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Friday Roundup

By on January 22, 2016 in Direct Access Partners, FCPA Scholarship, FCPA Sentences, Hyperdynamics Corporation, Investigative Fees, Maria Gonzalez
Roundup2

Listening in, for the reading stack, and time served.  It’s all here in the Friday Roundup.

Listening In

This previous post about the $75,000 FCPA enforcement action against Hyperdynamics highlighted that the company spent approximately $12.7 million in pre-enforcement action professional fees and expenses (a shocking 170:1 ratio).

In this recent investor conference call, company executives stated:

“The FCPA investigations restricted our available opportunities to raise capital and significantly increased our legal bills.

[…]

Speaking of legal fees I do want to address the fees we incurred during the FCPA investigation.  As you know, we spent $12 MM from inception to closure of that investigation.  We were unhappily aware that FCPA investigations can take years to conclude but that we only had until September 2016 because of the date for the conclusion of the concession.  We therefore determined that our only option was to do everything in our power to facilitate a resolution of the investigation, and ultimately were able to close the investigations in 20 months. This came at a very heavy legal cost to say the least, but again it was the best option we saw to move forward on the path to drilling the well.”

Dear Hyperdynamics executives and shareholders, you ought to be asking some serious questions about the extent of your pre-enforcement action professional fees and expenses.

To learn more how settlement amounts in an FCPA enforcement action are often only a relatively minor component of the overall financial consequences of FCPA scrutiny and enforcement, see here for “Foreign Corrupt Practices Act Ripples.”

Reading Stack

In 2015, the UC-Davis Law Review and Fordham Law Review both held events focused on bribery and corruption topics. The articles from those events were recently published and are available below.

UC-Davis Law Review

Fordham Law Review

Time Served

In 2013 and 2014 the DOJ brought FCPA and related charges against various individuals associated with broker dealer Direct Access Partners in connection with alleged improper payments to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes, an alleged Venezuelan state-owned banking entity that acted as the financial agent of the state to finance economic development projects).

As recently noted here by Reuters:

“Gonzalez “avoided prison time beyond the 16-1/2 months she already served after admitting that she accepted millions of dollars in bribes from a Wall Street brokerage to which she steered business. Maria de los Angeles Gonzalez de Hernandez, who was a senior official at Caracas-based Banco de Desarrollo Económico y Social de Venezuela, also known as Bandes, was further ordered by U.S. District Judge Denise Cote to forfeit the roughly $5 million she garnered from the scheme. Cote said she was “affected by the degree of remorse” Gonzalez showed in a statement she read to the court through an interpreter. “We’re enormously grateful for the court’s compassion and understanding,” said Jane Moscowitz, Gonzalez’s attorney, after the sentencing.”

Previously in connection with the same core action:

  • Jose Hurtado was sentenced to three years in prison, followed by three years of supervised release, and consented to a $11.9 million forfeiture.
  • Ernesto Lujan was sentenced to two years in prison, followed by three years of supervised release, and consented to a $18.5 million forfeiture.
  • Tomas Clarke was  sentenced to two years in prison, followed by three years of supervised release, and consented to a $5.8 million forfeiture.
  • Benito Chinea was sentenced to four years in prison, followed by three years of supervised release, and consented to a $3.6 million forfeiture; and
  • Joseph DeMeneses was sentenced to four years in prison, followed by three years of supervised release, and consented to a $2.7 million forfeiture.

*****

A good weekend to all.

 

Hyperdynamics Resolves FCPA Enforcement Action For $75,000, But Spends $12.7 Million To Get There

By on September 30, 2015 in 2015 Enforcement Actions, Guinea, Hyperdynamics Corporation, Investigative Fees, Lobbying, Oil and Gas Industry, SEC Enforcement Action
Surprise

Not that Foreign Corrupt Practices Act are conveniently timed or anything like that, but the SEC’s fiscal year ends on September 30th and for the second consecutive day, the SEC announced an FCPA enforcement action (in the past two days the SEC has announced 22 other enforcement actions).

Two days ago, it was Hitachi (see here for the prior post).

Yesterday, it was Hyperdynamics Corp  – an oil and gas company with shares quoted by the OTCQX, an over-the-counter marketplace operated by OTC Market Group, Inc.

If there was ever an inconsequential FCPA enforcement this would be it. In fact, the SEC’s normally chatty press office didn’t even issue a release. However, as relevant to the title of this post, tell Hyperdynamics shareholders that this episode was inconsequential and they are likely to have a different opinion.

