One Of The More Dubious FCPA Enforcement Actions Of All-Time
[This post is part of a periodic series regarding “old” FCPA enforcement actions]
If one were to compile a list of the most dubious Foreign Corrupt Practices Act enforcement actions of all-time, near the top of the list would be the DOJ’s 1994 enforcement action against Vitusa Corporation and its President Denny Herzberg.
In this criminal information, the DOJ alleged that Vitusa (a New Jersey corporation engaged in the business of selling commodities and other goods) “entered into a lawful contract to sell milk powder to the Government of the Dominican Republic.”
The DOJ then alleged as follows.
“Although Vitusa delivered the milk powder to the Government of the Dominican Republic, the Dominican government did not pay Vitusa promptly for the milk powder received and, in fact, maintained an outstanding balance due for an extended period of time. Vitusa, therefore, made various efforts to collect the outstanding balance due, including contacting officials of the United States and Dominican Governments to obtain their assistance in securing payment in full.”
According to the DOJ, “during the pendency of the contract, Servio Tulio Mancebo (a citizen of the Dominican Republic) communicated to Herzberg a demand made by a foreign official [a senior official of the Government of the Dominican Republic] which called for the payment of a ‘service fee’ to that official in return for the official using that official’s influence to obtain the balance due to Vitusa for the milk powder contract from the Dominican Government.”
According to the DOJ, “Herzberg agreed to Mancebo’s proposal that Vitusa would pay a ‘service fee’ indirectly to the foreign official.” Thereafter, the DOJ alleged that the Government of the Dominican Republic made payment of $63,905.12 to Vitusa on the contract, but that following Herzberg’s instruction, “Mancebo retained $20,000 from that payment.”
According to the DOJ, Vitusa and Herberg knew “that all or a portion of the money would be given to the foreign official for the purpose of inducing the official to use that official’s position and influence with the Government of the Dominican Republic in order to obtain and retain business, that is, full payment of the balance due for Vitusa’s prior sale of milk powder to the Government of the Dominican Republic.”
Based on the above allegations, the DOJ charged Vitusa with violating the FCPA’s anti-bribery provisions.
Based on the same allegations, the DOJ also charged Herzberg with violating the FCPA’s anti-bribery provisions. (See here for the DOJ’s Statement of Facts).
Vitusa pleaded guilty and agreed to pay a $20,000 criminal fine (see here).
Herzberg also pleaded guilty and was placed on two years probation (see here). Herzberg was also ordered to pay a $5,000 criminal fine, but the judgment notes that “this fine shall be applied to the $20,000 fine to be paid by Vitusa Corp.”
In the DOJ’s sentencing document (as to both Vitusa and Herberg – see here and here) the DOJ stated:
“The unlawful payments to the foreign official were made in order to obtain payment of a legitimate and lawful obligation owed by the Government of the Dominican Republic to Vitusa. There was no loss to any party and no individual victim exists.”
See here Vitusa Corp.’s current website.
FCPA aficionados know that the Vitusa / Herzberg action is not the only FCPA enforcement action in which an enforcement agency alleged that payments in connection with securing a bona fide receivable violated the anti-bribery provisions. See here for the prior post on the SEC’s 2010 FCPA enforcement action against Joe Summers.
Hats Off To Judge Rakoff
My 2010 Senate Foreign Corrupt Practices Act testimony focused on two things.
First, the general lack of individual enforcement actions in connection with most corporate FCPA enforcement actions.
Second, how this dynamic (far from the “but nobody was charged” claim) could best be explained by the quality and legitimacy of the corporate enforcement action in the first place given the prevalent use of non-prosecution and deferred prosecution agreements to resolve corporate FCPA enforcement actions. For more, see my article “The Facade of FCPA Enforcement.”
Recent statistics I calculated (here) provide a relevant data point concerning the quality and legitimacy of many corporate FCPA enforcement actions resolved via NPAs or DPAs. In short, if a corporate DOJ FCPA enforcement action is the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations, there is a 83% chance that related criminal charges will be brought against a company employee. However, if a corporate DOJ FCPA enforcement action is resolved solely with an NPA or DPA, there is a 6.5% chance that criminal charges will be brought against a company employee. As noted in the previous post, if these statistics do not cause you to question the quality and legitimacy of many corporate FCPA enforcement actions, no empirical data ever will.
