What Will Happen To Lindsey Manufacturing Co.?
The common way for a company to resolve an FCPA enforcement action is via a non-prosecution or deferred prosecution agreement. If the conduct is egregious, yet the company is cooperating, the company will generally plead guilty via a criminal information.
A criminal indictment of a company is rare. According to my records, it has not happened since September 2008.
It happened yesterday.
As noted in this DOJ release, “Lindsey Manufacturing Company (here), an Azusa, Calif., company and two of its executives (Keith E. Lindsey, 65 and Steve Lee, 60) were indicted today for their alleged roles in a conspiracy to pay bribes to Mexican government officials at the Comisión Federal de Electricidad (CFE), a state-owned utility company …”. Lindsey Manufacturing Co., Lindsey, and Lee each were charged in an eight-count superseding indictment with conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and FCPA violations
Given the allegations in the recent Enrique Faustino Aguilar Noriega and Angela Maria Gomez Aguilar indictments (see here for the prior post) this is hardly a surprising development.
What is surprising is that Lindsey Manufacturing was criminally indicted. Previous media reports indicated that Lindsey Manufacturing was “cooperating with authorities and wasn’t aware that its contracts were being used for bribes” according Lindsey attorney Jan Handzlik (here). According to this report, “attorneys for Lindsey and Lee said their clients had no knowledge of improper payments.”
What will happen to Lindsey Manufacturing, a company that has previously secured U.S. Department of Energy contracts?
The conventional wisdom is this post-Arthur Anderson world is that NPAs and DPAs are necessary because a company will fail when it is criminally indicted.
The last company criminally indicted for violating the FCPA was Nexus Technologies Inc. (see here).
It does not exist today (see here).
ABB
Earlier this week the DOJ and SEC announced a wide ranging enforcement action against ABB Ltd. and its subsidiaries ABB Inc., and ABB Ltd. – Jordan.
Swiss-based ABB Ltd. (here) is a provider of power and automation technologies with American Depositary Shares publicly traded on the New York Stock Exchange.
This post summarizes the various aspects of the enforcement action in which ABB Ltd. and ABB Inc. agreed to pay a total of $58.3 million ($19 million in DOJ criminal penalties and $39.3 million in SEC disgorgement and civil penalties).
DOJ
ABB Ltd. Deferred Prosecution Agreement
As noted in this DOJ release, ABB Ltd. agreed to enter into a deferred prosecution agreement (DPA). ABB’s press release (here) states that the DPA “includes provisions related to the involvement of a subsidiary in Jordan in the Oil for Food Program” and that “in lieu of an external compliance monitor, the DOJ and SEC have agreed to allow ABB to report on its continuing compliance efforts and the results of the review of its internal processes for a three-year period going forward.”
In other words, the DPA appears limited to the conduct of ABB Ltd. – Jordan (summarized below) and not the conduct of ABB Inc. (summarized below).
[Note – to my knowledge the DPA has yet to be publicly released. Here is a request for DOJ readers of this blog. Under the DOJ’s “old” website, the charging documents were released and linked along with the press release. With the revamped website, the charging documents are nowhere to be found requiring interested persons to go to Pacer or other sources. The charging documents ultimately end up on the DOJ’s FCPA specific website, but in many cases it takes weeks. DOJ may want to consider the old system which provided real-time access to these important charging documents]
ABB Ltd. – Jordan Criminal Information
The information charges ABB Ltd. – Jordan (“ABB-Jordan”) with one count of conspiracy to commit wire fraud and to violate the FCPA’s books and records provisions.
According to the information (here), ABB-Jordan was a wholly-owned subsidiary of ABB Ltd. ABB-Jordan, through its 95% owned subsidiary ABB Near East Trading Ltd. (“ABB Near East”) provided equipment and services to electrical utilities, including control measurement and protection systems, transducers, and metering equipment.
The information charges that ABB Near East “had three principle customers under the United Nations Oil-for-Food Program (“OFFP”) … the General Company for Electricity Energy Production, the Baghdad Mayoralty, and State Company Baghdad Electricity Distribution all of which were regional companies of the Iraqi Electricity Commission, an Iraqi government agency” (collectively the “Iraqi Electricity Companies”).
The information charges that “from in or about April 2000 through in or about April 2004, ABB Near East, received eleven purchase orders for electrical equipment and services worth over $5.9 million with the Iraqi Electricity Companies, pursuant to the OFFP.” According to the information, “to obtain these purchase orders, ABB Near East caused over $300,000 in kickbacks to be paid to the government of Iraq” and that “in order to generate the funds to pay the kickbacks to the Iraqi government and conceal those payments, ABB Near East would inflate the price of its contracts with the Iraqi government by approximately 10% before submitting the contracts to the U.N. for approval.”