In this slim administrative action (the specific factual allegations are a mere four paragraphs) the SEC states:

“Hyperdynamics was founded in 1996 as a commercial computer and communications service provider. In 2001, the company transitioned to the oil and gas industry, and one year later, Hyperdynamics purchased contract rights from a small oil company which owned the exclusive drilling rights offshore the Republic of Guinea. Company executives began travelling to Guinea in 2005, and eventually opened a wholly-owned subsidiary in Conakry to facilitate ongoing operations.

From July 2007 through October 2008, Hyperdynamics, through its subsidiary, paid $130,000 for public relations and lobbying services in the Republic of Guinea to two supposedly unrelated entities – $55,000 to BerMia Service SRL, and $75,000 to Africa Business Service (“ABS”). The subsidiary’s books and records were consolidated with Hyperdynamics’s books and records, and these payments were recorded as public relations and lobbying expenses, even though the company lacked sufficient supporting documentation to determine whether the services were actually provided and to identify the ultimate recipient of the funds.

In late 2008, Hyperdynamics discovered that a Guinean-based employee controlled BerMia and ABS. Hyperdynamics also learned that this employee was the sole signatory on the ABS account. But Hyperdynamics could not determine how, if at all, BerMia or ABS spent the funds they had received, or whether any services actually were provided. Moreover, the company could not recover the funds. There is no evidence that these funds were in fact spent on legitimate public relations and lobbying activities, yet Hyperdynamics’s books and records continued to reflect that the funds were spent for these purposes.

Hyperdynamics lacked adequate internal accounting controls over its disbursement of funds through its Guinean subsidiary, as well as its recording of such disbursements. In addition, the company did not have a due diligence and monitoring process in place for vetting third-party vendors; accordingly, it failed to conduct due diligence on BerMia and ABS. As a result, Hyperdynamics did not timely discover that the payments were made to companies controlled by its employee, nor could it ascertain the true purpose for which these funds were spent. The inadequate controls also led Hyperdynamics to record these disbursements as public relations and lobbying expenses without any supporting documentation that such services were provided.”

Based on the above, the SEC found that Hyperdynamics violated the FCPA’s books and records and internal controls provisions.

Under the heading “Remedial Efforts and Cooperation,” the order states:

“Beginning in July 2009, Hyperdynamics replaced its senior management team and its entire Board of Directors. The company also hired its first in-house lawyer, who implemented a number of training programs and revised company policies related to its Guinean operations. Hyperdynamics also increased the number of its accounting personnel, and instituted a series of procedures to more strictly control and identify transfers of funds to Guinea, including the transfer of signature authority over Guinean accounts to Houston-based employees, as well as requiring corporate pre-approval for all Guinean expenditures.

In determining to accept the Offer, the Commission considered remedial acts undertaken by Respondent and cooperation afforded the Commission staff.”

Without admitting or denying the SEC’s findings, Hyperdynamics agreed to pay a $75,000 penalty.

In this disclosure, the company states:

“As previously disclosed, the SEC had issued a subpoena to Hyperdynamics concerning possible violations of the FCPA.  This settlement fully resolves the SEC’s investigation.  As previously disclosed in May 2015, the DOJ closed its investigation into possible FCPA violations by Hyperdynamics without bringing any charges against the Company.

The allegations in the Order relate to certain issues concerning the company’s books and records and internal controls in 2007-2008. Hyperdynamics consented to the SEC Order without admitting or denying the SEC’s findings and agreed to pay a $75,000 penalty to the SEC.

In reaching this resolution, the Commission considered remedial acts undertaken by the company and cooperation afforded the Commission staff.  The SEC Order recognizes that, beginning in July 2009, Hyperdynamics replaced its senior management team and its entire Board of Directors, revised its policies, implemented training programs, increased its legal and accounting personnel, and instituted a series of procedures to more strictly control transfers of funds.”

According to the company’s most recent annual report:

“We incurred approximately $7.5 million in legal and other professional fees associated with the FCPA investigations in the year ended June 30, 2014, and another $5.2 million in the year ended June 30, 2015, for a total of $12.7 million.”

Calculating the ratio between pre-enforcement action professional fees and expenses and settlement amounts, this represents a whopping 170 to 1 ratio. (To learn more about such ratios see “FCPA Ripples“).

If I were a Hyperdynamics shareholder, I would be asking some serious questions.

Nancy Kestenbaum, Lanny Breuer and Barbara Hoffman of Covington & Burling reportedly represented Hyperdynamics.

Development From The “Other Universe” – In Dismissing FCPA-Related Securities Fraud Claims, Judge Repudiates FCPA Enforcement Theory

By on September 9, 2015 in Anything of Value, Hyperdynamics Corporation, Related Civil Litigation
parallel universe

Foreign Corrupt Practices Act issues often co-exist in two parallel universes.

