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Wynn’s Boardroom Battle Royale

[There are two posts today]

Rarely does a company issue a press release accusing a director of Foreign Corrupt Practices Act violations.  But then again, rarely does a director file a lawsuit against the company alleging facts that could implicate the FCPA, which then sets into motion an SEC inquiry.

Welcome to Wynn Resorts boardroom battle royale.

As indicated in this prior post, in January, Wynn boardmember Kazuo Okada filed a civil lawsuit in Nevada alleging facts which could implicate the FCPA – a $135 million Wynn donation to the University of Macau.  As noted in the post, last week Wynn announced that the SEC has launched an inquiry requesting information relating to the donation, other donations made by the company and the company’s “casino or concession gaming licenses or renewals in Macau.”

Yesterday, in a Sunday press release (here), Wynn announced that its “Compliance  Committee has concluded a year-long investigation after receiving an  independent report detailing numerous apparent violations of the U.S.  Foreign Corrupt Practices Act (FCPA) by Aruze USA, Inc. [see here], its parent company Universal Entertainment Corporation [see here] and its principal shareholder, Kazuo Okada.”

Okada’s bio on Wynn’s website (here) states as follows.  “Mr. Okada founded Universal Lease Co. Ltd., which became Aruze Corp. in 1998, a company listed on the Japanese Association of Securities Dealers Automated Quotation Securities Exchange. In November 2009, Aruze Corp. changed its name to Universal Entertainment Corporation. Universal Entertainment Corporation a Japanese manufacturer of pachislot and pachinko machines, amusement machines, and video games for domestic sales. In 1983, Mr. Okada also founded Universal Distributing Nevada, Inc., which changed its name to Aruze Gaming America, Inc. in 2005. Aruze Gaming America, Inc. is a manufacturer and distributor of gaming machines and devices in the United States and is expanding its sales business in Asia, Australia and South Africa. Mr. Okada currently serves as director and Chairman of the board of Universal Entertainment Corporation, as director, President, Secretary and Treasurer of Aruze USA, Inc., which is a wholly owned subsidiary of Universal Entertainment Corporation, and as director, President, Secretary and Treasurer of Aruze Gaming America, Inc.”

In yesterday’s release, Wynn further stated as follows.  “The Compliance Committee, chaired by former Nevada Governor Robert Miller, engaged several investigators, including Freeh, Sporkin and Sullivan, LLP, led by Louis J. Freeh, the former Director of the U.S. Federal Bureau of Investigation, which conducted a thorough independent investigation. Freeh’s investigators uncovered and documented more than three dozen instances over a three-year period in which Mr. Okada and his associates engaged in improper activities for their own benefit in apparent violation of U.S. anti-corruption laws and gross disregard for the Company’s Code of Conduct. These troubling discoveries include cash payments and gifts totaling approximately$110,000 to foreign gaming      regulators.  “Mr. Okada and his associates and companies appear to have engaged in a longstanding practice of making payments and gifts to his two chief gaming regulators at the Philippines Amusement and Gaming Corporation (PAGCOR), who directly oversee and regulated Mr. Okada’s Provisional Licensing Agreement to operate in that country,” according to the Freeh Report. The report further stated that Mr. Okada and his associates have “consciously taken active measures to conceal both the nature and amount of these payments.””

Based on the Freeh Report, the Wynn releases states as follows.  “The Board has requested that Mr. Okada resign as a Director of Wynn Resorts. The Company will immediately inform the Board of Directors of its Hong Kong listed subsidiary, Wynn Macau, Limited, of its actions and will recommend that Mr. Okada be removed from the Wynn Macau Board.”  […] “The Freeh Report is the culmination of a year-long investigation by the Compliance Committee based on increasing concerns the Board had relating      to the activities of Mr. Okada and Aruze USA, Inc. in the Philippines and statements made by Mr. Okada to Wynn Resorts’ Directors that gifts to regulators are permissible in Asia. Mr. Okada is the only Director of Wynn Resorts who has continued to refuse to sign the Company’s Code of Conduct or participate in mandatory Foreign Corrupt Practices Act training for Directors.”

To learn more, see here from Reuters.

