamoto (The Bureau of African Affairs, State Department) noted that China has emerged as the clear leader in trade and investment in Africa. Assistant Secretary Yamamoto noted however that”China’s practices have in some cases undermined efforts to promote progressive business practices, democracy, and good governance in Africa.” Among others, he stated as follows. “Although China enacted legislation criminalizing bribery of foreign public officials in 2011, some Chinese companies continue to undermine accountability and good governance by engaging in corrupt practices to win contracts and bids in Africa. Corrupt activity by Chinese companies also disadvantages U.S. companies who compete on the merits and do not engage in such illegal behavior (which is prohibited under domestic bribery laws in Africa as well as under the U.S. Foreign Corrupt Practices Act). The United States encourages China to rigorously enforce its anti-bribery laws, accede to the OECD Anti-Bribery Convention, and subscribe to international development practices.”
At the hearing, Carolyn Bartholomew (Commissioner, U.S.-China Economic and Security Review Commission) noted (here) as follows. “The deal-making [by Chinese companies in Africa] is often done between corrupt government officials. The public has no access to information about those deals. The Chinese government’s support for its state-owned and state-connected enterprises, its deep pockets, and its willingness to bring to the table a wide range of incentives, has created barriers for U.S. business participation in countries across the continent. Corruption is a serious problem. We should be proud of the standard set by the Foreign Corrupt Practices Act (FCPA). Yet, when Chinese partners are willing and able to offer new palaces, military equipment, sports arenas, and a host of other “gifts,” American companies cannot compete.”
Case Law Of Note
Last week, the DOJ got dinged on both coasts in criminal appeals. Although neither case involved the FCPA, the reasoning of the courts touch upon issues relevant to the recent “foreign official” challenges. For more on those challenges, the DOJ and defense positions, and the trial court rulings, see here, here, here and here (as well as the embedded links in those posts).
In addition to discussing the two cases with similarities to “foreign official” challenges, this post also discusses a decision from the U.S. District Court in the Middle District of Tennessee that is believed to be the first decision concerning the intersection of D0dd-Frank’s whistleblower provisions and the FCPA.
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In U.S. v. David Nosal, the Ninth Circuit, sitting en banc, affirmed a lower court dismissal of criminal charges under the Computer Fraud and Abuse Act (“CFAA”) filed against David Nosal who used to work for Korn/Ferry, an executive search firm. (See here for the decision). The issue before the court was how broadly to read the CFAA, particularly its provisions which defines “exceeds authorized access” as “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.”
Without getting into the specific facts of the case here, the court stated that “the government’s interpretation would transform the CFAA from an anti-hacking statute into an expansive misappropriation statute” and that “if Congress meant to expand the scope of criminal liability to everyone who uses a computer in violation of computer use restrictions … we would expect it to use language better suited to that purpose.” In a footnote, the court noted that Congress did just that in other federal statutes where the key terms were broader.
Thereafter, the court stated as follows. “The government’s construction of the statute would expand its scope far beyond computer hacking to criminalize any unauthorized use of information obtained from a computer. This would make criminals of large groups of people who would have little reason to suspect they are committing a federal crime. While ignorance of the law is no excuse, we can properly be skeptical as to whether Congress, in 1984, meant to criminalize conduct beyond that which is inherently wrongful, such as breaking into a computer.”
The DOJ urged the court to consider the CFAA’s legislative history and pointed to an earlier version of the statute that was more favorable to its position. However, the court stated that “that language was removed and replaced by the current phrase and definition” (emphasis in original).
The court then stated as follows. “The government assures us that, whatever the scope of the CFAA, it won’t prosecute minor violations. But we shouldn’t have to live at the mercy of our local prosecutor. […] And it’s not clear we can trust the government when a tempting target comes along.” (citations omitted, emphasis in original).
In conclusion, the court stated as follows. “We need not decide today whether Congress could base criminal liability on violations of a company or website’s computer use restrictions. Instead, we hold that the phrase ‘exceeds authorized access’ in the CFAA does not extend to violations of use restrictions. If Congress wants to incorporate misappropriation liability into the CFAA, it must speak more clearly. The rule of lenity requires penal laws to construed strictly. When choice has to be made between two readings of what conduct Congress has made a crime, it is appropriate, before we choose the harsher alternative, to require that Congress should have spoken in language that is clear and definite.” (citations omitted, emphasis in original).
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In U.S. v. Sergey Aleynikov, the Second Circuit reversed the criminal conviction of Sergey Aleynikov, a former computer programmer employed by Goldman Sach who was found guilty by a jury of violating the National Stolen Property Act (“NSPA”) and the Economic Espionage Act of 1996 (“EEA”). As noted in the opinion (here), Aleynikov argued on appeal that his conduct did not constitute an offense under either statute – namely that the source code at issue was not a “stolen good” within the meaning of the NSPA and that the source code was not “related to or included in a product that is produced for or placed in interstate or foreign commerce” within the meaning of the EEA.
Without getting in to the specific facts of the case here, the Second Circuit began its discussion by noting that “Aleynikov’s challenge requires us to determine the scope of the two federal statutes” and that “federal crimes are solely creatures of statute.” The court stated that “due respect for the prerogatives of Congress in defining federal crimes prompts restraint in this area, where we typically find a narrow interpretation appropriate” and held that Aleynikov’s conduct did not constitute an offense under either the NSPA or the EEA.
As to the EEA, and of note, the Court looked to the statute’s legislative history and found that a key provision did not appear in various draft of the bill and that therefore the words of the final bill that was enacted into law “were deliberately chosen.” As to the DOJ’s argument that the EEA had a broad sweep, the Court stated that one would expect to see such wording in the statute. Citing a prior Supreme Court decision, the Court stated as follows. “And ‘when choice has to be made between two readings of what conduct Congress has made a crime, it is appropriate, before we choose the harsher alternative, to require that Congress should have spoken in language that is clear and definite.”