One universe is ruled by all-powerful gods with big and sharp sticks  in which subjects dare challenge the gods.

Another universe consists of checks and balances in which independent actors call the balls and strikes.

The first universe refers to FCPA enforcement by the DOJ and SEC.

The second universe refers to litigation of FCPA-related claims in which judges make decisions in the context of an adversarial legal system. This second universe is often referred to as the rule of law universe.

There are several examples of theories used in the first universe that do not work in the second universe.

For instance, the FCPA enforcement agencies frequently take a seeming “if / then” position when it comes to issuer internal controls.  In other words, if some misconduct occurred somewhere within an issuer’s business organization or if some employee within that organization circumvented the issuer’s internal controls, then the issuer did not have effective internal controls.

However, when this simplistic theory is used in civil litigation, courts have routinely concluded that just because improper conduct allegedly occurred does not mean that internal controls must have been deficient.  (See e.g., Midwest Teamsters Pension v. Baker Hughes, 2009 WL 6799492 (S.D. Tex. 2009);  Freuler v. Parker Drilling 803 F.Supp.2d 630 (S.D. Tex. 2011).

This post concerns the most recent example regarding the parallel universes.

As readers likely know, a recent development in the first universe was the SEC’s enforcement theory in the BNY Mellon (“internship”) enforcement action (see here and here for prior posts) that bribery includes “things of value” provided indirectly to “foreign officials” if the thing of value is subjectively valued by the foreign official.

In the words of the SEC in BNY Mellon, ““The internships [for family members of alleged “foreign officials”] were valuable work experience[s], and the requesting officials derived significant personal value in being able to confer this benefit on their family members.”

Yet, in the other universe a federal court judge recently stated as follows.

“[The FCPA’s anti-bribery provision] does not bar a company from giving anything of value to a foreign government, as opposed to a foreign official personally, or to a third party such as a nonprofit in order to generate corporate goodwill, even if the gift indirectly influences government officials.” (emphasis added).

Those words were written by U.S. District Court Judge Melinda Harmon (S.D. Tex.) in dismissing securities fraud claims brought against Hyperdynamics Corporation in the aftermath of its FCPA scrutiny.  (See here for the opinion).

Before discussing the ruling, a bit of background.

It is often as predictable as the sun rising in the east.

When a company is the subject of FCPA scrutiny or resolves an FCPA enforcement action, plaintiff lawyers representing shareholders will emerge like bats from a cave bringing derivative actions and/or securities fraud actions against the company as well as officers and directors.  To learn more about this dynamic, see “Foreign Corrupt Practices Act Ripples.”

For instance, in September 2013 Hyperdynamics Corp. disclosed that it was the subject of FCPA scrutiny (see here for the prior post).  On the day of the disclosure, the company’s stock fell approximately 15%.  As sure as the sun rises in the east, a few days later, not one but two, plaintiffs firms issued releases (here and here) announcing an “investigation” and civil actions soon followed alleging Section 10(b) and Rule 10b-5 claims based on general risk disclosures in SEC filings referring to corruption.

As stated by Judge Harmon (certain internal citations omitted):

“Defendants issued twenty statements disclosing a risk of FCPA violations before they disclosed the FCPA subpoenas.  (“We operate in Guinea, a country where corrupt behavior exists that could impair our ability to do business in the future or result in significant fines or penalties.”). Seven of the statements further revealed Hyperdynamics had found “control deficiencies” in its accounting practices in 2009. (“Some of the identified internal control deficiencies contributing to our material weaknesses in financial reporting relate to our operations in Guinea. These material weaknesses make it more likely that [an FCPA] violation could have occurred.”). The control deficiencies are not identified in the record. Defendants state: “Hyperdynamics had historically had some difficulties—mainly during the period before the management and board were largely replaced beginning around 2009— maintaining adequate internal controls.” Four of the statements specifically deny violations of the FCPA. (“Neither the Company, nor any of its Subsidiaries, nor, to the Knowledge of the Company, any director, officer, agent, employee or other Person acting on behalf of the Company or any of its Subsidiaries, has, in the course of its actions for, or on behalf of, the Company, violated or is in violation of any provision of the [FCPA].”).

Defendants do not contend the statements above were adequate disclosures of FCPA related risks. Defendants tentatively argue: “Plaintiff never meaningfully addresses the Company’s risk disclosure language, including its disclosure beginning in 2009 that certain internal control weaknesses ‘make it more likely that a[n] [FCPA] violation could have occurred.’” Defendants maintain FCPA violations did not occur.

