Two Scoops Of Opaqueness
As noted in this previous post, in 2010 Digi International had a quick and strange disappearing act.
In a July 22, 2010 SEC filing, the company disclosed as follows.
“As previously reported, after receiving allegations regarding possible violations of our gifts, travel and entertainment policy for activities in the Asia Pacific region by a few employees, we initiated an investigation of these policy and corresponding internal control issues, and any possible related violations of applicable law, including the Foreign Corrupt Practices Act (FCPA). We voluntarily disclosed the allegations to the United States Department of Justice (DOJ) and the United States Securities and Exchange Commission (SEC). The investigation has been under the direction of the Audit Committee, comprised solely of independent directors, utilizing outside counsel, and focused on the APAC region. For completeness purposes, the investigation reviewed certain other foreign regions where no allegations have been made. We believe the investigation is substantially complete, pending the input from the DOJ and SEC. We have been providing the DOJ and SEC with updates and our proposed remediation plan. We will continue to cooperate fully with the SEC and DOJ process, which could include additional investigative procedures. This investigation found violations of company policy and internal controls that primarily involved three individuals in Hong Kong and our Chief Financial Officer. All four individuals have either been terminated or resigned from the company. The investigation also identified certain books and records and related internal controls issues under the FCPA. The ultimate impact and outcome of the DOJ and SEC process is unknown at this time. ” (emphasis added).
The prior post noted that SEC filings are carefully crafted, tightly worded documents created by in-house specialists and often vetted by outside professionals. In short, words matter in SEC filings and given the above italicized words, it would seem reasonable to conclude that Digi (with the assistance and input from outside counsel) identified conduct that implicated the FCPA. Why else would the disclosure contain the clause “under the FCPA”?
However, as noted in the previous post, approximately ten days after its SEC filing, Digi (a leading supplier of multifunction communication devices to the U.S. Federal Government) issued a press release (here) stating that: “Digi has now received confirmation through discussions with representatives of the DOJ and the SEC that they will not be initiating any enforcement proceedings against Digi.”
It was quite the disappearing act and a quick one at that. I highlighted in the previous post that FCPA enforcement (or lack of enforcement) is already largely an opaque process and Digi’s curious disappearing act served as another example for why transparency and accountability in FCPA enforcement is needed.
Digi’s 2010 disappearing act was merely the first scoop of opaqueness.
The second scoop was added last month when the SEC charged Digi’s former Chief Financial Officer Subramanian Krishnan.
The SEC’s complaint (here) alleges in summary form, among other things, that Krishnan “in his role as Chief Financial Officer […] engaged in certain actions and inactions, a result of which corporate funds were used to pay for unauthorized expenses” and that he “authorized such expenses for Digi employees, resulting in the filing of inaccurate expense reports, caused the Company to file inaccurate reports, failed to enforce Digi’s internal controls, demonstrated a lack of management integrity, failed to act to reveal inaccurate reports and wrongly certified the effectiveness of Digi’s internal controls and disclosed they were effective.” As to certain of the expenses, the complaint alleges as follows. “Krishnan approved corporate travel and entertainment expenses which appeared to have marginal, if any, business purpose.” Based on these allegations, and others in the complaint, the SEC charged Krishnan with aiding and abetting violations of the FCPA’s books and records provisions and substantive FCPA internal controls violations. As noted in this SEC release, without admitting or denying the SEC’s allegations, Krishnan consented to a final judgment permanently enjoining him from future securities law violations and to a bar from serving as an officer or director of any issuer. As noted in the release, the duration of the bar, and the amount of disgorgement and the civil penalty will be determined at a later date.
The FCPA provisions at issue in the Krishnan enforcement action of course are generic and can be implicated as to conduct that does not involve payments to individuals deemed “foreign officials” by the enforcement agencies. Yet it would seem unusual for a company to voluntarily disclose, as Digi did, violations of its gifts, travel and entertainment policy for activities in the Asia Pacific region that did not involve expenditures made to, or on behalf of, “foreign officials.” Indeed, several FCPA enforcement actions have been based in whole or in part on excessive travel and entertainment expenses made to or on behalf of “foreign officials” in the Asia Pacific region.
What type of FCPA issues did Digi disclose in 2010? Why did Digi’s FCPA scrutiny quickly and strangely disappear? What sort of travel and entertainment expenses that had marginal business purpose did Digi’s CFO approve?
Because of the lack of transparency surrounding most things FCPA related, we are left to wonder. All the public has to nibble on is two scoops of opaqueness and it leaves us hungry for more.
