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Recent Sentencing Activity

By on April 30, 2013 in Carson, FCPA Sentences, Flavio Ricotti, Mario Covino, Richard Morlock, Thomas Farrell
Previous posts have highlighted the sentences of various defendants in the so-called Carson / CCI enforcement action.  The sentences were as follows.
Stuart Carson (four months in prison, followed by eight months of home detention).
Hong Carson (three years probation to include six months of home detention)
Paul Cosgrove (thirteen months of home detention)
David Edmonds (four months in prison followed by four months of home confinement).

In mid-March, Judge James Selna (C.D. Cal.) sentenced the remaining defendants in the case – Mario Covino, Richard Morlok and Flavio Ricotti.

This post highlights various issues connected to these sentences.  Each of these defendants were the first to plead guilty in the case and cooperated with the DOJ in the prosecution of the above defendants – the so-called “Carson” defendants.  Much is made in the sentencing memos of this and the fact that Covino, Ricotti, and Morlok did not force the DOJ to prove its case.  (For more on the ending of the cases against the “Carson” defendants as the DOJ was close to being put to its burden of proof, see prior posts here and here).  The sentencing memos also shed light on the perceived unfairness from the defendants’ point of view of potentially receiving stiffer sentences than the “Carson” defendants.  This did not happen as Judge Selna sentenced Covino and Morlok to probation and Ricotti to time served.

Covino

Covino was sentenced to three years probation, including a three-month period of home detention.

As explained in the DOJ’s sentencing memorandum, Covino was the first CCI employee to plead guilty.  The DOJ stated as follows.

“Beginning in February 2008, during the initial stages of the government’s investigation, defendant provided and subsequently continued to provide the government with invaluable information concerning the bribery practices at CCI.  […] Defendant had a first-hand view of CCI’s “friends in camp” sale model and the improper payments that were an integral part of that model.  Defendant gave the government an insider’s view of the company’s sales practices, accounting systems, terminology, executives, employees, and agents, and provided a compelling narrative for the documents that indicated improper payments.  Defendant entered into a plea agreement in December 2008 and pleaded guilty in January 2009.  […]  The government’s indictment of six individual defendants followed in April 2009.”

The DOJ further stated that “for several of the counts and overt acts in the indictment, defendant’s statements were the only witness testimony the government had available to corroborate payment records and e-mails.”

In its sentencing memo, the DOJ made much of the fact that Covino’s early acceptance of responsibility “can be contrasted with the much later acceptance of responsibility by the Carsons, Cosgrove, and Edmonds, each of whom pleaded guilty only after approximately three years of hard-fought, protracted litigation.”  Elsewhere, the DOJ stated that it is “only fair” that Covino do “no worse than the defendants who resisted the government’s case for three years and only struck deals on the eve (or near eve) of trial.”  The DOJ recommended a sentence of probation.

Morlok

Covino was sentenced to three years probation, including a three-month period of home detention.

As explained in the DOJ’s sentencing memorandum, Morlok was the “second CCI employee to plead guilty, doing so just a few weeks after Mario Covino.”  The DOJ memo states that Morlok was CCI’s Finance Director from 2002 through 2007 and that in July 2007, “shortly after a new Chief Financial Officer joined CCI and became defendant’s new boss, defendant precipitated a confrontation with senior sales executives over commission payments to Korea.  This confrontation ultimately escalated into the new CFO’s discovery of the systematic corrupt payments made by CCI from 1998 until 2007 as alleged in the indictment.  This discovery caused CCI to undertake an internal investigation that led to its voluntary disclosure to the Department of Justice.”  In all other respects, the DOJ’s sentencing memorandum is similar to the above Covino sentencing memo.

Morlok’s sentencing memorandum makes much of the fact that the “Guidelines calculations contained in the plea agreements for the Carson Defendants are significantly less severe than those included in the plea agreements for Mr. Morlock and Mr. Covino, the two cooperators in this matter.”  The sentencing memo states that “this inconsistency is a result only of a change in the government’s strategic position.”  Morlok’s sentencing memo states that he “accepted responsibility for his conduct not only after the government’s investigation began, but well before that, when he took steps in 2004 and in 2007 to bring CCI’s misconduct to the attention of CCI’s parent company.”  The memo states, “as the government points out, Mr. Morlok’s whistleblowing ultimately caused the internal investigation that led to CCI’s voluntary disclosure to the Department of Justice.”

Ricotti

Ricotti was sentenced to time served.