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Recently, Judge Aleta Trauger (M.D. Tenn.) issued a decision (here) in Nollner v. Southern Baptist Convention Inc. that is believed to be the first judicial decision concerning the intersection of D0dd-Frank’s whistleblower provisions and the FCPA.
The basic facts are as follows. Ron and Beverly Nollner responded to a job post by The International Mission Board of the Southern Baptist Convention Inc. (“IMB”) (a wholly-owned subsidiary of Southern Baptist Convention Inc.) to perform missionary related work on the church’s behalf in New Delhi, India – specifically to manage construction of a new office building. After accepting the positions and arriving in New Delhi, the Nollners allege that the “situation was not what had been promised.” Among other things, the Nollners allege that they “became aware of a host of troubling information” including that “the contractor and architect were paying bribes to local Indian officials with money furnished by the defendants for that purpose.” The Nollners alleged that “Mr. Nolnner reported his grave concerns about potential bribery to the defendants’ employees, [but] that they seemed unbothered, if not complicit.” Thereafter, two of Mr. Nollner’s superiors allegedly asked him to resign and when he refused he was terminated.
Among other things, the Nollners brought a retaliatory discharge claim under Dodd-Frank claiming that they were terminated for, among other things, reporting and/or refusing to participate in bribes and other illegal payments. As to the Dodd-Frank claim, the Nollners allege that its whistleblower anti-retaliation provisions protected them against retaliation for reporting the defendants’ violations of the FCPA.
The court began by noting that Dodd-Frank “only protects [an] employee against retaliation if the federal violation falls within the SEC’s jurisdiction.” The court then stated that “the jurisdiction of the SEC with respect to FCPA violations is limited only to civil actions to enforce violations by issuers, but does not encompass FCPA violations by domestic concerns, which are subject to exclusive DOJ enforcement.” (emphasis in original). The court then stated as follows. “Here, because the defendants are not issuers, only the DOJ – not the SEC – has jurisdiction over them with respect to FCPA violations.” Accordingly, the court held, even assuming the allegations to be true, that the “Nollners may not maintain [Dodd-Frank] retaliation claims premised on their reporting of potential FCPA violations by the defendants.”
In addition, the court stated that the “FCPA does not itself protect whistleblowers; it contains no anti-retaliation provisions and affords no private cause of action” (relying on Lamb v. Philip Morris, Inc. 915 F.2d 1024 (6th Circ. 1990)). The court stated that “it falls on Congress to protect individual FCPA whistleblowers who are not otherwise protected from retaliation under state or federal law for disclosing FCPA violations.”
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In regards to the reference in Nollner that the jurisdiction of the SEC with respect to FCPA violations is limited only to civil actions to enforce violations by issuers, this is generally true, although in recent years the SEC has brought FCPA enforcement actions against non-issuers (see here for the Panalpina enforcement action and here for the Snamprogetti enforcement action).
All The News That’s Fit? To Print
This recent article from the New York Times (“In China Press, Best Coverage Cash Can Buy”) caught my eye. It discusses how Chinese journalists are often “more than willing to let flattering news about Western and Asian businesses appear in print and broadcast media – if the price is right.” The article notes that “while Western companies and many Chinese journalists are loath to discuss the subject, public relations and advertising firms are sometimes surprisingly candid about their roles as brokers in buying flattering coverage, referred to [in China] as ‘soft news’ or ‘paid news.'”
In the article, Ogilvy & Mather (one of the world’s largest advertising agencies that services Fortune Global 500 companies and a unit of NASDAQ listed WPP) essentially admits, in certain instances, to facilitating such payments for its clients. Also in the article a “Chinese account manager for another American public relations firms was strikingly frank about paying for coverage.”
The FCPA implication?
In the eyes of the enforcement agencies, employees of state-owned or state-controlled enterprises (i.e. most Chinese media outlets) are “foreign officials” under the FCPA. Given the agencies’ interpretation coupled with the agencies increasingly boundless interpretation of “obtain or retain business”, it will be interesting to see how they react (if they haven’t already) to the front-page New York Times article. Is the type of conduct described in the New York Times article the type of conduct that Congress sought to prohibit when it passed the FCPA? Likely no, but then again this same question could be asked in connection with many recent FCPA inquiries and enforcement actions.
While not a direct parallel to the issues discussed in the New York Times article, in FCPA Opinion Procedure Release 08-03 (here), TRACE International Inc. proposed to pay for certain expenses for journalists employed by Chinese state-owned media outlets to attend a TRACE press conference in Shanghai. According to TRACE in the request, “it is common practice for foreign and domestic companies operating in the PRC to provide a stipend and travel expenses to journalists in connection with a press conference and such stipends are not conditioned on subsequent coverage of the press conference or the nature of the coverage.” Given the various representations offered by TRACE, including that the payments were not contrary to Chinese law and that they would be accurately recorded in its books and records, the DOJ opined that it did not intend to take any enforcement action with respect to the payments. The DOJ noted that the expenses would fall within the FCPA’s affirmative defense in that they appeared to be directly related to the promotion, demonstration, and explanation of TRACE’s products or services. However, in its opinion, the DOJ stated it did not “place [any] weight on the fact that it may be common practice for companies in the PRC to provide such benefits to journalists attending a press conference.”
The New York Times article notes that the above dynamic may not be limited to China. The article states, “media outlets in Europe, Japan, the Philippines, Latin America and even the United States may venture into various gray area, encouraging companies to pay for journalists’ travel or underwriting favorable reporting or agreeing to take out advertising packages in exchange for coverage.”