Diebold Resolves $48 Million FCPA Enforcement Action Based Primarily On Excessive Travel And Entertainment Payments By Subsidiaries
Yesterday, the DOJ and SEC announced (here and here) that Ohio-based Diebold, Inc. agreed to resolve a Foreign Corrupt Practices Act enforcement action concerning alleged business conduct by its subsidiaries in China, Indonesia and Russia. The enforcement action has been expected for some time (as noted in this prior post, in August the company disclosed that it had agreed in principle to the settlement announced yesterday).
The enforcement action involved a DOJ criminal information resolved via a deferred prosecution agreement and a SEC settled civil complaint. Diebold agreed to pay approximately $48.1 million to resolve its alleged FCPA scrutiny ($25.2 million to resolve the DOJ enforcement action and $22.9 million to resolve the SEC enforcement action).
DOJ
The DOJ enforcement action involved a criminal information against Diebold resolved through a deferred prosecution agreement. (See here for the original source documents).
Information
Under the heading “conduct in China and Indonesia” the information alleges:
“Diebold sold ATMs and provided ATM-related services to banks in China and Indonesia, including state-owned banks such as Bank 1 and Bank 2”
Both Bank 1 and Bank 2 are described as follows.
“[The Banks] were controlled and approximately 70% owned by the [Chinese government] … and were [two] of several state-owned banks in [China] that together maintained a monopoly over the banking system in [China] and provided core support for the government’s projects and economic goals. The government retained a controlling right in [the Banks], including appointing or nominating a majority of board of directors and top managers at the bank. [The Banks] were an ‘instrumentality’ of a foreign government [under the FCPA].”
The information then alleges:
“The contracts between Diebold and the banks in China provided that Diebold would train employees from the bank customers with respect to Diebold’s ATMs.”
“In order to secure and retain business with bank customers, including state-owned banks such as Bank 1 and Bank 2, Executive A, Executive B, Employee A, Employee B, and other Diebold employees repeatedly provided things of value, including payments, gifts, and non-business travel for employees of the banks, totaling approximately $1.75 million over a five year period.”
“Executive A, Executive B, Employee A, Employee B, and other Diebold employees attempted to disguise the payments and benefits through various means, including by making payments through third parties designated by the banks and by inaccurately recording leisure trips for banks employees as ‘training.'”
Executive A is described as a “senior executive at Diebold” who “held several positions, initially overseeing Diebold’s operations in the Asia Pacific region and later overseeing Diebold’s international operations.” [The SEC’s complaint refers to an Executive A as being a citizen of Taiwan and a resident of China].
Executive B is described as “a vice president of Diebold’s Asia Pacific division” with responsibilities “overseeing Diebold’s operations in the Asia Pacific region.” [The SEC’s complaint refers to an Executive A as being a citizen of Taiwan and a resident of China].
Employee A is described as “an employee in Diebold’s Asia Pacific division” who was “involved in sales and customer relations in the Asia Pacific region.”
Employee B is described as “an employee in Diebold’s Asia Pacific division” who was “in the Finance Department responsible for the Asia Pacific region.”
Under the heading “conduct in Russia,” the information alleges that in connection with sales efforts to “privately-owned banks in Russia,” Diebold entered into a distributor agreement with Distributor 2. According to the information, Diebold, through its employees and agents, “created and entered into false contracts with Distributor 2 for services that Distributor 2 was not performing” and that “Distributor 2, in turn, used the money that Diebold paid to it, to pay bribes to employees of Diebold’s privately-owned bank customers in Russia in order to obtain and retain contracts with those customers.”
The information also alleges that “in connection with due diligence being conduct [by a Diebold employee] and other Diebold employees for a potential acquisition of Distributor 1 in Ukraine, [the employees] learned that Distributor 1 paid bribes to employees of bank customers to secure business.”
Based on the above allegations, the information charges (i) conspiracy to violate the FCPA’s anti-bribery provisions and books and records provisions; and (ii) substantive FCPA books and records violations.
DPA
The above charges against Diebold were resolved via a DPA in which Diebold admitted, accepted, and acknowledged that it was responsible for the acts of its officers, employees, agents as charged in the information.
The DPA has a term of three years and under the heading “relevant considerations” it states:
“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and Diebold. Among the facts considered were the following: (a) following discovery of the FCPA violations during the course of acquisition-related due diligence, Diebhold initiated an internal investigation and voluntarily disclosed to the DOJ the misconduct …; (b) Diebold cooperated fully and conducted an extensive internal investigation; (c) Diebold has committed to continue to enhance its compliance program and internal controls …; and (d) Diebold has agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of the company and its officers, directors, employees, agents, and consultants.
The DPA specifically mentions a previous accounting fraud enforcement action by the SEC (see here for the prior post) and states: “the DOJ believes that the Company’s remediation is not sufficient to address and reduce the risk of recurrence of the company’s misconduct and warrants the retention of an independent corporate monitor …”.
Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $36 million to $72 million. The DPA states that the monetary penalty of $25.2 million “is appropriate given the facts and circumstances of this case, including the nature and extent of the Company’s voluntary disclosure and cooperation.”
Pursuant to the DPA, Diebold agreed to review its existing internal controls, policies and procedures regarding compliance with the FCPA and other applicable anti-corruption laws. The specifics are detailed in Attachment C to the DPA. The DPA also requires Diebold to engage a corporate compliance monitor for “a period of not less than 18 months from the date the monitor is selected.” The specifics, including the Monitor’s reporting obligations to the DOJ, are detailed in Attachment D to the DPA. As is common in FCPA corporate enforcement actions, the DPA contains a “muzzle clause” prohibiting Diebold or anyone on its behalf “contradicting the acceptance of responsibility by the company” as set forth in the DPA.
In the DOJ’s release, Acting Assistant Attorney General Mythili Raman stated:
“In China, Indonesia and Russia, Diebold chose to pay bribes for business and falsify documents to cover its tracks. Through its corrupt business practices, Diebold undermined the sense of fair play that is critical for the rule of law to prevail. Today’s action – which holds Diebold accountable for its criminal conduct, while also recognizing its cooperation and voluntary disclosure to the government of its conduct – underscores that fighting global corruption is and will remain a mainstay of the Criminal Division’s mission.”
In the same release, Steven Dettelbach (U.S. Attorney for the N.D. of Ohio) stated:
“Companies that pay bribes to public officials, whether those officials are in Cleveland, in Ohio or overseas, violate the law. Corporate earnings cannot be placed above the rule of law, and today’s penalties – nearly $50 million in all – send the message again, loud and clear, that such conduct is unacceptable. We hope that Diebold will use this opportunity, including the internal controls and compliance monitor required by today’s agreement, to turn the page to a newer and more ethical corporate culture.”
SEC
The SEC’s complaint (here) is based on the same core set of facts alleged in the above DOJ action.
In summary fashion, the complaint alleges:
“This matter concerns violations of the anti-bribery, books and records, and internal control provisions of the FCPA by Diebold […] From 2005 through 2010, Diebold, through its agents and subsidiaries, lavished international leisure trips, entertainment, and other improper gifts on foreign officials to obtain and retain lucrative business with government owned banks in China and Indonesia. During that same period, Diebold, through its Russian subsidiary, paid bribes in connection with the sale of ATMs to private banks in Russia. In all, Diebold made approximately $3 million in illicit payments in China, Russia, and Indonesia.”
