Bridgestone Corporation Resolves FCPA (and Antitrust) Enforcement Action
The DOJ announced yesterday (here) that “Bridgestone Corporation [a Japanese company that is the world’s largest manufacturer of tires and rubber products] has agreed to plead guilty and to pay a $28 million criminal fine for its role in conspiracies to rig bids and to make corrupt payments to foreign government officials in Latin America related to the sale of marine hose and other industrial products manufactured by the company.”
Part conspiracy to violate the Sherman Act and part conspiracy to violate the FCPA, the FCPA portion of the criminal information (see here) alleges that Bridgestone conspired with others to “obtain and retain for Bridgestone’s IEPD [International Engineered Products Department] business million of dollars of sales of marine hose and other industrial products by making corrupt payments to foreign government officials in Latin America and elsewhere.” Among other things, the DOJ alleged that Bridgestone: (i) “contracted with local sales agents in many of the Latin American countries where Bridgestone sought IEPD sales;” (ii) developed relationships with employees of the state-owned entities [PEMEX in Mexico is specifically mentioned] with which Bridgestone sought to do business;” (iii) “negotiated with employees of state-owned entities who were ‘foreign officials’ under the FCPA, in Mexico and other Lartin American countries, to make corrupt payments to those foreign officials to secure business for Bridgestone and BIPA [Bridgestone Industrial Products of America Inc. – Bridgestone’s U.S. subsidiary];” (iv) “approved the making of corrupt payments to the foreign officials through the local sales agents to secure business for Bridgestone and BIPA;” (v) paid local sales agents commissions within which BIPA included corrupt payments to be paid to the foreign officials; (vi) “coordinated these corrupt payments in Latin America through Bridgestone’s agents in the United States located in BIPA’s offices, including in Houston, Texas; and (vii) “took steps to conceal these payments, including, in some instances writing ‘Read and Destroy’ on facsimiles that contained information related to the corrupt payments and, in other instances using verbal communication rather than written communication to avoid creating written record.”
As to jurisdiction against Bridgestone, the DOJ asserts 78dd-3 and merely alleges that e-mails or faxes were sent to or from Japan to the U.S. in connection with bribery scheme. Interestingly, in the Africa Sting case, Judge Leon – in the first judicial test of 78dd-3 jurisdiction – seemed to reject the notion that such conduct, in and of itself, satisfied 78dd-3’s “while in the territory of the U.S.” requirement. See here for the prior post.
According to this filing, it would appear that approximately 80% of the $28 million fine is for the FCPA conduct. The guidelines range for the antitrust conduct was $6.7 million – $13.4 million. The guidelines range for the FCPA conduct was $40 million – $80 million.
In other respects, the DOJ release states as follows. “Under the plea agreement, the department recognized Bridgestone’s cooperation with the investigations, including conducting a worldwide internal investigation, voluntarily making employees available for interviews, and collecting, analyzing and providing to the department voluminous evidence and information. In addition, the plea agreement acknowledges Bridgestone’s extensive remediation, including restructuring the relevant part of its business, terminating many of its third-party agents and taking remedial actions with respect to employees responsible for many of the corrupt payments. Under the terms of the plea agreement, Bridgestone has committed to continuing to enhance its compliance program and internal controls. As a result of these mitigating factors, the department agreed to recommend a substantially reduced fine.”
In a press release (here), Bridgestone [BSJ] noted as follows. “Since May 2007, the DOJ has been investigating BSJ’s involvement in international cartel activities relating to the sale of marine hose. The DOJ has also investigated improper payments to government officials through local sales agents focusing primarily on Latin America in connection with certain industrial products. BSJ has cooperated fully in this matter. The DOJ has agreed that BSJ’s cooperation has been ‘extraordinary’. The DOJ has also acknowledged that BSJ has engaged in extensive remediation including dismantling the International Engineered Products Department, closing its Houston office of Bridgestone Industrial Products of America, Inc., terminating many of its third party agents, and taking remedial actions with respect to its employees. BSJ has also decided to withdraw from the marine hose business.” The release further notes that the $28 million fine is a “significant reduction from the applicable sentencing guidelines due to BSJ’s cooperation and remediation efforts.”
