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Friday Roundup

Dear Attorney General Holder, U.K. developments not involving News Corp., and Halliburton updates its disclosure … it’s all here in the Friday roundup.

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Senators Klobuchar and Coons Write to Attorney General Holder On FCPA Guidance

As noted in this previous post, in November 2011, Senator Charles Grassley (R-IA) asked Attorney General Holder for detailed information about the DOJ’s promised upcoming FCPA guidance.

Earlier this week, Senators Amy Klobuchar (D-MN) and Chris Coons (D-DE) sent Attorney General Holder this letter regarding the DOJ’s forthcoming FCPA guidance.  From my perspective, the most notable paragraph of the letter was as follows.  “[I]t has become apparent that too many companies are devoting a disproportionate amount of resources to FCPA compliance and internal investigations.  To be clear, it is both necessary and desirable that companies pay adequate attention to compliance efforts, and in certain cases, adequate anti-corruption initiatives may require a significant corporate committment.  Over-compliance, however, can have a negative effect on product development, export promotion, and workforce expansion.”

I agree and devoted an entire section of “The Facade of FCPA Enforcement” (see here pages 997-1009) to why the facade of FCPA enforcement matters including the breeding of overcompliance and time-consuming internal investigations.  See also here pages 8-9 of my Senate FCPA testimony.

In addition, Senator Klobuchar and Coons encouraged the DOJ “to seek out the participation of U.S. corporate stakeholders when formulating its guidance.”  The Senators stated as follows.  “Engagement with the stakeholder community ought to occur prior to the release of guidance.  In the alternative, guidance should be issued in draft form and finalized after a comment period of sufficient length.”

U.K. Developments

Some recent U.K. developments that do not involve News Corp.

In this release, the U.K. Serious Fraud Office announced that Bruce Hall was charged with corruption offenses based on his alleged receipt of bribes while an employee of Aluminium Bahrain B.S.C. (“Alba”).  The charges against Hall relate to previous SFO charges against Victor Dahdaleh, an agent for Alcoa, who allegedly made bribe payments to Alba – see here for the prior post.  In recent years, the DOJ has likewise brought non-FCPA charges against bribe recipients.  See here for instance.

In this release, the U.K. Serious Fraud Office announced charges against a fourth person in connection with the Innospec enforcement action.  (See here for more on the corporate enforcement action).  Miltos Papachristos, a former Regional Sales Director for the Asia Pacific Region for Innospec, was charged with “conspiracy to corrupt in that he gave or agreed to give corrupt payments to public officials and other agents of the Government of Indonesia as inducements to secure, or as rewards for having secured, contracts from the Government of Indonesia for the supply of Innospec Ltd products including Tetraethyl Lead.”  For more on the other three individuals charged – see here.

Halliburton Updates Disclosure

Yesterday’s post (here) touched upon FCPA disclosures and how it seems like every week there is new disclosure to report.

Halliburton’s disclosure yesterday was not new, but it stated as follows.  “We are conducting an internal investigation of certain areas of our operations in Angola, focusing on compliance with certain company policies, including our Code of Business Conduct (COBC), and the FCPA and other applicable laws. In December 2010, we received an anonymous e-mail alleging that certain current and former personnel violated our COBC and the FCPA, principally through the use of an Angolan vendor. The e-mail also alleges conflicts of interest, self-dealing and the failure to act on alleged violations of our COBC and the FCPA. We contacted the DOJ to advise them that we were initiating an internal investigation with the assistance of outside counsel and independent forensic accountants. During the third quarter of 2011, we met with the DOJ and the SEC to brief them on the status of our investigation and provided them documents. We are currently responding to a subpoena from the SEC regarding this matter and are producing all relevant documents. We understand that one of our employees has also received a subpoena from the SEC regarding this matter. We expect to continue to have discussions with the DOJ and the SEC, and we intend to continue to cooperate with their inquiries and requests as they investigate this matter. Because these investigations are at an early stage, we cannot predict their outcome or the consequences thereof.”

In 2009, Halliburton (and related entities) resolved a $579 million DOJ/SEC FCPA enforcement action concerning conduct at Bonny Island, Nigeria.  (See here).

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A good weekend to all.

