Recent DOJ Statements At Issue In Carson “Foreign Official” Challenge
On Tuesday, Nathaniel Edmonds (Assistant Chief, DOJ Fraud Section who is specifically involved in the Carson “foreign official” challenge) participated in a webcast sponsored by the Conference Board titled “Enforcement of The Foreign Corrupt Practices Act: A Dialogue with Regulators” (see here).
According to a May 4th article authored by Christopher Matthews and published on the Just Anti-Corruption page of the website Main Justice, during the webcast Edmonds “warned defendants facing charges under the foreign bribery law against contesting that definition.”
The article states as follows.
[“It’s not necessarily the wisest move for a company,” Assistant Chief Nathaniel Edmonds said Tuesday during a webcast on the FCPA sponsored by The Conference Board. Edmonds reiterated the Justice Department’s belief that employees of state-owned or controlled companies can be considered foreign officials under the FCPA, which prohibits bribes to foreign officials to obtain or retain business. “Quibbling over the percentage ownership or control of a company is not going to be particularly helpful as a defense,” Edmonds said.]
Yesterday, in a supplement to its reply brief (here) the Carson defendants brought the article to the attention of the court and stated as follows.
“Defendants respectfully submit that Mr. Edmonds’ comments supplement at
least two important points made in Defendants’ Motion and Reply. First, there is a reason the Government’s maximalist position on the definition of “foreign official” has avoided serious judicial scrutiny for so long, and the reason is that individuals and companies are reluctant to challenge the Government’s interpretation for fear of the consequences. Second, the Government does not have a definition of “instrumentality” that can withstand judicial scrutiny because, among other things, it is unable to say what would make one state-owned enterprise, but not another, an “instrumentality” under the FCPA.”
Rockwell Automation Resolves SEC Action
[Note – because of my involvement in the below Rockwell matter while in private practice, this post is devoid of my customary commentary and analysis as to the enforcement action]
Yesterday, the SEC announced (here) a cease and desist proceeding and imposition of a cease and desist order as to Rockwell Automation, Inc.
As stated in the SEC’s order, the matter involved “violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Rockwell, through one of its former subsidiaries in China, Rockwell Automation Power Systems (Shanghai) Ltd. (“RAPS-China”), which was divested by Rockwell in January, 2007.”
In summary fashion, the SEC found as follows.
“From 2003 to 2006, certain employees of RAPS-China paid approximately $615,000 to Design Institutes, which were typically state-owned enterprises that provided design engineering and technical integration services that can influence contract awards by end-user state-owned customers. The payments were made through third-party intermediaries at the request of Design Institute employees and at the direction of RAPS-China’s Marketing and Sales Director. RAPS-China’s Marketing and Sales Director intended that these funds be paid directly to the Design Institute employees, with the expectation that they would influence the ultimate state-owned customers to purchase RAPS products. While the Design Institutes did provide some bona fide engineering and other services in connection with RAPS-China’s end-user contracts, RAPS-China could not substantiate the specific services rendered or the value of those services. Also during the same period, employees of RAPS-China paid approximately $450,000 to fund sightseeing and other non-business trips for employees of Design Institutes and other state-owned companies.”
“Rockwell realized approximately $1.7 million in net profits on sales contracts with end-user Chinese government-owned companies that were associated with payments to the Design Institutes.”
“Rockwell failed to accurately record the payments in its books and records, and failed to implement or maintain a system of internal accounting controls sufficient to prevent and detect the payments.”
Under the heading, “Discovery, Self-Reporting and Remediation” the SEC order states as follows.
“Rockwell discovered the DI Payments and the third-party payment mechanism in 2006 through its normal financial review process. This process was part of Rockwell’s global corporate compliance/internal controls program, which had targeted China for enhanced FCPA training and scrutiny starting in 2004. Upon discovery of the issue, Rockwell hired counsel and investigated the DI Payments with the oversight of its Board of Directors. It voluntarily self-reported the DI Payments to the Commission and voluntarily provided the Commission Staff with all relevant facts found in the investigation, and otherwise cooperated with the Commission. As a result of the discovery of this matter, Rockwell undertook numerous remedial measures, including employee termination and disciplinary actions, enhancements to its internal controls and compliance program and conducted a broad, global review of its other operations.”
The SEC order further states as follows.
“In connection with the payments described above, Rockwell failed to make and keep accurate books, records and accounts as required by Section 13(b)(2)(A) of the Exchange Act.”
“Further, as evidenced by the DI Payments (as described above) and leisure travel payments, Rockwell failed to devise or maintain sufficient internal controls as required by Section 13(b)(2)(B) of the Exchange Act.”
As noted in the SEC order, Rockwell, without admitting or denying the SEC’s findings, agreed to “pay disgorgement of $1,771,000, prejudgment interest of $590,091and a civil money penalty of $400,000.”