Ordinarily, extraordinary cooperation, remediation, etc. allow a company to settle an FCPA enforcement action via a non-prosecution or deferred prosecution agreement. Yet, the two-crime nature of the Bridgestone enforcement action may have prompted the DOJ to insist on a plea agreement to actual criminal charges.
As noted in the DOJ release, in 2008 Misao Hioki, the former general manager of Bridgestone’s international engineered products department, pleaded guilty to antitrust and FCPA conspiracy charges. See here for that prior enforcement action.
Since April, Japanese companies have contributed approximately $248 million to the U.S. Treasury for violating the FCPA (recognizing that the Bridgestone action also contains an antitrust component). See here for the prior JGC Corporation enforcement action. Another Japanese company, Sojitz Corporation, is also reportedly the subject of an FCPA investigation in relation to conduct in Bahrain. See here for the prior post.
You ask, doesn’t Japan have its own “FCPA-like” law? Yes, it does; however there is no criminal liability for corporations under the law. To learn more see here.
Finally, the FCPA Blog reports (here) that Bridgestone has ADRs traded in the U.S. over the counter in the pink sheets. In the past, the SEC has asserted FCPA books and records and internal controls jurisdiction over a company based on such a listing. Given that DOJ and SEC enforcement actions are typically announced on the same day, and given nothing was announced yesterday by the SEC, it is further interesting that the SEC has apparently chosen to sit out the Bridgestone matter.
Globalized Corporate Prosecutions
Brandon Garrett (Professor of Law at the University of Virginia School of Law – here) has released a preliminary draft of an article scheduled to be published in the Virginia Law Review in December. The article (here) is titled, “Globalized Corporate Prosecutions” and the abstract is as follows.
“In the past, domestic prosecutions of foreign corporations were not noteworthy. This has changed dramatically. Federal prosecutors now advertise a muscular approach targeting major foreign firms and even entire industries. High-profile prosecutions of foreign firms have shaken the international business community. Not only is the approach federal prosecutors have taken novel, but corporate criminal liability is itself a form of American Exceptionalism, and few other countries hold corporations broadly criminally accountable. To study U.S. prosecutions of foreign firms, I assembled a database of publicly reported corporate guilty plea agreements from the past decade. I analyzed U.S. Sentencing Commission data archives on federal corporate prosecutions and also data concerning federal deferred and non-prosecution agreements with corporations. Not only are large foreign firms prosecuted with some frequency, but they typically plead guilty and are convicted. In this Article, I develop how foreign corporate convictions have become common in distinct substantive criminal areas, but the trends and types of foreign corporate prosecutions share important features in common. The prosecutions are concentrated in crimes prosecuted by Main Justice, and international treaties and cooperation agreements have facilitated extraterritorial prosecutions. Larger and public foreign firms are prosecuted, and the typical resolution involves not only higher than average fines, but also a guilty plea and not pre-indictment leniency. I argue that due to their new prominence, we should consider foreign corporation prosecutions as a group so that we can better evaluate and define the emerging prosecution approach.”
While not specific to the FCPA, Garrett’s data demonstrates that FCPA enforcement constitutes a large percentage of enforcement actions against foreign companies. (To learn more about recent FCPA enforcement actions against foreign companies visit the Foreign Issuer tab under the Search feature of this site). As previously highlighted on these pages (see here and here for instance), many of these enforcement actions are based on broad and novel jurisdictional theories. Accordingly, Garrett’s general observation (“foreign corporate prosecutions raise unexplored issues regarding scope of prosecutorial discretion, jurisdiction, and judicial review”) is particularly pertinent to FCPA enforcement actions against foreign companies.
FCPA enforcement actions against foreign companies are not expected to wane any time soon. If anything, they are likely to increase and I predict the increase will slowly shift away from Europe-based companies to China-based companies as more list on U.S. exchanges and otherwise do business outside of China’s borders – including in several corruption prone regions.
