Friday Roundup
Wal-Mart news, the shadow regulatory state, save the date, checking in on Wynn-Okada, and there’s an app for that.
Wal-Mart News
Yesterday Wal-Mart released its first quarter financial results and stated as follows in its SEC filing.
The Audit Committee of the Company’s Board of Directors (the “Audit Committee”), which is composed solely of independent directors, is conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other alleged crimes or misconduct in connection with foreign subsidiaries including Wal-Mart de México, S.A.B. de C.V. (“Walmex”) and whether prior allegations of such violations and/or misconduct were appropriately handled by the Company. The Audit Committee and the Company have engaged outside counsel from a number of law firms and other advisors who are assisting in the on-going investigation of these matters. The Company is also conducting a voluntary global review of its policies, practices and internal controls for FCPA compliance. The Company is engaged in strengthening its global anti-corruption compliance programs through appropriate remedial anti-corruption measures. In November 2011, the Company voluntarily disclosed that investigative activity to the U.S. Department of Justice (the “DOJ”) and the SEC.
The Company has been informed by the DOJ and the SEC that it is also the subject of their respective investigations into possible violations of the FCPA. The Company is cooperating with the investigations by the DOJ and the SEC. A number of federal and local government agencies in Mexico have also recently initiated investigations of these matters. Walmex is cooperating with the Mexican governmental agencies conducting these investigations. Furthermore, lawsuits relating to the matters under investigation have recently been filed by several of the Company’s shareholders against it, its current directors, certain of its former directors, certain of its current and former officers and certain of Walmex’s current and former officers.
The Company could be exposed to a variety of negative consequences as a result of the matters noted above. There could be one or more enforcement actions in respect of the matters that are the subject of some or all of the ongoing government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders or other relief, criminal convictions and/or penalties. The shareholder lawsuits may result in judgments against the Company and its current and former directors and officers named in those proceedings. The Company cannot predict accurately at this time the outcome or impact of the government investigations, the shareholder lawsuits, or its own internal investigation and review. In addition, the Company expects to incur costs in responding to requests for information or subpoenas seeking documents, testimony and other information in connection with the government investigations, in defending the shareholder lawsuits, and in conducting its internal investigation and review, and it cannot predict at this time the ultimate amount of all such costs. These matters may require the involvement of certain members of the Company’s senior management that could impinge on the time they have available to devote to other matters relating to the business. The Company may also see ongoing media and governmental interest in these matters that could impact the perception among certain audiences of its role as a corporate citizen.
The Company is in the early stages of assessing and responding to the governmental investigations, the shareholder lawsuits, and its internal investigation and review are on-going. Although the Company does not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business in the future.
Wal-Mart stock closed yesterday at $61.68. On Friday April 20th (the day before the New York Times article – see here for the prior post) Wal-Mart stock closed at $62.45. See here for a recent Forbes column titled “Mexican Bribery Gave Me A Chance To Make Money In Wal-Mart” in which the contributor states as follows. “My 30 years of experience in the markets has repeatedly shown to me that whenever a company is accused of violations of FCPA, headlines are always scary, but in the end, the downdraft in the stock invariably becomes a buying opportunity.”
In other Wal-Mart news, as highlighted in this prior post, Elijah Cummings (D-MD), Ranking Member, House Committee on Oversight and Government Reform, and Henry Waxman (D-CA), Ranking Member, House Committee on Energy and Commerce have taken a keen interest in Wal-Mart’s potential FCPA exposure. Yesterday, the Congressmen sent this letter to Wal-Mart CEO Michael Dukes in which they state, among other things, that “we have obtained hundreds of internal documents relating to the Wal-Mart bribery allegations.”
The Shadow Regulatory State
In this previous post, I called for the abolition of non-prosecution and deferred prosecution agreements in the FCPA context. I noted how use of NPAs and DPAs to resolve alleged corporate criminal liability in the FCPA context present two distinct, yet equally problematic public policy issues and highlighted other critiques of NPAs and DPAs as well.
This recent report titled “The Shadow Regulatory State: The Rise of Deferred Prosecution Agreements” by James Copland (Senior Fellow, Manhattan Institute for Policy Research) caught my eye. Copland states as follows.
“… [P]rosecutors’ virtually unchecked powers under DPAs and NPAs threaten our constitutional framework. To be sure, prosecutors are acting upon duly enacted laws, but federal criminal provisions are often vague or ambiguous, and the fact that prosecutors and large corporations alike feel obliged to reach agreement, rather than follow an orderly regulatory process and litigate disagreements in court, denies the judiciary an opportunity to clarify the boundaries of such laws. Instead, the laws come to mean what the prosecutors say they mean—and companies do what the prosecutors say they must. Federal prosecutors are thus assuming the role of judge (interpreting the law) and of legislature (setting broad policy choices about industry conduct), substantially eroding the separation of powers. That such discretion is often delegated to private contractors with sweeping powers—namely, corporate monitors—makes the denial of justice even graver.”