Plaintiffs respond that the disclosures were false or misleading by omission, because violations occurred. Plaintiffs have not, however, established that FCPA violations occurred. The only authoritative evidence in the record that FCPA violations occurred is Hyperdynamics’s disclosure of subpoena requests by the DOJ in September 2013 and the SEC in January 2014.  On March 12, 2014, Hyperdynamics’s partner Tullow Guinea Limited declared these subpoenas a force majeure event but retracted the declaration in May 2014. These disclosures do not establish that FCPA violations occurred or that Defendants knowingly omitted FCPA violations. See Konkol v. Diebold, Inc., 590 F.3d 390, 402 (6th Cir. 2009) (“The mere existence of an SEC investigation does not suggest that any of the allegedly false statements were actually false . . . [,] nor does it add an inference of scienter.” (quoting In re Hutchinson Tech., Inc. Secs. Litig., 536 F.3d 952, 962 (8th Cir. 2008))). Defendants cannot be held liable for not preempting the SEC process and issuing a public confession. See City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173, 184 (2d Cir. 2014) (rejecting argument that “in addition to disclosing the existence of an investigation, defendants were required to disclose that [defendant] UBS was, in fact, engaged in an ongoing tax evasion scheme,” because “disclosure is not a rite of confession”).”

Judge Harmon next stated and concluded (certain internal citations omitted):

“Plaintiffs have not alleged FCPA-related facts which would render either the sixteen risk disclosures or the four specific denials misleading by omission and which Defendants had a duty to disclose. Furthermore, Plaintiffs have failed to allege facts which would render the specific denials false or misleading.

The FCPA prohibits a company from making an “offer, gift, promise to give, or authorization of the giving of anything of value” to a “foreign official for purposes of . . . influencing any act or decision of such foreign official in his official capacity” in obtaining business. This prohibition does not bar a company from giving anything of value to a foreign government, as opposed to a foreign official personally, or to a third party such as a nonprofit in order to generate corporate goodwill, even if the gift indirectly influences government officials. Nor does it prohibit misappropriation by a foreign official without the company’s knowledge.

Here, Plaintiffs have alleged Defendants made donations to the government of Guinea during three phases of negotiations over Hyperdynamics’s concession. Plaintiffs claim these donations constituted bribery under the FCPA. The first donation occurred after Hyperdynamics received a letter in 2005 indicating the government had cancelled its concession. Defendants met with the Secretary General of Guinea at the Presidential Palace and were told the letter was a “fake” but that further review was necessary. On August 1, 2006, Defendant CEO Kent Watts founded a nonprofit organization called American Friends of Guinea for the purpose of making charitable contributions “for the welfare of the Guinean population.”  Shortly thereafter, on September 22, 2006, the government approved the first renegotiated concession.

The second instance of alleged bribery occurred during negotiations from late 2007 to 2009, after the renegotiated concession became a local news story and the government again threatened to cancel it. In September 2007, a delegation led by the Secretary General visited Hyperdynamics’s office in Houston, and vice versa. Over the next year, American Friends of Guinea “delivered and paid for antibiotics and glucose fluids for men, women, and children who were stricken with cholera and quarantined as a result thereof. AFG also planned new water well projects to get to the source of solving the problem.”  In addition, Plaintiffs cite an  investor forum, www.investorvillage.com, which cites an article from a Guinean news website, www.guinee24.com, stating the Minister Secretary General “disbursed by means of [H]yperdynamics, the sum of five hundred (500) million Guinean francs, which were distributed to some of Ioubards [hooligans] Municipality of Kaloum and other districts in the capital of Guinea. Ioubards [were seen] in the streets two days before the fateful day of the strike of January 10, 2008. . . .”  Plaintiffs allege the “hooligans” supported the President and organized street protests against the Prime Minister. On February 8, 2008, according to a Wikileaks cable,Hyperdynamics CFO Briers met with the U.S. Embassy. The cable states, “Briers raised the issue of FCPA violations” by the Company during the meeting, and did so “without prompting.” Briers denied the Company paid the 500 million Guinea francs to the reported hooligans. Briers also denied Hyperdynamics had paid the Secretary General “to push through their contract.” Plaintiffs argue, “Despite Briers’ denials of specific instances of alleged bribery, his voluntary whistleblowing of FCPA violations further reinforced the Embassy’s view that Hyperdynamics was violating the act.” The cable explains the Embassy declined Brier’s request for assistance in negotiating with the government on grounds that “commercial advocacy would be very difficult, if not impossible, due to the fact that the [U.S. Government] does not recognize the military junta as a legitimate government.” According to another Wikileaks cable, Tidiane Diallo, a new employee of the Ministry of Mines who formerly worked at USAID told the Embassy, “I am sure Hyperdynamics was the minister’s ticket for his appointment.” According to the cable, Diallo based his statement on the fact that “the minister was appointed on August 27 . . . and that Hyperdynamics was at the ministry the very next day. The company’s contract was reinstated a few days later.” Diallo also claimed Hyperdynamics had offered to donate $56 million to the government to pay its annual bill for power plant fuel. The cable states: Diallo reportedly warned the minister of mines to reject the offer, pointing out that it is not clear what Hyperdynamics wants in return, and accepting a “donation” at this point would undermine the [government’s] future bargaining power. He said that the [government] has not yet decided whether or not to accept the funds, but that the ministers of mines and finance may decide to do so because of significant budgetary pressures. The embassy officer asked Diallo directly if the donation was a bribe, and Diallo responded, “yes and no.” Diallo explained, “[O]n the one hand, the offer is public and no one is trying to negotiate a deal behind closed doors. At the same time, the fact that the [government] does not know what Hyperdynamics wants in return raises questions about the company’s intent.” Again, Defendants’ negotiations bore fruit. On September 11, 2009, a Memorandum of Understanding was signed, partially affirming and modifying Hyperdynamics’s concession.  On September 29, 2009, Hyperdynamics made a donation to American Friends of Guinea of stock. On the same day, a director of Hyperdynamics resigned, following the firing of the CEO and resignation of the CFO and another director during the summer of 2009. The concession was approved by presidential decree in May 2010.

