Top Menu

Navigation

Judge Selna Rejects State Actor Theory

By on May 16, 2012 in David Edmonds, FCPA Trials, Internal Investigation Issues, Paul Cosgrove

Prior posts (here, here, and here) discussed a motion to suppress and a motion to dismiss brought by various defendants in the Carson matter.  Given the recent guilty pleas of Stuart Carson and Hong Carson (see here), as a practical matter the motions only affected the remaining defendants – Paul Cosgrove and David Edmonds.

In the motion to suppress, defendants moved to suppress statements which they made to attorneys from Steptoe & Johnson during the course of Steptoe’s internal investigation on behalf of Control Components, Inc. and its parent IMI plc.  The theory of the motion was that the Steptoe attorneys were part of the Government’s investigation and therefore state actors.

Judge Selna rejected the state actor theory – see here for his tentative order.  Judge Selna stated as follows.  “As a matter of fact finding, there is no basis to conclude on the basis of events that transpired prior to the interviews or in the aftermath that the Steptoe lawyers were acting as agents of the Government.”  The tentative order states as follows.  “Steptoe contacted the Department of Justice.  […]  There is no evidence that the Government had any input in the determination of which employees to interview or what they should be asked.  Although [Mark] Mendelsohn [former DOJ FCPA Unit Chief] was advised of the first day of interviews via e-mail, he did not provide guidance or input for the next day’s interviews, and put off discussing the ‘specifics’ of the interviews until the following week.”

Judge Selna further stated as follows.  “The facts here do not establish more than a unilateral determination on the part of CCI and its parent to cooperate with the Government.  Surely, it was in CCI’s interest and a legitimate activity to investigate potential criminal conduct in its business operations.  The Government had no involvement with the Defendants’ interviews, and it cannot be said that Steptoe’s action were so intertwined with the Government that those interviews may be ‘fairly treated’ as the conduct of the Government.  […]  The record is clear that CCI through its parent IMI had made a decision to conduct an internal investigation before Steptoe contacted the Government.”

*****

Judge Selna also issued a tentative ruling (here) denying defendants’ motion to dismiss the indictment “on a series on individual grounds upon which they claim to have been denied due process and on the basis of the cumulative effect of these individual deficiencies.”

Judge Selna noted that “a number of claims [were] predicated on the theory that Steptoe & Johnson … was the agent of the Government and joint investigator” and that such issues were properly resolved in the above-described tentative order.

As to the Defendants’ assertion that the FCPA and Travel Act lacked clarity, Judge Selna stated that “this is simply a cameo reprise of their earlier attacks on these statutes which the Court addressed at length, and rejected.”

As to the Defendants’ theories regarding denial of access to witnesses, missing documents, and foreign documents, Judge Selna concluded that none of these issues were “attributable to unilateral government action.”  As to Brady issues, Judge Selna concluded that “the Government has used its reasonable efforts to secure materials in the possession of CCI.”

*****

During Monday’s hearing on the motions, Judge Selna indicated that he will soon be issuing formal denials of the motions.  The remaining defendants in the Carson matter – Paul Cosgrove and David Edmonds – are scheduled to stand trial in late June.

Analyzing Wal-Mart

By on April 23, 2012 in Facilitating Payments, Internal Investigation Issues, Mexico, Obtain or Retain Business, Permits / Licenses / Customs / Tax, Related Civil Litigation, Retail Industry, SOX Certification Issues, Wal-Mart

This prior post discussed the New York Times lengthy Wal-Mart investigative piece published over the weekend.

This post analyzes the likely issues and the road ahead.

The Times article is both unremarkable and remarkable at the same time.

The unremarkable portion of the Times article is that a foreign subsidiary of a multi-national company operating in a FCPA high-risk jurisdiction allegedly made payments to “foreign officials” to facilitate or grease the issuance of certain licenses or permits.  According to the Times, Wal-Mart’s subsidiary in Mexico “had taken steps to conceal [the payments] from Wal-Mart’s headquarters in Bentonville, Ark.” and Wal-Mart Mexico’s chief auditor altered reports sent to Bentonville discussing various problematic payments.  In short, there is nothing in the Times report to suggest that Wal-Mart’s board or top executives (with the exception of Eduardo Castro-Wright – discussed below in more detail) knew of or authorized the problematic payments.