Save the Date
I am pleased to be participating in this June 5th program sponsored by The American Bar Association Criminal Justice Section and the ABA Center for Continuing Legal Education in cooperation with Dorsey & Whitney & LLP, and Pepper Hamilton, LLP. Titled “The New Era of FCPA Enforcement and the Collapse of the Africa Sting Cases: Time to Reevaluate?” the program will “evaluate the impact of Africa Sting cases in view of key New Era trends, calls for FCPA reform, and a reevaluation of the prosecution standards utilized by the DOJ and the SEC in enforcing statutes.” Panelists include DOJ, SEC, and OECD representatives, Stanley Sporkin and noted FCPA practitioners including Greg Andres (former DOJ who testified on behalf of the DOJ at the November 2010 Senate and June 2011 House FCPA hearings).
Wynn-Okada
Remember that Wynn-Okada dispute? (See here, here, here, and here for the prior posts).
Here is an update from Vegas Inc.
There’s An App For That
Click 4 Compliance recently launched “C4C Mobile Compliance Officer App” (see here). In a release (here) the company says the free mobile app “places practical anti-corruption compliance tips (including the FCPA and UK Bribery Act) in the hands of your company’s workforce and partners.”
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It’s an FCPA world – a good weekend to all.
Friday Roundup
Shining a light on monitor reports, the Wal-Mart effect, when the dust settles, and Alberto Gonzalez joins the club, it’s all here in the Friday roundup.
Shining A Light on Monitor Reports
As Willkie Farr & Gallagher notes in this recent client alert, although the imposition of compliance monitors in FCPA enforcement actions is less frequent than it used to be, “companies that do receive monitors must now be concerned that their reports may be publicly disclosed.” This is due to a recent decision (here) in SEC v. American International Group. Inc. (D.D.C.) in which Judge Gladys Kessler granted journalist Sue Reisigner’s Motion for Leave to Intervene and for Access to Monitor’s Reports.
In 2004, the SEC filed a complaint against AIG alleging violations of the federal securities laws. Under the terms of the settlement consent order, AIG, among other things, agreed to retain an independent consultant, selected by the Fraud Section of the DOJ and acceptable to the SEC to review various AIG transactions. At the conclusion of the consultant’s review, the consultant was required to provide copies of reports of his or her findings to the SEC and DOJ. Thereafter, the SEC and AIG filed a joint motion for clarification stating that it was not the intent of the parties that information provided by AIG to the independent consultant be disseminated or available to anyone outside of the entities identified in the consent order. The court granted the motion.
Enter Sue Reisinger who filed Freedom of Information Act requests requesting disclosure of the consultant reports. Her requests were denied citing the court’s order restricting dissemination of the reports. Thereafter, Reisinger filed a Motion to Intervene and for Access to Monitor’s Reports. The SEC and AIG filed a joint opposition. Reisinger argued that “the Court should order the SEC to make the IC Reports publicly available on two grounds: (1) a First Amendment right to access to judicial proceedings and (2) a common law right of access to judicial records.
As to the second issue, the key issues were whether the IC reports are a “judicial record” and if so, competing interests in publicity and secrecy. Judge Kessler concluded that the IC reports “are relevant to the judicial function and therefore are properly considered judicial records.” Judge Kessler stated as follows. “The Reports may provide information leading the SEC to return to this Court to secure further relief. In other words, the Consent Order empowers the Court to retain jurisdiction for the purposes of enforcing the Consent Order, including compliance with the IC Reports.” In addition, Judge Kessler concluded that “the central role the IC Reports play in the operation of the Consent Order makes them precisely the kind of documents that must be open to the public in order for the federal courts ‘to have a measure of accountability and for the public to have confidence in the administration of justice.'” As to the balancing of interests, Judge Kessler stated that the public’s interest in favor of disclosure of the IC Reports “is overwhelming” and that “there is no question that the public interest far outweighs AIG’s or the SEC’s interest in confidentiality …”.
As to the first issue, Judge Kessler concluded that there is no First Amendment right of access to the IC Reports because the SEC “brought a civil, not criminal, action against AIG” and “Reisinger has not even attempted to make the requisite showing that ‘such access has historically been available.” As the Willkie client alert notes however, given that Judge Kessler’s analysis as to this first issue focused on the civil nature of the proceedings, it leaves “the door open for an additional argument that the First Amendment would mandate public disclosure of corporate monitor reports in the context of a criminal settlement.”
As to monitors, Professor Brandon Garrett (University of Virginia Law School) and the Corporate Crime Reporter are seeking information on certain corporate monitors in the FCPA context and otherwise – see here.
The Wal-Mart Effect
Wal-Mart is clearly not the only company subject to the FCPA that needs licenses, permits and the like when doing business in Mexico. It is likely that Wal-Mart’s potential FCPA exposure has caused sleepless nights for many company executives doing business in Mexico and the general region.
The FCPA is also on the minds of investors of other companies doing business in Mexico – such as Kimco Realty Corporation (here).