“From 2005 through 2010, through its subsidiary Diebold Financial Equipment Company (China), Ltd. (“Diebold China”), Diebold provided international leisure trips and entertainment to officials of government owned banks in China. This included trips to Europe, with stays in Paris, Amsterdam, Florence, Rome, and other European cities, and trips to the United States, with travel to the Grand Canyon, Napa Valley, Disneyland, Las Vegas, and other popular tourist destinations. Diebold spent approximately $1.6 million on leisure trips, entertainment, and other improper gifts for government bank officials in China. During this same time period, through its subsidiary P.T. Diebold Indonesia (“Diebold Indonesia”), Diebold spent over $147,000 on leisure trips and entertainment for officials of government owned banks in Indonesia. Diebold executives in charge of the company’s operations in Asia knew of these improper practices. The illicit payments were falsely recorded in Diebold’s books and records as training or other legitimate business expenses.”
“From 2005 through 2008, through its subsidiary Diebold Self-Service Ltd. (“Diebold Russia”), Diebold also paid bribes on the sale of ATMs to private banks in Russia. These bribes, which totaled approximately $1.2 million, were funneled through a Diebold distributor in Russia. Diebold Russia executed phony service contracts with its distributor to hide and falsely record the payments as legitimate business expenses.’
The SEC complaint alleges as follows concerning “international leisure trips that Diebold provided to government bank officials in China.”
“In 2005, Diebold paid for a fifteen-day leisure trip to the U.S. for two officials from Bank A, a bank owned and controlled by the government of China. This trip included travel to Universal Studios and Disneyland in Los Angeles, Las Vegas, the Grand Canyon, Washington, DC, New York City, San Francisco, and Hawaii.”
“In 2006, Diebold paid for a twelve-day trip to Europe for eight officials from Bank B, a bank owned and controlled by the government of China. This was a leisure and sightseeing trip to Rome, Italy, and Stockholm, Sweden.”
“Also in 2006, Diebold paid for a two-week leisure trip to Australia and New Zealand for five officials from Bank C, a bank owned and controlled by the government of China.”
“In 2007, Diebold paid for a two-week trip to France for thirteen Bank A employees. While purportedly for training at Diebold’s offices, the primary purpose of the trip was leisure.”
“In 2008, Diebold paid for a two-week leisure trip to Europe for eight officials of Bank D, a bank owned and controlled by the government of China. The trip included travel to Paris, Brussels, Amsterdam, Cologne, Frankfurt, Munich, Salzburg, Vienna, Klagenfurt, Venice, Florence, and Rome.”
“Also in 2008, Diebold paid for a two-week leisure trip to the U.S. for three officials from Bank E, a bank owned and controlled by the government of China.”
“Also in 2008, Diebold paid for a two-week leisure trip for ten employees of Bank F, a bank owned and controlled by the government of China. This trip included travel to Hong Kong, Singapore, Malaysia, and Bali.”
“In 2009, Diebold paid for a two-week trip to the U.S. for twenty-four Bank A employees that included travel to Chicago; to Las Vegas for sightseeing, a dance show, and tour of the Grand Canyon; to Los Angeles for a tour of Universal Studios; to San Diego and San Francisco, which included a tour of Napa Valley.”
The SEC further alleges that “many of the government bank employees who received these leisure trips and other improper gifts were senior officials who had the ability to influence purchasing decisions by the banks.”
As to internal controls, the complaint alleges that “Diebold lacked sufficient internal controls to detect and prevent these illicit payments, many of which were paid to third-parties in China” and that “all of the illicit payments were falsely recorded in the company’s books and records as training or other legitimate business expenses.”
As to Executive A and B, the SEC complaint states that “even after these Diebold executives received FCPA training administered by the company in 2007, they took no action to halt these improper practices. Instead, these executives took further steps to hide the leisure nature of these trips including, on at least one occasion, providing false information to the company’s auditors in China.”
The complaint further states:
“Other executives at Diebold were on notice of potential corruption issues at Diebold China. In 2007, a regional government agency in China, the Chengdu Administration of Industry & Commerce (“CDAIC”), opened an investigation involving, among other issues, leisure trips and gifts Diebold China had provided to bank officials. Company executives in China and the U.S. learned of the investigation after a Diebold field office in Chengdu was raided by authorities. Executives A and B took the lead in responding to the investigation. Diebold was able to settle the matter with no corruption charges filed, by paying CDAIC an administrative penalty of 600,000 RMB (approximately $80,000) for business registration violations. Despite being on notice of potential corruption issues at Diebold China, Diebold failed to effectively investigate and remediate these problems.”
Based on the above conduct, the SEC’s complaint charges violations of the FCPA’s anti-bribery provisions and books and records and internal controls provisions.
As noted in the SEC release, Diebold agreed to pay $22.9 million in disgorgement and prejudgment interest, appoint an independent compliance monitor, and consent to a final judgment permanently enjoining the company from violating the FCPA’s anti-bribery and books and records and internal controls provisions. In the release, Scott Friestad (Associate Director of Enforcement) stated:
“A bribe is a bribe, whether it’s a stack of cash or an all-expense paid trip to Europe. Public companies must be held accountable when they break the law to influence government officials with improper payments or gifts.”
Jonathan Leiken (Jones Day) represented Diebold.
This Law360 article states:
“Mike Jacobsen, a spokesman for […] Diebold, called the settlement ‘an important step for the company moving forward.’ ‘It’s imperative for Diebold to recognize these issues head on, acknowledge responsibility, put the FCPA investigation period behind it and get on with the business of managing the company,’ Jacobsen said in a statement. ‘Given the experience the company has gained and its continued focus on global ethics and compliance, Diebold is confident in its ability to manage ethics-related issues as they arise.'”
Yesterday Diebold’s stock was up approximately .7%.
Total Agrees To Pay $398 Million To Resolve Its FCPA Scrutiny
Yesterday, the DOJ and SEC announced (here) and (here) a Foreign Corrupt Practices Act enforcement action against Total S.A., a French oil and gas company that has American Depositary Shares registered with the SEC and traded on the New York Stock Exchange.
The enforcement action involved a DOJ criminal information resolved via a deferred prosecution agreement and a SEC administrative cease and desist order. Total agreed to pay approximately $398 million to resolve its alleged FCPA scrutiny ($245.2 million to resolve the DOJ enforcement action and $153 million to resolve the SEC enforcement action). The $398 million enforcement action is the third largest in FCPA history in terms of fine / penalty amount.
DOJ
The DOJ enforcement action involved a criminal information (here) resolved through a deferred prosecution agreement (here).
Information
In the criminal information, the DOJ charged Total with conspiracy to violate the FCPA’s anti-bribery provisions and violating the FCPA’s books and records and internal controls provisions. The conduct at issue centered on Total’s negotiation of a contract with the National Iranian Oil Company (“NIOC”) in 1995 and 1997 for the development of the certain oil and gas fields. NIOC is described in the information as a “government-owned corporation operating under the direction and control of the Ministry of Petroleum of Iran.”