By unremarkable I do not mean to suggest that such payments will not attract DOJ and SEC scrutiny under the FCPA’s anti-bribery provisions.  They surely will, even if Congress likely intended to exclude such payments from the FCPA’s reach and even if the only case law of precedent on the issue is muddled.  (Both issues were discussed in the prior post).

Even if the Mexican payments do not meet the elements of an FCPA anti-bribery violation, the enforcement agencies are likely to assert that such payments violate of the FCPA books and records and internal control provisions.  For instance, the Times article suggests that the Mexican payments were routed through Mexican gestores who were told to submit invoices full of secret code words.  The enforcement agencies frequently take the position that payments recorded on a subsidiary’s books and records become the parent company issuer’s problem on the theory that such subsidiary books and records are consolidated with the issuers for purposes of financial reporting.

The enforcement agencies also expect that a parent company implement effective internal controls throughout its organization, including foreign subsidiaries.  On this issue, one of the most significant issues is likely to be, as the Times article details, that in 2003 Wal-Mart engaged Kroll Inc. on an apparent unrelated issue in which Kroll concluded that Wal-Mart Mexico “executives had failed to enforce their own anticorruption policies, [and] ignored certain internal audits that raised red flags.”  According to the Times article, “Wal-Mart then asked Kroll to evaluate Wal-Mart de Mexico’s internal audit and antifraud units” and that “Kroll wrote another report that branded the units ‘ineffective.'”

An issue the enforcement agencies are likely to explore is how Wal-Mart reacted to the 2003 Kroll audit and if it didn’t react why not?  The same general issue is present in Avon’s current FCPA scrutiny.  As noted in this February Wall Street Journal article, a grand jury is probing how certain U.S. executives reacted to a 2005 internal audit by the company that concluded Avon employees in China may have been bribing officials in violation of the FCPA.  As in Avon, an issue in the Wal-Mart matter, including as to individual executives who may not have participated in or authorized any Mexican payments, will likely be willful blindness as to the Mexican audit.

The remarkable aspects of the Times investigation include the conduct (or lack thereof) of Wal-Mart and its top executives upon learning of problematic conduct in its Mexican subsidiary.  Even in 2005 and continuing today, most business leaders, audit committees, and boards tend to overreact to FCPA issues and often reflexibly launch broad internal investigations.

However, the payment issues at Wal-Mart Mexico apparently resulted in exactly the opposite at Wal-Mart’s corporate headquarters.  Wal-Mart’s conduct will not be viewed favorably by the enforcement agencies.

For instance, under the DOJ’s Principles of Federal Prosecution of Business Organizations (here) a factor the DOJ will consider in arriving at its enforcement decision include “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.”  While the FCPA does not contain any affirmative disclosure obligation, most companies the size and stature of Wal-Mart tend to disclose conduct that could implicate the FCPA, particularly given the SEC’s position that all payments in violation of the FCPA are qualitatively material, even if not quantitatively material.

Lacking such a voluntarly disclosure, a company should, at the very least, thoroughly investigate the alleged wrongdoing and implement effective remedial measures, including by disciplining and terminating culpable employees.  Once again, the Principles of Prosecution state that “the corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies” is a factor the DOJ will consider in arriving at its enforcement decision.  As to this factor, the relevant comment in the Principles of Prosecution states as follows.  “In determining whether or not to prosecute a corporation, the government may consider whether the corporation has taken meaningful remedial measures. A corporation’s response to misconduct says much about its willingness to ensure that such misconduct does not recur. Thus, corporations that fully recognize the seriousness of their misconduct and accept responsibility for it should be taking steps to implement the personnel, operational, and organizational changes necessary to establish an awareness among employees that criminal conduct will not be tolerated. Among the factors prosecutors should consider and weigh are whether the corporation appropriately disciplined wrongdoers, once those employees are identified by the corporation as culpable for the misconduct.”