According to the information, the kickback payments were falsely characterized on ABB-Jordan’s or ABB Near East’s books and records which were “incorporated into the books and records of ABB Ltd. for purposes of preparing ABB Ltd’s year-end financial statements.”
According to the DOJ release, “ABB Ltd. admitted that [ABB-Jordan] agreed to pay kickback payments to the former Iraqi government” in connection with OFFP contracts and “agreed to pay a criminal penalty of $1.9 million.”
ABB Inc. Criminal Information
According to the information (here) ABB Inc. is an “indirect subsidiary” of ABB Ltd. incorporated under Delaware law. The information charges that ABB Inc. “conducted business, in part, through a business unit called ABB Network Management (“ABB NM”) that had its principal place of business in Sugar Land, Texas and was acquired by ABB Inc. in or around January 1999.”
According to the information, “ABB NM’s primary business was to provide products and services to electrical utilities for network management in power generation, transmission, and distribution.” The information charges that “many of ABB NM’s clients were foreign state-owned utilities” and that “ABB NM conducted business in a number of its foreign markets through sales representatives.”
The information largely centers on the conduct of John Joseph O’Shea and Fernando Maya Basurto and business with Comision Federal de Electricidad (“CFE”) – a Mexican electrical company. According to the information, O’Shea was the “General Manager of ABB NM” who “oversaw its operations both before and after its acquisition by ABB Inc.” and was “responsible for approving payments to sales representatives.” According to the information, Basurto was a “citizen of Mexico” who “performed work for ABB NM on its contracts with CFE.”
O’Shea was criminally charged in November 2009 (see here). Basurto has pleaded guilty (see here). For more, see this prior post.
For additional FCPA enforcements involving CFE see this recent post.
The information details an elaborate scheme that is summarized in the DOJ release as the payment of bribes “from 1997 to 2004 that totaled approximately $1.9 million” to various officials at CFE and that “in exchange for the bribe payments … ABB NM received contracts worth more than $81 million in revenue.”
As noted in the DOJ release, “ABB Inc. pleaded guilty to a criminal information charging it with one count of violating the anti-bribery provisions of the FCPA and one count of conspiracy to violating these provisions of the FCPA.” According to the release, the court “imposed a sentence that included a criminal fine of $17.1 million.”
The information specifically states that “ABB Inc. terminated O’Shea in November 2004 and thereafter conducted a thorough internal investigation of the improper payments. It voluntarily disclosed the conduct to the DOJ and the SEC in April 2005.”
SEC
The SEC’s civil complaint against ABB Ltd. (see here) picks up both the Iraq and Mexico conduct mentioned above and charges ABB Ltd. with violating the FCPA’s anti-bribery, books and records, and internal control provisions.
The complaint alleges in summary fashion as follows:
“From 1999 to 2004, ABB, through a U.S. subsidiary and six foreign-based subsidiaries, offered and paid bribes to government officials in Mexico to obtain and retain business with government owned power companies, and paid kickbacks to Iraq to obtain contracts under the United Nations Oil for Food Program. In all, ABB’s subsidiaries made at least $2.7 million in illicit payments in these schemes to obtain contracts that generated more than $100 million in revenues for ABB.”
The complaint describes numerous payments, including payments to “pay for the Mediteranean cruise vacation for two CFE officials and their wives” and “tuition for the son of a CFE official” at a “private military school in Wisconsin.”
As to the “Mexican bribery scheme”, the SEC alleges that “ABB, which failed to conduct any due diligence on the use or payments to [a Mexican agent] and other companies, improperly recorded the illicit payments on its books as payments for commission and services on the projects.”
As to the OFFP, the complaint alleges that “from approximately 2000 to 2004, ABB participated in the Oil for Food program through six of its subsidiaries” and that the “six subsidiaries developed various schemes to pay secret kickbacks to Iraq in order to obtain contracts. The kickbacks were characterized as after sales service fees but in reality they were nothing more than bribes paid to the Iraqi regime.” According to the SEC, “kickbacks of approximately $810,793 were paid in connection with the subsidiaries’ sales of goods on twenty-seven contracts with promises to pay additional kickbacks of $239,501 on three other contracts. The total revenues on the contracts were approximately $13,577,727 and profits were $3,801,367. ABB improperly disguised the [after sales service fees] on its books and records by mischaracterizing them as legitimate after sales services, consultation costs or commissions.”