Garret’s existing database of NPAs and DPAs (here) is already a valuable resource and his new corporate plea database is expected to be as well.
Mission Creep At The SEC?
Today’s post is from Bruce W. Bean (Professor and Director, LLM Program at Michigan State University College of Law – here).
*****
Last week FCPA Professor had a post (see here) describing the SEC’s internal search for the new Head of the Division of Enforcement’s FCPA Unit.
As previously reported (see here), Cheryl Scarboro, Head of the Commission’s FCPA Unit, will shortly join the Washington, D.C. office of Simpson Thacher.
The internal SEC marketing materials for this position state that this “Unit seeks to expand the Commission’s global reach in this area by executing targeted sweeps and sector-wide investigations, identifying systemic practices that give rise to potential FCPA violations and aggressively enforcing anti-bribery statutes.”
“[E]xpand the Commission’s global reach?” We do not find this concept in the FCPA. Nor is it in the original Securities Exchange Act that established the SEC. Has the Commission really run out of legitimate domestic prosecution targets? Does the Commission actually believe that, having long ignored stock manipulation by Wall Street traders (who can afford to mount a vigorous defense), it should declare victory in the domestic equities markets, shout “Mission Accomplished” and move on to police the rest of the world?
The most revealing aspect of this internal job posting for the new Head of the FCPA Enforcement Unit is this sentence, which encapsulates the SEC’s jurisdictional philosophy. “The Unit selects cases that present unique legal, evidentiary and policy challenges and attempts to develop case law and legal precedent that will have the greatest deterrent impact on conduct that violates the FCPA.”
Certainly “unique legal, evidentiary and policy challenges” are presented each time we have the Commission stretch and distort the language of the FCPA as it “attempts to develop case law.” For example, there is no FCPA language supporting the determination that millions of Chinese employees at State-Owned Enterprises are “foreign officials.” Similarly, we search in vain for the statutory basis for FCPA liability for a foreign company whose foreign subsidiary committed an act which the prosecutor claims violates the FCPA.
This newly developed FCPA “case law,” of course, is largely created by the enforcement attorneys. (See here for a prior post on “prosecutorial common law”). It is seldom fully litigated before the Judicial Branch. After all, few defendants can afford to litigate against the Government, and those that could most often do not wish to risk “debarment” from doing further business with the Government until proven innocent.
FCPA enforcement has come to mean, “Let’s see just how far we can push the inherent ambiguities in the statute.” When that rare defendant does stand up and fight as in U.S. v. Giffen, we see a multi-year, multi-million dollar legal defense during which a Federal Court ultimately did not endorse the prosecutor’s attempt to “develop new case law.”
Unquestionably, there is marvelous deterrent value when the SEC makes clear that it aggressively pursues FCPA violators. Prosecutors also find good value in high profile prosecutions, since this accelerates their passage through the SEC’s revolving door to much more lucrative private practice.
A closing note of warning. As outrageous as it may seem, the SEC’s jurisdictional and enforcement philosophy is comparatively good news. On Friday, July 1, the former Head of the Unit, Cheryl Scarboro, is likely to start at Simpson Thacher. That is also the date the U.K. Bribery Act comes into force. The Bribery Act actually does purport to give British prosecutors statutory authority to pursue bribery anywhere on the planet Earth. Stay tuned!
Significant dd-3 Development in Africa Sting Case
When listing reasons why FCPA enforcement has increased, the 78dd-3 prong of the FCPA’s anti-bribery provisions should be on the list.
The FCPA, since its inception in 1977, always applied to “issuers” and “domestic concerns”, but the 1998 amendments added a third prong providing jurisdiction as to “persons other than issuers or domestic concerns.”
As to this class of persons, the FCPA provides the following jurisdictional requirement: “while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value …”. (emphasis added).
Several recent FCPA enforcement actions have been based on the dd-3 prong of the statute including the actions against the Daimler subsidiaries (see here, here, and here); SSI International Far East (see here); and others.