On this issue, another remarkable aspect of the Times investigation is how Eduardo Castro-Wright (at the critical time period the CEO of Wal-Mart Mexico) was known by others at Wal-Mart to be involved in the Mexican payments, but was nevertheless continuously thereafter promoted by Wal-Mart.  For instance, as noted in this January 7, 2005 release, Wal-Mart announced that “Eduardo Castro-Wright, currently president and chief executive officer of Wal-Mart Mexico, will become executive vice president and chief operating officer of the Wal-Mart Stores Division in the United States.”  In the release, Wal-Mart President and CEO Mike Duke stated as follows.  “Eduardo is a proven leader who has helped Wal-Mart Mexico achieve outstanding results. His experience, perspective and management skills will be a valuable addition to our division here in the United States.”  In this June 2010 release, the company announced that “Vice Chairman Eduardo Castro-Wright has been appointed President and CEO of Global.com and Global Sourcing.”  Wal-Mart President and CEO Mike Duke stated as follows.  “Eduardo has made extraordinary contributions to Walmart U.S. over the past five years, and many contributions are still to come.  He is a visionary thinker who has strengthened our overall business and built a foundation that positions us well for the future.”

As to other Wal-Mart executives, while there is no suggestion at this point that they knew of or authorized the Mexican conduct while it was occurring, their conduct since learning of the misconduct is likely to attract regulatory scrutiny.  Such scrutiny is likely to include certification issues under Sarbanes-Oxley (SOX) as well as other executive statements to the market since 2005 when they became aware of the payments at issue.   You can bet that the SEC in particular will be analyzing every SEC filing, specifically the Management Discussion & Analysis section, and all other statements to the market since 2005 by executives regarding Wal-Mart Mexico.

As to SOX certification issues, as noted in this prior post, in 2011 the SEC charged Paul Jennings, the former CEO and CFO of Innospec.  Jennings was charged in connection with the payments, but also charged with violating Exchange Act Rule 13b2-2 by making false statements to accountants and violating Exchange Act Rule 13a-14 by signing false personal certifications required by SOX that were attached to annual and quarterly Innospec public filings.  As to these charges, the SEC alleged 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. […]  Jennings also signed annual and quarterly personal certifications pursuant to SOX 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.”  Then SEC FCPA Unit Chief, Cheryl Scarboro stated as follows:  “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.”

Also perhaps relevant is the 2009 SEC FCPA enforcement action against Nature’s Sunshine Products (“NSP”) including its executives Douglas Faggioli (President and Chief Executive Officer of NSP and a member of its board of directors during the relevant time period) and Craig Huff (the company’s CFO).  The SEC complaint did not allege that these executives knew of or participated in the improper payments at issue, but the SEC nevertheless charged the executives on a control person theory of liability.  The complaint charged that Faggioli and Huff, as “control persons” of NSP, violated the FCPA’s books and records and internal control provisions and generally alleged that both Faggioli and Huff had “supervisory responsibilities” over NSP’s senior management and policies, yet as “control persons,” “failed to make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflected the transactions of NSP” and failed to devise and maintain an adequate system of internal accounting controls.

Not only will the DOJ and SEC likely be examining the conduct of Wal-Mart executives, but so too will plaintiff law firms representing shareholders who will likely scour Wal-Mart’s SEC filings and other statements to the market in bringing derivative claims alleging breach of fiduciary duty and potential Section 10(b) claims based on material omissions concerning Wal-Mart Mexico.  On this score, shareholders are likely to allege, among other things, that Wal-Mart’s officers and directors demonstrated conscious disregard for fiduciary duties by failing to act diligently in the face of known facts suggesting a duty to act.

Whether remarkable or unremarkable, the information revealed in the Times article is likely to be a long and costly exercise for Wal-Mart and certain of its executives.  Wal-Mart’s statement over the weekend indicated that it already is conducting a world-wide review of its operations and such “where else” investigations frequently uncover additional problematic conduct.  Among other things, the enforcement agencies are likely to take a keen interest in how Wal-Mart obtained foreign licenses or permits in other FCPA high-risk jurisdictions around the world.  This world-wide review will take time and for this reason FCPA scrutiny of the type that Wal-Mart is currently under is likely to last 2-4 years.

Wal-Mart’s FCPA Scrutiny Grows

By on April 21, 2012 in Facilitating Payments, Internal Investigation Issues, Legislative History, Mexico, Obtain or Retain Business, Permits / Licenses / Customs / Tax, U.S. v. Kay, Wal-Mart

In December 2011, Wal-Mart made the following generic disclosure in a 10-K filing.