I’ve long argued that use of NPAs and DPAs to resolve alleged corporate criminal liability in the FCPA context presents two distinct, yet equally problematic public policy issues. The first is that such vehicles, because they do not result in any actual charges filed against a company, and thus do not require the company to plead to any charges, allow egregious instances of corporate conduct to be resolved too lightly without adequate sanctions and without achieving maximum deterrence. The second is that such vehicles, because of the “carrots” and “sticks’ relevant to resolving a DOJ enforcement action, often nudge companies to agree to these vehicles for reasons of risk-aversion and efficiency and not necessarily because the conduct at issue actually violates the law. Thus, use of NPAs or DPAs allow “under-prosecution” of egregious instance of corporate conduct while at the same time facilitate the “over-prosecution” of business conduct.
It is for this reason why I have long termed NPAs and DPAs toxic resolution vehicles that ought to be abolished in the FCPA context. The passionate defense former Assistant Attorney General Lanny Breuer made of NPAs and DPAs in a September 2012 policy speech (see here for the prior post) was – to use the cliché as the basketball season begins – an airball.
The above is all relevant background information for why I tip my hat – once again – to U.S. District Court Judge Jed Rakoff (S.D.N.Y.).
In a recent speech to a New York bar audience titled “Why Have No High Level Executives Been Prosecuted in Connection with the Financial Crisis,” Judge Rakoff hit on many of the same issues discussed above. In answering his own question, Judge Rakoff offered that “one possibility … is that no fraud was committed. This possibility should not be discounted.”
Rhetorically asking “so … what’s really going on here,” Judge Rakoff offered various “influences” which “have had the effect of limiting such prosecutions” including the “most important” which he said was the “shift that has occurred over the past 30 years or more from focusing on prosecuting high-level individuals to focusing on prosecuting companies and other institutions.”
Judge Rakoff stated:
“It is true that prosecutors have brought criminal charges against companies for well over a hundred years, but, until recently, such prosecutions were the exception, and prosecutions of companies without simultaneous prosecutions of their managerial agents were even rarer. These reasons were obvious. Companies do not commit crimes; only their agents do […] so why not prosecute the agent who actually committed the crime?
In recent decades, however, prosecutors have been increasingly attracted to prosecuting companies, often even without indicting a single individual. This shift has often been rationalized as part of an attempt to transform ‘corporate cultures,’ so as to prevent future such crimes; and, as a result, it has taken the form of ‘deferred prosecution agreements; or even ‘non-prosecution agreements,’ in which the company, under threat of criminal prosecution, agrees to take various prophylactic measures to prevent future wrongdoing. But in practice, I suggest, it has led to some lax and dubious behavior on the part of prosecutors, with deleterious results.”
In contrast to a situation in which a prosecutor is attempting to discover the individuals responsible for alleged misconduct, Judge Rakoff stated that if a prosecutor’s “priority is prosecuting a company,” the following scenario occurs.
“Early in the investigation, [the prosecutor] invites in counsel to the company and explains to him or why [the prosecutor] suspects fraud. [Counsel] responds by assuring [the prosecutor] that the company wants to cooperate and do the right thing, and to that end the company has hired a former Assistant U.S. Attorney, now a partner at a respected law firm, to do an internal investigation. The company’s counsel asks [the prosecutor] to defer [the prosecutor’s] investigation until the company’s own internal investigation is completed, on the condition that the company will share its results with [the prosecutor]. In order to save time and resources, [the prosecutor] agrees. Six months later the company’s counsel returns, with a detailed report showing that mistakes were made but that the company is now intent on correcting them. [The prosecutor] and the company then agree that the company will enter into a deferred prosecution agreement that couples some immediate fines with the imposition of expensive but internal prophylactic measures. For all practical purposes the case is now over. [The prosecutor] is happy because [he/she] believes that [he/she] has helped prevent future crimes; the company is happy because it has avoided a devastating indictment; and perhaps the happiest of all are the executives, or former executives, who actually committed the underlying misconduct, for they are left untouched.”