The SEC order concludes by noting that “the Commission is not imposing a civil penalty in excess of $400,000 based upon [Rockwell’s] cooperation” in the investigation.
See here for Rockwell’s press release.
David Simon (Foley & Lardner – here) and Greg Bruch (Willkie Farr & Gallagher – here) represented Rockwell.
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The Rockwell matter represents the second time in the past month (approximately) that the SEC has resolved an FCPA inquiry via the administrative cease and desist route. See here for the prior post regarding Ball Corporation.
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Other FCPA enforcement actions focused on alleged improper travel and entertainment benefits to employees of Chinese state-owned enterprises include: Lucent Technologies (see here) and UTStarcom Inc. (see here).
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Other FCPA enforcement actions focused (in whole or in part) on allegedly improper payments to employees of so-called Chinese “Design Institutes” include: ITT Corp. (see here); and Avery Dennison (see here).
Carson “Foreign Official” Challenge Fully Briefed
Yesterday various defendants in the U.S. v. Carson case pending in the Central District of California filed a reply brief (see here).
The brief begins as follows.
“In 1977, Congress could have enacted a general anti-bribery statute that made it a crime to pay a commercial bribe to any foreign national, but it did not. Rather, the FCPA criminalizes improper payments only to a “foreign official.” Thus, making an improper payment to a “foreign official” violates the FCPA; making that same payment to someone who is not a “foreign official” does not. This is undisputed.”
“The Government argues that “[s]tate-owned business enterprises [‘SOEs’] may, in appropriate circumstances, be considered instrumentalities of a foreign government and their officers and employees to be foreign officials.” But Congress (i) knew about SOEs when it enacted the FCPA, (ii) knew that some of the questionable payments in the pre-FCPA era may have been made to employees of SOEs, and (iii) knew how to include SOEs in the definition of “foreign official” if it had wanted to do so. Clearly, Congress did not do so, and contrary to the Government’s arguments, there is no evidence that Congress intended SOEs to be covered by this criminal statute, or intended the word “instrumentality” to encompass broadly anything through which a foreign government achieves an “end or purpose.” In fact, the plain language of the statute and its history illustrate that the FCPA was aimed at preventing improper payments to traditional government officials. If Congress had wanted SOEs to be included in the definition of “instrumentality,” it would have expressly said so – just as it did in 1976 when it enacted the Foreign Sovereign Immunities Act (“FSIA”).”
“Having no statutory authority for its sweeping position, the Government is thus unable to define the “appropriate circumstances” when an SOE allegedly falls within the FCPA. The Government states only that it is a “fact-based determination.” But facts in isolation are irrelevant unless analyzed in the context of a legal framework. And for over two hundred years it has been “emphatically the province and duty of the judicial department” – not the jury – “to say what the law is.” Marbury v Madison, 5 U.S. (1 Cranch) 137 (1803). Thus, while a jury may decide disputed issues of fact, this Court must first decide the law.”
“Defendants’ Motion squarely challenges the Government’s unsupported legal
interpretation of the FCPA by arguing that the term “instrumentality” simply does not include SOEs, and thus employees of SOEs are not, as a matter of law, “foreign officials.” The Government labels Defendants’ position as extreme, insisting that it “is not asking for a legal conclusion that all SOEs are instrumentalities,” only for a ruling that “the term instrumentality . . . can include SOEs.” But it is the Government’s position that is unreasonable, because the Government cannot articulate any principled test – and there is no test, other than one invented from whole cloth – for what would make one SOE, but not another, a government “instrumentality” under the FCPA. Accordingly, the Government’s concession, that some SOEs fall within and some outside the statute, coupled with the complete lack of any meaningful or discernable standards for deciding which is which, undermines the Government’s position and requires that it be rejected because it would render the FCPA unconstitutionally vague as applied.”
“Accordingly, the Court should hold that employees of SOEs are not “foreign
officials” under the FCPA and should dismiss Counts One through Ten of the
Indictment. Contrary to the Government’s overblown rhetoric, the sky will not fall upon such a ruling; rather, the issue will be returned to its proper forum: Congress. See Skilling v. United States, 561 U.S. ___, 130 S. Ct. 2896, 2933 (2010) (“If Congress desires to go further . . . it must speak more clearly than it has.”).”
This previous post links to the Defendants’ motion and my declaration filed in support. This previous post links to the DOJ’s opposition brief as well as supporting declarations from the State Department and the FBI.
The Carson defendants also moved (see here) to strike the State Department declaration or in the alternative for a court order requiring the State Department employee to appear for questioning at next week’s hearing). As noted in this prior post, the same State Department declaration was ordered stricken in the Lindsey “foreign official” challenge and is also being challenged in the O’Shea “foreign official” challenge – see here.