“During fiscal 2012, the Company began conducting a voluntary internal review of its policies, procedures and internal controls pertaining to its global anti-corruption compliance program. As a result of information obtained during that review and from other sources, the Company has begun an internal investigation into whether certain matters, including permitting, licensing and inspections, were in compliance with the U.S. Foreign Corrupt Practices Act. The Company has engaged outside counsel and other advisors to assist in the review of these matters and has implemented, and is continuing to implement, appropriate remedial measures. The Company has voluntarily disclosed its internal investigation to the U.S. Department of Justice and the Securities and Exchange Commission. We cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, we do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flows.”

Today, the New York Times ran a major story (here) titled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle” that relates to Wal-Mart’s prior disclosure.  Was Wal-Mart’s disclosure to the DOJ, as stated in its December 10-K filing “voluntary”?  According to the Times article, “in December, after learning of The Times’s reporting in Mexico, Wal-Mart informed the Justice Department that it had begun an internal investigation into possible violations of the Foreign Corrupt Practices Act.”  (emphasis added).

The conduct at issue in the Times article relates to Wal-Mart’s largest foreign subsidiary, Wal-Mart de Mexico (“Wal-Mart Mexico), and suggests that Wal-Mart Mexico “orchestrated a campaign of bribery to win market dominance” and that the entity “paid bribes to obtain permits in virtually every corner” of Mexico.

According to the article, in 2005, “Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark.”  According to the Times, Wal-Mart’s lead investigator, a former FBI agent, “recommended that Wal-Mart expand the investigation” but its own examination found that “Wal-Mart’s leaders shut it down.”  The article states that “in one meeting where the bribery case was discussed, H. Lee Scott Jr., then Wal-Mart’s chief executive, rebuked internal investigators for being overly aggressive.”

The Times examination included more than 15 hours of interviews with Sergio Cicero Zapata a former executive who resigned from Wal-Mart Mexico in 2004 after nearly a decade in the company’s real estate department.  The article states as follows.  “In the interviews, Mr. Cicero recounted how he had helped organize years of payoffs. He described personally dispatching two trusted outside lawyers to deliver envelopes of cash to government officials. They targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits — anyone with the power to thwart Wal-Mart’s growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders.”

Elsewhere, the Times article states as follows.  “The idea, [Cicero] said, was to build hundreds of new stores so fast that competitors would not have time to react. Bribes, he explained, accelerated growth. They got zoning maps changed. They made environmental objections vanish. Permits that typically took months to process magically materialized in days. ‘What we were buying was time,’ he said. ”  The article states that Cicero’s “allegations were all the more startling because he implicated himself” and “helped funnel bribes through trusted fixers, known as ‘gestores.'”

The times article contains several internal documents including Willkie Farr & Gallagher’s 2005 “investigative work plan” that called for tracing all payments to anyone who helped Wal-Mart Mexico obtain permits for the previous five years.  The Times article states as follows.  “In short, Willkie Farr recommended the kind of independent, spare-no-expense investigation major corporations routinely undertake when confronted with allegations of serious wrongdoing by top executives. Wal-Mart’s leaders rejected this approach. Instead, records show, they decided Wal-Mart’s lawyers would supervise a far more limited ‘preliminary inquiry’ by in-house investigators.”

According to the Times article, in 2006, Wal-Mart again considered a full investigation of the conduct in Mexico, but that in the end, the company largely delegated responsibility for the investigation to Wal-Mart Mexico.  The Times article quotes a person with knowledge of the thinking of Wal-Mart executives as follows.  “It’s a Mexican issue; it’s better to let it be a Mexican response.”

The Times article contains a detailed statement by Wal-Mart.  Among other things, the Wal-Mart statement notes that “many of the alleged activities in the New York Times article are more than six years old” and that “in a large global enterprise such as Walmart, sometimes issues arise despite our best efforts and intentions.”  The statement continues as follows. “When they do, we take them seriously and act quickly to understand what happened.  We take action and work to implement changes so the issue doesn’t happen again.  That’s what we’re doing today.”

See here for Wal-Mart’s video response to the New York Times article.

*****

The New York Times article paints a troubling picture for Wal-Mart that will likely occupy the company for years to come.  In addition to the Mexico conduct, the DOJ and SEC will surely be interested in the response (or lack thereof) by company executives in Arkansas as well as the results of Wal-Mart’s worldwide review of its operations.