The information alleges as conspiracy “to obtain and retain lucrative contracts related to [the oil and gas fields] through the promise and payment of tens of millions of dollars in unlawful payments to the Iranian Official and others. The Iranian Official is described in the information as “the Chairman of an Iranian engineering company that was more than 90% owned by the Government of Iran and substantially controlled by the Government of Iran.” The information further states that “from at least early 2001, the Iranian Official was the head of an Iranian organization concerned with fuel consumption, which was a wholly owned subsidiary of NIOC, and was a government advisor to a high-ranking Iranian official.”
The information alleges that Total caused Total International Ltd. (a wholly-owned subsidiary of Total registered in Bermuda) to execute purported consulting agreements with Intermediary One (described as an employee of a Swiss private bank who acted at the direction of the Iranian Official) and Intermediary Two (described as a British Virgin Islands company that acted at the direction of the Iranian Official) as a “mechanism for Total to pay at the direction of the Iranian Official millions of dollars in unlawful payments.”
According to the information, Total paid approximately $60 million to accounts designated by Intermediary One and Two. The information allegations that “Total mischaracterized the payments under the various consulting agreements as ‘business development expenses,’ when they were, in fact, unlawful payments for the purpose of inducing the Iranian Official to use his influence in connection with the granting of development rights” in the oil and gas projects.
The information then alleges 20 overt acts in furtherance of the conspiracy. 19 of the overt acts (95%) are alleged to have taken place between 10 to 18 years ago. The most recent alleged overt act is a November 2004 wire transfer. The only alleged overt act with a U.S. nexus is a 1995 wire transfer of $500,000 (.8% of the overall bribe payments) from Total International’s account at Banker’s Trust in New York to an account in Switzerland.
As to the FCPA books and records charge, the information states as follows.
“… Total knowingly falsified and caused to be falsified books, records, and accounts, required to, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Total, to wit: Total (a) mischaracterized the unlawful payments under the various consulting agreements as ‘business development expenses’ and (b) improperly characterized the unlawful consulting agreements as legitimate consulting agreements.”
As to the FCPA internal controls charge, the information states as follows.
“… Total knowingly circumvented and knowingly failed to implement a system of internal accounting controls sufficient to provide reasonable assurances that transactions and dispositions of Total’s assets complied with applicable law, including the FCPA, to wit: Total: (a) failed to implement adequate anti-bribery compliance policies and procedures; (b) failed to maintain an adequate system for the selection and approval of consultants; (c) failed to conduct adequate audits of payments to purported consultants; (d) failed to establish a sufficiently empowered and competent corporate compliance office; (e) failed to take reasonable steps to ensure the company’s compliance and ethics program was followed; (f) failed to evaluate regularly the effectiveness of the company’s compliance and ethics program; (g) failed to provide appropriate incentives to perform in accordance with the compliance and ethics program; (h) concealed the consulting agreements’ true nature and true participants; (i) performed no due diligence concerning the named or unnamed parties to these agreements; and (j) lacked controls sufficient to provide reasonable assurances that the consulting agreements complied with applicable laws.”
DPA
The above charges against Total were resolved via a DPA in which Total admitted, accepted, and acknowledged that it was responsible for the acts of its officers, employees, agents, and subsidiaries as charged in the information.
The DPA has a term of three years and under the heading “relevant considerations” it states as follows.
“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and Total. Among the facts considered were the following: (a) the related investigation by French criminal enforcement authorities of the same conduct that forms the basis of this resolution and to which the Department has been providing assistance; (b) the evidentiary challenges presented to both parties by this matter, in which most of the underlying conduct occurred in the 1990s and early 2000s; and (c) Total’s production of relevant documents from abroad and disclosure of the results of its internal investigation into the misconduct described in the Information.”
Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $235.2 to $470.4 million. The $245.2 million that Total agreed to pay pursuant to the DPA is a rare instance of an FCPA corporate penalty being within the Guidelines range. Most corporate FCPA criminal fines are approximately 25% below the minimum amount suggested by the Guidelines range.
Pursuant to the DPA, Total agreed to review its existing internal controls, policies and procedures regarding compliance with the FCPA, the anti-corruption provisions of French law, and other applicable anti-corruption laws. The specifics are detailed in Attachment C to the DPA. The DPA also requires Total to engage a corporate compliance monitor who is a French national for a three year term. The specifics, including the Monitor’s reporting obligations to the DOJ, are detailed in Attachment D to the DPA.
In the DOJ’s release (here) Acting Assistant Attorney General Mythili Raman stated as follows.
“Today we announce the first coordinated action by French and U.S. law enforcement in a major foreign bribery case. Our two countries are working more closely today than ever before to combat corporate corruption, and Total, which bought business through bribes, now faces the criminal consequences across two continents.”
The DOJ release further states as follows.
“In addition, French enforcement authorities announced earlier today that they had requested that Total, Total’s Chairman and Chief Executive Officer, and two additional individuals be referred to the Criminal Court for violations of French law, including France’s foreign bribery law.”
In this Wall Street Journal article, “Total said the company and [its CEO] acted in accordance with all applicable French laws. The decision to send [Total] and its CEO to trial now rests with the magistrate in charge of the investigation.” Total’s CFO is quoted as follows concerning he U.S. settlement. “These settlements, the outcome of which are customary in the U.S., allow us to put an end to this investigation.”
SEC
The SEC’s administrative cease and desist order (here) is based on the same core set of facts alleged in the above DOJ action.
The Order states, in summary fashion, as follows.
“During the relevant time period, Total and others violated the anti-bribery provisions of the Foreign Corrupt Practices Act by making payments at the direction of the Iranian Official in connection with obtaining contracts. In addition, Total lacked sufficient internal controls and, by mischaracterizing the payments as legitimate consulting fees, Total violated the books and records [and internal controls] provisions of the federal securities laws.”
Under the heading “Total’s Steps to Conceal the Payments” the Order states as follows.
“From the inception of Total’s relationship with the Iranian Official Total mischaracterized the expenses under the Consulting Agreements as ‘business development expenses’ when they were, in fact, unlawful payments for the purpose of inducing the Iranian Official to use his influence in connection with granting rights to Total for the development of the [oil and gas] fields. Total improperly characterized the unlawful consulting agreements as legitimate consulting agreements. Total ceased making payments to the Iranian Official’s designated intermediary in approximately November 2004.”
As noted in this SEC release, the Order requires Total to pay disgorgement of $153 million in illicit profits and to cease and desist from committing future FCPA violations. In the release, Andrew Calamari (Director of he SEC’s New York Regional Office) stated as follows. “Total used illicit payments to win business in Iran, and reaped substantial financial benefits as a result. Total must now pay back all of its profits from the company’s corrupt conduct and additionally pay criminal penalties on top of that.”
Robert Luskin (Patton Boggs) represented Total.
*****
Total’s most recent SEC filing states, in pertinent part, as follows.