“I suggest that this is not the best way to proceed. Although it is supposedly justified in terms of preventing future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing. Just going after the company is also both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager? And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.”
Swiss National, A Former Maxwell Technologies Exec, Criminally Charged
When highlighting the frequent lack of individual Foreign Corrupt Practices Act charges in connection with most corporate FCPA enforcement action, the qualifier “at least yet” has always been used. This qualifier if warranted because in certain instances individual charges follow years after a corporate FCPA enforcement action.
For instance, in January 2011 Maxwell Technologies (a California-based manufacturer of energy storage and power delivery products) resolved parallel DOJ and SEC FCPA enforcement actions concerning alleged business conduct in China by agreeing to pay approximately $14 million.
Alleging the same core conduct at issue in the 2011 corporate enforcement action, earlier this week the DOJ criminally charged Alain Riedo, a Swiss citizen, with conspiracy and substantive violations of the FCPA’s anti-bribery provisions, books and records and internal controls provisions. According to the indictment, Riedo was, at various relevant times, a Vice President and General Manager of Maxwell Technologies S.A. (a wholly-owned subsidiary of Maxwell Technologies incorporated and located in Switzerland) as well as a Senior Vice President and officer of Maxwell. As noted in this SEC filing, in July 2009 the employment contract between Riedo and Maxwell was terminated.
According to this Wall Street Journal Risk and Compliance post, Riedo is currently “the director of the Fribourg chapter of the Chamber of Commerce and Industry of Switzerland” and the DOJ considers Riedo a fugitive.
As indicated above, the allegations in the Riedo indictment mirror the conduct at issue in the 2011 Maxwell corporate enforcement action.
In pertinent part, the DOJ alleges that Riedo and others made “corrupt payments to Chinese government officials, including officials at Pinggao Group, Xi-an XD and Shenyang HV, and to others” and falsely “record[ed] such payments on Maxwell’s books, records, and accounts, in order to obtain and retain business, prestige, and increased compensation for Riedo, Maxwell, Maxwell S.A. and others.”
As in the prior corporate enforcement action, Pinggao is alleged to be a “state-owned and state-controlled manufacturer of electric-utility infrastructure in Henan Provice, China,” Xi-an XD is alleged to be a “state-owned and state-controlled manufacturer of electric-utility infrastructure in Shaanxi Province, China,” and Shenyang HV is alleged to be “either state-owned or substantially controlled by the Chinese government.”
Like the prior corporate enforcement, Agent 1 (a Chinese national who served as Maxwell S.A.’s third party agent from 2002 to 2009 and was “responsible for the sale of Maxwell capacitors to customers” in China) is prominently mentioned in the Riedo indictment. According to the indictment, Agent 1 “would and did pay bribes to Chinese government officials” and “would and did ensure that the quotes [obtained from Maxwell S.A.] contained a secret mark-up of approximately 20 percent, resulting in a higher total price to the Chinese customers for Maxwell S.A.’s equipment.” According to the indictment, Riedo and another individual caused Maxwell S.A.’s books and records to “falsely record the ‘extra amount’ bribe payments as commissions, sales expenses, or consulting fees.”
The indictment further alleges that Riedo and another individual “would and did hamper efforts by other Maxwell executives to learn the truth about operations and finances at Maxwell S.A’s operations in Switzerland” and that “after Maxwell terminated its sales-representative arrangement with Agent 1, Riedo would and did attempt to re-hire Agent 1 as the company’s sales agent in China under the name of another company and against the instructions of Maxwell’s CEO.”
The DOJ generally alleges the following U.S. acts by Riedo.
- Riedo electronically transmitted or caused to be transmitted to Maxwell’s headquarters in California Maxwell S.A’s false books and records and also caused the false entries to be included “in Maxwell’s books, records, and accounts, including Maxwell’s publicly filed financial statements and SEC filings.”