FCPA-Palooza
I first began using the term FCPA Inc. in April 2010 (see here).
I then coupled FCPA Inc. with Business of Bribery in this February 2012 post to describe a presentation I gave at Indiana University Robert H. McKinney School of Law regarding a work in progress of the same title.
I am glad to see that the terms have caught on as yesterday the Wall Street Journal ran a series of FCPA related articles, an FCPA-Palooza of sorts, including a lead article titled “FCPA Inc.: The Business of Bribery” (see here).
The article is spot-on and contains the following quotes from industry participants. “It’s one of the few sort of crown-jewel practices right now.” “When you get these situations and you have a young enforcement attorney…telling you to look under every rock, you do it.” “If you get two of these [FCPA investigations] a year as a partner, you’re pretty much set.”
Assistant Attorney General Breuer is quoted in the article as follows. “We absolutely need companies through their firms to provide us with their investigations.” The article states that “prosecutors test information they receive from the companies and conduct parallel investigations” with Breuer stating that “we’re not simply relying on what the companies give us.” Many FCPA practitioners (including this former one) are likely to disagree with this statement. In representing corporate clients in an FCPA inquiry, it is common for counsel to hand over to the enforcement agencies witness interview memos, key documents in chronological order, and investigative reports (if done). While it is difficult to assess what the DOJ and/or SEC did after that, I never once got the sense that the enforcement agencies tested the information or conducted a parallel investigation.
The Wall Street Journal FCPA-Palooza also included an article (here) concerning compliance costs, an article (here) concerning prosecution of individuals, and an article (here) regarding the FCPA’s history and certain reasons for the increase in enforcement.
The WSJ compliance article notes that as “part of the corporate cost for stepped-up enforcement of the Foreign Corrupt Practices Act over the last several years has been the creation of new compliance structures at companies that hope to avoid indictments and million-dollar fines under the U.S. antibribery law.” Of course, not even the most robust, state-of-the-art FCPA compliance program will allow a company to avoid indictment as a matter of law. Such programs merely best position companies for leniency as determined by the enforcement agencies behind closed doors in Washington D.C. This needs to change and I have set forth the reasons for an FCPA compliance defense in my recent scholarship “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here).
The WSJ individual prosecutions article notes the absence of individual prosecutions in most corporate FCPA enforcement actions, the DOJ’s difficulty of extraditing foreign nationals charged with FCPA offenses, and the string of recent DOJ losses in individual enforcement actions when it is put to its burden of proof. For more on this last issue, see my recent article “What Percentage of DOJ FCPA Losses in Acceptable” (here).
The WSJ Law Blog also contributed to the FCPA feast with this post which asked whether corporate FCPA scrutiny and enforcement actions move markets. In answering the question, the post states as follows. “In general, we found a lot of shrugging on the part of investors. The average change in stock price from the day before to the day after the disclosure of an FCPA investigation was a decrease of 1%. […] It was far easier to study market reaction to FCPA settlements. Companies’ stock prices increased, on average, by 1.1% after enforcement actions were announced.”
The WSJ Law Blog also noted here that “FCPA enforcement shows no signs of cooling.” I agree. As noted in the FCPA 101 feature of my website (here) there are several practical, as well as provocative, reasons for why FCPA enforcement has increased. Among the later is the industry itself.
At least more people are thinking and talking about it now after the Wall Street Journal’s FCPA-Palooza.
Friday Roundup
Add a few to the list, take a few off, a word on guest posts, take a deep breath, whose fault is it, once again nobody was charged. It’s all here in the Friday roundup.
Add Another
Most companies bury FCPA disclosures deep in SEC filings. Not so with Nordion Inc. (here – a Canadian based health sciences company with shares traded in the U.S). It took the open and direct route by issuing a release (here) specifically devoted to the topic. The release states as follows.