“In 2003, the SEC followed by the DOJ issued a formal order directing an investigation in connection with the pursuit of business in Iran by certain oil companies, including among others, Total.”
“Since 2010, the Company has been in discussions with U.S. authorities (DOJ and SEC)” to resolve the case.
*****
The Total enforcement action is not the first FCPA enforcement action against a foreign oil and gas company focused on conduct in Iran’s oil and gas fields. In 2006, the DOJ and SEC brought a coordinated FCPA enforcement action against Norway-based Staoil by which the company agreed to pay $21 million in combined fines and penalties. Like the Total enforcement action, the Statoil enforcement action was also based on a slim US jurisdictional nexus – that the company received an invoice from a U.K. consulting company instructing that money “be routed through a United States bank in New York, New York to a bank account in Switzerland” which the company paid.
Ashland Oil – The “FCPA’s” First Repeat “Offender”
[This post is part of a periodic series regarding “old” FCPA enforcement actions]
In 1986 the SEC brought this civil injunctive action against Ashland Oil, Inc. (a Kentucky based oil refining company) and its Chairman and CEO Orin Atkins for engaging in conduct in violation of the FCPA’s anti-bribery provisions.
The complaint began by noting that in 1975, prior to the passage of the FCPA, the defendants consented to final judgments of permanent injunction enjoining them from using corporate funds “for unlawful political contributions or other similar unlawful purposes.” As noted in “The Story of the Foreign Corrupt Practices Act” Ashland Oil’s payments to Albert Bernard Bongo, the President of Gabon, were among a group of payments that drew Congressional attention to the foreign corporate payments problem and motivated Congress to pass the FCPA in 1977.
The 1986 Ashland Oil enforcement action is thus notable as the first instance of an “FCPA” repeat “offender.”
As highlighted in more detail below, the enforcement action is also notable for the following reasons: (i) the thing of value consisted of buying a “foreign official’s” interest in a largely worthless mine); (ii) the conduct at issue lead to an FCPA-related civil suit in which two terminated company employees were awarded $70 million in damages; and (iii) there was controversy both as to the DOJ’s and SEC’s handling of the conduct at issue.
In the 1986 action, the SEC alleged that Ashland Oil and Atkins “paid $25 million in principal plus approximately $4 million in interest, and by virtue of the acquisition of an interest in Midlands Chrome [a largely worthless Zimbabwe mine owned by the “foreign official” and his family], gave something of value to James Landon [a British national seconded (detailed) to the government of Oman who served as a special adviser to the Sultan of Oman on Omani intelligence and security matters] … for the purpose of inducing Landon to use his influence with the government of Oman … in order to assist Ashland in obtaining and retaining business with the government of Oman … namely certain business related to crude oil.”
According to the complaint, Atkins was told that Midlands Chrome “could be purchased from persons who could be sympathetic to Ashland’s desire to become a purchaser of crude oil from Oman.” Even though a company lawyer advised that the transaction raised issues under the FCPA, the SEC alleged that the “board of directors of Ashland held a meeting at which Atkins presented for the Board’s approval the acquisition of Midland Chrome.” According to the complaint, Atkins viewed the acquisition as a “high risk project” but one that had “potential of being more than offset by a potential crude oil contract …”. According to the complaint, initial board meeting minutes show that Atkins said “the corporation was interested [in the Midlands Chrome acquisition] for the reason that it might thereby be enabled to obtain a contract to purchase crude oil from Oman” but that “this statement was deleted from the final version of the minutes at Atkins’ direction.”
Based on the above core conduct, in a detailed 35 page complaint, the SEC alleged three substantive FCPA anti-bribery violations.
Atkins resigned as chairman of Ashland in 1981 after an internal investigation into a number of questionable foreign payments. According to media reports, when the 1986 matter was resolved Atkins issued a statement which read as follows. “Although it would be my personal preference to litigate this matter, I have agreed to settle this action so that the company can put this lingering dispute behind it, and because to contest this matter would have involved disproportionate trouble and expense.” For more on the life of Orin Atkins, see here and here.
In media reports, Richard Murphy, an SEC enforcement lawyer, said the Ashland case was significant because it demonstrated that the SEC will go beyond the traditional “cash cases” and scrutinize more complicated transactions to determine if they represent violations.
In 1995, Ashland Oil changed its name to Ashland Inc.
In an interesting side note, former Ashland employees Bill McKay and Harry Williams sued the company for breach of contract and wrongful discharge, asserting that Ashland’s pattern of corrupt practices amounted to a violation of the Racketeer Influenced and Corrupt Organizations law. McKay alleged that he was terminated because he refused to take part in any bribery schemes and that he refused in subsequent investigations to hide Ashland’s conduct from officials at the IRS and SEC. According to a 1989 ABA Journal report, “Williams had not been asked to take part in any foreign payments, but he’d become sympathetic to McKay’s efforts to change Ashland’s policy.” According to the report, Williams “made an anonymous phone call to the SEC and spoke freely about Ashland’s recent actions abroad.” A jury returned a verdict of approximately $70 million. According to the ABA report, McKay was awarded over $44.5 million, and the rest was apportioned to Williams. According to the report, Ashland threatened to appeal and the parties settled for $25 million.
Set forth below, in pertinent part, is an interesting article published in the Washington Post on July 10, 1988. about the DOJ’s and SEC’s handling of the conduct at issue.
“Lawyers for two former executives who won a $ 69.5 million award from Ashland Oil Co. contend that their victory shows the Securities and Exchange Commission pulled its punches in handling charges of overseas bribery and other illegal conduct by Ashland. The two former vice presidents had said in wrongful-dismissal lawsuits and in SEC testimony that Ashland paid tens of millions of dollars in bribes to foreign officials to get scarce crude oil and then tried to cover up the illegal conduct. They said they lost their jobs after refusing to participate in conspiracies, perjury and other crimes. Last month, a U.S. District Court jury in Covington, Ky., awarded Bill E. McKay $ 44.6 million and Harry D. Williams $ 24.9 million after a 35-day trial. The jury said the liability should be shared by Ashland; its former chairman and chief executive, Orin E. Atkins; John R. Hall, who succeeded Atkins in 1981, and Richard W. Spears, senior vice president for human resources and law.”
“The SEC filed a much narrower civil lawsuit in July 1986 charging that Ashland and Atkins had bribed an official of Oman to get oil from the sultanate. The suit was filed in tandem with a consent decree, a final court judgment in which Ashland and Atkins neither admitted nor denied past violations while agreeing to face criminal penalties for future ones.”
“The jury and the SEC each had essentially the same evidence of possible violations of the Foreign Corrupt Practices Act (FCPA) of 1977. The gap between the jury’s verdict and the SEC action shows that the SEC dealt with the matter too lightly, according to John R. McCall and Kenneth M. Robinson, the lawyers for McKay and Williams. ‘I can understand how counsel for McKay and Williams are proud of their achievement, and they certainly have the right to crow about it,’ said SEC enforcement chief Gary G. Lynch. ‘But any criticism of the commission’s investigation, or of the results that we achieved, is simply unwarranted.'”