The DOJ and SEC frequently bring FCPA enforcement actions premised on payments to obtain foreign licenses, permits and the like.  For instance see here (and embedded posts therein) for the numerous Panalpina related enforcement actions in 2010.  See here at pages 972-975  for a listing of such cases 2007-2009.

This despite the following relevant history.

The FCPA’s original definition of “foreign official” was as follows. “… any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or any person acting in an official capacity for or on behalf of such government or department, agency or instrumentality. Such terms do not include any employee of a foreign government or any department, agency, or instrumentality thereof whose duties are essentially ministerial or clerical.”

This last sentence was the FCPA’s original (albeit indirect) facilitating payment or grease exception. The relevant House Report states in pertinent part as follows: “… a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must be performed in any event.”

When Congress amended the FCPA in 1988 it, among other things, amended the definition of foreign official by removing this indirect facilitating payment exception from the “foreign official” definition by creating a stand-alone facilitating payment exception currently found in the statute.

The relevant House Report indicates that Congress did not seek to disturb Congress’s original intent. “The policy adopted by Congress in 1977 remains valid, in terms of both U.S. law enforcement and foreign relations considerations. Any prohibition under U.S. law against this type of petty corruption would be exceedingly difficult to enforce, not only by U.S. prosecutors but by company officials themselves. Thus while such payments should not be condoned, they may appropriately be excluded from the reach of the FCPA. U.S. enforcement resources should be devoted to activities have much greater impact on foreign policy.”

Also relevant is the holding of U.S. v. Kay, the only appellate court decision to directly address payments outside the context of directly securing a foreign government contract.  In Kay, the 5th Circuit said that such payments “could” violate the FCPA, but that “there are bound to be circumstances” in which such payments merely increase the profitability of an existing profitable company and thus, presumably does not assist the payer in obtaining or retaining business.  The court specifically stated as follows.  “If the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

Checking In On The Carson Case

By on April 19, 2012 in Carson, David Edmonds, FCPA Trials, Foreign Official, Internal Investigation Issues, Paul Cosgrove, Poland, Taiwan

In April 2009, Stuart and Hong Carson (husband and wife) were criminally charged, along with other defendants who were also former employees of Control Components Inc. (CCI), in a criminal indictment (here) for engaging in “a conspiracy to secure contracts by paying bribes to officials of foreign state-owned companies as well as officers and employees of foreign and domestic private companies.”

The indictment alleged as follows.

“Company A’s state-owned customers included, but were not limited to, Jiangsu Nuclear Power Corporation (“JNPC”)  (China), Guohua Electric Power (China), China Petroleum Materials and Equipment Corporation (“CPMEC”), PetroChina, Dongfang  Electric Corporation (China), China National Offshore Oil Corporation (“CNOOC”), Korea Hydro and Nuclear Power (“KHNP”),  Petronas (Malaysia), and National Petroleum Construction Company (“NPCC”) (United Arab Emirates).  Each of these state-owned entities was a department, agency, and instrumentality of a  foreign government, within the meaning of the FCPA. The officers  and employees of these entities, including the Vice-Presidents, Engineering Managers, General Managers, Procurement Managers, and Purchasing Officers, were “foreign officials” within the meaning of the FCPA.”

As noted in the DOJ release (here), Stuart Carson was charged with one count of conspiracy to violate the FCPA and the Travel Act, and two counts of violating the FCPA.  Hong Carson was charged with one count of conspiracy to violate the FCPA and the Travel Act, five counts of violating the FCPA, and one count of destruction of records in connection with a matter within the jurisdiction of a department or agency of the United States.  This latter charge was ultimately dismissed by the DOJ.  As stated in the DOJ release, “in the period from 2003 through 2007, the defendants caused the valve company to pay approximately $4.9 million in bribes, in violation of the Foreign Corrupt Practices Act (FCPA), to officials of foreign state-owned companies …”.

Shortly thereafter, Control Components Inc. resolved an FCPA enforcement action based on the same core set of conduct alleged in the above indictment.  (See here for the prior post).  I noted, then, as I had since launching this website in July 2009, that DOJ’s position that employees of state-owned companies, regardless of position, are “foreign officials” under the FCPA is an unchallenged and untested legal theory – and one I believe is ripe for challenge.