“[The company] disclosed that it is conducting an internal inquiry and investigation of a foreign supplier and related parties focusing on compliance with the Canadian Corruption of Foreign Public Officials Act (CFPOA) and the U.S. Foreign Corrupt Practices Act (FCPA). Through the Company’s own internal review as part of its CFPOA compliance program, Nordion discovered potential compliance irregularities. As a result, the Company recently commenced an internal investigation of the possible compliance issues. These issues relate to potential improper payments and other related financial irregularities in connection with the supply of materials and services to the Company. The investigation is being conducted by outside legal counsel and external forensic and accounting firms who are experts in such compliance. These external advisors are reporting regularly to a special Committee of the Board constituted to deal with this matter. Nordion has voluntarily contacted the regulatory and enforcement authorities, including the Canadian and U.S. Department of Justice, the Royal Canadian Mounted Police (RCMP), the U.S. Securities and Exchange Commission (SEC) and the Public Prosecution Service of Canada, to provide details of the matter and advise that an internal investigation is underway. The internal investigation is in its early stages and the Company’s external advisors have met with these authorities and will continue to provide reports to them as the investigation progresses.Nordion is committed to the highest standards of integrity and diligence in its business dealings and to the ethical and legally compliant business conduct by its employees, representatives and suppliers. The Company reviews its compliance programs on a regular basis to assess and align them with emerging trends and business practices. Corrupt or fraudulent business conduct is in direct conflict with the Company’s Global Business Practice Standards and corporate policies. The Company will continue to investigate this matter and cooperate with regulatory and enforcement authorities with a view to an expedient resolution.”
By my estimation, in the past four months, approximately twenty companies have become subject to FCPA scrutiny (whether through disclosures or FCPA-related civil complaints). In addition, industry sweeps as to the Hollywood movie industry and retail industry have reportedly been launched. See here for a prior post titled “The Sun Rose, A Dog Barked, and a Company Disclosed FCPA Scrutiny.”
Academi, Inc., formerly known as Xe Services, formerly known as Blackwater was also in the news this week. As noted in this FBI release, pursuant to a deferred prosecution agreement (here) the company admitted to certain facts and agreed to a $7.5 million fine in connection with certain export controls and firearms law violations. As noted in the release, the DPA “also acknowledges and references a $42 million settlement between the company and the Department of State as part of a settlement of violations of the Arms Export Control Act and the International Trafficking in Arms Regulations.” As noted in this previous post, Blackwater has been under investigation for FCPA violations in Iraq (and Sudan as noted in the FBI release). The above DPA specifically states however that “this agreement does not apply to the Foreign Corrupt Practices Act investigation independently under investigation by the DOJ.” As noted in this previous post, Blackwater’s FCPA scrutiny in Iraq inspired Representative Peter Welch to introduce H.R. 5366, the “Overseas Contractor Reform Act,” an impotent debarment bill that passed the House in September 2010 (see here).
There are also developments to report on the other side of the Atlantic as the U.K. Serious Fraud Office announced hereas follows. “The Director of the Serious Fraud Office has decided to open a criminal investigation into allegations concerning GPT and aspects of the conduct of their business in the Kingdom of Saudi Arabia.” As noted in this Bloomberg piece, GPT is a unit of European Aeronautic Defence & Space Co. (EADS), and the investigation involved suspected payments to win a telecommunications deal with Saudi Arabia’s royal family. The Financial Times stated that the “Serious Fraud Office’s criminal inquiry is a step-change for the agency after it said in March that it was happy with an internal investigation the company was conducting.”
Although he is no longer in Congress, former Representative Todd Tiahrt is probably delighted by this news. See here for the prior post.
Take a Few Off
Huntsman Corporation recently disclosed as follows in a SEC filing (here).
“During the third quarter of 2010, we completed an internal investigation of the operations of Petro Araldite Pvt. Ltd. (“PAPL”), our majority owned joint venture in India. PAPL manufactures base liquid resins, base solid resins and formulated products in India. The investigation initially focused on allegations of illegal disposal of hazardous waste and waste water discharge and related reporting irregularities. Based upon preliminary findings, the investigation was expanded to include a review of the production and off-book sales of certain products and waste products. The investigation included the legality under Indian law and U.S. law, including the U.S. Foreign Corrupt Practices Act, of certain payments made by employees of the joint venture to government officials in India. Records at the facility covering nine months in 2009 and early 2010 show that less than $11,000 in payments were made to officials for that period; in addition, payments in unknown amounts may have been made by individuals from the facility in previous years. […] Also in May 2010, we voluntarily contacted the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) to advise them of our investigation and that we intend to cooperate fully with each of them. We met with the SEC and the DOJ in October 2010 to discuss this matter and we continue to cooperate with these agencies. Steps have been taken to halt all known illegal or improper activity, including the termination of employment of management employees as appropriate. In May 2012, the SEC and DOJ notified us that they would not recommend any enforcement action be taken against our Company in this matter.”
Since August 2010 (see here for the prior post), I have proposed that when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC, and when the DOJ and/or SEC decline enforcement, the DOJ and/or the SEC should publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.
