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On Point

Two recent Q&A interviews in Law360 with leading white-collar practitioners caught my eye.

George Terwilliger (here) is a partner in the Washington D.C. office of White & Case and global head of the firm’s White Collar Practice Group. Terwilliger is a former U.S. Attorney, Deputy Attorney General and Acting Attorney General.

In a recent interview with Law360, Terwilliger was asked “what aspects of law in your practice area are in need of reform, and why?”

Terwilliger responsed as follows: “I represent many companies who get caught up in the ever-widening net of federal criminal offenses arising from ordinary business activity that runs afoul of government regulatory requirements or dictates. In many such cases, and as in most cases, there is room for reasonable disagreement on the application of relevant legal standards to the salient facts. But because of the collateral consequences of drawn-out investigations and/or of conviction after trial, few if any companies have the opportunity to adjudicate such reasonable disputes before a judge or jury. Consequently, prosecutors, who are entirely appropriately zealous advocates for their side of the case, also become judge and jury in determining an appropriate resolution of the matter. In a system where rule of law is determined by adversarial process, this state of affairs results in an imbalance that is not healthy for the cause of justice.”

Stephen Jonas (here) is a partner in the Boston office of WilmerHale and chairman of the firm’s Investigations and Criminal Litigation Practice Group. He is also a former state prosecutor.

In a recent interview with Law360, Jonas was similarly asked “what aspects of law in your practice are in need of reform, and why?”

Jonas responded, in pertinent part as follows. “One area greatly in need of reform, in my view, is the investigation of alleged health care fraud. This is an area in which the government regularly secures enormous settlements, starting in the tens of millions of dollars, and now exponentially expanding to the billions of dollars. Virtually every pharmaceutical company has now been subjected to one or more of these investigations and the results are predictable — enormous monetary contributions to the federal government. I find it hard to believe that wrongdoing is so rampant in this industry that every company has at least several hundred million dollars worth of it. The more likely answer is that these settlements often have far more to do with the leverage the government enjoys than the merits of what the company did or didn’t do. In order to stay in business, pharmaceutical and medical device companies must be able to sell products that can be paid for by Medicaid and Medicare. But a conviction for a health care offense would result in exclusion of the companies from federal health insurance and essentially a death sentence for their business. So they cannot afford to fight even the most debatable of charges. One of the results is that novel legal theories and sketchy evidence will never be tested in a court of law and negotiated settlements (under threat of exclusion) serve as “precedent” for the next case. That is a system badly in need of reform.”

One statement is generic, the other relates to health fraud, but both are directly on point when it comes to Foreign Corrupt Practices Act enforcement. (See here for my recent Facade of FCPA Enforcement piece in which I make several similar arguments in terms of FCPA enforcement).

With the pharma industry sweep currently in full force, Jonas’s comments, I suspect, will be even more “on point” in the coming months as numerous pharma and other health care related companies are expected to reach, what will no doubt be, multi-million FCPA settlements that will likely be resolved via resolution vehicles subject to little or no judicial scrutiny. The government will bring in millions, the news will dominate the headlines for a few days, and then the question will be asked – did the conduct at issue even violate the FCPA?

Richard Cassin at the FCPA Blog recently highlighted a “corporate investigations list” (see here). It listed 72 companies “known to be the subject of an ongoing and unresolved FCPA-related investigation.”

Similar to Jonas, I find it hard to believe that wrongdoing is so rampant that seemingly every major company has at some time run become the subject of FCPA scrutiny or run afoul of the FCPA.

There is a much bigger picture relevant to this new era of FCPA enforcement and it is this new era that is in need of urgent reform.

My own two cents, which I will elaborate on in the future, is that the answer to the problem of enforcement agencies enforcing (in many cases) the FCPA contrary to the intent of Congress and based on dubious legal theories is largely not to amend the FCPA – this will solve very little. The more fundamental question remains – how to rein in the enforcement agencies and to force judicial scrutiny of FCPA enforcement actions?

Innospec Checkup

“As of March 31, 2010, Innospec had $67.5 million in cash and cash equivalents, $22. million more than its total debt of $45.0 million.” (see here for the prior post).

“As of June 30, 2010, Innospec had $77.0 million in cash and cash equivalents, $30.0 million more than its total debt of $47.0 million.” (see here for the prior post).

As reported by the company earlier this week (see here):

“As of September 30, 2010, Innospec had $101.5 million in cash and cash equivalents, $53.5 million more than its total debt of $48 million.”

As evident from the above, Innospec’s cash coffers continue to grow and business is doing well. The company’s President and CEO “We are pleased to report strong earnings growth as well as excellent cash generation for the third quarter of 2010. All three of our business segments again performed well, generating double-digit increases in operating income.”

Why does any of this matter?

