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Cobalt Experiences The Front Page Effect As Well

Wal-Mart’s stock is not alone in experiencing a wild ride based on recent front page news coverage of FCPA issues.  Last week, Cobalt International (a Houston based oil exploration and production company) experienced a wild ride as well.

On Friday, April 13th, Cobalt’s shares closed at $28.38.

On Sunday, April 15th, the Financial Times (“FT”) published two articles: “Spotlight Falls on Cobalt’s Angola Partner” and “Angola Officials Held Hidden Oil Stakes” that spooked investors the following day.  Never mind that, as in Wal-Mart’s case, Cobalt disclosed FCPA scrutiny weeks earlier – see here for the prior post.  (Point taken that market reaction to Wal-Mart – the stock was down an additional 3% yesterday, down approximately 8% this week – is likely not just based on Wal-Mart’s potential FCPA scrutiny, but Wal-Mart’s response (or lack thereof) to the payments since 2005 and the impact this could have for senior leadership at the company).

The FT articles document how in 2008 Cobalt was looking to obtain rights to drill for oil in Angolan waters.  According to the FT, an Angolan government stipulation was that Cobalt would have partner with Nazaki Oil & Gaz, described by the FT as “an obscure local company.”  According to the articles, FT confirmed that “three of the most powerful figures in the Angolan regime have held interests in Nazaki.”  The FT stated that these individuals “interests in Cobalt’s local partner could raise questions about compliance with U.S. anti-corruption laws, which make it a crime to pay or offer anything of value to foreign officials to win business.”  For its part, Cobalt stated in the articles that its extensive and ongoing due diligence “has not found any credible support for the central allegation that Angolan government officials, and specifically the officials identified … have any ownership in Nazaki” and that the company “has at all times complied fully with both U.S. and Angolan laws.”

Nevertheless, in mid-day trading on Monday, April 16th, the company’s stock plunged approximately 11% and closed at $26.35, down approximately 7% from its previous close.

After watching its stock dive based on the FT article, Cobalt issued a release (here) strongly refuting “any allegations of wrong doing and once again stood behind its principles of full compliance with all laws in all jurisdictions in which it operates.”  According to Cobalt’s release, “prior to publication of [the FT] articles, Cobalt went on the record asking for any documentation that the Financial Times could offer which was at  odds with its position. The Financial Times declined Cobalt’s repeated requests for supporting documentation. In fact, in the course of these communications, Cobalt informed the Financial Times of certain egregious, demonstrably false allegations that it provided to Cobalt.”  As noted in the release, “Cobalt began its investigation into its Angola business relationships in 2007. Cobalt has based its decisions and actions on the results of these  extensive investigations and will continue to maintain rigorous due diligence in all of its worldwide activities. Cobalt remains confident that it has not violated any US or Angolan Law and will vigorously defend its reputation and legal rights in this matter.”

On Tuesday April 17th, as if on cue, a plaintiff shareholder firm announced (here) that it is investigating “potential claims on behalf of purchasers of the securities of Cobalt International Energy Inc. concerning whether the company and certain of its officers and directors have violated federal securities laws.”  Other shareholder firms have joined in as well – see here.

Also on Tuesday April 17th, Morgan Stanley, in a morning equity summary, said that the “market is overreacting to worries of alleged” Cobalt violations and that Cobalt “has no risk of losing” its interest in the Angola blocks.  The company’s shares climbed approximately 4% and closed at $27.44.  Since then the company’s stock has generally trended downward, yesterday it closed at $26.41.

What to make of Cobalt’s potential FCPA exposure?

Time will tell of course, but the DOJ has previously brought FCPA enforcement actions where the thing of value given to the “foreign official” was provided in the context of a business relationship with a company owned or controlled by a “foreign official” or family members.

For instance, in both the Charles Jumet and John Warwick (these individuals were employed by Ports Engineering Consultants Corporation) charging documents (here and here) the DOJ generally alleged as follows.

“Government Official A was the Administrator of Panama’s National Maritime Ports Authority (APN), the Panamanian governmental entity responsible for operating and maintaining the lighthouses and buoys in the waterways near the Panama Canal.” “Government Official B” was at various times the Deputy Administrator or Administrator of APN.  “Government Official C was a very high-ranking executive official of the Republic of Panama.”