In the meantime, we can only speculate as to why the enforcement agencies did not bring an enforcement action against Hunstman. Of note, in the DOJ’s written declination responses after the June 2011 House hearing (see here), the DOJ stated that it has declined matters when, among other circumstances, “the improper payments involved minimal funds compared to the overall business revenue.”
As noted in this previous post, in April Hercules Offshore disclosed as follows. “On April 4, 2011, the Company received a subpoena issued by the Securities and Exchange Commission (“SEC”) requesting the delivery of certain documents to the SEC in connection with its investigation into possible violations of the securities laws, including possible violations of the Foreign Corrupt Practices Act (“FCPA”) in certain international jurisdictions where the Company conducts operations. The Company was also notified by the Department of Justice (“DOJ”) on April 5, 2011, that certain of the Company’s activities were under review by the DOJ. On April 24, 2012, the Company received a letter from the DOJ notifying the Company that the DOJ has closed its inquiry into the Company regarding possible violations of the FCPA and does not intend to pursue enforcement action against the Company. The DOJ indicated that its decision to close the matter was based on, among other factors, the thorough investigation conducted by the Company’s special counsel and the Company’s compliance program. The Company, through the Audit Committee of the Board of Directors, intends to continue to cooperate with the SEC in its investigation. At this time, it is not possible to predict the outcome of the SEC’s investigation, the expenses the Company will incur associated with this matter, or the impact on the price of the Company’s common stock or other securities as a result of this investigation.”
Earlier this week, the company updated its disclosure as follows. “On August 7, 2012, Hercules Offshore, Inc. (the “Company”) received a letter from the Securities and Exchange Commission (“SEC”) notifying the Company that the SEC staff has completed its investigation into the Company regarding possible violations of the Foreign Corrupt Practices Act (“FCPA”) and does not intend to pursue enforcement action against the Company. As previously disclosed, the Company was notified by the SEC and the Department of Justice (“DOJ”) in April 2011, that certain of the Company’s activities were under review by the SEC and DOJ with respect to possible violations of the FCPA in certain international jurisdictions where the Company conducts operations. The Company previously disclosed that it received a letter from the DOJ on April 24, 2012, notifying the Company that the DOJ has closed its inquiry into the Company regarding possible violations of the FCPA and does not intend to pursue enforcement action against the Company. The DOJ noted that it terminated its investigation ‘…based on a number of factors, including, but not limited to, the thorough investigation undertaken by Hercules and the steps that Hercules has taken in the past and continues to take to enhance its compliance program, including efforts to ensure compliance with the FCPA.’ As a result of the termination by the SEC and the prior termination by the DOJ, there are no open FCPA investigations against the Company.”
As evident from the disclosures, unlike Huntsman, the FCPA scrutiny of Hercules was not based on a voluntary disclosure, but inquiries from the SEC and DOJ. Whether this represents a declination or a dud is the question.
Guest Posts
Part of the mission of FCPA Professor is to facilitate a forum for discussion and analysis of FCPA and related issues among FCPA practitioners, business and compliance professionals, scholars and students, and other interested persons. Given this mission, I frequently publish guest posts (see here for approximately 60 such posts). In publishing guest posts, it should not be assumed in all cases that I agree in whole or in part with the content of such posts. Rather, providing the forum for delivery into the marketplace of ideas is what I hope to facilitate and I encourage all who want to make their voice heard on the issues to consider submitting a guest post.
A Deep Breath
The FCPA is a unique statute, with unique and difficult to manage risks.
Nevertheless , it was refreshing to see this piece by Pamela Marple (Chabourne & Park – here) in the NACD Director Advisory titled “The FCPA: A New Bear in the Woods?” Marple begins as follows. “Over the past five years, the Foreign Corrupt Practices Act has solidified itself as an industry brimming with expert forums, company departments and substantial news coverage. Is this statute really the bear in the woods some say it is?” Marple states as follows. “The existence of the FCPA industry (and professionals who are available to conduct internal investigations at a high price) does not mean that this reaction is what is always required. What is required first and foremost is reasonable judgment exercised by directors and professionals who seek both compliance and solutions—without assuming a bear is present at every turn.”
As I previously commented (here) to Corporate Board Member, corporate directors need to keep a proper perspective. There’s a whole industry out there that’s trying to sell the steroids version of FCPA compliance. But directors should not get their undies in a bundle over this. This is an issue, just like any other risk area, that directors need to have on their radar screen. Corporate directors should not panic when it comes to FCPA compliance.
Whose Fault is It?