Further the SEC alleged as follows:
“as evidenced by the extent and duration of the illicit payments to foreign officials, the large number of ABB subsidiaries involved in these bribery and kickback schemes, ABB’s knowledge from the prior Commission action of illicit payments by other ABB subsidiaries, the improper recording of millions of dollars of illicit payments in ABB’s books and records, ABB’s failure to detect these irregularities, and ABB’s failure to conduct sufficient due diligence on local agents and others, ABB failed to devise and maintain an effective system of internal controls to prevent or detect these anti-bribery and books and records violations.”
In an SEC release (see here) SEC officials stated: “as the sanctions in this case demonstrate, there are significant consequences for public companies that fail to implement strong compliance programs and prevent corrupt payments to government officials” and that “multi-national companies that make illicit payments through layers of subsidiaries will be held accountable.”
Without admitting or denying the SEC’s allegations, ABB Ltd. consented to the entry of a final judgment that permanently enjoins the company from future FCPA violations, orders the company to pay $17,141,474 in disgorgement, $5,662,788 in prejudgment interest, and a $16,510,000 penalty. According to the SEC release, “the order also requires the company to comply with certain undertakings regarding its FCPA compliance program.”
In a press release (here), ABB noted that it “initiated these matters in a voluntary disclosure to the DOJ and SEC beginning in 2005.” The company stated that it “cooperated fully with the DOJ and SEC and has put in place a global comprehensive compliance and integrity program the DOJ has said ‘may become a benchmark for the industry.'”
Laurence Urgenson (here) and others from Kirkland & Ellis LLP represent the ABB entities.
The 30% Commission, The Dream Seeker, The Ferrari Spyder, and Consulting Fees for Mom
According to its website (see here) Mexico’s Comision Federal de Electricidad (“CFE”) “is a decentralized government agency, duly incorporated and which controls its own assets.”
Does that make CFE’s Sub-Director of Generation and Director of Operations “foreign officials” under the FCPA?
According to the DOJ, apparently so, as it alleges in this recent indictment against Enrique Faustino Aguilar Noriega and Angela Maria Gomez Aguilar. See here for the DOJ release.
According to the indictment, “Comision Federal de Electricidad (‘CFE’) was an electric utility company owned by Mexico. During the time period relevant to this Indictment, CFE was responsibile for supplying electricity to all of Mexico othern than Mexico City. CFE contracted with Mexican and foreign companies for goods and services to help supply electricity services to its customers.”
“Company LM” according to the indictment, (a company identified as Lindsey Manufacturing in media reports – see here see here for more about Lindsey Manufacturing), is a “privately held company incorporated in California and headquartered in Azusa, California. According to the indictment, LM “manufactured emergency restoration systems and other equipment used by electrical utility companies” including “state-owned utilities, including CFE” “one of LM’s most significant customers.” According to the indictment, LM “conducted business in a number of foreign markets through sales representatives.”
According to the indictment, “Grupo Internacional De Asesores S.A. (‘Grupo’) was a company incorporated in Panama and headquartered in Mexico” with a “brokerage account in Houston, Texas at Global Financial Services, Inc.” The indictment alleges that “Grupo’s purported business was to provide sales representation services for companies like LM that had business with CFE” and that “Grupo was LM’s sales representative in Mexico and received a percentage of the revenue LM received from its contracts with CFE.” According to the indictment, Grupo was an “agent of a domestic concern” under the FCPA.
According to the indictment, Enrique Aguilar, a lawful permanent resident of the U.S. “was a Director of Grupo and was hired by LM to obtain contracts from CFE” and a “an agent of a domestic concern” under the FCPA.
According to the indictment, Angela Aguilar, a citizen of Mexico, “served as an Officer and a Director of Grupo” and “managed Grupo’s finances” and was “the sole signatory on Grupo’s Global Financial brokerage account.”
According to the indcitment, Enrique Aguilar, together with President KL (an individual identified as the President of LM), Vice President SL (an individual identified as the Vice President and Chief Financial Officer of LM), LM and others conspired to make improper payments to “foreign officials” to assist Aguilar, Grupo, President KL, Vice President SL, LM, and others in obtaining and retaining business in violation of the FCPA.
The indictment alleges that Aquilar offered to become LM’s “sales representative in Mexico in exchange for a thirty percent commission on all of the goods and services” LM sold to CFE and that President KL and Vice President SL “would agree to pay” Aquilar “a thirty percent commission into Grupo’s brokerage account at Global Financial, even though it was significantly higher than the commission LM paid to its previous sales representative in Mexico” knowing that Aquilar “had a close personal relationship with Official 1 and would use all or a portion of the thirty percent commission to pay Official 1 and others bribes in exchange for CFE awarding LM contracts.”