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In a related development, last week the DOJ announced (here) that “Flavio Ricotti, a former executive of [Control Components, Inc. – the same employer as the above referenced defendants challenging the DOJ’s “foreign official” interpretation] has pleaded guilty for his participation 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.” See here for the plea agreement.
As noted in the DOJ release, “Ricotti pleaded guilty […] to a one-count superseding information [see here] charging him with conspiring to make corrupt payments to foreign government officials, and officers and employees of private companies in several countries, including Saudi Arabia and Qatar, in violation of the Foreign Corrupt Practices Act (FCPA) and the Travel Act.”
The DOJ release further states as follows. “In connection with his guilty plea, Ricotti admitted that he conspired with other CCI employees to offer a payment to an official of Saudi Aramco, a Saudi Arabian state-owned oil company, in connection with attempting to obtain a valve contract for CCI in 2003. Ricotti also admitted to conspiring with other CCI employees to make a payment to an employee of a private company so that the employee would assist in awarding to CCI a valve contract in Qatar.”
As further noted in the DOJ release:
“In related cases, two defendants previously pleaded guilty to conspiring to bribe officers and employees of foreign state-owned companies on behalf of CCI. On Jan. 8, 2009, Mario Covino, the former director of worldwide factory sales for the valve company, pleaded guilty [see here] to one count of conspiracy to violate the FCPA and admitted to causing the payment of approximately $1 million in bribes to officers and employees of several foreign state-owned companies. On Feb. 3, 2009, Richard Morlok, the former finance director for the valve company, pleaded guilty [see here] to one count of conspiracy to violate the FCPA and admitted to causing the payment of approximately $628,000 in bribes to officers and employees of several foreign state-owned companies. Covino and Morlok are scheduled to be sentenced in February 2012.”
See here for July 2009 enforcement action against Control Components, Inc.
Stay Tuned for More
As have been widely reported (see here for the New York Times article), an FCPA sweep of the pharmaceutical / medical device industry is currently underway. Merck, Medtronic, Zimmer and several other companies are reportedly under investigation.
For instance, last week Eli Lilly disclosed (here) that it is “in advanced discussions with the SEC to resolve their investigation” that began in August 2003 as to “compliance by Polish subsidiaries of certain pharmaceutical companies, including Lilly, with the [FCPA].”
AstraZeneca disclosed (here) last week as follows. “As previously disclosed, AstraZeneca has received inquiries from the US Department of Justice and the Securities and Exchange Commission in connection with an investigation into Foreign Corrupt Practices Act issues in the pharmaceutical industry across several countries. AstraZeneca is cooperating with these inquiries and is investigating, among other things, sales practices, internal controls, certain distributors, and interactions with healthcare providers, institutions, and other government officials. AstraZeneca is investigating inappropriate conduct in certain countries, including China.”
Johnson & Johnson, previously included in the group of companies under investigation, resolved an FCPA enforcement action last month (see here for the prior post).
Many have suggested that J&J’s voluntarily disclosed conduct served as the point of entry for the industry wide sweep based on this sentence from the J&J deferred prosecution agreement – “J&J has cooperated and agreed to continue to cooperate with the Department in the Department’s investigations of other companies and individuals in connection with business practices overseas in various markets.”
Thus, the J&J enforcement action in many ways provides a glimpse into potential future FCPA enforcement actions involving the pharmaceutical / medical device industry.
Two issues likely to be found in such future FCPA enforcement actions are discussed below.
42 USC 1320a-7(a)
The J&J deferred prosecution agreement states – for why the DOJ agreed to resolve the case the way it did – as follows. “Were the Department to initiate a prosecution of J&J or one of its operating companies and obtain a conviction, instead of entering into this Agreement to defer prosecution, J&J could be subject to exclusion from participating in federal health care programs pursuant to 42 U.S.C. 1320a-7(a).” (See here for those provisions).
This component of the J&J enforcement is nothing new – as many companies such as Siemens, BAE and others – have escaped the most serious consequences of the alleged criminal conduct because of “who” the companies were (i.e. the products sold and to whom).
This feature of FCPA enforcement is controversial (for additional reading – see here for my Q&A exchange with former Senator Arlen Specter and here for the recent article titled “FCPA Sanctions: To Big to Debar”).
In recent months, the DOJ has pledged allegiance to the OECD Convention on Bribery to defend certain of its sentencing and “foreign official” enforcement positions (see here for instance).
Does the OECD Convention say anything about enforcement agencies looking at the unique aspects of an alleged violator and then crafting a resolution to fit that alleged violator?
Yes it does.