The third instance of alleged bribery occurred in 2011, after the concession was again disputed by the transitional government and modified by way of a mining code promulgated in September 2011. Plaintiffs cite testimony from confidential witness CW-1, a former Logistics Operations Manager for Hyperdynamics, alleging Hyperdynamics donated and installed $20,000 of computer equipment for the Ministry of Mines in 2011 and $8,000 to $10,000 of computer equipment for the Guinean Offshore Department of Environment, “an agency that the Company helped to create from scratch.” Plaintiffs do not specify any particular official action influenced by the computer donations. Plaintiffs also fail to plead donations to the government and the American Friends of Guinea constituted gifts to a “foreign official for purposes of . . . influencing any act or decision of such foreign official in his official capacity.”

In sum, Plaintiffs’ FCPA-related fraud claims are based on speculations of uncharged, unadjudicated FCPA violations that are not plausibly material.”

Friday Roundup

By on May 29, 2015 in Enforcement Agency Policy, Enforcement Agency Speeches, FCPA Statistics, Gray Cloud, Hyperdynamics Corporation, Investigative Fees
Roundup

Survey says, scrutiny alert, chuckle, and for the reading stack.  It’s all here in the Friday roundup.

Survey Says

Items that caught my eye from Kroll/Compliance Week’s recent 2015 Anti-Bribery and Corruption Benchmarking Report (a report based on approximately 250 survey responses from compliance professionals of large companies).

The average respondent to the survey was associated with a company that employs 22,000 employees and has more than 2,900 third party relationships.

In the minds of some, FCPA compliance is easy.  But as previously highlighted here, consider if the respondent companies were 99% compliant on a daily basis.  99% success in most all areas of life is rewarded, but 99% compliance for the respondent companies would mean 220 employee and 29 third party violations.

Against this backdrop, I am not at all surprised that approximately 50% of respondents in the survey were less than confident that company financial controls can catch potential books and records violations of the FCPA.

After all, the FCPA’s books and records (and internal control provisions) are among the broadest legal provisions one can find even if they are qualified in several respects.

As noted in the report accompanying the survey findings:

“There is a little bit of anti-bribery and anti-corruption fatigue at the board level across large organizations.  In 2009 and 2010 lawyers and regulators predicted doomsday scenarios, bolstered by an explosion in the growth of formal investigation and fines imposed.  That uptick leveled off in recent years, leading some companies to believe they have more time to get their houses in order.”

Perhaps the lesson is that boards should take with a grain of salt the doomsday scenarios of FCPA Inc. because they are often self-serving.

Scrutiny Update

As previously highlighted here, in September 2013 Hyperdynamics disclosed:

“[On] September 2013 [the company] received a subpoena from the United States Department of Justice (DOJ) requesting that the Company produce documents relating to its business in Guinea.  In 2006, a Production Sharing Contract was signed by the Company and the government of Guinea granting rights to an oil and gas concession offshore Guinea.  The Company understands that the DOJ is investigating whether Hyperdynamics’ activities in obtaining and retaining the concession rights and its relationships with charitable organizations potentially violate the U.S. Foreign Corrupt Practices Act or U.S. anti-money laundering statutes.  The Company has retained legal counsel to represent it in this matter and is cooperating fully with the government.  The Company is unable to predict when the investigation will be completed, what outcome may result and what costs the Company will incur in the course of the investigation.”