As explained in the DOJ’s sentencing memorandum, after the grand jury indictment in the case in April 2009, Ricotti, an Italian citizen and resident, was detained in Germany, subsequently extradicted, and following his guilty plea served nearly 11 months in federal custody.  The memo indicates that Ricotti was the third CCI employee to plead guilty after Mario Covino and Richard Morlock, both of whom pleaded guilty pre-indictment.  In all other respects, the DOJ’s sentencing memorandum is similar to the above Covino and Morlok sentencing memos.  Given Ricotti’s time in custody, the DOJ recommended a sentence of time served.

Ricotti’s sentencing memo makes much of the fact that given his time in custody he “already served the longest sentence in this case despite having cooperated and pleaded guilty long” before the other defendants “some of whom are significantly more culpable than Mr. Ricotti.”  Ricotti’s sentencing memo states as follows.

“Most of this time [Ricotti’s time in custody] was in the United States, thousands of miles away from any family or friends.  Although he speaks English, Mr. Ricotti was completely cut off from Italian life and language.  Thus, Mr. Ricotti served ‘harder’ time than most defendants in this jurisdiction who usually have some cultural and family ties to the U.S.”

The sentencing memo also states as follows.  “After Mr. Ricotti began to cooperate and pleaded guilty, the remaining defendants continued their pitched litigation campaign against the government’s case for another year and forced the government to prepare for trial.  Nonetheless, they received disparately more favorable plea agreements and hence lighter sentences than Mr. Ricotti.”

*****

Thomas Farrell, a defendant in the long-running Bourke/Kozeny matter concerning alleged payments in Azerbaijan, was also recently sentenced.  Farrell, according to the DOJ, was involved in various investment vehicles used by Bourke, Kozeny and others in connection with the bribery scheme and pleaded guilty in 2003 to conspiracy to violate the FCPA and a substantive FCPA violation.  Judge Shira Scheindlin sentenced Farrell to time served with no period of supervised release.

Carson “Foreign Official” Challenge Fully Briefed

By on May 3, 2011 in Carson, Control Components Inc., FCPA Jurisprudence, FCPA Trials, Flavio Ricotti, Foreign Official, Mario Covino, Qatar, Richard Morlock, Saudi Arabia, State Department

Yesterday various defendants in the U.S. v. Carson case pending in the Central District of California filed a reply brief (see here).

The brief begins as follows.

“In 1977, Congress could have enacted a general anti-bribery statute that made it a crime to pay a commercial bribe to any foreign national, but it did not. Rather, the FCPA criminalizes improper payments only to a “foreign official.” Thus, making an improper payment to a “foreign official” violates the FCPA; making that same payment to someone who is not a “foreign official” does not. This is undisputed.”

“The Government argues that “[s]tate-owned business enterprises [‘SOEs’] may, in appropriate circumstances, be considered instrumentalities of a foreign government and their officers and employees to be foreign officials.” But Congress (i) knew about SOEs when it enacted the FCPA, (ii) knew that some of the questionable payments in the pre-FCPA era may have been made to employees of SOEs, and (iii) knew how to include SOEs in the definition of “foreign official” if it had wanted to do so. Clearly, Congress did not do so, and contrary to the Government’s arguments, there is no evidence that Congress intended SOEs to be covered by this criminal statute, or intended the word “instrumentality” to encompass broadly anything through which a foreign government achieves an “end or purpose.” In fact, the plain language of the statute and its history illustrate that the FCPA was aimed at preventing improper payments to traditional government officials. If Congress had wanted SOEs to be included in the definition of “instrumentality,” it would have expressly said so – just as it did in 1976 when it enacted the Foreign Sovereign Immunities Act (“FSIA”).”

“Having no statutory authority for its sweeping position, the Government is thus unable to define the “appropriate circumstances” when an SOE allegedly falls within the FCPA. The Government states only that it is a “fact-based determination.” But facts in isolation are irrelevant unless analyzed in the context of a legal framework. And for over two hundred years it has been “emphatically the province and duty of the judicial department” – not the jury – “to say what the law is.” Marbury v Madison, 5 U.S. (1 Cranch) 137 (1803). Thus, while a jury may decide disputed issues of fact, this Court must first decide the law.”