In a recent earnings call, a UBS analyst asked the following question. “I hate to even ask this question. But I’m wondering if you have any comments on the Wal-Mart allegations down in Mexico and if Kimco had conducted any reviews, maybe not so much of your local Mexico employees. Maybe my concern is more toward JV partners to make sure that they’re operating to the same high ethical standards that Kimco has already operated toward.”
David Henry (Kimco Realty Corporation – Vice Chairman, President, CEO) answered as follows. “Obviously, we anticipated this question, so permit me to be very, very specific in a response, and I’d like to make the following points. One, the extent of what we know about the Wal-Mart actions is what we read in the New York Times article, the same way you did. We are not aware of any Wal-Mart improprieties with respect to any of our Mexican properties or any of our Mexican operating partners. The acquisitions and development of the Wal-Mart projects in our portfolio occurred in 2005 or later, and this is a year after the activities that were described in the article occurred. With respect to all of our Wal-Mart projects, the developer obtained the building permit, not Wal-Mart. We employ a third-party consultant to oversee the construction process. There’s a construction manager in many cases right on site that reviews and approves every payment we make on these development projects. We also have our own Kimco employees provide asset management and oversee the project construction and approve the individual payments. As part of our normal operating procedures, all of our local Mexican development partners execute letters certifying to us they are not aware of any kind of improper payments. We have a very comprehensive FCPA policy, foreign corrupt practices act policy, at Kimco that includes extensive training for all of our employees that are directly or indirectly involved with any international projects. The training includes members of senior management and our Board are taken through this training on an annual basis. And then I just have to zoom up to the highest level. From the very beginning, when we went to both Canada and Mexico and then South America, we really tried to set the right tone because we’ve always emphasized that we are a public company and as a public company we adhere to the highest ethical standards and we expect that all of our local operating partners to also meet those standards. So that gives you the highest level of flavor I can give you at this point.”
When the Dust Settles
In 2010, Daimler (and certain of its subsidiaries) resolved a wide-ranging FCPA enforcement – see here for the prior post.
As to conduct in Russia, the DOJ also filed a two count criminal information against DaimlerChrysler Automotive Russia SAO (“DCAR”), a “Moscow-based, wholly-owned subsidiary of Daimler” that “sold Daimler spare parts, assisted with the sale of vehicles from various Daimler divisions in Germany, including in particular its overseas sales division (“DCOS”), to government customers in [Russia], and also imported Daimler passenger and commercial vehicles into Russia for sale to customers and distributors.”
The charged conduct focused on Daimler’s, DCAR’s and DCOS’s relationships with: “the Russian Ministry of Internal Affairs (“MVD”) a department and agency of the Russian government principally responsible for police, militia, immigration and other functions” including supervising the “Russian traffic police; “the Special Purpose Garage (“SPG”) an ‘instrumenality’ of the Russian government” whose employees were “foreign officials” under the FCPA; “Machinoimport a Russian government-owned and controlled purchasing agent for the City of Moscow,” an “instrumentality of the Russian government” whose employees were “foreign officials” under the FCPA; and “Dorinvest a Russian government-owned and controlled purchasing agent for the City of Moscow,” an “instrumentality of the Russian government” whose employees were “foreign officials” under the FCPA.
The information charged that “Daimler, through DCAR, made improper payments at the request of Russian government officials or their designess in order to secure business from Russian government customers.” Among other things, the information charges that: “between 2000 and 2005″ Daimler’s sale of vehicles to Russian government customers was approximately “€64,660,000″ and that “in connection with these vehicle sales, DCAR and Daimler made over €3 million in improper payments to Russian government officials employed at their Russian governmental customers, their designess, or to third-party shell companies that provided no legitimate services to Daimler or DCAR with the understanding that the funds would be passed on, in whole or in part, to Russian government officials.”
In this recent article, The Moscow Times reports that Russian “investigators have reportedly dropped inquiries against military officials and employees of four companies implicated in a 2010 corruption case involving kickbacks for state purchases of Mercedes automobiles.”
For more on the dynamic of what I’ve called “when the dust settles” – see this prior post.
Alberto Gonzalez Joins the Club
What club you ask?
The former Attorney General who has taken a great interest in the FCPA club. Former Attorney General Michael Mukasey’s FCPA reform activities are well known, this prior post discussed a recent FCPA speech by former Attorney General John Ashcroft, and in this recent article in Corporate Counsel, Gonzalez and his co-authors forecast the future of FCPA enforcement.
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A good weekend to all.
Wal-Mart And FCPA Reform
A hot topic of late is what impact Wal-Mart’s FCPA scrutiny will have on FCPA reform efforts.
Last week, in an editorial (here) USA TODAY stated as follows. “Supporters of weakening the act argue that the Justice Department has become too powerful and arbitrary. Some Chamber proposals, such as clearer enforcement guidelines, are relatively non-controversial. But others would seriously undermine the law. The most troublesome would give companies an automatic defense merely for implementing internal compliance programs to prevent and police bribery. The proposal would amount to giving companies a get-out-of-jail-free card. It’s not hard to imagine corporations drawing up a set of cookie-cutter guidelines designed to meet the letter of the law, which might or might not reflect their commitment to thwarting corruption.”