Among other things, the indictment alleges that: (i) Grupo’s Global Financial brokerage account was used to “pay the credit card bills for Official 1’s American Express credit card ‘in full every month, until further notice'”; (ii) Aquilar “aided Official 1 in purchasing an 82 foot yacht named the Dream Seeker for $1,800,010 …;” (iii) Aquilar caused wire transfers to Official 2’s female and male relatives for “payment for professional services advice” and Official 2’s mother and brother for a “consulting fee;” and (iv) Aquilar caused the “issuance of a check to Ferrari of Beverly Hills from Grupo’s Financial brokerage account for approximately $297,500 to purchase a 2005 Ferrari Spyder for Official 1.”
Who are Official 1 and 2?
According to the indictment:
“Official 1 was a Mexican citizen who held a senior level position at CFE. Official 1 became the Sub-Director of Generation for CFE in 2002 and the Director of Operations in 2007. Official 1’s position at CFE made him a ‘foreign official’ as that term is defined in the FCPA …”
“Official 2 was a Mexican citizen who also held a senior level position at CFE. Official 2 was the Director of Operations at CFE until that position was taken over by Official 1 in 2007. Official 2’s position at CFE made him a ‘foreign official’ as that term is defined in the FCPA …”
[For more on Official 1 and CFE – see David Luhnow, “U.S. Probe Leads to Mexico Chief,” Wall Street Journal (August 24, 2010)]
According to the indictment, Angela Aguilar assisted or otherwise caused many of the above referenced payments to be made.
Based on the above core conduct, Enrique Aquilar was charged in a seven-count indictment with conspiracy to violate the FCPA, FCPA violations, money laundering conspiracy and money laundering. Angela Aquilar was charged with money laundering conspiracy and money laundering.
As noted in the DOJ’s release “an indictment is merely an accusation, and defendants are presumed innocent until and unless proven guilty beyond a reasonable doubt.”
Michael Zweiback (here), a former DOJ prosecutor currently with Seyfarth Shaw LLP, represents both Enrique and Angela Aquilar. He stated: “we intend to vigorously defend the charges and expect the Aguiliar’s to be found not guilty.”
With Lindsey Manufacturing and certain of its top executives implicated in the alleged conduct, it is likely that the above core allegations will be repeated in future enforcement actions.
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The Aquilar indictments continue a DOJ trend of holding agents, sales representatives etc. accountable for allegedly participating in bribery schemes. (See this prior post for other such enforcement actions).
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Does CFE ring a bell?
It should because this alleged “state-owned utility company” is at the center of the enforcement actions against John Jospeh O’Shea (see here and here) and Fernando Maya Basurto (see here).
Friday Roundup
The DOJ appears not interested in Anadarko’s allegations and more disclosure news … its all here in the Friday roundup.
DOJ Appears Not Interested in Anadarko’s Allegations
The Jubilee field is located off the coast of Ghana.
Participants in the West Cape Three Points Block include: Kosmos Energy LLC; Anadarko Petroleum Corporation; Tullow Oil PLC; Ghana National Petroleum Corporation; E.O. Group Ltd.; and Sabre Oil and Gas Limited.
Anadarko (here) apparently reported Kosmos (here) to U.S. authorities for possible violations of the FCPA “in connection with securing licensing and exploration and production agreements.”
Anadarko apparently made similar allegations against EO Group.
Apparently, the DOJ is not interested – according to this Bloomberg article by David Wethe and and Jason McClure.
The article, which cites to a May 12 letter from the DOJ to Kosmos and June 2 letter from the DOJ to EO Group, states that the DOJ does not intend to “take any enforcement action” or pursue charges against either company and that the DOJ closed its inquiry into the matter.
According to the article, “Ghana is pressing ahead with its own criminal inquiry into alleged corruption in the development of the field.”
Disclosure News
From Orthofix International N.V.’s Form 8-K filed August 31 (see here):
“During a recent internal management review of Promeca S.A. DE C.V. (“Promeca”), one of its Mexican subsidiaries, the Company received allegations of improper payments, allegedly made by certain of Promeca’s local employees in Mexico, to employees of a Mexican governmental health care entity. The Company has engaged Hogan Lovells US LLP and Deloitte Financial Advisory Services LLP to conduct an internal investigation focusing on compliance with the Foreign Corrupt Practices Act (“FCPA”) and voluntarily contacted the U.S. Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. During 2009, Promeca accounted for approximately one percent of the Company’s consolidated net sales and consolidated total assets. The internal investigation is in its early stages and no conclusions can be drawn at this time as to its outcome; however, the FCPA and related statutes and regulations provide for potential criminal and civil sanctions in connection with FCPA violations, including criminal fines, civil penalties, and disgorgement of past profits.”