Last week the company disclosed:

“As set forth in the attached letter, the United States Department of Justice (DOJ) has closed its investigation into possible violations by Hyperdynamics of the Foreign Corrupt Practices Act (FCPA) without bringing any charges against the Company.  Hyperdynamics had cooperated with the government’s investigation, and DOJ noted the value of the Company’s cooperation in its letter.  Ray Leonard, President and CEO, commented, “This is an important development for Hyperdynamics. We are extremely pleased to be informed that the DOJ has closed its inquiry into this matter.” As previously disclosed, both the DOJ and SEC issued subpoenas to Hyperdynamics concerning possible violations of the FCPA and other laws. The SEC investigation has not yet been resolved.”

To those who frequently overuse the “d” word (as in declination), this was a DOJ declination.  However, when a company merely receives a subpoena and the DOJ closes its investigation, I prefer to call that the law enforcement investigative process.

Nevertheless, it what seems to be a new trend for FCPA Inc., the law firm representing Hyperdynamics issued this press release stating:

“Covington represented Hyperdynamics in an investigation conducted by the U.S. Department of Justice into potential violations of the Foreign Corrupt Practices Act related to its business activities in the Republic of Guinea. The Justice Department has completed its investigation without bringing any charges against the company. Hyperdynamics received a subpoena from the Justice Department in September 2013 concerning possible violations of the FCPA and other laws relating to its business in Guinea. The Houston-based oil and gas company fully cooperated with the government’s investigation and the Justice Department noted the value of the company’s cooperation in its declination letter. […] The SEC also issued a subpoena to Hyperdynamics concerning possible violations of the FCPA and other laws. The SEC investigation has not yet been resolved. The Covington team handling the matter included Lanny Breuer, Nancy Kestenbaum and Barbara Hoffman.”

Lanny Breuer is the former head of the DOJ’s criminal division.

According to disclosures by Hyperdynamics, the company spent approximately $11.2 million on its FCPA scrutiny.

Chuckle

There has been much recent discussion and war of words concerning the length of FCPA scrutiny (see here and here).

Against this backdrop, I had a good chuckle when I recently stumbled upon this 2005 speech by the DOJ’s then Assistant Attorney General of the Criminal Division.

“Simply put, speed matters in corporate fraud investigations.  The days of five-year investigations, of agreement after agreement tolling the statute of limitations – while ill-gotten gains are frittered away and investor confidence sinks – are increasingly a thing of the past.”

For the Reading Stack

As highlighted in this prior post, last month  Paul Pelletier (former principal deputy chief of the DOJ Criminal Division’s Fraud Section) penned a dandy Wall Street Journal editorial titled “The Foreign Bribery Sinkhole at Justice.”

In this recent piece Pelletier goes into more-depth on the same topic.  In pertinent part he writes:

“[T]he pattern of costly delay in FCPA investigations continues unabated.  While every government investigation and resolution poses unique facts and circumstances that may serve to delay the investigatory process, these recent long-developing FCPA resolutions, together with the findings of the OECD report, are convincingly problematic.  The staggering investigative costs, ultimately borne by employees and shareholders alike, however, also can reach unconscionable levels.

[…]

The Department of Justice has recently articulated that at least part of the rationale or justification for these interminable investigations is that “[c]ompared to other white collar crime, the challenges associated with FCPA investigations can be much greater.”  The DOJ offered “overseas evidence” as one basis for this greater challenge.2

But this statement fails to explain the  more than twofold increase in investigatory durations from historical norms.  A dispassionate, experience-based analysis of this overly broad assertion exposes a faulty premise.  Simply put, the DOJ can and must do better.

[…]

With a cooperating corporation, FCPA investigators routinely find themselves in the unique position of having prompt access to overseas evidence and witnesses without a need to resort to cumbersome international treaty requests.  Such cooperation is much like the prosecution having secured a cooperator with unfettered access to the critical evidence.

[…]

Regardless of the reason or reasons for these protracted investigations, both the continued vitality of the DOJ’s FCPA enforcement efforts and the prominence of the United States as the global leader of anti-corruption enforcement would seem to demand a renewed effort to dramatically reduce the time frame necessary to achieve resolution.

[…]

Legitimate enterprises benefit from those kinds of real-time revelations, and criminal political regimes can be immediately identified and deterred.  Moreover, when a criminal resolution discloses and punishes criminal conduct that occurred five or more years earlier, any deterrent effect of the resolution is significantly diminished.  This is particularly true in industries where the overseas corrupt conduct flourishes with abandon.

At that late stage, the principal deterrent effect is relegated to the size of the monetary penalty — something the DOJ continues to emphasize with all too much frequency and relish.  As recent cases have demonstrated, lengthy FCPA investigations also place untenably wasteful financial burdens on corporations, their employees and their shareholders.

