In the minds of some (see here and here) rogue employees are a myth – a convenient rationalizing for inadequate internal controls and compliance policies and procedures.
The irony of course is that even the DOJ acknowledges the existence and reality of rogue employees. The U.S. Attorneys’ Manual (9-28.800) states that “no compliance program can ever prevent all criminal activity by a corporation’s employees …” and high-ranking DOJ officials have observed that “there will always be rogue employees who decide to take matters into their own hands. They are a fact of life.” As this recent Economist article rightly stated: “fraud by wayward employees, be they high or low, can never be eliminated.”
This post highlights the DOJ’s recent indictment of Asem Elgawhart, the logical relationship this case has to a pending FCPA enforcement action, and how the Elgawhart action further supports the notion that the DOJ’s so-called Morgan Stanley declination was nothing more than a conveniently timed public relations campaign.
Elgawhart was employed by Bechtel and was assigned by Bechtel to be the General Manager of Power Generation Engineering and Services Company (PGESCo), a joint venture between Bechtel and Egyptian Electricity Holding Company (the alleged “state-owned and state-controlled electricity company in Egypt”).
According to the DOJ, Elgawhart “used his position and authority as the General Manager of a power generation company to solicit and obtain millions of dollars of kickbacks for his personal benefit from U.S. and foreign power companies that were attempting to secure lucrative contracts to perform power-related services.”
“In total,” the DOJ alleged, “Elgawhart received more than $5 million in kickbacks to help secure more than $2 billion in contracts for the kickback-paying companies, all of which he concealed from his employer, from bidding companies that did not pay kickbacks and from the U.S. Internal Revenue Service.”
Based on these allegations, and as indicated in this DOJ release, Elgawhart was charged in a 8-count indictment with mail and wire fraud, money laundering and various tax offenses.
Bechtel was not criminally charged and there is a good and obvious reason why. There was no basis to charge Bechtel with any criminal offense.
Indeed, the DOJ alleges that Elgawhart: “defrauded Bechtel,” “concealed material facts from executives at Bechtel,” provided to executives at Bechtel annual Representation Letters containing representations that he “knew to be false,” “concealed and misrepresented material facts to counsel for Bechtel” during interviews, and caused certain evidence to be “deleted and destroyed.”
According to the DOJ, Elgawhart engaged in the above conduct against the following relevant background.
“Bechtel maintained a Code of Business Ethics that imposed on its employees certain standards and duties, including: (a) That employees not misrepresent themselves to anyone; (b) That employees not misuse proprietary, confidential or private information of Bechtel, its customers and suppliers; (c) That employees never give, solicit or accept a gift if that gift may create a payback obligation; and (d) That employees not have a financial interest in an actual or potential supplier, competitor, customer or any other organization that could cause a conflict of interest.
In addition, Bechtel maintained an Ethics and Compliance Policy requiring its employees to fully disclose through a conflict of interest revIew process any activity or transaction that might give rise to a conflict of interest.
During the course of his tenure at Bechtel, Elgawhart acknowledged Bechtel’s policies and agreed to comply with them. In or around 2001, in connection with his continued assignment as General Manager at PGESCo, Elgawhart signed a “Recital of International Employment Conditions” that required Elgawhart to comply with published Bechtel personnel policies and stated that Bechtel could discharge Elgawhart for violations of law, conduct that discredited Bechtel, theft and breach of Bechtel policy.” [The DOJ also made similar allegations as relevant to PGESCO’s internal controls].
Logical Relationship to Pending FCPA Enforcement Action
Although some have inaccurately described the Elgawhart case as a “Foreign Corrupt Practices Act prosecution,” it is not. Nevertheless, it is hard not to notice that at the bottom of the DOJ’s release there is reference to the DOJ’s “FCPA enforcement efforts.”
Indeed, there appears to be a logical relationship between the Elgawhart case and a pending FCPA enforcement action. The Elgawhart indictment specifically alleges that the kickback scheme involved, among other companies, “Power Company A” (a French company engaged in the business of providing power generation and transportation-related services around the world”) including “Power Company A’s subsidiary in Connecticut.”
This is the same exact description of Power Company A (widely known to be Alstom) in the April 2013 FCPA enforcement action against current and former Alstom executives, several of which were employed by Power Company A’s subsidiary in Connecticut.” (See here for the prior post).
A Noticeable Juxtaposition
As discussed above, Bechtel was not criminally charged in connection with the Elgawhart indictment and there was a good and obvious reason why. There was no basis to charge Bechtel with any criminal offense.
Similarly, there was no basis to charge Morgan Stanley with any criminal offense in connection with the April 2012 Garth Peterson enforcement action.
Like in the Elgawhart action, in the Peterson action the DOJ alleged as follows as highlighted in this previous post.
- “Peterson and Chinese Official 1 had a close personal relationship before Peterson joined Morgan Stanley.”
- A shell company used to facilitate the scheme was owned 47% by Chinese Official 1 and 53% by Peterson and a Canadian Attorney.
- “Without the knowledge or consent of his superiors at Morgan Stanley, Peterson sought to compensate Chinese Official 1″
- “Peterson concealed Chinese Official 1’s personal investment [in certain properties] from Morgan Stanley”
- “Peterson used Morgan Stanley’s past, extensive due diligence [as to certain of the investment properties] to benefit his own interests and to act contrary to Morgan Stanley’s interests.”
Consistent with these allegations, in its press release the DOJ stated: “Mr. Peterson admitted … that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official.” Moreover, in sentencing Peterson the judge stated that ”it is likely that [Morgan Stanley] would be considered a victim” of Peterson’s conduct. (See 859 F.Supp.2d 477).
Yet, you all the know the story-line in the Peterson case as it has become part of FCPA religion preached by the DOJ and carried forward at every available opportunity by obedient parishioners. The DOJ declined to prosecute Morgan Stanley because of its pre-existing compliance policies and procedures!
Most everyone was drinking the Kool-Aid, perhaps because taking a sip from the communal cup was convenient in marketing FCPA compliance services and products.
So why the difference in the DOJ’s public statements regarding Peterson / Morgan Stanley and Elgawhart / Bechtel?
Well, the Peterson enforcement action occurred in April 2012 when FCPA reform (including a corporate compliance defense) was still a hot topic and the DOJ was facing pressure to demonstrate something fair about its FCPA enforcement events.
Indeed, as noted in this previous post which highlighted a Morgan Stanley – Davis Polk webinar (Davis Polk represented Morgan Stanley), Davis Polk stated that part of its advocacy to the DOJ and SEC was that the agencies needed to publicly send a message on compliance and that the Morgan Stanley – Peterson case provided an “ideal case to do so.” Interestingly, the webinar was moderated by a Davis Polk attorney who called the Morgan Stanley declination “unprecedented and important” and that it was “important and new, it is news that sets precedent.” This same attorney of course was the Assistant Attorney General (DOJ, Criminal Division) during most of the time period relevant to the enforcement action and is the same person who testified on behalf of the DOJ at the Nov. 2010 Senate FCPA hearing and the June 2011 House FCPA hearing and stated (see here and here for the transcripts of the hearings) that a compliance defense was not necessary because the DOJ already considers compliance efforts when making its enforcement decisions.
In short, the juxtaposition between the DOJ’s statements in connection Peterson / Morgan Stanley and Elgawhart / Bechtel further supports the notion that the DOJ’s so-called Morgan Stanley declination was nothing more than a conveniently timed public relations campaign.
Yet the Kool-Aid continues to be served and enjoyed by many.