A Dialogue Worth Having

This previous post discussed U.K. plans to introduce U.S.-style corporate plea bargains, including deferred prosecution agreements. Among other things, the post mentioned an October 17th meeting with U.K. prosecutors at Pinset Mason’s London office.

thebriberyact.com summarizes the meeting and nicely frames the issues  here and here.    The post states as follows.  “We think that the need for DPA legislation is obvious. Its absence has often been remarked upon by the Director of the SFO and for very good reason. It is a serious hole in the UK law. Its absence has a chilling effect on the attempts to ensure that ethical attitudes become a permanent feature of corporate life in all companies, be they International, SME or small.”

Others have shared their views on whether the U.K. should adopt U.S. style alternative resolution vehicles and, if so, how.

Thomas Fox at the FCPA Compliance and Ethics Blog (here) believes “that the ability to enter into a DPA is a powerful tool that advances the interests of prosecutors, the judiciary and the public.”  Fox states that “the primary reason for both the prosecution and a company which violates the Bribery Act entering into a DPA is certainty.”

Ross Parlane of McGuire Woods writing at The Bribery Library (here)  states as follows.  “There are a number of benefits to be gained from giving UK prosecutors the power to negotiate DPAs.  Certainly the cost and time involved in investigating offences would be significantly reduced, which is good news for the public purse.  Further, a well negotiated DPA that gives proper attention to remediation (e.g. through monitoring) as well as to punishment, has the potential to effect a permanent positive change in the culture of an organisation.”  Yet Parlane states (and identifies) that “there are a number of tricky issues that need to be resolved before the use of deferred prosecution agreements can be adopted in the the U.K.”

Michael Volkov, writing at thebriberyact.com (here) notes that “for UK policymakers, the balance between judicial review and prosecutorial discretion is one which has to be resolved before any new policy can be enacted.”

Let me contribute to the dialogue by posing this question.  Why does a law with an adequate procedures defense require the third option of a deferred prosecution agreement – the first two options being prosecute vs. not prosecute?

If a corporate has adequate procedures, but an isolated act of bribery nevertheless occurs within its organization, the corporate presumably would not face prosecution under the Bribery Act.  Seems like a reasonable result.  In other words, no need for the third option in such a case.

On the other hand, if a corporate does not have adequate procedures (i.e. has no committment to anti-bribery compliance) and an act of bribery occurs within its organization, it presumably would face prosecution under the Bribery Act.  Seems like a reasonable result.  Does a third option really need to be created for corporates who do not implement adequate procedures?

Because the FCPA does not have an adequate procedures / compliance defense (at least not yet), the same analysis does not apply.

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In other recent U.K. developments, last week the SFO announced (here) that two former Innospec executives were charged.  Dennis Kerrison, the former CEO of Innospec Ltd., was charged with “an allegation of conspiracy to corrupt, in that he gave or agreed to give corrupt payments to public officials and other agents of the Government of Indonesia as inducements to secure, or as rewards for having secured, contracts from the Government of Indonesia.”  Paul Jennings, the former CEO of Innospec, is accused of “two allegations of conspiracy to corrupt, in that he gave or agreed to give corrupt payments to public officials and other agents of the Governments of Indonesia and Iraq as inducements to secure, or as rewards for having secured, contracts from those Governments.”

Earlier in the week, the SFO also announced (here) that David Turner, a former business unit director of Innospec Ltd., was charged with “alleged offenses of conspiring to make corrupt payments to public officials in Indonesia and Iraq to secure contracts for Innospec Ltd. for the supply of its products.”

Both Jennings (here for the prior post) and Turner (here for the prior post) previously settled SEC FCPA enforcement actions based on the same core set of conduct.

As with the SFO’s  recent case against Victor Dahdaleh (see here for the prior post), the recent Innospec related enforcement actions are not Bribery Act enforcement actions.

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Sure, it’s Halloween and all, but the FCPA reform debate (see here) is getting a little silly don’t you think?

Innospec – Were The DOJ and SEC Duped?

Suppose A is ordered to pay B $160.  However, A claims an inability to pay that amount and based on this inability to pay B agrees to accept only $25.  The following year, a year during which A publicly discloses evidence of financial health, A pays C $45.  You might conclude that B was duped.

Convert the above numbers to millions, insert Innospec for A, insert the DOJ and SEC for B, and insert NewMarket (a competitor corporation) for C, and you now have a real scenario.

As highlighted in this prior post, in March 2010 Innospec agreed to resolve a DOJ and SEC enforcement action by paying $25.3 in combined fines and penalties after pleading guilty to FCPA and other offenses, based largely on conduct in Iraq and Indonesia.