In February 2011 (as noted in this prior post), for the first time in FCPA history, a federal court judge, with the benefit of a detailed and complete overview of the FCPA’s extensive legislative history on the “foreign official” element, was asked to rule on the DOJ’s interpretation that employees of alleged state-owned or state-controlled enterprises are “foreign officials” under the FCPA.  My declaration on the FCPA’s legislative history relevant to “foreign official” (here) was used in the “foreign official” motion to dismiss.

In May 2011 (as noted in this prior post), Judge James Selna denied the “foreign official” motion to dismiss and concluded that “the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.”  The “foreign official” issue thus moved to the jury instructions (as noted in this prior post).

In February 2012 (as noted in this prior post), Judge Selna issued certain jury instructions.  Not surprisingly, Judge Selna carried forward his previous “instrumentality” analysis into the “instrumentality” jury instruction.  Yet, in a significant development in terms of the future of the case, Judge Selna issued an instruction titled “knowledge of status of foreign official.”  In pertinent part, the instruction stated as follows.

[…..]

“(4) The defendant offered, paid, promised to pay, or authorized the payment of money, or offered, gave, promised to give, or authorized the giving of anything of value to a foreign official;

(5) The payment or gift at issue in element 4 was to (a) a person the defendant knew or believed was a foreign official or (b) any person and the defendant knew that all or a portion of such money or thing of value would be offered, given, or promised (directly or indirectly) to a person the defendant knew or believed to be a foreign official. Belief that an individual was a foreign official does not satisfy this element if the individual was not in fact a foreign official.”

In his order, Judge Selna stated as follows.

“The Government proposes to add the following paragraph to element 5:”

The government need not prove that the defendant knew the legal definition of “foreign official” under the FCPA or knew that the intended recipient of the payment or gift fell within the legal definition. The defendant need not know in what specific official capacity the intended recipient was acting, but the defendant must have known or believed that the intended recipient had authority to act in a certain manner as specified in element 6.”

The Court does not believe that this language is necessary, and it is potentially confusing.”

Earlier this week, the DOJ announced (here) that Stuart Carson and Hong Carson “each pleaded guilty … before U.S. District Judge James V. Selna in Santa Ana, Calif., to separate one-count superseding informations charging them with making a corrupt payment to a foreign government official in violation of the FCPA.”

Unlike the original indictment, the four page superseding information as to Stuart Carson (here) focuses solely on Turow Power Plant in Poland and states as follows.  “Turow was a department, agency, and instrumentality of a foreign government, within the meaning of the FCPA, […].  The officers and employees of Turow were “foreign officials” within the meaning of the FCPA.”  The superseding information states that on March 8, 2000, Stuart Carson “corruptly caused an e-mail to be sent authorizing the payment of approximately $16,000 to officials of Turow for the purpose of securing Turow’s business.”

Unlike the original indictment, the four page superseding information as to Hong Carson (here) focuses solely on Kuosheng Nuclear Power Plant in Taiwan and states as follows.  “Kuoshen was a department, agency, and instrumentality of a foreign government, within the meaning of the FCPA, […].  The officers and employees of Kuosheng were “foreign officials” within the meaning of the FCPA.  The superseding information states that on August 14, 2002, Hong Carson “corruptly caused an e-mail to be sent authorizing the payment of $40,000 to officials of Kuosheng for the purposes of securing Kuosheng’s business.”

As noted in the DOJ’s release, “at sentencing (Oct. 15, 2012), Stuart Carson, 73, faces up to 10 months in prison.  Rose Carson, 48, faces a sentence of three years probation, which may include up to six months of home confinement.”

The conclusions are yours to reach.

Paul Cosgrove and David Edmonds remain defendants in the case and their trial is scheduled for June.

*****

Previous posts here and here discussed the motion to suppress filed by Cosgrove and Edmonds (joined by Hong Carson) to suppress certain statements made by the individuals to CCI and its counsel (Steptoe & Johnson) on the basis that its counsel were de facto public actors and that CCI’s actions in compelling their statements were “fairly attributable to the government” and ought to be suppressed.