- Riedo signed a “sub-certification” as part of Maxwell’s Sarbanes-Oxley process and falsely certified information that Riedo knew was incorrect and that Riedo caused the false “sub-certification” and other financial data to be sent to corporate headquarters in California.
- Riedo sent an e-mail from Switzerland to California “asking Maxwell’s CFO to release funds to Agent 1 to retain business in China”
- Riedo sent an e-mail from Switzerland to California attaching an “FCPA” certificate and asking Maxwell’s CFO to proceed in approving payment of an extra amount.
The DOJ further alleges that Riedo completed an internal Maxwell questionnaire and answered “no” to various FCPA issues “when in fact Riedo knew that Agent 1 was, directly and indirectly, receiving extra-amount payments and passing those payments along to employees of Chinese state-owned entities and other companies in order to obtain or retain business.”
Based on the above allegations, the indictment charges conspiracy to violate the FCPA’s anti-bribery and books and records and internal controls provisions, two substantive violations of the anti-bribery provisions, five substantive violations of the FCPA’s books and records provisions, and one substantive violation of the FCPA’s internal controls provisions.
This will be an interesting case to follow should Riedo choose to contest the DOJ’s charges.
Aside from the enforcement theory that employees of alleged China SOEs are “foreign officials” under the FCPA (the same general issue is currently on appeal before the 11th Circuit – see here), are potential jurisdiction issues. In certain respects, this action may implicate the same general issues as in SEC v. Elek Strab et. al (see here for the pre-trial motion to dismiss decision) and SEC v. Herbet Steffen (see here for the pre-trial motion to dismiss decision).
Checking In
This post checks in on recent developments in two enforcement actions: (i) the FCPA enforcement action against various individuals associated with Alstom; and (ii) the FCPA-related enforcement action against alleged Haitian “foreign official” Jean Duperval currently on appeal to the 11th Circuit.
Alstom-Related Action
Earlier this week, the DOJ announced that Lawrence Hoskins, “a former senior vice president for the Asia region for [Alstom], was charged in the District of Connecticut with conspiring to violate the Foreign Corrupt Practices Act (FCPA) and to launder money, as well as substantive FCPA and money laundering violations.”
The conduct at issue in the Second Superceding Indictment is the same core conduct alleged in original criminal charges filed against Frederic Pierucci and David Rothschild, as well as the conduct alleged in the Superceding Indictment which added William Pomponi to the action. (See here and here for previous posts). That is – alleged payments in connection with the Tarahan coal-fired steam power plant project in Indonesia. In the prior charging documents, Hoskins was generically referred to as Executive A.
As noted in previous posts, Rothschild pleaded guilty to conspiracy to violate the FCPA.
The DOJ further announced in its release earlier this week that Pierucci pleaded guilty to one count of conspiring to violate the FCPA and one count of violating the FCPA. (See here for the plea agreement).
Duperval Action
This previous post detailed the 11th Circuit appeal of Jean Duperval. Duperval was one of the alleged “foreign officials” charged in connection with the Haiti Teleco enforcement actions (see here for a summary and roundup of the entire Haiti Teleco enforcement actions) with non-FCPA offenses and he was found guilty by a jury of various money laundering charges.
As noted in the previous post, in his appeal Duperval argues, among other things, as follows. “The evidence was insufficient to prove beyond a reasonable doubt that Haiti Teleco was a government instrumentality and that Jean Rene Duperval was a foreign official as required to prove that a violation of the Foreign Corrupt Practices Act generated proceeds of a specified unlawful activity – a necessary predicate for the convictions on the money laundering conspiracy and substantive money laundering charges.”
As noted in the previous post, Duperval’s substantive arguments as to “foreign official” largerly mirror the arguments of Joel Esquenazi and Carlos Rodriguez (also criminally charged and convicted in the Haiti Teleco matter) in their historical “foreign official” appeal to the 11th Circuit (see here for links to the briefing).
Among other things, Duperval’s argument includes discussion and several citations to my “foreign official” declaration (see here).
Briefing is now complete in the Duperval appeal.