[…]

Given that the DOJ’s FCPA unit within the Fraud Section has more than doubled in size from 2009 to today and has been fortified by a dedicated squad of FBI agents, it is puzzling that many of these investigations seem to drag on interminably.  The DOJ must strive to be more than just “FCPA Inc.,” churning out stale resolutions notable only for their record-breaking penalties.”

In conclusion Pelletier writes:

“The interests of justice are neither served nor advanced when FCPA investigations routinely drag on for five or more years.  Rigorous and prompt FCPA enforcement with respect to current bribery schemes can have a dramatic impact on the insidious and corrosive effect of corruption overseas.  Real-time enforcement is just one component of what must be a larger proactive strategy to root out overseas corruption, which includes punishing the bribe takers as well as the bribe payers and dispossessing the government officials of access to ill-gotten gains.

Curing the deficiencies that lead to costly and wasteful delays will require a systemic and sustained effort, primarily by the DOJ.  It will also require a more focused approach by outside counsel.  Although the ameliorative benefits resulting from such change will not be achieved overnight, the long-term vitality and efficacy of the DOJ’s anti-corruption enforcement efforts ultimately rests on the government’s ability to sustainably alter the status quo.”

*****

A good weekend to all.

Friday Roundup

By on September 19, 2014 in Alibaba, China, Enforcement Competition, FCPA Statistics, Foreign Issuers, GlaxcoSmithKline, Hyperdynamics Corporation, Investigative Fees, Offensive Use of FCPA

GSK announces verdict in China, the silly season, interesting read, Alibaba, and get it right!  It’s all here in the Friday roundup.

GSK Verdict in China

Earlier today, GlaxoSmithKline announced:

“[T]he Changsha Intermediate People’s Court in Hunan Province, China ruled that GSK China Investment Co. Ltd (GSKCI) has, according to Chinese law, offered money or property to non-government personnel in order to obtain improper commercial gains, and been found guilty of bribing non-government personnel. The verdict follows investigations initiated by China’s Ministry of Public Security in June 2013.  As a result of the Court’s verdict, GSKCI will pay a fine of £297 million [approximately $490 million USD] to the Chinese government. […] The illegal activities of GSKCI are a clear breach of GSK’s governance and compliance procedures; and are wholly contrary to the values and standards expected from GSK employees. GSK has published a statement of apology to the Chinese government and its people on its website (www.gsk-china.com).  GSK has co-operated fully with the authorities and has taken steps to comprehensively rectify the issues identified at the operations of GSKCI. This includes fundamentally changing the incentive program for its salesforces (decoupling sales targets from compensation); significantly reducing and changing engagement activities with healthcare professionals; and expanding processes for review and monitoring of invoicing and payments. GSK Chief Executive Officer, Sir Andrew Witty said: “Reaching a conclusion in the investigation of our Chinese business is important, but this has been a deeply disappointing matter for GSK. We have and will continue to learn from this. GSK has been in China for close to a hundred years and we remain fully committed to the country and its people. We will continue to expand access to innovative medicines and vaccines to improve their health and well-being. We will also continue to invest directly in the country to support the government’s health care reform agenda and long-term plans for economic growth.”

For more, see here from the BBC.

“The court gave GSK’s former head of Chinese operations, Mark Reilly, a suspended three-year prison sentence and he is set to be deported. Other GSK executives have also been given suspended jail sentences. The guilty verdict was delivered after a one-day trial at a court in Changsha, according to the Xinhua news agency.”

The GSK penalty was described as the biggest fine in Chinese history.  The $490 million fine is also believed to be one of the largest bribery/corruption fines ever.  For instance, a $490 million settlement would rank third on the top ten list of FCPA settlements.

Perhaps the most interesting aspect of the GSK development is reference in the company’s release to the charges involving “non-government personnel.”  In the U.S., it is a prominent enforcement theory that employees of various state-run health care systems – including in China – are “foreign officials” under the FCPA.  (See here).

Another interesting aspect of the GSK development – and one foreshadowed in this 2013 post – is how the Chinese verdict will impact GSK’s scrutiny in its home country (United Kingdom).  As highlighted in the post, the U.K. has a unique double jeopardy principle and, as explained by former SFO Director Richard Alderman, the U.K. “double jeopardy law looks at the facts in issue in the other jurisdiction and not the precise offense.  Our law does not allow someone to be prosecuted here in relation to a set of facts if that person has been in jeopardy of a conviction in relation to those facts in another jurisdiction.”

GSK remains under investigation for conduct outside of China as well.