Do FCPA violations occur because companies subject to the law go into foreign markets intent on engaging in bribery or because the companies are confronted by corrupt foreign officials seeking to line their own pockets?
Circumstances vary of course, but this recent article in the African Globe includes comments from human rights lawyer and Senior Advocate of Nigeria Femi Falana who focused on the former. The article stated as follows. “In order to cover up the involvement of western governments and corporations in the promotion of corruption, terrorism and drug abuse in Africa, the impression is often created by top public officials of some foreign governments that Africans are the most corrupt people in the world,” Falana observed noting that only last week, the US Secretary of State, Mrs. Hillary Clinton, kicked off her 11-day tour of some African states in Senegal by condemning corruption in Africa and urging African leaders to fight it in order to get good governance in the continent. He said it was also the kernel of President Barack Obama’s message to Africans when he made a brief stopover in Ghana three years ago. “While we do not condone corruption, it is high time the Obama administration was told to stop blaming the victims of grand corruption promoted and fuelled by western countries led by Switzerland, France, United Kingdom and United States,” Falana said.”
Nobody Was Charged
A recent New York Times article (here) once again raises the issue of why few corporate fraud enforcement actions result in individual charges. The article states as follows. “The Justice Department has collected $8.6 billion over the last three years, more than in any similar period in history, but relatively few prosecutions of individuals have come from the biggest settlements.”
A reason?
In the FCPA context, I submit and stated during my 2010 Senate testimony (here), involves the quality of the corporate enforcement action. Given the prevalence of NPAs and DPAs in the FCPA context and the ease in which DOJ offers these alternative resolution vehicles to companies subject to an FCPA inquiry, companies often agree to enter into such resolution vehicles regardless of the DOJ’s legal theories or the existence of valid and legitimate defenses. It is simply easier, more cost efficient, and more certain for a company to agree to a NPA or DPA than it is to be criminally indicted and mount a valid legal defense even if the DOJ theory of prosecution is questionable. (See here for my scholarship “The Facade of FCPA Enforcement). Individuals, on the other hand, face a deprivation of personal liberty, and are more likely to force the DOJ to satisfy its high burden of proof as to all FCPA elements.
A telling statistic?
As noted in this prior post, since alternative resolution vehicles were first used in the FCPA context (December 2004) there have been 61 “core” corporate DOJ FCPA enforcement actions. 47 of the 61 ”core” corporate DOJ FCPA enforcement actions (77%) have been resolved via an NPA (19 instances) or a DPA (28 instances). In these 47 “core” corporate DOJ FCPA enforcement actions, only 7 enforcement actions (15%) have resulted in any individual FCPA criminal charges against company employees. In other words, when the DOJ resolves an FCPA enforcement action via a NPA or DPA, there is only a 15% likelihood that individual criminal charges will be filed against any company employee or those affiliated with the company. [Note: the above statistics were calculated in Sept. 2011]
For previous posts on this very same issue see here.
*****
A good weekend to all.
An Important FCPA Case You’ve Likely Never Heard About
Last week (here) I noted, in connection with Wal-Mart’s potential FCPA exposure, that the enforcement theory that payments outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions has been subjected to judicial scrutiny three times. After summarizing those three instances, I noted that the scorecard was as follows: US – 1; Defendants – 2; or if you prefer US – .5; Defendants – 2.5 (recognizing that the 5th Circuit decision in Kay is equivocal).
Last week in doing some research, I stumbled upon a fourth instance where this enforcement theory was subjected to judicial scrutiny.
The result? DOJ lost.
Thus, the scorecard is as follows when an enforcement agency is put to its burden of proof on the enforcement theory that payments outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions: US – 1; Defendants – 3; or if you prefer US – .5; Defendants – 3.5 (again recognizing that the 5th Circuit decision in Kay is equivocal).
This 1990 FCPA enforcement action is so obscure it was not even cited in any of the decisions of the other challenges which occurred between 2002-2004. For instance, in the Kay trial court decision in 2002, the court stated that it was confronting an issue of first impression in the federal courts.
Below is a summary of U.S. v. Alfredo Duran.
AEA Aircraft Recovery (“AEA”) was a division of Summerland Engineering Corp. (a Florida corporation) and engaged in the business of recovery of seized aircraft. The sole shareholder of Summerland was Robert Gurin.