“Punitive damages accounted for only $ 3 million of the awards to McKay and Williams. Compensatory damages were tripled — to $66.5 million — for conspiring to violate, and for violating, the Racketeer Influenced and Corrupt Organizations Act. RICO makes it unlawful for any person associated with an enterprise affecting commerce to lead or to join in ‘conduct of [the] enterprise’s affairs through a pattern of racketeering activity.’ The jury found that the three individual defendants had all conducted or participated in ‘a pattern of racketeering activity’ principally through multiple violations of the FCPA antibribery section and of a law prohibiting travel for the purpose of violating the section.”
[…]
“The SEC’s 1986 lawsuit, which followed months of negotiations with Ashland’s law firm, Cravath, Swaine & Moore, named only one person paid by the oil company, James T.W. (Tim) Landon of Oman, as a foreign government official under the FCPA’s antibribery provisions. The complaint also alleged only one bribe, described by Ashland as a $ 25 million investment in a Landon-controlled chromium mine in Rhodesia. But the jury found that Ashland, ‘with corrupt intent to bribe,’ had made payments to three figures it said were foreign officials under the FCPA: Landon and Yehia Omar of Oman, and Hassan Y. Yassin of Saudi Arabia (who also has operated a consulting firm in McLean). With the same corrupt intent, the jury said, Ashland had made payments to a fourth recipient, Sadiq Attia, ‘knowing or having reason to know that’ all or a portion of the money — $ 17 million — ‘would be used to bribe a government official of Abu Dhabi.'”
“The SEC complaint and consent decree did not mention Yehia Omar or cite any Abu Dhabi and Saudi Arabia payments. Last December, SEC Chairman David S. Ruder told Senate Banking Committee Chairman William Proxmire (D-Wis.) that the Division of Enforcement ‘concluded that the evidence was … insufficient to support further charges of violations’ of the FCPA. In an interview after the jury verdict, Lynch said ‘there was not sufficient evidence that we felt comfortable we could prevail’ if charges were brought based on Ashland payments to Omar. ‘Even before we sat down to negotiate, we had decided privately to exclude Omar, Abu Dhabi, and Saudi Arabia from the consent decree. ‘It was clear to us that the Landon transaction was the strongest, because we believed we could establish that Landon was a government official at the time the chrome transaction occurred.’ Lynch said. He called a multiple-count complaint unnecessary. ‘We were suing for injunctive relief,’ and ‘we could get it with Landon,’ he said. ‘There was no need to push and take on a litigation risk in a case that was much less certain.’ He extended this argument to the omission of the Abu Dhabi and Saudi Arabia cases.”
“But lawyers McCall and Robinson disagreed. ‘The finest judicial scrutiny our American judicial system can provide has now determined that the earlier government efforts were incomplete,’ McCall said. It’s ‘ridiculous’ for the SEC to claim the evidence was insufficient to convince a jury that bribery far beyond that which it alleged hadn’t occurred, he said.”
“Lynch also defended the SEC’s decision not to ask a federal court to find Ashland and Atkins had violated a 1975 consent decree and to hold them in criminal contempt. ‘We did have a concern about meeting the higher burden of proof in order to prove criminal contempt,’ Lynch said. […] One difficulty in going the criminal route was that ‘the major thrust’ of the 1975 decrees involved unlawful political contributions, and ‘these were foreign bribes,’ Lynch said.”
“But the lawyers for McKay and Williams dismissed this explanation. They pointed out that the 1975 consent decrees prohibited false or fictitious bookkeeping entries, and said the $ 25 million Oman item that the SEC called a bribe, as well as the Abu Dhabi and Saudi Arabia payments, all were recorded by Ashland as ordinary outlays. ‘It was like shooting ducks in a barrel,’ Robinson said. ‘There was no answer that any Ashland official could give on the stand to explain the fraud that was in the documents that they wrote. And how the SEC could miss that is beyond description.’ ‘The SEC should have seen it. These were indictable offenses … I don’t see the evidence that the SEC even slapped Ashland’s wrist. They just closed the book by executing another consent decree — a promise to pay, which is all that it is.'”
“Arthur F. Mathews, who was an SEC deputy enforcement chief in 1969, said in an interview that ‘in the horse-trading for not litigating,’ Cravath, Swaine ‘got the staff to strike Yehia Omar … If I had to guess, they did not include Yehia Omar in their action because they thought it was a toss-up whether you could prove it, and they gave it up in the bargain.'”
“McCall said the SEC staff may well have done all it could have, particularly in light of the Reagan administration’s apparent reluctance to enforce the FCPA’s antibribery provisions.’ The SEC commissioners, for example, voted 3 to 2 to reject the division’s initial recommendation for a lawsuit that named only Landon as the recipient of a bribe. Only after the division reargued its case did the commission reverse itself, allowing Lynch to file the lawsuit. Lynch said the SEC disregarded a report by an outside counsel who concluded that the Oman transactions had not violated the FCPA or the 1975 consent decree. Williams and McKay had challenged the independence of the outsider, Pittsburgh attorney Charles J. Queenan. Queenan is a friend of Cravath, Swaine presiding partner and Ashland director Samuel C. Butler, who submitted the report to the SEC as the work of an independent counsel. ‘We did not accept the conclusion that it was an ‘independent counsel’ report,” Lynch said. The SEC staff ‘did our own very thorough investigation of the matter,’ he said. ‘It is clear that if we had accepted the Queenan report’s findings, we would not have filed an action.”
[…]
“Sen. Proxmire, who monitors FCPA enforcement, also has raised questions about the Justice Department’s role in the Ashland case. The department had full access to the SEC’s files from the start of the SEC staff investigation in May 1983. Last October, after a Washington Post series on Ashland’s payments to overseas consultants, Proxmire asked the department if it had investigated the matter and if ‘it has concluded that violations of the FCPA have taken place.’ If the conclusion was that there’d been no violations, ‘I would like an explanation of the rationale underlying such a judgment,’ Proxmire said. ‘If the department has not investigated these allegations, I request that you do so and let me know the results.’ Assistant Attorney General John R. Bolton said on Jan. 20 that he would respond when he received a report from the fraud section of the Criminal Division. On June 20, Proxmire, having heard nothing more for six months, sent Attorney General Edwin Meese III a news story on the jury verdict in Kentucky and asked ‘whether the Department of Justice will now initiate a criminal action.’ If not, Proxmire said he wanted to know why. A department spokesman said a response is being prepared.”
Ralph Lauren Resolves FCPA Enforcement Action Via Double NPAs Based On Subsidiary Conduct In Argentina
Yesterday, the DOJ and SEC announced (here) and (here) a Foreign Corrupt Practices Act enforcement action against apparel company Ralph Lauren Corporation (“RLC”). The conduct at issue focused on Argentina custom issues and the actions were resolved via a DOJ NPA (here) and an SEC NPA (here).
Although the DOJ frequently uses NPAs and DPAs in the FCPA context, this is only the second instance the SEC has used an alternative resolution vehicle to resolve an FCPA enforcement action. As noted in this previous post, in May 2011 the SEC used a DPA to resolve an FCPA enforcement action against Tenaris. For more on the SEC’s use of alternative resolution vehicles, see prior posts here and here.