“Defendants’ Motion squarely challenges the Government’s unsupported legal
interpretation of the FCPA by arguing that the term “instrumentality” simply does not include SOEs, and thus employees of SOEs are not, as a matter of law, “foreign officials.” The Government labels Defendants’ position as extreme, insisting that it “is not asking for a legal conclusion that all SOEs are instrumentalities,” only for a ruling that “the term instrumentality . . . can include SOEs.” But it is the Government’s position that is unreasonable, because the Government cannot articulate any principled test – and there is no test, other than one invented from whole cloth – for what would make one SOE, but not another, a government “instrumentality” under the FCPA. Accordingly, the Government’s concession, that some SOEs fall within and some outside the statute, coupled with the complete lack of any meaningful or discernable standards for deciding which is which, undermines the Government’s position and requires that it be rejected because it would render the FCPA unconstitutionally vague as applied.”

“Accordingly, the Court should hold that employees of SOEs are not “foreign
officials” under the FCPA and should dismiss Counts One through Ten of the
Indictment. Contrary to the Government’s overblown rhetoric, the sky will not fall upon such a ruling; rather, the issue will be returned to its proper forum: Congress. See Skilling v. United States, 561 U.S. ___, 130 S. Ct. 2896, 2933 (2010) (“If Congress desires to go further . . . it must speak more clearly than it has.”).”

This previous post links to the Defendants’ motion and my declaration filed in support. This previous post links to the DOJ’s opposition brief as well as supporting declarations from the State Department and the FBI.

The Carson defendants also moved (see here) to strike the State Department declaration or in the alternative for a court order requiring the State Department employee to appear for questioning at next week’s hearing). As noted in this prior post, the same State Department declaration was ordered stricken in the Lindsey “foreign official” challenge and is also being challenged in the O’Shea “foreign official” challenge – see here.

*****

In a related development, last week the DOJ announced (here) that “Flavio Ricotti, a former executive of [Control Components, Inc. – the same employer as the above referenced defendants challenging the DOJ’s “foreign official” interpretation] has pleaded guilty for his participation in a conspiracy to secure contracts by paying bribes to officials of foreign state-owned companies as well as officers and employees of foreign and domestic private companies.” See here for the plea agreement.

As noted in the DOJ release, “Ricotti pleaded guilty […] to a one-count superseding information [see here] charging him with conspiring to make corrupt payments to foreign government officials, and officers and employees of private companies in several countries, including Saudi Arabia and Qatar, in violation of the Foreign Corrupt Practices Act (FCPA) and the Travel Act.”

The DOJ release further states as follows. “In connection with his guilty plea, Ricotti admitted that he conspired with other CCI employees to offer a payment to an official of Saudi Aramco, a Saudi Arabian state-owned oil company, in connection with attempting to obtain a valve contract for CCI in 2003. Ricotti also admitted to conspiring with other CCI employees to make a payment to an employee of a private company so that the employee would assist in awarding to CCI a valve contract in Qatar.”

As further noted in the DOJ release:

“In related cases, two defendants previously pleaded guilty to conspiring to bribe officers and employees of foreign state-owned companies on behalf of CCI. On Jan. 8, 2009, Mario Covino, the former director of worldwide factory sales for the valve company, pleaded guilty [see here] to one count of conspiracy to violate the FCPA and admitted to causing the payment of approximately $1 million in bribes to officers and employees of several foreign state-owned companies. On Feb. 3, 2009, Richard Morlok, the former finance director for the valve company, pleaded guilty [see here] to one count of conspiracy to violate the FCPA and admitted to causing the payment of approximately $628,000 in bribes to officers and employees of several foreign state-owned companies. Covino and Morlok are scheduled to be sentenced in February 2012.”

See here for July 2009 enforcement action against Control Components, Inc.

FCPA Enforcement … It’s More Than Just Suitcases Full of Cash to Government Officials

By on August 9, 2009 in Anything of Value, Carson, China, Control Components Inc., David Edmonds, DOJ Enforcement Action, Foreign Official, Han Yong Kim, Individual Enforcement Action, Korea, Malaysia, Manufacturing Industry, Mario Covino, Paul Cosgrove, Richard Morlock, Travel Act, United Arab Emirates

When conducting FCPA training, one of the first things I like to do is immediately dispel the notion that the FCPA only applies to suitcase full of cash to a government official types of situations. While the FCPA does indeed apply to such egregious situations, the FCPA (and certainly DOJ/SEC’s interpretation of the statute) applies to a wide range of other – seemingly less culpable – conduct as well.

My future FCPA training slides will certainly include the recent Control Components Inc. (“CCI”) FCPA enforcement action as it clearly demonstrates the broadness of FCPA enforcement.

First, the big picture.