In the Daimler actions, the jurisdictional statements in the charging documents are as follows. “wire transfers … sent from Daimler accounts in Germany to financial institutions in the United States and elsewhere, via international and interstate wires, in furtherance of corrupt payments to Russian government officials;” “payments to third party agents, including shell companies established in the United States knowing that such payments would be passed on in whole or in part to Russian government officials;” ” “wire transfers … sent from Daimler accounts in Germany to financial institutions in the United States and elsewhere, via international and interstate wires, in furtherance of corrupt payments to Chinese government officials;” and “enter[ing] into sham consulting contracts with shell companies incorporated in Delaware and Wyoming for the purpose of making improper payments to Croatian government officials.”
In SSI, the jurisdictional statement in the charging document is as follows. SSI ” transmitted requests to the United States for approval and wire transfer of funds for payment to managers of Schnitzer Steel’s customers in South Korea and China in connection with sales of scrap metal to those customers. Accordingly, defendant SSI acted within the territorial jurisdiction of the United States.”
In my recent Q&A with Homer Moyer (here) he stated as follow: “To be sure, in enforcing the FCPA, the government tries to overreach from time to time — exercising anti-bribery jurisdiction over foreign subsidiaries and aggressive applications of dd-3 jurisdictional on the grounds that some step in the process took place “in the territory of the United States” come to mind as occasional examples. When enforcement agencies overreach, they should be challenged.”
Yet, as with most things FCPA related, these aggressive jurisdictional theories have generally escaped judicial scrutiny.
Until now.
In what is believed to be the first judicial ruling on the jurisdictional prong of the dd-3 prong of the FCPA, earlier this week, Judge Richard Leon (presiding judge in the Africa Sting cases) granted defendant Pankesh Patel’s Rule 29 acquittal motion at the end of the DOJ’s as to an FCPA substantive charge premised on his sending a DHL package – containing a purchase agreement in furtherance of the alleged corrupt scheme – from the U.K. to the U.S.
Pankesh Patel is among the first group of four defendants currently on trial and he is described in the indictment as follows. “[A] citizen of the United Kingdom and […] a “person” other than an issuer or a domestic concern as that term was defined in the FCPA. 15 U.S.C. § 78dd-3(f)(1). Patel was the Managing Director of Company A, a United Kingdom company that acted as a sales agent for companies in the law enforcement and military products industries. As a company that maintained its place of business in the United Kingdom, Company A was a “person” other than an issuer or domestic concern as that term was defined in the FCPA. 15 U.S.C. § 78dd-3(f)(1).”
Among the charges against Patel was Count 3 – that Patel violated the FCPA’s anti-bribery provisions by sending, on October 13, 2009, a DHL package from the U.K. to Washington D.C. “containing one original copy of the purchase agreements for the corrupt Phase Two deal.”
At the close of the DOJ’s case earlier this week, Patel’s attorney, Eric Bruce (Kobre & Kim LLP – see here) moved, as did the other defendants as to other charges, pursuant to Rule 29 for a judgement of acquittal.
Judge Leon did not request briefing as to the Rule 29 motions and his decision and reasoning was not reduced to writing – thus what follows are quotes from the hearing transcript.
As to Count 3, Bruce stated that the DOJ “charged Mr. Patel in Count 3 with something that cannot be a crime under U.S. law. And here’s what I mean by that. As we saw in the FCPA statute with which he’s charged, 78dd-3, because he’s a U.K. citizen, operating a U.K. company, he’s not a domestic concern under the statute, he can only be liable under the FCPA statute for conduct “while in the territory of the United States.” And that’s required by statute. That’s their sort of jurisdictional hook on him. And what they’ve done in Count 3, if you look at the language, if you go back to the indictment, Your Honor –.”
At this point, the following exchange occurred.
“Judge Leon: Sending it DHL?