Earlier this week, Judge Selna, whose practice is to issue tentative rulings, tentatively ruled (here), in connection with a subpoena to Steptoe & Johnson, that production must be made as to the following.  “All communications exchanged between Steptoe, IMI, and/or CCI on the one hand, and the United States Department of Justice, on the other hand during the period August 10 through August 25 2007 which relate to interviews of CCI employees, taken or to be taken, for the purpose of investigating actual or suspected violations of the [FCPA and Travel Act].  This includes but is not limited to all e-mails exchanged between Patrick Norton (Steptoe & Johnson) and Mark Mendelsohn (former DOJ FCPA unit chief).  Judge Selna noted that such information “could yield admissible evidence under the defendants’ Government-actor theory of agreements or understanding between Steptoe that would render Steptoe lawyers agents of the Government, specifically the Department of Justice, at the time the interviews of defendants were conducted.”

Judge Selna also issued another tentative ruling (here) regarding various aspects of the subpoena to Steptoe & Johnson that will be of interest to FCPA practitioners.

Potpourri

By on April 9, 2012 in Carson, Compliance Defense, FCPA Reform, FCPA Sentences, FCPA Trials, Fernando Maya Basurto, Internal Investigation Issues, Permits / Licenses / Customs / Tax

“Can Someone Please Turn On the Lights”

Former U.S. Attorney General Michael Mukasey (here – currently at Debevoise & Plimpton and active in the FCPA reform movement on behalf of the Chamber of Commerce) and James Dunlop (here – Jones Day) recently published “Can Someone Please Turn On the Lights?  Bringing Transparency to the Foreign Corrupt Practices Act” (here).  Published in Engage, a publication of the Federalist Society, the article asserts as follows.

” … [The] unobjectionable vision [of the FCPA] has virtually disappeared in a miasma of aggressive prosecutions by the Justice Department … The FCPA is almost never litigated in court. Public companies are the typical FCPA target, and such defendants are rarely positioned to litigate criminal charges, or even risk indictment, given (among other things) the substantial risk of federal contract debarment in many industries. The same is often true for individuals, most of whom face substantial prison time if convicted and who are thus unwilling to hang their hopes on uncertain interpretive arguments. As a result, the FCPA has had almost no judicial oversight, with the result that corporations trying to comply with its mandates find they are fighting corruption in the dark, their quest for standards confined to making mitigation arguments in prosecutors’ offices. This has enabled the FCPA’s enforcers, the Justice Department, and the Securities and Exchange Commission, to ‘win’ most FCPA cases through plea bargains or settlements, in which regulators set the terms, and into which regulators import their capacious constructions of the FCPA. This regulatory latitude has, in turn, transformed the FCPA into a catch-all for illicit conduct abroad, no matter how removed the target of the enforcement action is from the underlying offense. As Professor Mike Koehler has put it, ‘the FCPA means what the enforcement agencies say it means.'”

The article next states that “because the FCPA will never be heavily litigated—thus depriving the courts of the opportunity to clarify its murky text—Congress must speak clearly about what conduct does and does not violate the FCPA.”  The article then largely tracks the reform proposals originally set forth in the Chamber sponsored white paper “Restoring Balance” (here).

Regardless of your views on FCPA reform, the Mukasey, Dunlop article is well written, extensively footnoted, and should find a place on your reading stack.

Checking in on the Carson Case

This previous post highlighted the Carson defendants recent motion to suppress (here) and motion to dismiss (here).

In substance, the motion to suppress argued that “from the outset of [Control Component Inc’s] CCI’s internal investigation in August 2007, CCI, through its counsel Steptoe & Johnson LLP (“Steptoe”), worked hand-in-hand with DOJ to investigate the matters at issue in this case.”  The motion further argued as follows.  “The DOJ and CCI essentially agreed to a private information-sharing arrangement between them. With this agreement in place, CCI selectively disclosed only information CCI believed inculpated Defendants and DOJ did not seek additional information.”  According to the motion, “the collaborative nature of DOJ’s and CCI’s relationship provided both parties benefits, to the detriment of Defendants …”.

Last week the DOJ filed (here) its opposition brief.  In summary, the DOJ asserts as follows.  “Only state actors can violate a defendant’s Fifth Amendment rights, and the evidence shows that the Company’s actions were not the result of any pressure or influence from the government sufficient to convert the Company’s lawyers to state actors.”