As described in a recent DOJ release (see here), CCI pleaded guilty to a three-count criminal information charging two counts of violating the FCPA and one count of violating the Travel Act in connection with a “decade-long scheme to secure contracts in approximately 36 countries by paying bribes to officials and employees of various foreign state-owned companies as well as foreign and domestic private companies.”

Pursuant to the plea agreement, CCI agreed to pay a criminal fine of $18.2 million, serve a three-year term of organizational probation and adopt a host of other measures common in FCPA settlements such as create, implement and maintain an anti-bribery compliance program and retain an independent compliance monitor.

The CCI enforcement action demonstrates the broadness of FCPA enforcement in at least two respects: (i) the “foreign official” element; and (ii) the “anything of value” element.

“Foreign Official”

As to the “foreign official” element, para 5 of the Indictment is the key paragraph. It states as follows:

“Defendant CCI’s state-owned customers included, but were not limited to, Jiangsu Nuclear Power Corporation (China), Guohua Electric Power (China), China Petroleum Materials and Equipment Corporation, PetroChina, Dongfang Electric Corporation (China), China National Offshore Oil Company, Korea Hydro and Nuclear Power, Petronas (Malaysia), and National Petroleum Construction Company (United Arab Emirates). Each of these state-owned entities was a department, agency, or instrumentality of a foreign government, within the meaning of the FCPA, Title 15, United States Code, Section 78dd-2(h)(2)(A). The officers and employees of these entities, including but not limited to the Vice-Presidents, Engineering Managers, General Managers, Procurement Managers, and Purchasing Officers, were “foreign officials” within the meaning of the FCPA, Title 15, United States Code, Section 78dd-2(h)(2)(A).

As I’ve stated before in this forum (see here) and likely will in the future until this legal issue is decided by a court, DOJ’s position that employees of state-owned companies, regardless of position, are “foreign officials” under the FCPA is an unchallenged and untested legal theory – and one I believe is ripe for challenge.

Even if DOJ’s position were to be upheld by a court, those subject to the FCPA could certainly benefit from some clarity as to what DOJ considers to be a state-owned entity. Instead, in the CCI Information (and countless others) all that is there is a mere conclusory statement that each of the relevant companies are “state-owned entities” (see para 5).

What attributes of, for instance, Guohua Electric Power, make it a state-owned entity? I’ve long been curious as to what extent of investigation or discovery DOJ undertakes before it concludes that a company is a state-owned entity? If anyone has insight into this issue, please do share.

Also interesting to note is that even though para 6 of the Information states that CCI, through its former officers and employees, made corrupt payments to officers and employees of “numerous state-owned” customers around the world for the purpose of assisting in obtaining or retaining business for CCI, the Information charges only two FCPA violations.

Count two concerns payments to secure a contract with China National Offshore Oil Company and Count three concerns payments to secure a contract with Korean Hydro and Nuclear Power.

Presumably DOJ did not have sufficient evidence to support other FCPA counts as to CCI’s alleged payments to the other “numerous state-owned” customers, including the others specifically listed in para. 5 of the Information.

So why would a company such as CCI plead guilty to violating the FCPA when the “foreign officials” it allegedly bribed are “foreign officials” only under DOJ’s untested and unchallenged legal theory?

That is a good question, but I suspect it has to do with the fact that companies are in the business of making money and not in the business of setting legal precedent. With a settlement comes certainty, whereas with litigation comes uncertainty.

“Anything of Value”

As to the “anything of value” element, the Information lists the following “things of value” given by CCI, directly or indirectly to “foreign officials” – “overseas holidays to places such as Disneyland and Las Vegas” (para 19); “extravagant vacations” with the following expenses “first-class airfare to destinations such as Hawaii, five-star hotel accommodations, charter boat trips, and similar luxuries” (para 20); “college tuition” [for] the children of at least two executives” at CCI’s state-owned customers (para 20); “lavish sales events” including CCI payment of “hotel costs, meals, green fees for golf, and travel expenses” (para 21); and “expensive gifts” (para 21).

What do all these things have in common? They are not “suitcases full of cash” yet still “things of value” under the FCPA.

This is not the first time FCPA followers have heard of CCI and it is likely not the last time either. As described in the DOJ release, two former CCI executives (Mario Covino and Richard Morlok) have already pleaded guilty to conspiracy to violate the FCPA (see here and here). In addition, six former CCI executives (Stuart Carson, Hong (Rose) Carson, Paul Cosgrove, David Edmonds, Flavio Ricotti, and Han Yong Kim) were criminally indicted in April 2009 on charges of, among other things, violating the FCPA (see here).

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