The U.S. does not have a similar double jeopardy principle, relevant to the extent GSK has shares listed on a U.S. exchange and its conduct in China and elsewhere has been under FCPA scrutiny.

As indicated in the prior post, GSK’s scrutiny – and now liability – in China makes for an interesting case study in enforcement competition.

The Silly Season

Offensive use of the FCPA to accomplish a business objective or advance a litigating position is an observable trend highlighted in my article “Foreign Corrupt Practices Act Ripples.”  As noted here, the FCPA has also been used offensively to score (or at least attempt to score) political points.

The election season is upon us and during this “silly season” perhaps the silliest use of the FCPA ever is happening – not once – but twice.

As noted in this article:

“Michigan Democrat Gary Peters profited from a French oil company [Total S.A.] that admitted to bribing Iranian officials for access to their oil fields.  […] The Peters campaign did not return requests for comment about whether he was aware of the bribery scandal. […] Republican Senate nominee Terri Lynn Land called on him to divest from the company, but the three-term congressman refused. […] “Gary Peters will do anything to make a dollar and say anything to win an election,” Land spokesman Heather Swift said in a statement. “The more Michigan voters learn about Gary Peters the more they know they can’t trust him to put Michigan first.”

Silly.  And there is more.

As noted in this separate article from the same source:

“Sen. Jeanne Shaheen has invested tens of thousands of dollars in a French oil company that admitted to bribing Iranian officials.  […]  Shaheen’s family owns between $50,000 and $100,000 of stock in Total S.A., the fourth-largest oil company in the world, through a mutual fund.”

Two scoops of silly.

And now for some facts.

Per the DOJ/SEC’s own allegations in the 2013 Total FCPA enforcement action, the vast majority of the alleged improper conduct took place between 1995 and 1997 (that is 17 to 19 years ago).  So old was the conduct giving rise to the Total enforcement action, that the DOJ made the unusual statement in the resolution document that “evidentiary challenges” were present for both parties given that “most of the underlying conduct occurred in the 1990s and early 2000s.”

Interesting Read

Speaking of those FCPA ripples, Hyperdynamics Corporation has been under FCPA scrutiny since 2013 and its recent annual report makes for an interesting read as to the wide-ranging business effects of FCPA scrutiny.  Among other things, the company disclosed approximately $7.5 million in the prior FY for legal and other professional fees associated with its FCPA scrutiny.  Not all issuers disclose pre-enforcement action professional fees and expenses, so when a company does, it provides an interesting data-point.

Chinese Issuers

I began writing about Chinese companies and the FCPA in this 2008 article at the beginning of the trend of Chinese companies listing shares on U.S. exchanges.  This 2009 post returned to the issue and noted that with the IPO market showing signs of life again, and with foreign companies increasingly turning to U.S. capital markets, and with many of these companies doing business in FCPA high-risk countries, the number of FCPA enforcement actions against foreign issuers is likely to increase.  That, of course, has turned out to be true.

Today, of course, is the IPO of Chinese company Alibaba, expected to be largest U.S. IPO ever.  The company’s business model does not exactly rank high in terms of FCPA risk, but recall that the FCPA has always been a law much broader than its name suggests because of the books and records and internal control provisions.

Even as to the anti-bribery provisions, it is at least worth noting, as highlighted in this recent New York Times article:

“Alibaba’s [recent acquisition of a company] provides an example of how the rapid growth of the private sector is also benefiting the country’s political elite, the so-called princelings, or relatives of high-ranking officials.  […]  Although Alibaba declined to comment for this article, citing regulatory restrictions on public statements ahead of a public offering, the company has said it relies on the market — not political connections — to drive its business. “To those outsiders who stress companies’ various ‘backgrounds,’ we didn’t have them before, we don’t have them now, and in the future we won’t need them!” the company said in a statement in July after a report that several investment companies tied to the sons and grandsons of senior Communist Party leaders owned stakes in Alibaba, including New Horizon Capital, whose founders include the son of former Prime Minister Wen Jiabao.”

As noted in the article, over the past year JPMorgan and several other financial services companies have come under FCPA scrutiny for alleged relationships with princelings.

Get It Right!

It’s a basic issue.

If you are writing about the Foreign Corrupt Practices as a paid journalist you have an obligation to get it right and engage in due diligence before hitting the publish button.

This Corporate Counsel article states:

“It’s already been a big year for enforcement activity under the U.S. Foreign Corrupt Practices Act. In the first half of 2014 alone, the U.S. Department of Justice and the U.S. Securities and Exchange Commission initiated 15 actions against companies alleged to have violated the international corruption law.”

For the record, in the first half of 2014, there have been three corporate FCPA enforcement actions: HP, Alcoa and Marubeni.

*****

A good weekend to all.

 

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