Because in March 2010, Innospec (see here) agreed to pay $40.2 million in combined DOJ/SEC/SFO fines and penalties for violating the Foreign Corrupt Practices Act and other laws.

However, it could have been worse.

The SEC release (see here) notes that Innospec, without admitting or denying the SEC’s allegations, was ordered to pay $60,071,613 in disgorgement, but because of Innospec’s “sworn Statement of Financial Condition” all but $11,200,000 of that disgorgement was waived.

The release states that “[b]ased on its financial condition, Innospec offered to pay a reduced criminal fine of $14.1 million to the DOJ and a criminal fine of $12.7 million to the SFO. Innospec will pay $2.2 million to OFAC for unrelated conduct concerning allegations of violations of the Cuban Assets Control Regulations.”

In other words, Innospec got a pass on approximately $50 million.

Innospec’s “Inability to Pay” is also noted in the DOJ’s plea agreement (see here).

In other Innospec news, the company’s most recent 10-Q filing (see here) suggests that the company expects its compliance monitor to cost $3.9 million (see pg. 22).

This prior post discussed the civil complaint, based on the DOJ and SEC’s allegations, filed against Innospec by a competitor alleging violations of
the Robinson-Patman Act and the Virginia Antitrust Act as well as the Virginia Business Conspiracy Act.

Here is what Innospec had to say about this litigation in its recent filing:

“On July 23, 2010, NewMarket Corporation and its subsidiary, Afton Chemical Corporation (collectively, “NewMarket”), filed a civil complaint against the Company and its subsidiary, Alcor Chemie Vertriebs GmbH (“Alcor”), in the U.S. District Court for the Eastern District of Virginia. The complaint makes certain claims against the Company and Alcor with respect to alleged violations of provisions of the Robinson-Patman Act, the Virginia Antitrust Act and the Virginia Business Conspiracy Act as a result of alleged actions involving officials in Iraq and Indonesia pertaining to securing sales of the Company’s tetra ethyl lead (TEL) fuel additive, to the apparent detriment of the plaintiffs and their sales of a competing non-lead based fuel additive. The complaint seeks treble damages of an unspecified amount, plus attorneys’ fees, costs and expenses. The factual allegations underlying the complaint appear to relate to the same matters that were the subject of the Company’s recently-disclosed resolution with the DOJ, SEC, OFAC and SFO. On September 22, 2010, the Company filed a motion to dismiss. On October 4, 2010, NewMarket filed an amended complaint incorporating the Sherman Act and related claims in addition to its previous claims. The Company filed its response to the amended complaint and a separate motion to dismiss on October 29, 2010. The Company believes both the complaint and amended complaint are without merit and intends to defend them vigorously, but because of uncertainties associated with the ultimate outcome of these complaints and the costs to the Company of responding to them, we cannot assure you that the ultimate costs and damages, if any, that may be imposed upon us will not have a material adverse effect on our results of operations, financial position and cash flows. As at September 30, 2010 we had accrued $0.5 million in respect of probable future legal expenses and provided no additional accruals in respect of this matter.”

An Immaterial Disclosure?

The securities laws generally require issuers to disclose material facts and events to investors.

What is material?

Technically, there is SEC guidance on the issue (see here).

The issue basically boils down to whether the information would affect the judgment of a reasonable investor in making an investment decision.

As Thierry Olivier Desmet (Assistant Regional Director, FCPA Unit, SEC) explained at the recent World Bribery and Corruption Compliance Forum (here) the concept of materiality itself has two “sub-concepts”: (i) quantitative materiality (something that impacts a company’s financial statements) – Desmet conceded that very few bribes are quantitatively material; and (ii) qualitative materiality a “complicated gray area” to use Desmet’s words. He said that all bribes can be considered qualitatively material because they may “automatically trigger a books and records violation.” Because of this, Desmet said that it is “prudent” for any issuer to approach the SEC with any “suspicion” of bribes “as soon as” the company learns of the improper payment.

It is against this backdrop that issuers frequently disclose immaterial payments which may implicate the FCPA.

Case in point, Sensata Technologies Holding N.V. (“Sensata”) (here), a global industrial technology company that began trading on the New York Exchange in March 2010 (see here).

The company had this to say in its October 22nd 10-Q filing (here):

“An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether
any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was
immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The
Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review. The FCPA (and related statutes and regulations) provides for potential monetary penalties, criminal and civil sanctions, and other remedies. The Company is unable to estimate the potential penalties, if any, that might be assessed and, accordingly, no provision has been made in the accompanying condensed consolidated financial statements.”

Since the disclosure, Sensata’s shares have climbed approximately 1.5%.

However, this has not stopped the new breed “FCPA” plaintiff lawyers from acting.