In 1989, the DOJ charged Joaquin Pou (a Dominican Republic citizen and an agent of AEA, Summerland and Gurin), Alfredo Duran (a U.S. citizen and agent of AEA, Summerland, and Gurin) and Jose Guasch (a U.S. citizen and agent of AEA, Summerland, and Gurin) with conspiracy to violate the FCPA’s anti-bribery provisions. See here for the criminal indictment. In a criminal information (see here) the DOJ also charged Robert Gurin.
According to the charging documents, the defendants conspired to make payments to officials of the Dominican Republic in order to obtain the release of two aircraft seized by the government of the Dominican Republic. The charging documents then proceed to set forth various acts in furtherance of the conspiracy.
Gurin and Guasch pleaded guilty and Pou (a citizen of the Dominican Republic) became a fugitive. Gurin was sentenced to 5 years probation and 100 hours of community services and Guasch was sentenced to 4 years probation, 1 month of house arrest and 75 hours of community service.
Duran, a former Florida state Democratic Party chairman, pleaded not guilty and put the DOJ to its burden of proof at trial. At the close of the DOJ’s case, he filed a motion for judgment of acquittal (see here). Duran argued that “no reasonable jury could find that the purpose of any of the alleged intended payments was to assist […] in obtaining or retaining business” and that the government “has failed to adduce sufficient evidence to prove any intended payments were not facilitating or expediting payments for the purpose of expediting or securing routine governmental action (i.e. grease payments).”
The motion stated that “the legislative history to the 1977 Act makes clear that the evil redressed by the Act was the use of bribery by U.S. corporations to obtain contracts for the sale of good or services to foreign countries.” The motion then referenced that in 1988 Congress “created an exception for expediting or facilitating payments for the purpose of securing routine governmental action.” The motion stated, “by clear implication, payments in respect of the awarding of procurement contracts of the foreign government are the type of payments targeted” by the FCPA.
The motion then stated as follows. “The evidence, taken in the light most favorable to the government, shows at best that payments were to be made to Joaquin Pou and, through him, to unidentified Dominican government officials for the purpose of obtaining the release of a single aircraft to its owner. Clearly, this is not what Congress intended by the phrase obtaining or retaining business … The fact that this intended payment may have indirectly benefited Gurin’s business by facilitating the release of an aircraft does not establish the type of direct business purpose contemplated by the statute.” Duran argued that “the government has failed to establish that the intended payments in this case were for the specific purpose of obtaining or retaining business … and, accordingly, a judgment of acquittal should be entered.
Turning next to facilitating payments, the motion argued that “the government bears the burden of disapproving that the payment was not a ‘facilitating or expediting payment” and that had “Congress intended the ‘facilitating or expediting payment exception’ to be an affirmative defense, it would have placed it” in the portion of the FCPA containing affirmative defenses. The motion stated as follows. “By its nature, therefore, the exception creates an additional element which the government must disprove beyond a reasonable doubt to establish the crime.” The motion then goes through the legislative history of facilitating payments and how in the original FCPA the concept was imbedded in the definition of “foreign official” and how in 1988 Congress created the stand-alone facilitating payment exception.
As to the evidence at trial, the motion stated as follows. “Here the evidence introduced by the prosecution is only consistent with a finding that the purpose of the alleged intended payments was to facilitate or expedite the release of an aircraft. The Defendant had been told by an undercover government informant that there was no legal holds upon the aircraft. He was led to believe that neither the Dominican Republic nor any other government held any legal claim to or right in the aircraft. He understood that it was simply a straightforward matter of expediting the release of an aircraft on behalf of the owner. Any intended payment was simply for the purpose of hurrying along a bureaucratic process. The purpose of the alleged intended payment was to expedite a routine governmental action. Consequently, no reasonable jury could conclude that the Defendant agreed upon an illegal objective.”
Elsewhere, the motion stated as follows. “The facts simply show that the army of the Dominican Republic had no discretion in the matter of the release of the aircraft, and that some government officials were simply trying to line their pockets outside of their official capacities.” Further the motion stated as follows. “There was no decision-making process in this case, the facts merely demonstrate a ministerial or clerical matter involving the processing of government papers and the automatic release of the aircraft.”
On April 17, 1990, U.S. District Court Judge Jame Kehoe granted a judgment of acquittal (see here).
Original source media accounts note that Judge Kehoe said “the government failed to prove the charges against [Duran] were a crime under the Foreign Corrupt Practices Act.” According to media reports, Judge Kehoe refused a government request to stay acquittal while prosecutors appealed. Duran is reported as stating, “I feel that I have been throughly vindicated. I was ready to take the stand in my own defense. I am very happy.”