[Dear USA TODAY Editorial Board, as noted in my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here) an FCPA compliance defense would not eliminate corporate criminal liability under the FCPA or reward “fig leaf” or “purely paper” compliance programs. A compliance defense would not apply to corrupt business organizations, activity engaged in or condoned by executive officers, or activity by any employee if it occurred in the absence of preexisting compliance policies and procedures. A growing chorus of former Department of Justice officials, including those who used to enforce the FCPA, support an FCPA compliance defense and a compliance defense will better incentivize more robust corporate compliance, reduce improper conduct, and thus best advance the FCPA’s objective of reducing bribery. As noted in this prior post, that’s not weakening the FCPA, that is strengthening the FCPA and best advancing its objective of reducing bribery.]
In an opposing view (here) also published by USA TODAY, former U.S. Attorney General Michael Mukasey (who represents the U.S. Chamber Institute for Legal Reform with regard to the Foreign Corrupt Practices Act) stated as follows. “Some suggest that increased FCPA enforcement has proved the law’s utility without the need for changes. But the opposite is true: Aggressive enforcement has alerted business and the courts alike to its flaws. That is why clarifying the FCPA has drawn bipartisan support.”
[I agree that high-profile instances of FCPA scrutiny such as News Corp.’s and Wal-Mart’s has shined a much needed light on FCPA enforcement and caused those who do not ponder FCPA issues every day to take notice. See here and here for prior posts. And indeed, Mukasey is right, as noted in this previous post, certain aspects of FCPA reform share bipartisan support.]
This Wall Street Journal Corruption Currents post by Samuel Rubenfeld titled “Wal-Mart Bribery Allegations Stir Up FCPA Debate Anew” contains the views of many including a statement I liked from Ian Koski, a spokesman for Sen. Chris Coons (D., Del. who has been open to amending the FCPA) that the Wal-Mart investigation is ongoing and that the senator wouldn’t decide legislative policy based on a news story.
In this post Tom Fox (FCPA Compliance and Ethics Blog) said that Wal-Mart’s FCPA scrutiny “will sound the death knell for any efforts to amend” the FCPA. Fox also penned a guest post on the FCPA Blog (here) titled “How Wal-Mart Killed The Compliance Defense.” Also on the FCPA Blog, (here) Professor Andy Spalding penned a post titled “The Good Faith Compliance Defense, Unscathed.” Professor Peter Henning, writing on the New York Times DealBook page (here), stated as follows. “The investigation of Wal-Mart has brought the Foreign Corrupt Practices Act to the attention of the public in a way not seen since the 1970s scandals that led to its adoption. Congress may find it politically impossible to adopt changes to the statute that would arguably make it more difficult to pursue cases as long as the allegations of foreign bribery by a leading American company remain in the headlines.” Likewise, Michael Volkov (Corruption, Crime and Compliance Blog) stated (here) that “Congress is not going to amend the FCPA anytime soon, and especially not in an election year” and yesterday he stated (here) that “FCPA reform is dead — not just for this year but for years to come.”
What to make of all this?
For starters, let’s observe what I submit are facts. The reason Wal-Mart has dominated the news cycle the past few weeks is not because the company is under FCPA scrutiny, this was known in December 2011 when Wal-Mart disclosed its FCPA scrutiny, becoming one of approximately 100 companies known to be under FCPA investigation. Rather, the reason Wal-Mart has dominated the news is because of how the company acted, or failed to act, since learning of potential FCPA issues in approximately 2005. This is a corporate governance issue, not an FCPA issue, and thus should not impact limited and sensible FCPA reform.
However, many people, including politicians who are ultimately responsible for reform, are unlikely to make this critical distinction and thus the recent news regarding Wal-Mart could impact FCPA reform.
Exhibit A and B in the politicization of FCPA reform are nearly identical letters here and here from Elijah Cummings (Ranking Member of the House Committee on Oversight and Government Reform) and Henry Waxman (Ranking Member of the House Committee on Energy and Commerce) to the Chairman of the Board of Directors of the Retail Industry Leaders Association and the President of the U.S. Chamber of Commerce. The letters state as follows. “We are concerned about the role that Wal-Mart officials may have played in the Chamber’s Institute for Legal Reform. It would appear to be a conflict of interest for Wal-Mart officials to advise on ways to weaken the Foreign Corrupt Practices Act at a time when the leadership of the company was apparently aware of corporate conduct that may have violated the law.”
Regardless of any impact Wal-Mart’s FCPA scrutiny may have on FCPA reform, FCPA reform was unlikely to happen this year even before the recent coverage of Wal-Mart. When the DOJ in November 2011 promised FCPA guidance in 2012 (see here for the prior post), this forestalled introduction of an actual FCPA reform bill. Guidance has still not been released and when it is, there is likely to be an absorption period that flows into the election season.