RLC agreed to pay $1.6 million to resolve its FCPA scrutiny – $882,000 pursuant to the DOJ NPA and $700,000 pursuant to the SEC NPA ($593,000 in disgorgement and $141,845 in prejudgment interest).
The gist of the enforcement action is as follows.
RLC has approximately 95 foreign subsidiaries. One subsidiary, PRL S.R.L, an indirectly wholly-owned subsidiary of RLC headquartered and incorporated in Argentina, had a General Manager who conspired with a customs clearance agency to make improper payments “to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection.”
There is no allegation or suggestion that RLC was aware of, or participated in, the alleged conduct. The resolution documents merely say that “in the five years that General Manager A, Agent 1, and others at PRL S.R.L carried out this scheme, RLC did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to PRL S.R.L.”
The simplistic inference would seem to be that General Manager A would not have engaged in the improper conduct had RLC had an anti-corruption program and provided anti-corruption training. However, this notion would seem to be undermined by reference to RLC’s worldwide FCPA compliance review which “identified no further violations.”
DOJ NPA
The NPA states that the DOJ “will not criminally prosecute RLC … related to violations of the anti-bribery provisions of the FCPA … arising from and related to improper payments in Argentina …”.
The NPA next states as follows. “The DOJ enters into this Non-Prosecution Agreement based, in part, on the following factors:
(a) the Company’s timely, voluntary, and complete disclosure of the conduct;
(b) the Company’s extensive, thorough, and real-time cooperation with the Department, including conducting an internal investigation, voluntarily making employees available for interviews, making voluntary document disclosures, conducting a world-wide risk assessment, and making multiple presentations to the Department on the status and findings of the internal investigation and the risk assessment;
(c) the Company’s early and extensive remedial efforts already undertaken – including conducting extensive FCPA training for employees world-wide, enhancing the Company’s existing FCPA policy, implementing an enhanced gift policy as well as other enhanced compliance, control and anti-corruption policies and procedures, enhancing its due diligence protocol for third-party agents, terminating culpable employees and a third-party agent, instituting a whistleblower hotline, and hiring a designated corporate compliance attorney – and to be undertaken, including enhancements to its compliance program as described in [the compliance features of the NPA); and
(d) the Company’s agreement to provide annual, written reports to the Department on its progress and experience in monitoring and enhancing its compliance policies and procedures, as described in [the compliance features of the NPA).
In the NPA, which has a term of two years, RLC admitted, accepted and acknowledged responsibility for the conduct set forth in the statement of facts contained in the NPA, and further agreed to a “muzzle” clause in connection with the conduct at issue (see here for the prior post describing such a clause).
The conduct at issue focused on PRL S.R.L “an indirect wholly-owned subsidiary of RLC headquartered and incorporated in Argentina.” According to the NPA, “PRL S.R.L. marketed and sold RLC merchandise, including merchandise that was shipped from outside Argentina.” According to RLC’s most recent annual report PRL S.R.L. is one RLC’s approximate 95 subsidiaries.
More specifically, the conduct at issue focused on “General Manager A” described as a “dual U.S. and Argentine citizen … hired by RLC to manage the business of PRL S.R.L. from 2003 until 2009” and “Agent 1” described as a “customs clearance agency that was retained by PRL S.R.L. to assist with customs clearance issues in Argentina.”
According to the NPA, from 2004 to 2009 “PRL S.R.L. and its employees, including General Manager A, together with Agent 1 and others, conspired to make unlawful payments to foreign officials to use the officials’ influence with foreign government agencies and instrumentalities in order to assist PRL S.R.L. in obtaining and retaining business for and with, and directing business to PRL S.R.L.”
According to the NPA, the improper payments were “to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection.” The NPA states that “these payments were not for routine government action.”
According to the NPA, the improper payments were “disguised” by “having Agent 1 include the payments in Agent 1’s invoice as ‘Loading and Delivery Expenses’ and ‘stamp tax/label tax.” The NPA states that “General Manager A and others at PRL S.R.L. knew of the true purpose of these expenses and nonetheless approved reimbursement to Agent 1.”
The NPA next states as follows.
“In the five years that General Manager A, Agent 1, and others at PRL S.R.L carried out this scheme, RLC did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to PRL S.R.L.”
The approximate three-page NPA concludes as follows. “In total, General Manager A and PRL S.R.L. paid roughly $580,000 to Agent 1 for the purpose of paying bribes to customs officials in order to obtain improper customs clearance of merchandise.”
Pursuant to the NPA and based on the above statement of facts, RLC agreed to pay a penalty of $882,000. There is no indication in the NPA as to how this figure was calculated or what it is based on.
SEC NPA
The SEC’s NPA is based on the core set of conduct set forth in the DOJ’s NPA.
The short 2.5 page document does however contain the following additional paragraph.
“In addition to paying bribes to Argentina customs officials, RLC Argentina’s general manager directly provided or authorized several gifts to be made to Argentine government officials to improperly secure the importation of RLC’s products into Argentina. The gifts provided to three different government officials between approximately 2005 through approximately 2009 included perfume, dresses and handbags value at between $400 and$14,000 each.”
[As to this “statement of fact,” I noted in”Grading the FCPA Guidance” that one of the utilities of the FCPA Guidance issued in November 2012 would be to serve as a useful measuring stick for future FCPA enforcement activity. As noted in this prior post, this is yet again another FCPA enforcement action based, in part, on such items as perfume, dresses and handbags – in the RLC action – allegedly paid by one employee at one of RLC’s approximate 95 subsidiaries.]
Under the heading “RLC’s Inadequate Internal Controls and Inaccurate Books and Records,” the NPA states as follows.
“As evidenced by the improper payments to Argentine customs officials and gifts to other government officials, the failure to ensure that proper and effective due diligence was conducted on the customs broker and Customs Broker A, and the failure of the review process for authorization or approval of reimbursement payments to Customs Broker A to detect a single improper payment, between 2005 and 2009, RLC failed to devise and maintain a system of internal controls at RLC Argentina sufficient to provide reasonable assurances that (i) transactions were executed in accordance with management’s general or specific authorization; (ii) transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements; (iii) transactions were recorded as necessary to maintain accountability for assets; and (iv) that access to assets was permitted only in accordance with management’s general or specific authorization. RLC’s policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act (“FCPA”) compliance in place at that time of the misconduct warranted further strengthening to ensure effective compliance with the related laws.
Between 2005 and 2009, certain RLC Argentina employees and agents paid bribes which were inaccurately recorded in RLC Argentina’s books, records and accounts, which were consolidated into the books and records of RLC.”
Under the heading “RLC’s Self Report,” the NPA states as follows.
“In or about February 201 0, RLC’ s Board of Directors adopted a new FCPA policy and shortly thereafter the policy was disseminated through RLC’s intranet site. In approximately Spring or Summer 2010 RLC Argentina employees reviewed the FCPA policy and raised concerns about the company’s customs broker in Argentina. As a result, RLC conducted an internal investigation of the allegations and discovered the improper payments to the customs officials and gifts to Argentine government officials. Within two weeks of uncovering the payments and gifts, RLC self-reported its preliminary findings to the both the SEC and the Department of Justice.”