An additional dynamic in the case was that Pou fled the U.S. and Judge Kehoe agreed with the defense that all evidence concerning Pou should be excluded from the case.
According to media reports, the case began when the Government used an informant to pose as an agent for the owner of a drug plane seized by the Dominican military. Media reports suggest that the government was investigating Gurin in light of allegations he had bribed high-ranking military officials in the Dominican Republic and other Caribbean countries to recover drug planes.
Too Much Guanxi
“In the end, Garth Peterson, a rising star at Morgan Stanley in China, was undone by his pursuit of “guanxi.” So begins this 2009 Reuters article that details the rise and fall of Peterson, fired by Morgan Stanley in 2008, “amid suspicions” that he had violated the FCPA. According to the article, Morgan Stanley, voluntarily reported the case to U.S. authorities after a nine month internal investigation.
Yesterday the DOJ and SEC announced a joint enforcement against Peterson.
DOJ
In this release, the DOJ announced that Peterson, a former managing director for Morgan Stanley’s real estate business in China, pleaded guilty to a one count criminal information (unavailable at this point) for “conspiring to evade internal accounting controls that Morgan Stanley was required to maintain under the FCPA.”
The release states as follows.
“According to court documents, Morgan Stanley maintained a system of internal controls meant to ensure accountability for its assets and to prevent employees from offering, promising or paying anything of value to foreign government officials. Morgan Stanley’s internal policies, which were updated regularly to reflect regulatory developments and specific risks, prohibited bribery and addressed corruption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, charitable contributions and employment. Morgan Stanley frequently trained its employees on its internal policies, the FCPA and other anti-corruption laws. Between 2002 and 2008, Morgan Stanley trained various groups of Asia-based personnel on anti-corruption policies 54 times. During the same period, Morgan Stanley trained Peterson on the FCPA seven times and reminded him to comply with the FCPA at least 35 times. Morgan Stanley’s compliance personnel regularly monitored transactions, randomly audited particular employees, transactions and business units, and tested to identify illicit payments. Moreover, Morgan Stanley conducted extensive due diligence on all new business partners and imposed stringent controls on payments made to business partners.”
“According to court documents, Peterson conspired with others to circumvent Morgan Stanley’s internal controls in order to transfer a multi-million dollar ownership interest in a Shanghai building to himself and a Chinese public official with whom he had a personal friendship. The corruption scheme began when Peterson encouraged Morgan Stanley to sell an interest in a Shanghai real-estate deal to Shanghai Yongye Enterprise (Group) Co. Ltd., a state-owned and state-controlled entity through which Shanghai’s Luwan District managed its own property and facilitated outside investment in the district. Peterson falsely represented to others within Morgan Stanley that Yongye was purchasing the real-estate interest, when in fact Peterson knew the interest would be conveyed to a shell company controlled by him, a Chinese public official associated with Yongye and a Canadian attorney. After Peterson and his co-conspirators falsely represented to Morgan Stanley that Yongye owned the shell company, Morgan Stanley sold the real-estate interest in 2006 to the shell company at a discount to the interest’s actual 2006 market value. As a result, the conspirators realized an immediate paper profit of more than $2.5 million. Even after the sale, Peterson and his co-conspirators continued to claim falsely that Yongye owned the shell company, which in reality they owned. In the years since Peterson and his co-conspirators gained control of the real-estate interest, they have periodically accepted equity distributions and the real-estate interest has appreciated in value.”
Assistant Attorney General Lanny Breuer stated as follows. “Mr. Peterson admitted today that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official. As a managing director for Morgan Stanley, he had an obligation to adhere to the company’s internal controls; instead, he lied and cheated his way to personal profit. Because of his corrupt conduct, he now faces the prospect of prison time.”
Peterson is to be sentenced on July 17th.
As to Morgan Stanley, the release states as follows.
“After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to Peterson’s conduct. The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation.”
Kudos to the DOJ. Would anything really change with an FCPA compliance defense – see here for “Revisiting a Foreign Corrupt Practices Act Compliance Defense”?
SEC
In this complaint, the SEC alleged in summary as follows.
“From at least 2004 to 2007, Defendant Garth Peterson, while employed at Morgan Stanley & Co., Inc. ‘s (“Morgan Stanley”) real estate investment and fund advisory business, secretly acquired millions of dollars worth of real estate investments from Morgan Stanley’s funds for himself, the former Chairman of Yongye Enterprise (Group) Co. (“Yongye”) -a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai-and others. Peterson also arranged to have paid to himself and the former Chairman of Yongye (“the Chinese Official”) at least $1.8 million in what he misrepresented were finder’s fees Morgan Stanley’s funds owed to third parties. In exchange for offers and payments from Peterson, the Chinese Official helped Peterson and Morgan Stanley obtain business while personally benefitting from some of these same investments. This self-dealing and misappropriation by Peterson breached the fiduciary duties he and Morgan Stanley owed to their clients.”