According to the charging documents, Government Official A owned a shell corporation, Soderville Corporation, which become a majority shareholder of Ports Engineering Consultants Corporation (PECC).  Government Official B’s relatives were corporate officers of Warmspell Holding Corporation, which became a shareholder of PECC.

The DOJ alleged a conspiracy “to pay money secretly to Panamanian government officials in return for awarding PECC contracts to maintain lighthouses and buoys along Panama’s waterways.”  According to the DOJ, part of the conspiracy was that Government Official A and Government Official B received “corrupt payments” in the form of purported ‘dividends’ and that Government Official C received “bearer” shares from PECC as part of the conspiracy.

Doing business with a “foreign official” of course is not per se illegal under the FCPA and several FCPA Opinion Procedure Releases discuss the issue – see here, here and here for instance.

Yet one of the red flags when engaging foreign partners is when a company is told by the foreign government who to do business with.  In such a situation, a company needs to ask itself – why are we being told to do business with this company?  A company needs to do sufficient pre-engagement due diligence, as Cobalt claims it did in Angola, to understand who the owners are to be satisfied that it is not being told to do business with the particular entity simply as an indirect way of enriching foreign officials.

Additional Lighthouses and Buoys Sentence

Last Friday, the DOJ announced (see here) that John Warwick was sentenced to approximately three years in federal prison “for his role in a conspiracy to pay bribes to former Panamanian government officials to secure maritime contracts.” U.S. District Court Judge Henry Hudson also sentenced Warwick to two years of supervised release following his prison term and ordered Warwick to forfeit approximately $330,000 in proceeds from his crime.

In February, Warwick pleaded guilty to a one-count indictment charging him with conspiring to make corrupt payments to Panamanian officials for the purpose of securing business for Ports Engineering Consultants Corporation in violation of the Foreign Corrupt Practices Act. The business involved contracts to maintain lighthouses and buoys along Panama’s waterways.

This is the same conduct at issue in the prior plea and sentencing of Charles Edward Jumet. (See here for additional posts on this matter). In April, Jumet was sentenced to approximately 7.25 years in federal prison after pleading guilty to two charges – conspiracy to violate the FCPA and making false statements to federal agents. (See here). Even though Jumet’s charges were equal part FCPA and equal part making false statements to federal agents, his sentence was described as the “longest prison term imposed against an individual for violating the FCPA.”

Given that Warwick was charged and pleaded guilty to the same conspiracy as Jumet, it suggests that the FCPA component of Jumet’s sentence was between 3-4 years.

Lighthouses and Buoys – Additional Plea

The DOJ announced yesterday (here) that John Warwick pleaded guilty to a one-count criminal indictment charging him with conspiracy to pay bribes to former Panamanian officials to obtain contracts to maintain lighthouses and buoys along Panama’s waterways.

For additional posts about this case, including the prior guilty plea of Warwick’s co-conspirator Charles Jumet (see here). Warwick and Jumet are both associated with Virginia-based Ports Engineering Consultants Corporation (PECC).

The indictments against both individuals are substantively similar and involve a rather complex and convoluted way of getting the “thing of value” to the “foreign official.” According to the indictments, Warwick and Jumet designated certain corporate entities as shareholders of PECC and allowed the “foreign officials” to receive dividend payments and bearer shares from these entities.

Lighthouses and Buoys – Part II

Earlier this week, the DOJ announced (see here) the indictment of John Warwick, the former President of Ports Engineering Consultants Corporation. Warwick is charged (see here) with conspiracy to pay bribes to former Panamanian officials to obtain contracts to maintain lighthouses and buoys along Panama’s waterways. The substance of the allegations against Warwick are substantively similar to the previous charges against Warwick’s co-conspirator Charles Jumet (see here for the prior post). As noted in that post, Jumet pleaded guilty.


I hate to be a Grinch this time of year, but why does DOJ continually use the term “foreign government official” in its charging documents when that term/element doesn’t even appear in the FCPA? (see para. 1 of the indictment). For more on the incorrect/inconsistent use of this key FCPA term see here.

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