From Diageo PLC’s 2010 Preliminary Results Release, dated August 26th (see here)
“SEC investigation: As previously reported, Diageo Korea and several of its current and former employees have been subject to investigations by Korean authorities regarding various regulatory and control matters. Convictions for improper payments to a Korean customs official have been handed down against two former Diageo Korea employees, and a former and two current Diageo Korea employees have been convicted on various counts of tax evasion. Diageo had previously voluntarily reported the allegations relating to the convictions for improper payments to the US Department of Justice and the US Securities and Exchange Commission (SEC). The SEC has commenced an investigation into these and other matters, and Diageo is in the process of responding to the regulators‟ enquiries regarding activities in Korea, Thailand, India and elsewhere. Diageo‟s own internal investigation in Korea, Thailand, India and elsewhere remains ongoing. The US Foreign Corrupt Practices Act (FCPA) and related statutes and regulations provide for potential monetary penalties, criminal sanctions and may result in some cases in debarment from doing business with governmental entities in connection with FCPA violations. Diageo is unable to quantify meaningfully the possible loss or range of loss to which these matters may give rise.”
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A good Labor Day weekend to all.
Friday Roundup
The DOJ appears not interested in Anadarko’s allegations and more disclosure news … its all here in the Friday roundup.
DOJ Appears Not Interested in Anadarko’s Allegations
The Jubilee field is located off the coast of Ghana.
Participants in the West Cape Three Points Block include: Kosmos Energy LLC; Anadarko Petroleum Corporation; Tullow Oil PLC; Ghana National Petroleum Corporation; E.O. Group Ltd.; and Sabre Oil and Gas Limited.
Anadarko (here) apparently reported Kosmos (here) to U.S. authorities for possible violations of the FCPA “in connection with securing licensing and exploration and production agreements.”
Anadarko apparently made similar allegations against EO Group.
Apparently, the DOJ is not interested – according to this Bloomberg article by David Wethe and and Jason McClure.
The article, which cites to a May 12 letter from the DOJ to Kosmos and June 2 letter from the DOJ to EO Group, states that the DOJ does not intend to “take any enforcement action” or pursue charges against either company and that the DOJ closed its inquiry into the matter.
According to the article, “Ghana is pressing ahead with its own criminal inquiry into alleged corruption in the development of the field.”
Disclosure News
From Orthofix International N.V.’s Form 8-K filed August 31 (see here):
“During a recent internal management review of Promeca S.A. DE C.V. (“Promeca”), one of its Mexican subsidiaries, the Company received allegations of improper payments, allegedly made by certain of Promeca’s local employees in Mexico, to employees of a Mexican governmental health care entity. The Company has engaged Hogan Lovells US LLP and Deloitte Financial Advisory Services LLP to conduct an internal investigation focusing on compliance with the Foreign Corrupt Practices Act (“FCPA”) and voluntarily contacted the U.S. Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. During 2009, Promeca accounted for approximately one percent of the Company’s consolidated net sales and consolidated total assets. The internal investigation is in its early stages and no conclusions can be drawn at this time as to its outcome; however, the FCPA and related statutes and regulations provide for potential criminal and civil sanctions in connection with FCPA violations, including criminal fines, civil penalties, and disgorgement of past profits.”
From Diageo PLC’s 2010 Preliminary Results Release, dated August 26th (see here)
“SEC investigation: As previously reported, Diageo Korea and several of its current and former employees have been subject to investigations by Korean authorities regarding various regulatory and control matters. Convictions for improper payments to a Korean customs official have been handed down against two former Diageo Korea employees, and a former and two current Diageo Korea employees have been convicted on various counts of tax evasion. Diageo had previously voluntarily reported the allegations relating to the convictions for improper payments to the US Department of Justice and the US Securities and Exchange Commission (SEC). The SEC has commenced an investigation into these and other matters, and Diageo is in the process of responding to the regulators‟ enquiries regarding activities in Korea, Thailand, India and elsewhere. Diageo‟s own internal investigation in Korea, Thailand, India and elsewhere remains ongoing. The US Foreign Corrupt Practices Act (FCPA) and related statutes and regulations provide for potential monetary penalties, criminal sanctions and may result in some cases in debarment from doing business with governmental entities in connection with FCPA violations. Diageo is unable to quantify meaningfully the possible loss or range of loss to which these matters may give rise.”
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A good Labor Day weekend to all.