Honestly debating and considering changes to a statute titled the “Foreign Corrupt Practices Act’ is a political hot potato. It always has been and will always be. For instance, several reform bills in the 1980’s sought to change the name of the law to the “Business Accounting and Foreign Trade Simplification Act” so that an honest and considered debate could occur.
Certain FCPA amendments occurred in 1998, but the last period of major substantive FCPA reform occurred in the 1980’s. Those reform efforts took approximately eight years.
FCPA reform is not dead, nor should it be. But it is likely going on a summer vacation. For more on my views on FCPA reform see this recent video (with many thanks to Levick Strategic Communications for the opportunity).
I conclude this post with guiding words from key players during the FCPA reform debates in the 1980’s.
In 1981, Senator Alfonse D’Amato opened Senate hearings on a bill to amend the FCPA. He stated that the bill “provides us with a good opportunity to assess the effect of recently enacted legislation and its implementation.” Senator D’Amato noted as follows. “The discussion which takes place during these hearings is not a debate between those who oppose bribery and those who support it. I see the major issue before us to be whether the law, including both its antibribery and accounting provisions, is the best approach, or whether it has created unnecessary costs and burdens out of proportion to the purposes for which it was enacted, and whether it serves our national interests.”
In an opening statement during Senate hearings, Senator John Chafee, a leader in the FCPA reform movement stated: “We’ve learned a great deal about the Foreign Corrupt Practices Act in the last three years. We’ve learned that the best of intentions can go awry and create confusion and great cost to our economy.” During the hearing, Senator Chafee further stated as follows: “Critics have attempted to characterize my bill as a signal to U.S. companies that they can return to the ‘bad old days’ of foreign bribery. That is not my intent, nor should it be the signal. I abhor bribery, whether domestic or foreign, but I also dislike confusion. Thus, my bill will eliminate uncertainty while maintaining strong prohibitions against bribery. The ambiguities and murkiness of the bill’s language have caused U.S. companies to withdraw from legitimate markets and contributed to the decline in the U.S. share of world exports. We need to end this confusion.”
During Senate hearings, Senator D’Amato also noted as follows: “The thing that bothers me about this kind of a debate is that we tend to posture this thing as if somebody were for or against bribery. I think it is important to state for the record that bribery of any foreign official by any U.S. concern is bad for our national health, and it is something that we have got to stop, we have got to deal with, and we have, I think, gone a long way with the FCPA. What we proposed to do is to simplify that law and to make it workable so that we can set that standard in concrete from now on and not have the abuses that occurred prior to 1977, but not by stopping exports, but by stopping bribery. That is the objective.” Senator D’Amato further stated as follows. “I think it is very important that in the committee’s work that we not create the attitude that this committee is making it easier for businesses to engage in illegal activity. That has, in fact, been suggested, not only by our distinguished colleague from Wisconsin [Senator Proxmire, a Senate leader in enactment of the FCPA who generally opposed the reform efforts], but also by certain journalists, who are questioning the need for proposed changes. I think that rather than hampering prosecution of illegal acts, [the reform bill at issue] would clarify and make possible just prosecution of those who engage in bribery. It would eliminate any ‘gray area’ by clearly spelling out the limits of the law.”
During Senate hearings, Senator John Heinz stated as follows. “… There are many people that are extremist, and there are others who get carried away by their enthusiasm who are going to argue that even if we change the provisions in the present act, that are unnecessary or ambiguous or uncertain, that even though we are not doing so, we are legalizing bribery. That strikes me as the worst kind of demagoguery, because it implies that everything that Congress has done in the past is perfect. And does anybody believe that?”
During the Senate hearing, William Satterwhite (Senior VP, General Counsel and Chief Legal Officer of Enserch Corp.) testified. He began his testimony as follows: “Before I begin my comments, I would like to state for the record, Enserch Corp. is not in favor of bribery. It is a sad commentary on the political atmosphere surrounding this legislation that those who support the bill feel compelled to make clear that they do not condone corruption.”
My favorite quote from the FCPA reform debates of the 1980’s and one that rings true today is from William Brock (U.S. Trade Representative) who observed, during a 1982 FCPA reform hearing, as follows. “Just because the Foreign Corrupt Practices Act spotlights a sensitive subject, some people wish to turn a ‘blind eye’ to its shortcomings rather than risk being accused of being ‘soft on bribery.’ That is too easy a way out. Retreating from controversy will not cure the law’s deficiencies. [… ] Is there any U.S. law that ought to be above such review and clarification – especially one as complex as the FCPA.”
Friday Roundup
From the campaign stump, Wal-Mart civil suits start to pour in – plus a comment regarding statute of limitations, where should the money go, don’t believe the hype, and for the weekend reading stack. It’s all here in the Friday roundup.
From The Stump
Zein Obagi (here – a fiscally conservative Democratic candidate for California’s new 33rd Congressional District) earlier this week posted a letter (here) he sent to U.S. Senator Dianne Feinstein (D-CA). Titled “Keeping California Companies Competing Abroad Competitive” the letter begins as follows. “I am writing to ask you to show our party’s understanding of international trade by updating and clarifying the Foreign Corrupt Practices Act. As you know Senator, both sides of the aisle have put forth efforts to clarify the FCPA, to assist in its enforcement and also keep America competitive with foreign nations’ trade practices.” In the letter, Obagi states that “California businesses expend enormous resources with insufficient assurances that they will not run afoul of the FCPA.”