Not surprisingly, the DOJ’s arguments in connection with “foreign official” largely mirror the arguments it makes in the Esquenazi and Rodriguez appeal. The DOJ is again seeking to exclude my foreign official declaration from the record and its brief states:
“Duperval relies on a 144-page declaration by a proposed defense expert that was filed on behalf of the defendants in Carson. Although Duperval suggests that this Court may take judicial notice of the declaration because it relates to legislative history, the declaration selectively reviews the legislative history and draws inferences in support of a defense motion to dismiss the indictment. As such, it is not necessarily the statement of a disinterested expert, it was not reviewed as a scholarly article, and it was never subject to impeachment in the case below.”
Last week Duperval filed a reply brief, and not surprisingly, the arguments in connection with “foreign official” largely mirror the arguments made by Esquenazi and Rodriguez in their reply brief. As to my “foreign official” declaration, the brief states:
“The government also condemns Duperval’s reference to Professor Michael J. Koehler’s declaration addressing the legislative history of the FCPA, which was filed in United States v. Carson. Aside from the analysis contained in the Koehler declaration, the substance of the declaration is the legislative history of the FCPA. The Court can surely take notice of legislative history, and evaluate the utility and accuracy of Professor Koehler’s declaration for itself. But the Government’s claim that the declaration of a professor filed in another criminal proceeding and under penalty of perjury is somehow of lower status than a law-review article reviewed by law students strains credulity.”
It will be an interesting “foreign official” Fall in the 11th Circuit.
Without Individual FCPA Defendants, There Would Be No FCPA Case Law
Lest there be any confusion, I start this post with the basics.
The Foreign Corrupt Practices Act is a criminal statute. Those that violate the FCPA ought to be charged. Those who are found guilty of FCPA violations are not worthy of commendation.
Yet in the same way the Wall Street Journal recently stated (here) that former Goldman Sachs employee Fabrice Tourre “is doing a public service by forcing the SEC to defend its theories in court,” FCPA individual defendants who have put the DOJ (or the SEC in a civil FCPA enforcement action) to its burden of proof by testing their innocence have done a public service that ought to be recognized.
By recognized, I simply mean that it needs to be recognized that without FCPA individual defendants there would be no FCPA case law.
The unfortunate reality is that it takes individual defendants to go through unpleasant experiences, and for the stars to align in terms of the individual’s risk tolerance and financial resources, for there to be any FCPA case law.
Because of Stuart Carson, Hong Carson, Paul Cosgrove, David Edmonds, Keith Lindsey, Steve Lee, Mark Jackson, David Ruehlen, Joel Esquenazi and Carlos Rodriguez – there have been legal developments concerning the “foreign official” element.
Because of Eric Mattson, James Harris, David Kay and Douglas Murphy – there have been legal developments concerning the “obtain or retain” business element.
Because of Frederic Bourke, David Kay and Douglas Murphy – there have been legal developments concerning mens rea issues.
Because of Pankesh Patel, Elek Straub, Andras Balogh, Tamas Morvai, and Herbert Steffen – there have been legal developments concerning jurisdiction.
Because of Mark Jackson and David Ruehlen – there have been legal developments concerning facilitating payments and statute of limitations.
Because of Frederic Bourke – there have been legal developments concering the local law affirmative defense.
Other FCPA individual defendants such as, but not limited to, John O’Shea and the other Africa Sting defendants of course tested their innocence as well, even if no formal FCPA case law resulted from these enforcement actions.
Each of the above individuals could have chosen the path of least resistance, and if they would have, there would be no FCPA case law. Indeed, if just three individuals (Bourke, Kay and Murphy) chose the path of least resistance, there would be very little FCPA case law.
Even with the occassional FCPA individual defendant putting the DOJ (or the SEC) to its burden of proof, so little is know about the contours of the FCPA beyond DOJ or SEC enforcement theories and prosecutorial common law.
Should your response be that much is known about the judicial contours of the FCPA, I say show me another area of law where an issue is settled because of one appellate court decision or because of a few non-binding and unreported pre-trial trial court decisions.
Regardless of the facts and circumstances given rise to their FCPA liability in the first place, the above individual defendants have indeed done a public service that ought to be recognized, because without them, there would be no FCPA case law.