Under the heading “Remedial Measures and Cooperation,” the NPA states as follows.
“Upon discovering the bribes, RLC took steps to end the misconduct, including terminating its customs broker. RLC also thoroughly reviewed its pre-existing compliance program and undertook steps to further update and enhance its compliance program, and successfully implemented those new enhancements. These steps included, in part, adoption of: (1) an amended anticorruption policy and translation of the policy into eight languages, (2) enhanced due diligence procedures for third parties, (3) an enhanced commissions policy, (4) an amended gift policy, and (5) in-person anticorruption training for certain employees. RLC also ceased retail operations in Argentina and is in the process of formally winding down all operations there.
RLC provided extensive, thorough, real-time cooperation with the staff of the Division and the Department of Justice, including: voluntary and complete production of documents and disclosure of information to the staff, including the facts described above; voluntarily providing accurate translations of documents; voluntarily making witnesses available for interviews; and conducting a risk assessment of certain other world-wide operations of the company. The worldwide review included its operations in Italy, Hong Kong and Japan, and identified no further violations. In fact, the revised compliance policies appear to be working, as the world-wide review identified one instance of a bribe solicitation being rejected by the company’s employees after adoption of the company’s revised FCPA policy in 2010.”
Without admitting or denying liability, RLC agreed to enter into the NPA. At the same time, the NPA states as follows. “This agreement should not … be deemed exoneration of RLC or to be construed as a finding by the Commission that no violations of the federal securities laws have occurred.” At the same time, the NPA states that the “facts set forth are made pursuant to settlement negotiations and are not binding against RLC or its directors, officers or employees, or any other person or entity in any other legal proceeding.”
Like the DOJ NPA, the SEC NPA also contains a “muzzle” clause.
The SEC’s release (here) states as follows.
“The SEC has determined not to charge Ralph Lauren Corporation with violations of the Foreign Corrupt Practices Act (FCPA) due to the company’s prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC’s investigation. Ralph Lauren Corporation’s cooperation saved the agency substantial time and resources ordinarily consumed in investigations of comparable conduct.”
Of course, these are not distinguishing factors.
Many SEC FCPA enforcement actions are the result of corporate voluntary disclosures where companies are likewise commended on the information and cooperation provided. In the Tenaris DPA action, the SEC (see here) said substantively the same thing. In the recent Philips SEC enforcement action, the SEC (see here) said substantively the same thing.
The SEC release further states as follows.
“According to the NPA, Ralph Lauren Corporation’s cooperation included:
- Reporting preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts.
- Voluntarily and expeditiously producing documents.
- Providing English language translations of documents to the staff.
- Summarizing witness interviews that the company’s investigators conducted overseas.
- Making overseas witnesses available for staff interviews and bringing witnesses to the U.S
“The SEC took into account the significant remedial measures undertaken by Ralph Lauren Corporation, including a comprehensive new compliance program throughout its operations. Among Ralph Lauren Corporation’s remedial measures have been new compliance training, termination of employment and business arrangements with all individuals involved in the wrongdoing, and strengthening its internal controls and its procedures for third party due diligence. Ralph Lauren Corporation also conducted a risk assessment of its major operations worldwide to identify any other compliance problems. Ralph Lauren Corporation has ceased operations in Argentina.”
Thomas Hanusik (Crowell & Moring – and a former DOJ and SEC enforcement official) represented RLC.
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Should conduct at one of RLC’s approximate 95 foreign subsidiaries (which per the government’s own allegations appears to have been isolated in scope) have led to a world-wide risk assessment by RLC? (See here for the prior post on the “Where Else” question).
Should conduct at one of RLC’s approximate 95 foreign subsidiaries (which per the government’s own allegations appears to have been isolated in scope) have lead to RLC having a reporting obligation to the DOJ and SEC during the two-year term of the NPA? (See here for the prior post “A Government Mandated Transfer of Shareholder Wealth to FCPA Inc.?)
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It is tempting, based on the SEC’s statements that “Ralph Lauren Corporation has ceased operations in Argentina” and “is in the process of formally winding down all operations there” to make the causal inference that RLC did this because of the FCPA enforcement action and/or risk associated with the FCPA.
However, that would appear to be wrong conclusion. As noted here and here, when RLC made the decision in August 2012 to suspend and wind-down its Argentine operations, the decision appeared to be based on import controls put on foreign companies and associated foreign currency controls intended to control one of highest rates of inflation in the world. As noted in the above-linked CNN article, the economic measures caused tourism in Argentina to drop. Indeed, RLC was one of several luxury brands – such as Ermenegildo Zegna, Escada, Calvin Klein Underwear, Cartier, Yves Saint Laurent, Hermes, and Louis Vuitton – to have abandoned or are considering leaving Argentina.
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The RLC enforcement action is just the latest to involve customs and related issues in Argentina.
See here for the Ball Corp. enforcement action, here for the Helmerich & Payne enforcement action, here for the BJ Services enforcement action.
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The RLC enforcement action was a rare instance of an issuer not previously disclosing its FCPA scrutiny. Subject to materiality thresholds (which are rarely triggered in cases of FCPA scrutiny), there is no disclosure obligation, yet most issuers choose to disclose FCPA scrutiny. Thus, yesterday appeared to be the first instance of public disclosure of RLC’s scrutiny. The company’s stock closed at $165.93, down 1.9%.
Friday Roundup
Docket exploration in this Friday roundup.
SEC v. Jackson & Ruehlen
My first post concerning the SEC’s enforcement action against Mark Jackson and James Ruehlen asked – will the SEC be put to its burden of proof? I noted that the case would be most interesting to follow as the SEC is rarely put to its burden of proof in Foreign Corrupt Practices Act enforcement actions and I highlighted, at the time, how the last time that happened (in 2002) the SEC lost.
As time would demonstrate, Jackson and Ruehlen indeed did put the SEC to its burden of proof and in December 2012 Judge Keith Ellison (S.D. of Tex.) granted Defendants’ motion to dismiss the SEC’s claims that sought monetary damages while denying the motion to dismiss as to claims seeking injunctive relief. (See here for the prior post). Even though Judge Ellison granted the motion as to SEC monetary damage claims, the dismissal was without prejudice meaning that the SEC was allowed to file an amended complaint. As noted in this prior post, that is indeed what happened next, and as noted here a second round of briefing began anew.
In the Defendant’s renewed motion to dismiss (filed Feb. 22nd) they argued that the SEC could not rely on the fraudulent concealment or continuing violations doctrine to extend the limitations period to cover certain claims that accrued before May 12, 2006. A week later the Supreme Court issued its unanimous decision in SEC v. Gabelli (see here for the prior post) and soon thereafter on March 11th the Defendants filed a notice of supplemental authority with the court arguing that Gabelli “bolstered” their position.
On March 22nd, the same day the SEC’s opposition brief was due, the parties jointly notified the court “that in lieu of opposing the [motion to dismiss] the SEC intends to file a Second Amended Complaint.” The filing noted that the then proposed Second Amended Complaint “moots the relief sought in the [the motion to dismiss] because it clarifies that, among the violations alleged, the SEC seeks civil penalties … only to the extent such violations accrued on or before May 12, 2006.
