Judge (Again) Significantly Rejects DOJ’s Recommendation In Sentencing Garth Peterson, Peterson Goes On Offense And Says The DOJ Is Lying About Morgan Stanley’s FCPA Compliance Procedures
While FCPA enforcement is largely devoid of judicial scrutiny, sentencing of individual FCPA defendants remains a judicial function and provides an opportunity for someone other than the DOJ to have input on some aspect of the DOJ’s positions when it comes to FCPA enforcement.
While there are a few examples of federal court judges harshly sentencing defendants consistent with DOJ sentencing recommendations (the majority of those sentences have been issued by Judge Jose Martinez in the S.D. of Florida), the clear trend is for judges to significantly reject the DOJ’s FCPA sentencing recommendations. See here, here, here and here for previous posts among others.
Given this trend, it is not surprising that last week Judge Jack Weinsten (E.D.N.Y.) significantly rejected the DOJ’s sentencing recommendation of 51-60 months in sentencing Garth Peterson to 9 months in prison. See here for the Reuters article. See here for the previous post discussing the April 2012 DOJ and SEC enforcement action against Peterson.
Of note, in its sentencing memo (here), the DOJ accused Peterson of making several misrepresentations in his sentencing submission. The DOJ stated as follows. “Peterson’s efforts to mislead the Court concerning the genesis of his crime – a crime fundamentally based upon deceit – call into serious question his assertion that he understands the gravity of the crime he committed, that he is unlikly to engage in such deception in the future, and that he accepts responsibiity for his wrongful conduct. Peterson should be sentenced within the advisory guidelines because he circumvented Morgan Stanley’s internal controls to bribe an official of the Chinese government – an action that has serious consequences for the United States and for American companies transacting business in China.”
The sentencing memos of both parties (see here for Peterson’s sentencing submission and here for his reply) also shed light on additional information relevant to Morgan Stanley’s so-called declination (see here for the prior post). In its submission, the DOJ stated that Peterson “repeatedly and consistently lied to his Moran Stanley supervisors and c0-workers” concerning the conduct at issue and that “each of Peterson’s [Morgan Stanley required FCPA certifications] was but another lie that lulled his employer in trusting Peterson.” In his sentencing submission, Peterson stated as follows concerning the Chinese Official he had a relationship with prior to joining Morgan Stanely. “The Chinese Official was a close friend of Peterson’s – in many ways a father figure to him – and Peterson helped him in order to repay the help that the Chinese Official had given him through his career.” Peterson also asserts that his attempt to influence the “father figure” Chinese Official in the investment project giving rise to the enforcement action was an attempt to recoup an investment for this mother.
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On the eve of his sentence, Peterson sat for an exclusive interview on CNBC. See here a video clip, here for the transcript.
In the interview, Peterson stated as follows concerning the investment at issue in the enforcement action.
“The government hasn’t released some important background about that. I made that investment before I joined Morgan Stanley. When I joined, I declared it to Morgan Stanley. Then, Morgan Stanley became familiar with that deal, and decided they wanted to buy in as well. So, I helped them to do that. Then, in– two– about a year and a half after that– essentially, just to make it very simple, Morgan Stanley forced me out of that deal. And I felt that was unfair, because it had been something I’d had before. Then, I brought them in, and then they were forcing me out. And so, about a year after that, I found a way to buy back in at the same price that I’d been forced out at. That’s still—a wrong action. When Morgan Stanley forced me out of the deal, I should’ve either quit, and thereby kept the investment, or I should’ve just accepted that they didn’t want me to be involved in the deal as long as the company was involved. But I don’t believe that that should be characterized as a, “web of deceit,” and whatever, to– you know, to take things from Morgan Stanley.”
The following exchange occurred between Scott Cohn (CNBC) and Peterson as to his decision to plead guilty.
COHN: So, why did you plead guilty to anything?
PETERSON: You know, it’s– I think, hopefully most people will never be in the position I had to be in. But when you’re an individual against the weight of the U.S. Government– and the U.S. Government, the Department of Justice, the SEC, perhaps it’s their way of doing things. They can have—a heavy stick, you know. That if you don’t cooperate with us, you’ll– you know, we’re going to do all these other things. And so, I just cooperated. You know, everybody’s different. Some people are fighters. I guess I’m not.
COHN: But, I mean, you– you’re giving away a lot. You’re– potentially giving away your freedom for a number of years?
PETERSON: In some sense, they took that away a long time ago in reality. Because once I started to cooperate– when they wanted to speak to me, I had to go speak to them. They were– literally, the SEC was harassing my family for years. But– at the end of the day, like I said, I agreed to cooperate, and so, I took that path.