Kudos to Obagi for the courage to tackle the politically sensitive issue of reforming the FCPA. His letter reminds us of an issue lost in the FCPA reform debate – that certain aspects of FCPA reform share bipartisan support. See here for the transcript of the Senate’s 2010 FCPA hearing (particularly statements from Democratic Senators Amy Klobuchar and Chris Coons) and here for the transcript of the House’s 2011 FCPA hearing (particularly statements from Democrat Representative John Conyers).
Wal-Mart Civil Suits Begin to Pour In
One of my earlier Wal-Mart posts (here) noted that not only will the DOJ and SEC likely be examining the conduct of Wal-Mart executives, but so too will plaintiff law firms representing shareholders who will likely scour Wal-Mart’s SEC filings and other statements to the market in bringing derivative claims alleging breach of fiduciary duty and potential Section 10(b) claims based on material omissions concerning Wal-Mart Mexico. On this score, shareholders are likely to allege, among other things, that Wal-Mart’s officers and directors demonstrated conscious disregard for fiduciary duties by failing to act diligently in the face of known facts suggesting a duty to act.
Approximately ten days later the civil suits are starting to pour in. See here (New York Times) and here (Los Angeles Times) for the derivative lawsuit brought by the California State Teachers’ Retirement System, the country’s second-largest public pension fund, the California State Teachers’ Retirement System, against current and former board members and executives of Wal-Mart Stores Inc., accusing them of using bribery and corruption to gain authorization from Mexican government officials to build new stores.
The complaint (here) generally tracks the New York Times article (see here for a prior summary), but also includes allegations suggesting potential insider trading. The complaint alleges as follows. “[T]he trading records of defendants [H. Lee Scott Jr.] and [Eduardo] Castro-Wright show that both of these defendants began selling millions of dollars worth of Wal- Mart shares in the months after The New York Times first contacted the Company regarding possible FCPA infractions by Wal-Mex in December 2011. Scott and Castro-Wright were divesting their shares in Wal-Mart in apparent anticipation of the publication of The New York Times exposé and the corresponding stock drop that would undoubtedly occur, and did occur. On the three trading days after The New York Times’ April 21, 2012 exposé, Wal-Mart stock dropped eight percent, wiping out all of its gains in 2012. Scott and Castro-Wright sold uncharacteristically large amounts of stock while in possession of the materially adverse nonpublic information that the Company was exposed to undisclosed liability for massive FCPA penalties and other contingences relating to the bribes and cover-up …”.
In addition, yesterday Gilman Law LLP announced here a derivative lawsuit filed in the United States District Court for the Western District of Arkansas against Wal-Mart. According to the release, the “complaint alleges the Directors of Wal-Mart breached their fiduciary duties by violating the Foreign Corrupt Practices Act and engaging in a six-year-long cover-up of a massive bribery scheme concerning Wal-Mart’s expansion in Mexico.”
Wal-Mart Statute of Limitations
In recent days, there has been much talk about the FCPA’s statute of limitations (5 years) and how the limitations period can generally be extended through conspiracy charges. All correct observations as to a fundamental black-letter law concept. Except in corporate FCPA inquiries, one can generally toss aside fundamental black-letter law concepts because they simply do not matter.
Sure, Wal-Mart (or any other company subject to FCPA scrutiny) can talk about statute of limitations around conference room tables behind closed doors in Washington D.C., but to truly challenge the DOJ on this issue (as all others) first requires that the company be criminally indicated, something few corporate leaders are willing to let happen. Cooperation is the name of the game in corporate FCPA inquiries and to assert statute of limitations issues is not cooperating. Given the “carrots” and “sticks” relevant to resolving FCPA enforcement actions (to learn more about these “carrots” and “sticks” please read ”The Facade of FCPA Enforcement” – here), one of first steps during a corporate disclosure of FCPA issues (one that Wal-Mart made in December 2011) is to enter into a tolling agreement or to waive any statute of limitations defenses.
As evidence, dig into the details of most FCPA enforcement actions and one quickly discovers that the conduct at issue is old – in some cases very old. The 2012 Biomet enforcement action (see here for the prior post) concerns conduct going back to 2000; the 2012 Smith & Nephew enforcement action (see here for the prior post) concerns conduct going back to 1998; and the 2012 Marubeni enforcement action (see here for the prior post) concerns conduct going back to 1995 (17 years ago) with the last act alleged occurring in 2004.
For a similar post on fundamental black letter law concepts in FCPA enforcement actions, see this prior post “Does DOJ Expect FCPA Counsel to Roll Over and Play Dead?”