Based on the above conduct, the SEC charged Peterson with violating the FCPA’s anti-bribery and internal controls provisions, as well as aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act.
In this release, the SEC noted that Peterson agreed to a settlement of the SEC’s charges “in which he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement, and relinquish his interest in the valuable Shanghai real estate (currently valued at approximately $3.4 million) that he secretly acquired through his misconduct.”
Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows. “Peterson crossed the line not once, but twice. He secretly bribed a government official to illegally win business for his employer and enriched himself in violation of his fiduciary duty to Morgan Stanley’s clients. This case illustrates the SEC’s commitment to holding individuals accountable for FCPA violations, particularly employees who intentionally circumvent their company’s internal controls.”
Kara Novaco Brockmeyer (Chief of the SEC Enforcement Division’s FCPA Unit) stated as follows. “As a rogue employee who took advantage of his firm and its investment advisory clients, Peterson orchestrated a scheme to illegally win business while lining his own pockets and those of an influential Chinese official.”
As to Yongye and the Chinese Official, the complaint states as follows.
“Yongye Enterprise (Group) Co. Ltd. was a large real estate development arm of the Luwan District Government in Shanghai, China. Since its inception in 1994, Yongye held leases for many prime areas in the Luwan District. Yongye’s business was to keep or take a small share in real estate joint ventures, including with Morgan Stanley and its funds, in exchange for helping its joint venture partner obtain the proper licensing from the local government. Yongye owned and developed residential and commercial real property, sold and brokered real estate to Morgan Stanley and its funds, and partnered with Morgan Stanley and its funds in various real estate investments.”
“The Chinese Official was the Chairman of Yongye at all pertinent times until his retirement in September 2006. As Chairman, he exercised control over Y ongye and had the authority to make investment decisions for it. Before Yongye, the Chinese Official worked for the Luwan District government. After his retirement in September 2006, the Chinese Official continued to work with Morgan Stanley as a private real estate developer and broker until approximately the time Peterson was terminated in 2008.”
The complaint contains an entire section titled “Morgan Stanley’s FCPA Compliance Program and Internal Controls” which states as follows.
“Morgan Stanley trained Peterson on the FCPA numerous times during his employment, as follows:
(1) Morgan Stanley trained Peterson on anti-corruption policies and the FCPA at least seven times between 2002 and 2008. In addition to other live and web-based training, Peterson participated in a teleconference training conducted by Morgan Stanley’s Global Head of Litigation and Global Head of Morgan Stanley’s Anti-Corruption Group in June 2006.
(2) Morgan Stanley distributed to Peterson written training materials specifically addressing the FCPA, which Peterson maintained in his office.
(3) A Morgan Stanley compliance officer specifically informed Peterson in 2004 that employees of Yongye, a Chinese state-owned entity, were government officials for purposes of the FCPA.
(4) Peterson received from Morgan Stanley at least thirty five FCPA-compliance reminders. These reminders included FCPA-specific distributions; circulations and reminders of Morgan Stanley’s Code of Conduct, which included policies that directly addressed the FCPA; various reminders concerning Morgan Stanley’s policies on gift-giving and entertainment; the circulation of Morgan Stanley’s Global Anti-Bribery Policy; guidance on the engagement of consultants; and policies addressing specific high-risk events, including the Beijing Olympics.
(5) Morgan Stanley required Peterson on multiple occasions to certify his compliance with the FCPA. These written certifications were maintained in Peterson’s permanent employment record.
Morgan Stanley required each of its employees, including Peterson, annually to certify adherence to Morgan Stanley’s Code of Conduct, which included a portion specifically addressing corruption risks and activities that would violate the FCPA. Morgan Stanley required its employees, including Peterson, annually to disclose their outside business interests. Morgan Stanley had policies to conduct due diligence on its foreign business partners, conducted due diligence on the Chinese Official and Yongye before initially conducting business with them, and generally imposed an approval process for payments made in the course of its real estate investments. Both were meant to ensure, among other things, that transactions were conducted in accordance with management’s authorization and to prevent improper payments, including the transfer of things of value to officials of foreign governments.”