In the interview Peterson criticized Morgan Stanley’s FCPA procedures and said the DOJ is lying to the public.
COHN: Do you– do you– do you feel like Morgan Stanley threw you overboard?
PETERSON: Yeah. Look, I did things wrong. I deserved to get fired. I never bribed anybody, so it’s still a mystery, a little bit why– you know, this whole case is– has been focused on that. Because as I’ve said, I know what I did. These are the things I did wrong. Morgan Stanley got off scot-free. And I think, you know, I have no– you know, desire for them to be harmed in any way, or you know. So– it’s not that. But what I feel bad about is– the government lying to the– to the public. And– saying that– they had this wonderful compliance– program, when in fact the government knows that it wasn’t getting into people’s heads. Which is what really matters.
The Former CFO Of RAE Systems Speaks
How often have you heard the former Chief Financial Officer of a company that recently resolved a Foreign Corrupt Practices Act enforcement action speak on camera regarding his experience and that of the company?
The answer is probably never.
That is what makes this recent video of Randall Gausman, the former CFO of RAE System, interesting and instructive. If I were a corporate board member, I would make it required viewing for the CFO to best demonstrate how FCPA scrutiny can be burdensome and distracting to the company.
First, a bit of background.
As discussed in this prior post, in December 2010 RAE System (a San-Jose, California publicly-traded company and “a leading global provider of rapidly deployable connected, intelligent gas detection systems” resolved parallel DOJ and SEC FCPA enforcement actions. The conduct at issue concerned “improper benefits corruptly paid by employees of two joint ventures majority owned and controlled by RAE Systems to foreign officials of departments, agencies, and instrumentalities” of the Chinese government. In connection with the SEC enforcement action, the then Chief of the SEC’s FCPA Unit stated as follows. “RAE Systems develops products to detect harmful emissions, yet it did not have adequate measures in place to detect and root out internal wrongdoing. Companies that fail to respond to red flags can be held liable for the acts of their joint venture partners.”
Back to the video which was recorded by the Markkula Center for Applied Ethics at Santa Clara University (here).
In the video, Gausman speaks of discovery of the problem giving rise to the enforcement action and the company’s internal investigation and voluntary disclosure. Gausman also tells how the company’s FCPA scrutiny came to derail his other jobs duties and, at approximately six minutes of the video, Gausman describes a falling out with the company’s CEO that raises a host of questions.
Of note, Gausman also explains how the company’s pre-enforcement action professional fees and expenses (approximately $4.2 million) exceeded the combined fine and penalty amount ($2.95 million) it paid to resolve the enforcement action. This has become common when a company is the subject of FCPA scrutiny.
[The above video, as well as several others, are included on the FCPA Profesor YouTube channel – here]
“Foreign Official” Podcast
It did not take long to write today’s post, but it is far from short.
Thank you to Brian Kindle at the Association of Certified Financial Crime Specialists for the opportunity to go long and deep in this approximate 35 minute podcast on various “foreign official” issues, including the recent 11th Circuit appeal in the Esquenazi and Rodriguez case (see here for the prior post).
For Your Listening Enjoyment
On June 5th, the American Bar Association Criminal Justice Section and the ABA Center for Continuing Legal Education in cooperation with Dorsey & Whitney & LLP and Pepper Hamilton LLP sponsored a program titled “The New Era of FCPA Enforcement and the Collapse of the Africa Sting Cases: Time to Reevaluate?”
I was pleased to participate along with John Buretta (Deputy Assistant Attorney General, Criminal Division, Department of Justice); Charles Cain (Deputy Chief, FCPA Unit, Securities and Exchange Commission); France Chain (Senior Legal Analyst, Anti-Corruption Division, OECD); Stanley Sporkin; and Eric Bruce (Partner, Kobre & Kim LLP). The program was moderated by Thomas Gorman (Partner, Dorsey & Whitney LLP) and Frank Razzano (Partner, Pepper Hamilton LLP).
An audio version of the 90 minute program can be downloaded here. Below is a breakdown of topics discussed along with the approximate minute mark(s) of the discussion.
4 – 11 minutes – Eric Bruce (defense counsel in the Africa Sting case) provides an inside view of the case.