Don’t Believe the Hype
Writing at the Huffington Post (here), Professor Brandon Garrett (here – University of Virginia School of Law) says “Don’t Believe the Hype on Corporate Bribery.” Professor Garrett notes that “at first, foreign bribery prosecutions may seem big and brash and the farthest thing from a wrist-slap” but he cautions that many FCPA enforcement actions “can be smaller than they appear.”
I frequently am put in the “the DOJ is too aggressive in enforcing the FCPA” camp and in many respects that is true. However, I have also frequently stated (see here for my Facade of FCPA Enforcement article, here for my Senate testimony and here and here for prior posts as to the same Siemens and BizJet enforcement actions Professor Garrett references) that in egregious instances of corporate bribery that legitimately satisfy the elements of an FCPA anti-bribery violation involving high-level executives and/or board participation the DOJ’s aggressive rhetoric does not match the reality of the enforcement action.
See this prior post for discussion of Professor Garrett’s article “Globalized Corporate Prosecutions.”
Where Should the Money Go
This prior post discussed the recent letter by Socio-Economic Rights and Accountability Project (“SERAP”) (a non-governmental civil society organization in Nigeria) to SEC Enforcement Division Director Robert Khuzami (with a copy to Assistant Attorney General Lanny Breuer and Deputy Chief, Fraud Section Charles Duross) regarding “FCPA civil penalty and disgorgement proceeds that companies agree to pay to resolve US Foreign Corrupt Practices Act investigations.”
The specific SERAP proposal is as follows. “…[A]fter, and ony after, public notice of an FCPA settlement agreement, the victim foreign government entity and any applicant NGO would have 60 days to file a request that the Enforcement Division pay some or all of the agreed payment proceeds to or for the benefit of the victim government entity or to a home country-based or US based NGO that would present a proposal [to] spend the proceeds for public purposes (e.g. on public health programs) in the country of the victim entity. Thereafter, the Enforcement Division would have 60 days to act upon the request, favorably or not in its discretion; in this context the Enforcement Division should provide a brief statement of its reasons for its decisions. In reaching its decisions the Enforcement Division would have the inherent authority to consult with Executive Branch agencies of the US government.
Recently the SEC responded to the letter (see here). The SEC thanked SERAP for its ‘thoughtful submission” and stated that it will “give appropriate consideration” to its suggestions while also noting as follows. “Although the macro effects of corruption can be ascribed generally, the framework of our securities laws requires a proximate connection to the harm caused by a particular violation. The question of identifying investors or other parties that suffer cognizable harm in connection with the securities law violation(s) at issue in a given enforcement matter is driven by the facts and circumstances of that particular case.”
For more, including my views, see here from Trustlaw.
Others are also thinking about the issue of where FCPA enforcement proceeds should go. In this draft paper titled “Reforming the Foreign Corrupt Practices Act to Reduce Rent Seeking and Better Deter Transnational Bribery,” Matthew Turk argues as follows: “(1) the SEC should cease retaining profits disgorged by corporate defendants; (2) disgorgements should be transferred to the Host country where the bribe took place, conditional on the Host government’s cooperation with the FCPA investigation; and (3) if cooperation is not forthcoming, disgorgement proceeds should be transferred to the OECD Working Group, an international organization designed to facilitate the enforcement of an important anti-bribery treaty.” According to Turk, “Reforming disgorgement practices in the manner suggested here would not constitute a legalistic attempt to ratchet the total level of anti-corruption enforcement up or down in a particular direction. Instead it would re-allocate the proceeds from FCPA enforcement on a global scale so as to properly align the incentives of the parties involved and provide greater access to the information required for effective enforcement.”
Weekend Reading Stack
I recommend this recent Q&A in Metropolitan Counsel with Homer Moyer (Miller & Chevalier) a “Dean” of the FCPA. Might as well make it a Homer Moyer weekend – see here for a prior Q&A post on this site with Moyer.
Understanding Wal-Mart
Prior posts here and here discussed and analyzed the New York Times April 21st article regarding Wal-Mart and its potential FCPA exposure. As noted in the prior posts, the New York Times article was both unremarkable and remarkable at the same time. Wal-Mart has dominated the news cycle not because it is under FCPA scrutiny (this was known since December 2011 when Wal-Mart disclosed its FCPA scrutiny joining a list of approximately 100 companies known to be under FCPA investigation). Rather, Wal-Mart has dominated the news cycle because of how the company acted, or failed to act, since learning of potential FCPA issues in approximately 2005. Thus, Wal-Mart is mostly a corporate governance story.
Even so, there are some core and fundamental FCPA issues worthy of exploration. This post discusses many of the same issues I’ve discussed with journalists and others over the past week. Given the space constraints of media outlets, the below was understandably reduced to one or two sentences. It is in instances like this when I particularly enjoy having my own website and having the ability to go long and deep.
So long and deep we shall go and the issues discussed below are informed by, among other things, my review of the FCPA’s entire legislative history and my years as an FCPA practitioner. Although focused on the FCPA’s “foreign official” element, a thorough and comprehensive review of the FCPA’s legislative history can be found here (my “foreign official” declaration used in connection with several recent judicial challenges). My article “The Story of the Foreign Corrupt Practices Act” is forthcoming in the Ohio State Law Journal.