The government submitted in camera the notes of Mark Mendelsohn, then Deputy Chief of the DOJ’s Fraud Section, reflecting his summary of the Company’s voluntary disclosure and many of the factual issues in dispute concern e-mails between Steptoe & Johnson and Mendelsohn.  As to these e-mails, the DOJ states as follows.  “These e-mails show no nexus between the Company and the government.  Instead, they show a company in cooperative mode informing the government of what is transpiring in its internal investigation.  [….] At no time did the government direct the actions of Steptoe/CCI.  The government did not instruct the company who to interview or what questions to ask.  In fact, the government provided no direction or instruction as to the conduct of the interviews.”

Citing caselaw that purports to show that a company’s efforts to cooperate with the government do not transform it into an arm of the state, the DOJ states that a company’s voluntary disclosure coupled with DOJ policy regarding a company’s cooperative efforts does not equate to state action and that finding state action “on these facts alone would be unprecedented and unwarranted, the effect of which would be to turn the cooperating company into a government agent in every case.  There is no precedent for such an outcome.”

The DOJ also filed last week (here) its opposition to the motion to dismiss which mostly focused on due process / discovery issues.

Common Ground

Recently, Ann Hollingshead, writing on Global Financial Integrity’s (GFI) blog (here), made a spot-on observation regarding the type of “petty corruption” (or what I will call “harassment bribery”) common throughout the world.  Hollingshead stated as follows.

“But this type of corruption is pervasive and deeply entrenched in the culture of many nations. It makes life difficult for citizens trying to live their lives and carry out what should be ordinary tasks. And in many countries—like India for example—where paying a bribe is illegal, the corrupt official forces everyday citizens to choose between completing your transaction and complying with the law. It is in this way that systematic corruption creates both a power imbalance and a forced cooperative between those demanding the bribe and those paying it.” (emphasis added).

I agree and the same is precisely the point I argue in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here) as to a specific reason, among others, warranting an FCPA compliance defense.  Like Hollingshead, I too focus on India and note as follows.  “Recent FCPA enforcement actions concerning business conduct in India demonstrate that harassment bribery is common and that companies operating in India face – just as locals face – difficult conditions simply to get things done.”  I further note that “companies seeking to do business in many foreign countries are often funneled into an arbitrary world of low-paying civil servants who frequently supplement their meager salaries through bribe payments condoned in the host country.”

It is encouraging to see that proponents of an FCPA compliance defense and opponents on an FCPA compliance defense seem to at least agree on the business conditions present in many foreign markets giving rise to discussion of an FCPA compliance defense.

Hollinghead’s comments on GFI’s blog would seem drastically different from GFI’s previous statements concerning the general issue.  Previously, in connection with the June 2011 House FCPA hearing, GFI (and others) release a statement (here) that stated as follows.  “If a company is found to be in violation of the FCPA, then the existence of a company’s compliance program must not have prevented the acts of bribery. So why should the existence of their compliance program be a defense to the charge of bribery?”

Basurto Sentenced to Time Served

As detailed in this prior post, Fernando Maya Basurto was charged along with John Joseph O’Shea.  Unlike O’Shea, who decided to put the DOJ to its burden of proof – and when he did he prevailed (see here), Basurto (the principal of the Mexican company that performed work for ABB’s business unit on its contracts with CFE) pleaded guilty.

The DOJ release (here) stated as follows.  “Basurto pleaded guilty …  to a one-count information charging him for his role in the conspiracy.  In his plea, Basurto admitted that while he acted as a sales representative for the Texas business unit, he conspired with others to make corrupt payments to CFE officials, helped launder the bribe monies, and engaged in a cover up to obstruct the investigations of the Department of Justice and the SEC.  Basurto also admitted that he submitted false invoices and helped fabricate correspondence in contemplation of federal investigations into the bribery.”

As part of his plea agreement, Basurto agreed to cooperate with the DOJ in its prosecution of O’Shea and Basurto was a key DOJ  witness at O’Shea’s trial.  However, the presiding judge, Judge Lynn Hughes (S.D. Tex.), stated, in dismissing the FCPA charges against O’Shea, that Basurto knew ” almost nothing” and that his answers “were abstract and vague, generally relating to gossip.”

Last week, Hughes granted the DOJ’s request and sentenced Basurto to time served.  As noted by Christopher Matthews (here – Wall Street Journal Corruption Currents), Basurto was arrested in April 2009 and was released on bail in July 2011, according to court records.

Powered by WordPress. Designed by WooThemes