The total amount of fines and penalties could have been much higher as the minimum U.S. Sentencing Guidelines amount was $101.5 million and the SEC ordered the company to pay approximately $60 million.  However, Innospec received a pass on approximately $135 million in fines and penalties based on its claimed inability to pay.

The DOJ’s sentencing memorandum (here) stated as follows.  “Innospec has represented that it is unable to pay, and, even with the use of a reasonable installment schedule, is not likely to be able to pay, a $101.5 million fine. Over the course of nearly a year, Innospec has provided the Department, the SEC [and other U.S. and non-U.S. authorities] with detailed presentations regarding its current financial condition and available assets. Those representations have been analyzed in detail by qualified accounting professionals within the SEC […]. Innospec has represented that, were the company to pay more than the amount agreed, the continued viability of the company would be threatened, as follows: (1) Innospec would breach the limits of its credit facilities; (2) Innospec would be unable to make up a deficit in funding its pension plan, resulting in an $85 million shortfall; (3) Innospec would be unable to remediate certain environmental damage caused by its manufacturing facility in the United Kingdom; (4) Innospec would be unable to invest sufficiently in research and development; and (5) Innospec would be forced to close facilities around the world, resulting in dozens of employees losing their jobs.”

The SEC’s release (here) stated, in pertinent part, as follows: “Innospec has consented to the entry of a court order […] ordering it to pay $60,071,613 in disgorgement, provided that the Commission waive all but $11,200,000 of disgorgement and permitting payment in four installments based upon Innospec’s sworn Statement of Financial Condition…”.

Since March 2010, I highlighted in a series of posts (here, here, and here) that despite receiving the above pass based on inability to pay Innospec has consistently reported positive financial results.

This previous post highlighted a civil case filed against Innospec by a competitor (NewMarket Corp.) alleging that Innospec’s conduct, as described in the DOJ and SEC enforcement actions, violated the Robinson-Patman Act and the Virginia Antitrust Act as well as the Virginia Business Conspiracy Act.  According to news reports,  NewMarket learned of Innospec’s actions after reading the documents released in connection with the March 2010 enforcement action in which, among other things, the DOJ and SEC alleged that Innospec’s bribe payments in Iraq ensured that a field test of a competitor’s fuel additive failed. NewMarket claimed that the competitor was a subsidiary company Ethyl Petroleum Additives Inc. which now goes by the name Afton Chemical Corp.

As reported earlier this week by Joe Palazzolo (Wall Street Journal Corruption Currents), Innospec recently announced a settlement of the civil action.  In This 8-K filing the company stated as follows.   “NewMarket and the Company have agreed to settle these actions pursuant to the terms of a settlement agreement between them signed on September 13, 2011 which provides for mutual releases of the parties and dismissal of the actions with prejudice. Under the settlement agreement, the Company will pay NewMarket an aggregate amount of approximately $45 million, payable in a combination of cash, a promissory note and stock, of which $25 million is payable in cash by September 20, 2011, $15 million is payable in three equal annual installments under the promissory note (carrying simple interest at 1% per annum) the first installment of which is due on September 10, 2012, and approximately $5 million is payable in the form of 195,313 shares of the Company’s common stock by September 20, 2011.”

Innospec’s immediate $25 million cash payment to NewMarket, as well as its committment to pay an additional $15 million in installments, raises the question of whether the DOJ and SEC were duped by Innospec last year when the agencies gave the Innospec a pass on $135 million in fines and penalties based on the company’s claimed inability to pay.

First Enforcement Action of 2011 Involves a Former Executive Officer

In March 2010, Innospec Inc. was charged on both sides of the Atlantic in a joint DOJ / SEC / U.K. Serious Fraud Office enforcement action. (See here and here).

In August 2010, the SEC charged David Turner, the Business Director of Innospec’s TEL Group, and Ousama Naaman, the company’s agent, for their role in the bribery scheme. (See here). Naaman was also charged by the DOJ, pleaded guilty, and awaits sentencing. (See here).

Yesterday, in the first FCPA enforcement action of the year, the SEC charged Paul Jennings, Innospec’s former CFO and CEO, for his involvement in the bribery scheme. (See here). Jennings resigned from Innospec in March 2009 (see here).

Jennings name is now included on a rather short list of high-ranking executives of public companies (or affiliates) recently charged by the SEC in an FCPA enforcement action. In July 2009, Douglas Faggioli (the current President and CEO) and Craig Huff (the former CFO) of Nature’s Sunshine Products were charged (see here); in September 2008, Albert Jackson Stanley (the former CEO of Kellogg Brown & Root Inc.) was charged (see here); in December 2007, Robert Philip (the former Chairman/CEO of Schnitzer Steel was charged (see here); and in September 2007, Monty Fu (the former Chairman of Syncor International Corp. was charged (see here).