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Speaking of statute of limitations, a recent article highlights how the DOJ is “testing a novel argument” to extend statute of limitations in certain cases. The theory. We are at war … in Afghanistan … and regardless of whether the conduct at issue has anything to do with that war in Afghanistan, the 1948 Wartime Suspension of Limitations Act gives prosecutors unlimited time to go after alleged fraud during times of war.
No this article was not in the Onion, it was in the Wall Street Journal (see here).
Former Siemens Executive Sharef Settles 2011 SEC Enforcement Action
The SEC announced earlier this week (here) that Uriel Sharef, “a former officer and board member of Siemens” agreed to settle – as had long been expected – the SEC’s action against him. As noted in this previous post, Sharef, along with others was charged (both by the DOJ and SEC) in December 2011 in connection with an Argentine bribery scheme that was also the focus, in part, of the 2008 Siemens corporate enforcement action.
As noted in the SEC’s release, without admitting or denying the SEC’s allegations, Sharef consented to entry of a final judgment prohibiting future FCPA violations and he agreed to pay a $275,000 civil penalty – a penalty the SEC called “the second highest penalty assessed against an individual in an FCPA case.”
[In connection with the Innospec FCPA enforcement action, in August 2010, Ousama Naaman resolved an SEC enforcement action by agreeing to disgorge $810,076, pay prejudgment interest of $67,020 and pay a civil penalty of $438,038. See here for the prior post].
The burning question of course is whether the SEC would have prevailed against Sharef if he put the SEC to its burden of proof. As highlighted in this previous post, Sharef’s co-defendant, Herbert Steffen, did just that and in February Judge Shira Scheindlin dismissed the SEC’s complaint against Steffen finding that personal jurisdiction over Steffen exceeded the limits of due process.
The SEC’s allegations against Sharef mention the phone call Sharef placed in the U.S. to Steffen. As to this call, Judge Scheindlin stated as follows in the Steffen decision.
“Neither Sharef’s call to Steffen from the United States nor the fact that a portion of the bribery payments were deposited in a New York bank provide sufficient evidence of conduct directed towards the United States to establish minimum contacts. First, Steffen did not place the calls to Sharef. Further, Steffen did not direct that the funds be routed through a New York bank. […] His conduct was focused solely on ensuring the continuation of the Siemens contract in Argentina.”
The SEC complaint did however state the following additional as to Sharef.
“Sharef met in New York, NY [in January 2003] with payment intermediaries and agreed to pay $27 million in bribes to Argentine officials in connection with the [contract at issue].
Obstruction Charges Filed Against French Citizen in Connection With FCPA Investigation
The DOJ announced (here) earlier this week that “Frederic Cilins a French citizen, has been arrested and accused of attempting to obstruct an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.”
The Criminal Complaint charges Cilins with one count of tampering with a witness, victim, or informant; one count of obstruction of a criminal investigation; and one count of destruction, alteration, and falsification of records in a federal investigation.
Under the heading “Overview of the Defendant’s Crimes” the complaint states, in pertinent part, as follows.
“Cilins … has made repeated efforts to obstruct an ongoing federal grand jury investigation … concerning potential money laundering violations and potential violations of the Foreign Corrupt Practices Act, including such violations by a domestic concern as defined by the FCPA, relating to bribes to officials of a former government of the country of Guinea for the purpose of obtaining valuable mining concessions in Guinea. During monitored and recorded phone calls and face-to-face meetings with a cooperating witness “CW” [identified as the former wife of a now deceased high-ranking official in the Government of Guinea who is cooperating with the government “in the hopes of obtaining immunity for her own potential criminal conduct”] assisting in this investigation, Cilins, among other things, agreed to pay large sums of money to the cooperating witness to induce the cooperating witness to: (1) provide to Cilins, for destruction, documents Cilins knew had been requested from the cooperating witness by special agents of the FBI and which were to be produced before a federal grand jury; and (2) sign an affidavit containing numerous false statements regarding matters within the scope of the grand jury investigation. Cilins repeatedly told the cooperating witness that the documents needed to be destroyed ‘urgently’ and that Cilins needed to be present to personally witness the documents being burned.”
Various reports (see here for instance) have linked Cilins to Guernsey-based BSG Resources Ltd and the Criminal Complaint would seem to reference this company as a “particular business entity not based in the United States engaged in the mining industry” (the “Entity”). The Criminal Complaint sketches a bribery scheme and states, in pertinent part, as follows.
“CW was visited by several individuals including Cilins who identified themselves as representatives of the Entity. According to the CW, these individuals told the CW, on behalf of the Entity, that they wished to invest in mines in Guinea and asked the CW for help with the Guinean Official, who was then CW’s spouse. Cilins offered the CW $12 million, to be distributed to the CW and ministers or officials within the Government of Guinea who might be needed to secure the mining rights if all went well after their introduction to the Guinean Official.”
The Criminal Complaint further states that “some of the money paid to the CW by the Entity and its affiliates or agents was wired to a bank account in Florida controlled by the CW.”
It would appear from the Criminal Complaint that BSG Resources is not the sole focus of the U.S. investigation. Indeed, BSG Resources does not fit the description of a “domestic concern” as referenced in the Criminal Complaint which further states that “subjects of the grand jury investigation include one or more “domestic concerns” within the meaning of the FCPA …”.
Contrary to this assertion, obstruction charges were not first used in the FCPA enforcement against Hong Carson. Prior to Carson (in which the charge was ultimately dropped) obstruction charges have been used in several FCPA enforcement actions since the FCPA’s first-mega case in 1982 (see here for the prior post). Although not always successful prosecuted, the following FCPA defendants were nevertheless also charged with various obstruction charges: Gerald Green, David Kay and Douglas Murphy, Leo Winston Smith and John O’Shea
TJGEM, LLC Complaint
In another example of the noticeable trend of increasing “offensive” use of the FCPA, in late March, Missouri-based TJGEM, LLC filed this civil complaint in U.S. District Court for the District of Columbia alleging a variety of claims, including RICO, against various Ghana officials and New Jersey-based Conti Construction Co. Inc. in connection with a sewer project. AllAfrica reports here as follows.
“TJGEM is claiming that [a Ghanian official] inflated the contract sum for the construction of the sewer system, which has now been awarded to Conti Construction, also an American company, by $10 million … According to [the complaint] because TJGEM’s representatives, who were negotiating with [the official] for the contract, were totally non-receptive and unresponsive to the [official’s] corrupt practices and solicitations, and refused to neither entertain nor accede to same, but instead, rejected said corrupt practices, the contract was taken away from them. [TJGEM] argues that the selection of a company whose price for the reconstruction of the sewer project was some $10,000,000 in excess of the price fixed by TJGEM, leads to a reasonable inference that the [official] inflated the price of the sewer project, in order to receive said $10,000,000 as a bribe and kickback in the award of the sewer project contract to his own use and benefit, and to the use and benefit of other Ghanaian public officials with whom he is acting in concert in the said criminal enterprise.”
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A good weekend to all.