Bruce: Yeah from London. So in Count 3 it says on the face of the indictment, DHL from the United Kingdom to Washington, D.C., containing one original copy of the purchase agreement for the corrupt phase 2 deal. So literally they’ve charged him with being in London and dropping a DHL package in the mail as a substantive FCPA violation, while the statute very clearly requires that he can only be liable for something while in the territory of the United States.”
Joey Lipton, on behalf of the DOJ, then stated as follow. “And under the FCPA, as long as he’s taking an act as someone who’s not a domestic concern, as Mr. Patel is a U.K. citizen, he falls under section 78dd-3, which Mr. Bruce said. He actually has to do less than a U.S. citizen really, because a U.S. citizen has to make use of the mails or interstate commerce. And Mr. Patel just has to take an act, any act, while he’s in the United States. Doesn’t have to be an illegal act, doesn’t have to be anything related to the deal going forward. He has to take any act in the United States, which he clearly does. First of all, he flies over from the U.K. to the United States, which we established through his travel records. And then he meets with the fictitious official and receives a purchase agreement. He then later takes that purchase agreement and sends it back. So the deal’s not done at that point, contrary to what Mr. Bruce said. But he’s already taken the act, he’s here in the United States, he sends it. With regard to Count 3 — and you don’t have to prove all of the elements of the offense while he’s in the United States. Doesn’t have to be counts or elements 1 through 6 of the FCPA while he actually travels here and does all that stuff. He just has to take an act while he’s in the United States. He did take an act. In Count 3 he then sends back the purchase agreement that he gets from the official, from Mahmadou, and he’s able — and that falls under the FCPA because he’s already taken an act here when he’s done that. So that independently can be its own act. It doesn’t have to be that each substantive count is an act while he’s in the United States, as long as he takes an act while he’s here. So his burden actually as a U.K. citizen is even less than what the other defendants have to do in terms of using the mail or traveling and the like.”
The following exchange then occurred between Lipton and Judge Leon.
“Judge Leon: Help me understand why it doesn’t have to be an act while in the territory of the United States for Count 3, whereas Count 2 [a substantive FCPA offense against Patel based on his attendance at a Washington D.C. meeting to discuss the allegedly corrupt deal], sounds like you admit that that’s the case in Count 2. In Count 3, I think your rationale is since he’s already taken one act within the United States, the subsequent act of mailing doesn’t have to be within the United States, right?
Lipton: Correct, Judge.
Judge Leon: All right. So what’s the rationale for that? Why doesn’t the second act have to be within the United States too? I’m not sure I understand that.
Lipton: Well, as long as he takes an act here, then we’re allowed to charge him with other acts, like a mailing or a travel that goes to the FCPA substantive offense. So it doesn’t have to be that each individual act is the one act while he’s in the United States that he’s taking. As long as he’s taking one act, he can have multiple substantive violations for other acts he’s taking as long as —
Judge Leon: Outside the United States?
Lipton: Outside the United States. Correct, Judge.
Judge Leon: Has the Supreme Court said that?
Lipton: Judge, no.
Judge Leon: Has the D.C. Circuit said that?
Lipton: No.
Judge Leon: How about the 2nd Circuit, where you used to prosecute?
Lipton: Judge, there’s not a lot of case law on the FCPA, as Your Honor I think is well aware.
Judge Leon: So is this a novel interpretation you want me to take?
Lipton: I don’t know if it’s a novel interpretation. I think it’s an interpretation that’s grounded in the law that’s out there.
Judge Leon: Is it grounded in the legislative record?
Lipton: We can go back and we can get Your Honor more particulars about the legislative history if Your Honor wants that.
Judge Leon: I would think the more cautious, conservative interpretation would be that each act has to be while in the territory of the United States, wouldn’t it?