The facts of the underlying bribery scheme in the Jennings enforcement action are detailed in the prior posts linked above and this post details the allegations in the SEC’s complaint (here) regarding Jennings knowledge and involvement in the scheme.

In summary fashion, the complaint alleges as follows:

“This action arises from widespread bribery of foreign officials by Innospec, Inc., some of which occurred and was approved by Paul W. Jennings beginning in mid to late 2004 during his tenure as Chief Financial Officer (“CFO”) and continuing after he became Chief Executive Officer (“CEO”) in 2005.”

“Beginning in mid to late 2004, Jennings, who held various senior roles at Innospec, including CFO and CEO, actively participated in the bribery schemes in Iraq and Indonesia.”

“Jennings violated [the FCPA’s anti-bribery provisions] by engaging in widespread bribery of government officials in Iraq during the post-Oil for Food period in order to sell TEL to the Iraqi Ministry of Oil (“MoO”) and by engaging in bribery of Indonesian officials to sell TEL to state owned oil companies in Indonesia. Jennings aided and abetted Innospec’s violations of [the FCPA’s anti-bribery provisions] by substantially assisting in Innospec’s bribery of Iraqi and Indonesian government officials.”

“Innospec, a U.S. issuer, made use of U.S. mails and interstate commerce to carry out the scheme, and Jennings, a dual U.S. and U.K. national was complicit in the scheme. Jennings both sent and received e-mails to and from the United States to carry out the scheme. He also used interstate commerce and the mails as part of the scheme. Jennings obtained $116,092 in bonuses that were tied to the success of the TEL sales, which were procured through bribery.”

“Jennings also violated Section13(b)(5)of the Exchange Act and Rule 13b2-1 thereunder by falsifying documents as part of the bribery scheme. Jennings also violated Exchange Act Rule 13b2-2 by making false statements to accountants and violated Exchange Act Rule 13a-14 by signing false personal certifications required by the Sarbanes-Oxley Act of 2002 that were attached to annual and quarterly Innospec public filings.”

“Jennings also aided and abetted Innospec’s violations of [the FCPA’s books and records and internal control provisions] by substantially assisting in Innospec’s failure to maintain internal controls to detect and prevent bribery of officials in Iraq and Indonesia, and the improper recording of the illicit payments in Innospec’s books and records.”

According to the SEC, “beginning in 2005, Jennings, along with other members of Innospec’s management, approved bribery payments to officials at the Iraqi Ministry of Oil in order to sell TEL to Iraq. The complaint alleges that Innospec, with the approval of Jennings, used Naaman as its agent in Iraq to make improper payments and the complaint alleges that Jennings was copied on certain e-mails between Naaman and Turner discussing the bribery scheme. The complaint further alleges that Jennings approved certain payments to Naaman to facilitate the bribery scheme including certain payments Jennings approved “while in the United States.” Many of the SEC’s allegations as to the Iraqi conduct are phrased as Jennings had “general knowledge” or that Jennings was “generally aware” of the conduct at issue.

As to Indonesian payments, the complaint alleges that “Jennings became aware of and approved the improper payments to Indonesian government officials in order to win contracts for the sale of TEL to state owned oil and gas companies. Among other allegations, the complaint alleges that “in December 2004, Jennings and Executive B [the CEO of Innospec from 1998 to April 2005] discussed Innospec’s bribery scheme in Iraq and Indonesia on a flight from Denver to New York” and that “while Indonesian Agent was in the United States during the holidays, various e-mails were sent to and from the United States that discussed Jennings’ and Turner’s continued efforts to support Indonesian Agent’s payment of bribes on Innospec’s behalf.” The SEC also alleges that the “bribery scheme” was also discussed “during Jennings’ performance review in January 2005.”

As to Jennings false certifications, the complaint alleges as follows.

“From 2004 to February 2009, Jennings signed annual certifications that were provided to auditors where he falsely stated that he complied with Innospec’s Code of Ethics incorporating the company’s Foreign Corrupt Practices Act policy, and that he was unaware of any violations of the Code of Ethics by anyone else. During that time frame, Jennings actively participated in bribery of Iraqi and Indonesian officials as described above. Jennings also signed annual and quarterly personal certifications pursuant to the Sarbanes-Oxley Act of 2002 in which Jennings made false certifications concerning the company’s books and records and internal controls. Jennings also signed false management certifications to Innospec’s auditors indicating that the books and records were accurate and that Innospec had appropriate internal controls.”