Wynn Resorts $135 Million University of Macau Donation The Subject Of SEC Scrutiny

In May 2011,  Wynn Resorts donated $135 million to the University of Macau (see here for the University’s press release).

In an 8-K filing yesterday, Wynn Resorts Ltd. disclosed as follows.

“As previously disclosed, in May 2011, Wynn Macau, a majority owned subsidiary of Wynn Resorts, Limited (the “Company”), made a commitment to the University of Macau Development Foundation in support of the new Asia-Pacific Academy of Economics and Management. This contribution consists of a $25 million payment made in May 2011 and a commitment for additional donations of $10 million each year for the calendar years 2012 through 2022 inclusive. The pledge was consistent with the Company’s longstanding practice of providing philanthropic support for deserving institutions in the markets in which it operates. The pledge was made following an extensive analysis which concluded that the gift was made in accordance with all applicable laws. The pledge was considered by the Boards of Directors of both the Company and Wynn Macau and approved by 15 of the 16 directors who serve on those boards. The sole dissenting vote was Mr. Kazuo Okada whose stated objection was to the length of time over which the donation would occur, not its propriety.

Also as previously disclosed, Mr. Okada commenced litigation on January 11, 2012 [see here for the complaint], in Nevada seeking to compel the Company to produce information relating to the donation to the University of Macau, among other things.

On February 8, 2012, following Mr. Okada’s lawsuit, the Company received a letter from the Salt Lake Regional Office of the U.S. Securities and Exchange Commission (“SEC”) requesting that, in connection with an informal inquiry by the SEC, the Company preserve information relating to the donation to the University of Macau, any donations by the Company to any other educational charitable institutions, including the University of Macau Development Foundation, and the Company’s casino or concession gaming licenses or renewals in Macau. The Company intends to fully comply with the SEC’s request.”

While the Wynn’s disclosure does not specifically mention the Foreign Corrupt Practices Act, given that the company’s disclosure of the SEC inquiry appears to link the donation to the “Company’s casino or concession gaming licenses or renewals in Macau” it is likely that the SEC’s interest in the donation is based, at least in part, on the FCPA.  As Okada alleges in his complaint “Wynn Macau’s gaming concession expires in June 2022” – the last year of Wynn’s donation committment.  According to Okada’s complaint “he objected to this donation, which appears to be unprecedented in the annals of the University” [which he alleges sits on land owned by the government].

According to Wynn’s most recent quarterly filing, the company’s Macau operations constitute approximately 75% of the company’s overall revenue.  Macau is also a focus of the company’s expansion plans.

Charitable donations are not in and of themselves prohibited by the FCPA’s anti-bribery provisions.  For instance, see here for a 2009 FCPA Opinion Procedure Release.  Yet, such donations do carry FCPA risk and, as anyone who has reviewed DOJ NPAs and DPAs know, FCPA best practices is to have adequate controls as to charitable donations (see here for the recent Aon NPA – specifically Appendix B).

Charitable donations hit the radars of FCPA practitioners as a result of a 2004 SEC FCPA enforcement action against Schering-Plough (see here).  In the enforcement action, the SEC alleged that Schering-Plough violated the FCPA when its wholly-owned Polish subsidiary (“S-P Poland”) improperly recorded a bona fide charitable donation to a Polish foundation that restored castles where the founder/president of the foundation was also a director of a government health fund  that provided money to hospitals throughout Poland for the purchase of pharmaceutical products.  Although the SEC and Schering-Plough ultimately resolved the matter based only on violations of the FCPA books and records and internal control provisions, the enforcement action is commonly viewed as standing for the proposition that “payments to a bona fide charity could violate the FCPA if made to influence the actions of a government official” (see this client alert from Wilmer Cutler).

Wynn is not the only casino under scrutiny for Macau conduct.  Las Vegas Sands has also been under FCPA scrutiny concerning its operations in Macau.  In a question out of left-field, during the June 2011 FCPA hearing in the House, Representative Quayle (R-AZ) asked the DOJ whether it “looked into the gambling practices in Macau and if there is any illegal activity occurring in that arena?”  (See here page 71).

Like Wynn’s Macau inquiry, the Las Vegas Sands inquiry also seems to have started with a civil lawsuit.  See here for the prior post.

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