11 – 13 minutes – discussion of 78dd-3 jurisdictional issues, including in the Africa Sting case
13 – 19 minutes – discussion of various issues including corporate FCPA resolutions, whether the DOJ is more of a regulator than prosecutor in FCPA cases, and the DOJ’s view of the Africa Sting cases including whether it learned anything from the cases
19 – 24 minutes – Stanley Sporkin weighs in as to the origins of the FCPA’s books and records and internal control provisions, says that the DOJ was hunting in the wrong place in the Africa Sting cases and says that FCPA enforcement needs to get back to the basics of “blocking and tackling”
25 – 30 minutes – discussion of the “foreign official” issue in which the DOJ says that “no one really conveys that they are confused” about what “foreign official” means
30 – 38 minutes – discussion of facilitation payments and whether the enforcement agencies have ignored this statutory exemption
38 – 41 minutes – I raise the question of whether the FCPA has morphed into an all-purpose corporate ethics or governance statute and discussion regarding what is the best way to expand the FCPA – through charging decisions or through Congressional action
42 – 50 minutes – discussion of compliance issues and how best to reward corporate compliance as well as the recent Garth Peterson / Morgan Stanley case in which I pose to the DOJ and the SEC the question of whether the outcome would have been any different if the FCPA had a formal compliance defense
50 – 55 minutes – discussion of miscellaneous issues including transparency in enforcement, cooperation issues and self-reporting
55 – 67 minutes – further discussion of compliance issues, including whether a compliance defense would be a “race to the bottom” or a “race to the top,” whether there is a Washington D.C. beltway view on FCPA compliance, and whether the increase in FCPA enforcement is doing anything to properly incentivize business conduct
67 – 71 minutes – discussion of whether there is any practical difference in the corporate liability standards in the U.K. Bribery Act and the FCPA
72 – 76 minutes – further discussion of the Africa Sting cases
77 – 79, 83 – 86 minutes – DOJ responds to a question regarding FCPA guidance, including timing and specifics
80 – 83 minutes – discussion as to whether it is acceptable not to self-report if the company otherwise implements a variety of internal remedial measures
87 – 89 – once again the issue of whether the DOJ has learned anything from the Africa Sting cases
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If you are aware of other FCPA video or audio programs and would like to provide a similar annotation as to issues, please consider this an open invitation to do a guest post as many could benefit.
The Donald Goes Off And Conflates The Issues
Business mogul Donald Trump (who in recent years flirted with a Presidential run) recently went off on the Foreign Corrupt Practices Act on CNBC’s Squawk Box program. (See here for the video – the FCPA portion begins at approximately minute 14). Joining Trump in the discussion was Tom Stemberg of Highland Capital Partners. You will hear during the program views that FCPA enforcement has become “absolutely crazy,” and that the FCPA is a “horrible law.”
As with most post-News Corp. and post-Wal-Mart commentary, Trump conflates two issues: (1) the FCPA as passed by Congress and (2) the FCPA as enforced by the DOJ and SEC. Many of the concerns Trump and Stemberg raise were addressed by Congress when Congress elected not to capture payments to “foreign officials” in connection with ministerial or clerical acts. For more on this issue, see this previous post “Understanding Wal-Mart.”
You will also hear during the Squawk Box program a suggestion that instead of prohibiting improper payments, the FCPA should merely require disclosure of such payments. I do not agree with the suggestion, but it is not an outlandish suggestion. Indeed, as discussed in several prior posts (see here for instance) in the mid-1970’s Congress considered two main competing legislative proposals to deal with the so-called foreign corporate payments problem: prohibition vs. disclosure.
The disclosure regime was favored by the administration of Gerald Ford. President Ford’s point person on the issue was Elliot Richardson (Secretary of Commerce) who, in a letter to Senator William Proxmire (a Congressional leader on the issue), summarized the work of the Ford Task Force as follows. “The Task Force has concluded that the criminalization approach would represent little more than a policy assertion, for the enforcement of such a law would be very difficult if not impossible. […] The criminal approach would represent poor public policy. […] At the same time, the Task Force perceived several very positive attributes of systematic disclosure.” President Ford stated as follows. “The reporting requirement covers a broad range of payments relative to government transactions as well as political contributions and payments made directly to foreign public officials. By requiring reporting of all significant payments, whether proper or improper, made in connection with business with foreign government, the legislation will avoid the difficult problems of definition and proof that arise in the context of enforcement of legislation that seeks to deal specifically with bribery and extortion abroad.”
The disclosure regime was rejected by Congressional leaders. A Senate Report stated as follows. “The Committee concluded that an outright prohibition would be at least as feasible to enforce as any meaningful disclosure requirement. […] Clearly, in order to enforce such a disclosure requirement and apply sanctions for failure to file reports, it would be necessary to prove that the undisclosed payment was actually made, and that it was made with an improper purpose. Thus, the same evidence necessary to prove a violation of a direct prohibition would have to be marshalled in order to enforce a disclosure statute. Accordingly, the Committee concluded that a disclosure approach has at least the same enforcement problems inherent in the direct prohibition approach and none of its advantages.”
Jimmy Carter (who favored a prohibition regime over a disclosure regime) defeated Ford in the 1976 election and the rest is history.