As noted in the SEC release, without admitting or denying the SEC’s allegations, Jennings agreed to disgorge $116,092 plus prejudgment interest of $12,945 and pay a civil penalty of $100,000. The SEC stated that the figures take into consideration Jennings’s cooperation in this matter.

In the release, Cheryl Scarboro (Chief of the SEC’s FCPA Unit) stated, “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.”

Innospec Checkup

“As of March 31, 2010, Innospec had $67.5 million in cash and cash equivalents, $22. million more than its total debt of $45.0 million.” (see here for the prior post).

“As of June 30, 2010, Innospec had $77.0 million in cash and cash equivalents, $30.0 million more than its total debt of $47.0 million.” (see here for the prior post).

As reported by the company earlier this week (see here):

“As of September 30, 2010, Innospec had $101.5 million in cash and cash equivalents, $53.5 million more than its total debt of $48 million.”

As evident from the above, Innospec’s cash coffers continue to grow and business is doing well. The company’s President and CEO “We are pleased to report strong earnings growth as well as excellent cash generation for the third quarter of 2010. All three of our business segments again performed well, generating double-digit increases in operating income.”

Why does any of this matter?

Because in March 2010, Innospec (see here) agreed to pay $40.2 million in combined DOJ/SEC/SFO fines and penalties for violating the Foreign Corrupt Practices Act and other laws.

However, it could have been worse.

The SEC release (see here) notes that Innospec, without admitting or denying the SEC’s allegations, was ordered to pay $60,071,613 in disgorgement, but because of Innospec’s “sworn Statement of Financial Condition” all but $11,200,000 of that disgorgement was waived.

The release states that “[b]ased on its financial condition, Innospec offered to pay a reduced criminal fine of $14.1 million to the DOJ and a criminal fine of $12.7 million to the SFO. Innospec will pay $2.2 million to OFAC for unrelated conduct concerning allegations of violations of the Cuban Assets Control Regulations.”

In other words, Innospec got a pass on approximately $50 million.

Innospec’s “Inability to Pay” is also noted in the DOJ’s plea agreement (see here).

In other Innospec news, the company’s most recent 10-Q filing (see here) suggests that the company expects its compliance monitor to cost $3.9 million (see pg. 22).

This prior post discussed the civil complaint, based on the DOJ and SEC’s allegations, filed against Innospec by a competitor alleging violations of
the Robinson-Patman Act and the Virginia Antitrust Act as well as the Virginia Business Conspiracy Act.

Here is what Innospec had to say about this litigation in its recent filing:

“On July 23, 2010, NewMarket Corporation and its subsidiary, Afton Chemical Corporation (collectively, “NewMarket”), filed a civil complaint against the Company and its subsidiary, Alcor Chemie Vertriebs GmbH (“Alcor”), in the U.S. District Court for the Eastern District of Virginia. The complaint makes certain claims against the Company and Alcor with respect to alleged violations of provisions of the Robinson-Patman Act, the Virginia Antitrust Act and the Virginia Business Conspiracy Act as a result of alleged actions involving officials in Iraq and Indonesia pertaining to securing sales of the Company’s tetra ethyl lead (TEL) fuel additive, to the apparent detriment of the plaintiffs and their sales of a competing non-lead based fuel additive. The complaint seeks treble damages of an unspecified amount, plus attorneys’ fees, costs and expenses. The factual allegations underlying the complaint appear to relate to the same matters that were the subject of the Company’s recently-disclosed resolution with the DOJ, SEC, OFAC and SFO. On September 22, 2010, the Company filed a motion to dismiss. On October 4, 2010, NewMarket filed an amended complaint incorporating the Sherman Act and related claims in addition to its previous claims. The Company filed its response to the amended complaint and a separate motion to dismiss on October 29, 2010. The Company believes both the complaint and amended complaint are without merit and intends to defend them vigorously, but because of uncertainties associated with the ultimate outcome of these complaints and the costs to the Company of responding to them, we cannot assure you that the ultimate costs and damages, if any, that may be imposed upon us will not have a material adverse effect on our results of operations, financial position and cash flows. As at September 30, 2010 we had accrued $0.5 million in respect of probable future legal expenses and provided no additional accruals in respect of this matter.”

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