Yesterday, the Shareholders Foundation announced (here) an investigation on behalf of investors of Sensata concerning “whether certain officer and directors of Sensata […] breached their fiduciary duties and are liable for possibly violating the U.S. Foreign Corrupt Practices Act (“FCPA”).”

Market Yawns at Schlumberger News

A favorite topic of mine is reputational harm and the FCPA, more specifically stock price movement, if any, based on FCPA news and events. (See here for a previous post.

So what happens when a major company is the feature of a front-page Wall Street Journal article about a previously undisclosed FCPA inquiry.

The short answer is not much and on the day of the news the company’s shares rise and the market yawns.

Last Friday, Dionne Searcey and Margart Coker of the Wall Street Journal revealed that the “Justice Department has begun looking into allegations of possible bribery in Yemen several years ago by Schlumberger Ltd., the large oil services company.” (see here). According to the article, “the allegations concern contract payments Schlumberger made to a consulting firm with ties to Yemen’s government at a time when Schlumberger sought approval to create an oil-exploration databank in Yemen.” The article identifies the consulting firm as Zonic Invest Ltd. and indicates that the general director of the firm was the nephew of the Yemeni President. According to the article , Yemen’s Petroleum Exploration and Production Authority, before signing off on the relevant project, “urged the company” to hire Zonic and Schlumberger agreed to “hire Zonic and pay it a $500,000 signing bonus, and the project went forward.” The article also indicates that Schlumberger paid Zonic for other services that “were done at above-market rates or were unnecessary.” According to the article, the “investigation is at an early stage” and “investigators have been in touch with former Schlumberger employees who say they have knowledge of internal allegations made at the company, and of internal Schlumberger probes of those allegations.” According to the article “Schlumberger compliance officers became aware of the matter in 2008 and carried out investigations.” The article states that “Schlumberger’s legal team eventually determined no one had violated its anticorruption policy” and that the internal investigation “ended without any significant disciplinary action.”

Did the front-page Wall Street Journal story affect Schlumberger’s stock? Apparently not. The stock closed on Friday up approximately .5% from the previous day’s close.

Were investors and analysts rattled?


Matthew Conlan (Wells Fargo Securities, LLC) wrote: “Our take: $1.38 million is a very small amount for an $86B market cap company, so the total penalty for this issue is likely to be insignificant to the investment case.” “We don’t see a significant economic impact from this specific investigation.”

Stephen Gengaro (Jefferies’ Equity Research) wrote: “We would remind investors that [Schlumberger] is the largest oil service company in the world, with the most diverse product mix, best [return on invested capital] among its peers, and most importantly a balance sheet loaded with $3.1 billion in cash and short-term investments that could easily dispose of any pending fine.”

Tudor, Pickering, Holt & Co. Securities, Inc. wrote that the Wall Street Journal headline is “never positive, but we’re not overly concerned given [Schlumberger’s] size and recent peer settlements (small $) maintain buy.”

See also, Ryan Dezember – “Analysts Unfazed by Justice Dept. Probe On Schlumberger” – Dow Jones (here).

Yesterday at the Motley Fool, David Lee Smith wrote, under the title “DOJ Probe or Not, Schlumberger’s a Keeper” (here) “I’m not inclined [to] start sweating about a still early stage Justice Department look into Schlumberger’s activities in Yemen.” “I’d still label the company a consummate keeper.”

A Conversation With Richard Alderman – Director of the U.K. Serious Fraud Office

While in London recently to chair the World Bribery & Corruption Compliance Forum (see here, here and here for previous posts), I was pleased to accept the invitation of the U.K. Serious Fraud Office to visit its offices and meet top-level SFO personnel to discuss Bribery Act and other anti-corruption issues and topics. As part of the invitation, Richard Alderman (here), the Director of the SFO, invited me to submit questions to him on any topic of my choosing.

I submitted approximately thirty detailed questions covering a broad range of topics, including the role and policies of the SFO, the Bribery Act, the BAE and Innospec cases, Bribery Inc., and other questions of general interest. Except for certain questions regarding the BAE case, which is still pending in the U.K. courts, Mr. Alderman provided answers to every question, including on topics I have been critical of the SFO in the past.

In his answers, Mr. Alderman, among other things:

(i) compares and contrasts the SFO’s role with the DOJ’s role in enforcing the Foreign Corrupt Practices Act, including the more active and independent role U.K. courts have in reviewing SFO charging decisions;

(ii) talks about voluntary disclosure, and the role of non-prosecution and deferred prosecution agreements;

(iii) discusses reputational harm, debarment, and reparations; and

(iv) talks specifically about the Bribery Act which is to be implemented in April 2011.

I thank Mr. Alderman and other SFO personnel for taking a keen interest in my work and commend the “active engagement” approach the SFO has taken in going about its work.

My complete “conversation” with Mr. Alderman can be downloaded here.

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