Lipton: Well, Judge, if you read the statute, the way that I understand it and the way it’s been interpreted is that you just have to take an act. And if he’s traveling or if he’s mailing something from outside that comes into the United States, that that on its own would be sufficient. And I also believe Mr. Patel’s charged with an aiding and abetting theory as well, so, I haven’t fleshed that out, but there may be an argument to be made that even less has to be done on an aiding and abetting theory. Also, there’s a Pinkerton theory, which if he knows as a conspirator that acts are being taken by his codefendants or himself in furtherance of the conspiracy, then anything that’s reasonably foreseeable can also be an act, a substantive count. But, Your Honor, I can go back and we can get more details and particulars. Frankly, I don’t have the case law or the legislative history to the extent that that’s going to be helpful. That goes to that point.”
In reply, Bruce stated as follows. “I heard Mr. Lipton say that Mr. Patel only has to do an act in the United States, it doesn’t even have to be illegal. If that’s the government’s position, I’m happy to take that to the D.C. Circuit if there’s a conviction on these points. That is absurd, with all due respect to Mr. Lipton. The statute plainly requires, Your Honor, that while in the territory of the United States he has to corruptly make use of the mails or any means or instrumentality of interstate commerce or do any act in furtherance of an offer, payment, promise to pay or authorization. It’s clear as day.”
After a recess, Judge Leon dismissed Count 3 against Patel.
Judge Leon also dismissed Count 8 (a substantive FCPA violation charge) as to defendant Lee Allen Tolleson; and dismissed Count 10 (money laundering) as to all four defendants. In all other respects, Judge Leon denied the Rule 29 motion.
Judge Leon’s ruling is a significant FCPA development as many FCPA charges (as demonstrated by the above cases) are based on similar “novel” jurisdictional theories under the dd-3 prong of the FCPA.
Does DOJ Expect FCPA Counsel To Roll Over And Play Dead?
Remember those “issue spotting” exams in law school?
Well, here is one.
A Japanese company (without shares traded on a U.S. exchange) participated in a joint venture operating in Nigeria. The joint venture operated through three Portuguese special purpose corporations. The joint venture hired a U.K. citizen who, along with his Gibraltar corporation, allegedly paid bribes to Nigerian government officials. The U.S. Department of Justice starts an investigation as to your Japanese company client. Consistent with your duty to zealously advocate on behalf of your client, discuss likely legal defenses your client may raise to a U.S. enforcement action based on the described conduct?
Got the answer?
Your answer includes jurisdictional issues does it not?
In fact, a lawyer representing the Japanese company would likely fall short of his/her professional duties without raising a jurisdictional defense.
Why am I even talking about this?
Because of this troubling sentence in the recent JGC Corporation of Japan deferred prosecution agreement (here p. 3) – “after initially declining to cooperate with the Department based on jurisdictional arguments, JGC began to cooperate, and has agreed to continue to cooperate, with the Department in its ongoing investigation of the conduct of JGC and its present and former employees, agents, consultants, contractors, subcontractors, subsidiaries, and other relating to violations of the FCPA.”
The above sentence – save for the portion in italics – is standard fare in DOJ resolution agreements.
However, the portion in italics is troubling.
For starters, what does it mean to decline “to cooperate with the Department based on jurisdictional arguments?”
The DOJ’s Principles of Federal Prosecution of Business Organizations (“Principles”) (here) talk about the “Value of Cooperation” (at 9-28.700), but the discussion focuses on issues such as “identifying potentially relevant actors and locating relevant evidence, among other things, and in doing so expeditiously.” Further, 9-28.720 discusses cooperation as disclosing “relevant facts.”
However, nothing in the Principles suggest that raising legal arguments obviously implicated by the DOJ’s investigation is not cooperating.
Surely the DOJ carries a big stick and has juicy carrots at its disposal. Thus, cooperation – along the lines outlined in the Principles – may be warranted in certain cases.
However, is the message tucked in the JGC DPA that the DOJ now expects FCPA counsel to roll over and play dead and that the failure to do so will be adverse consequences for the client?
After all, JGC’s total culpability score under the U.S. Sentencing Guidelines (a score that impacts the ultimate fine amount) was only reduced by -1 whereas the other joint venture partners that previously resolved enforcement actions (Technip, Snamprogetti, and KBR) all received a “better” -2 reduction.