Article 5 of the OECD Convention (here), under the heading “Enforcement,” states that investigation and prosecution of bribery offenses “shall not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”
Health-Care Providers as “Foreign Officials”
As noted in the prior J&J post (here) the principal FCPA enforcement theory at issue in the pharmaceutical / medical device industry sweep would seem to be the notion that [insert country] had a national healthcare system wherein most [insert country] hospitals are publicly owned and operated and thus health care providers who work at publicly-owned hospitals are government employees providing health care services in their official capacities. According to the DOJ, the individuals are therefore “foreign officials” “as that term is defined in the FCPA.”
Against this backdrop, it is interesting to observe that in the United States approximately 20% of hospitals are owned by state or local governments (see here). In addition, approximately 150 more medical centers are run by the Veterans Health Administration (see here).
Are we calling 20+% of U.S. health-care providers U.S. officials? If not, why not and why the difference?
Something to keep in mind as additional pharmaceutical / medical device FCPA enforcement actions burst onto the scene.
Judge Matz Issues Narrow “Foreign Official” Decision / Calls DOJ Post-Hearing Request “Astounding”
As noted in an April 1st post (see here), United States District Judge Howard Matz (C.D. of California) issued an oral ruling denying the Lindsey defendants “foreign official” challenge. See here for a transcript of the hearing.
As noted in the hearing transcript, Judge Matz stated that the “foreign official” challenge “warrants and will receive a very considered written ruling.”
Yesterday, Judge Matz issued his written decision. See here.
According to Judge Matz, “the question presented by the motion is whether an officer or employee of a state-owned corporation can be a ‘foreign official’ for purposes of FCPA liability.” [In a footnote, Judge Matz noted, “[a]s discussed in the Addendum to this order, the Government never directly challenged that assumption until more than two weeks after the Court had issued its oral ruling denying Defendants’ motion to dismiss and trial had commenced.” (emphasis added)].
Judge Matz’s holding is as follows. “The Court denies the motion to dismiss, because a state-owned corporation having the attributes of CFE may be an ‘instrumentality’ of a foreign government within the meaning of the FCPA, and officers of such a state-owned corporation, as Messrs. Nestor Moreno and Arturo Hernandez are alleged to be, may therefore be ‘foreign officials’ within the meaning of the FCPA.”
As to the meaning of “instrumentality,” Judge Matz stated as follows. “Instrumentality is a noun having an inherently broad scope, but it is unnecessary for this Court to choose a particularly elastic dictionary definition of that word. Instead, the Court will adopt the very definition that Defendants themselves proffer.” Judge Matz then analyzed those definitions.
As to the FCPA’s legislative history, Judge Matz stated as follows. “It is unnecessary to base this ruling upon the legislative history of the FCPA, given that the meaning of ‘instrumentality’ under Defendants’ definition of the term clearly encompasses CFE. Nevertheless, because legislative history was so central to Defendants’ motion, the Court will summarize the parties’ contentions.”
After providing such a summary, Judge Matz stated in dicta as follows.
“The Court finds that the legislative history of the FCPA is inconclusive. Although it does not demonstrate that Congress intended to include all state-owned corporations within the ambit of the FCPA, neither does it provide support for Defendants’ insistence that Congress intended to exclude all such corporations from the ambit of the FCPA.” (emphasis in original).
As discussed above, Judge Matz’s decision contains an Addendum. It begins as follows.
“After the jury trial had been underway for more than two weeks, and just before this order was to be filed, the Government asked the Court to take judicial notice of what the Government claims is this fact. ‘CFE was created by Mexico as a decentralized public entity with its own legal status and assets.’ In a footnote the Government added, ‘… [U]nder Mexican law, CFE is a decentralized public entity, not a corporation.’ This request is astounding.”
Judge Matz then stated, among other things, that:
“throughout the hundreds of pages of argument and exhibits that were filed as part of motion practice, the Government never stated that CFE is not a corporation;”
“nor did it assert that view at the hearing on this motion;”
“in a lengthy footnote in its opposition papers the Government stressed that in more than a dozen FCPA prosecutions, ‘guilty pleas were accepted by U.S. District Courts, involved bribery of officials of state-owned companies‘” (emphasis added)
“the Government cited two cases in which state-owned companies were found to fall within the scope of the FCPA” and the Government “cited and attached jury instructions in yet two additional cases, to the effect that ‘the definition of government instrumentality includes companies owned or controlled by the state;” (emphasis added)
“still later, the Government continued in this vein, purporting to refute the Defendants’ legislative history analysis by stressing that the author of the declaration that the Defendants’ cited ‘is unable to find a single reference … that Congress intended to exclude state-owned companies from the definition of instrumentality …'”; (emphasis added)
“the Government concluded , “from the FCPA’s inception, state-owned and state-controlled companies were within Congress’s intended definition of instrumentalities of a foreign government.'” (emphasis added).
Judge Matz then ends the Addendum as follows.
“There is nothing in the Government’s peculiar request for judicial notice which warrants a change in the foregoing ruling.”