Do the Wal-Mart Mexico payments at issue violate the FCPA’s anti-bribery provisions? From a practical standpoint, does it even matter?
The FCPA’s Anti-Bribery Provisions
Two distinct and important questions can be asked about many instances of FCPA scrutiny, including Wal-Mart’s, in this new era of FCPA enforcement.
The first question is whether, given the DOJ and SEC’s current enforcement theories, the Mexican payments at issue – allegedly in connection with permitting, licensing and inspection issues – can expose Wal-Mart to an FCPA enforcement action? The answer is likely yes and in the past several years the enforcement agencies have brought several FCPA enforcement actions premised on payments to obtain foreign licenses, permits and the like. For instance see here (and embedded posts therein) for the numerous Panalpina related enforcement actions in 2010. See here at pages 972-975 for a listing of such cases 2007-2009.
The second (and from my perspective more important) question is whether Congress, in passing the FCPA, intended the law to capture payments occurring outside the context of foreign government procurement and involving ministerial and clerical acts by foreign officials. The answer from the FCPA’s legislative history is no.
In the mid-1970’s Congress learned of a variety of foreign corporate payments to a variety of recipients and for a variety of reasons. Congress accepted and acknowledged in passing the FCPA that it was capturing only a narrow range of foreign payments. For instance the relevant Senate Report in May 1977 specifically notes that “the committee has recognized that the bill would not reach all corrupt overseas payments.” Likewise, the relevant House Report in September 1977 also states that “the proposed law will not reach all corrupt payments overseas.”
Of note, in November 1977 (a month prior to passage of the FCPA in December 1977), Representative Robert Eckhardt (D-TX, a Congressional leader on the foreign payments issue) stated on the House floor as follows. “Payments to a [foreign official with ministerial or clerical duties] for instance, to complete a form that ought, in equity, to be completed, to give everybody equal treatment, to move the goods off a dock which he will not move without a tip, a mordida, I think, as they call it in the Spanish language, a facilitating payment, or a grease payment would not constitute a bribe.”
Thus, when the FCPA was passed in December 1977 it specifically excluded from the definition of “foreign official” “any employee of a foreign government or any department, agency, or instrumentality thereof whose duties are essentially ministerial or clerical.” This was the FCPA’s original (albeit indirect) facilitating payment or grease exception. The relevant House Report states in pertinent part as follows: “… a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must be performed in any event.”
When Congress amended the FCPA in 1988 it, among other things, amended the definition of foreign official by removing this indirect facilitating payment exception from the “foreign official” definition by creating a stand-alone facilitating payment exception currently found in the statute. The relevant House Report indicates that Congress did not seek to disturb Congress’s original intent. “The policy adopted by Congress in 1977 remains valid, in terms of both U.S. law enforcement and foreign relations considerations. Any prohibition under U.S. law against this type of petty corruption would be exceedingly difficult to enforce, not only by U.S. prosecutors but by company officials themselves. Thus while such payments should not be condoned, they may appropriately be excluded from the reach of the FCPA. U.S. enforcement resources should be devoted to activities have much greater impact on foreign policy.”
Even if a payment does not meet the FCPA’s facilitation payments exception, in order for there to be a violation of the FCPA’s anti-bribery provisions, all statutory elements must be met including the “obtain or retain business” element.
To my knowledge, the enforcement theory that payments outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions has been subjected to judicial scrutiny three times. These three judicial decisions are summarized below.
Kay Trial Court
In 2001, David Kay and Douglas Murphy (“Defendants”), the president and vice president of Houston-based American Rice, Inc. (“ARI”), were criminally indicted. The indictment charged FCPA anti-bribery violations and alleged that the defendants made improper payments to Haitian “foreign officials” for the purpose of reducing customs duties and sales taxes owed by ARI to the Haitian government. The indictment, while specific as to other items, merely tracked the FCPA’s “obtain or retain business” language and did not specifically allege how the alleged payments assisted ARI in obtaining or retaining business in Haiti or what business was obtained or retained. As stated by the court: “In other words, the indictment recite[d] no facts that could demonstrate an actual or intended cause-and-effect nexus between reduced taxes and obtaining identified business or retaining identified business opportunities.”
In a case of first impression in the federal courts, the court granted Defendants’ motion to dismiss the indictment and held, as a matter of law based on the FCPA’s legislative history, that the alleged payments were not payments made to “obtain or retain business” and thus did not fall within the scope of the FCPA’s anti-bribery provisions. See 200 F.Supp.2d 681 (S.D. Tex. 2002).
Mattson / Harris
A few months after the trial court decision in Kay, the Southern District of Texas again considered whether payments made outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions. As noted in this previous post, the Mattson and Harris enforcement action (a civil enforcement action brought by the SEC) involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment. The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment. The court noted that U.S. v. Kay had already dismissed that case finding that the plain language of the FCPA does not prohibit goodwill payments to foreign government officials to reduce a tax obligation. However, the SEC attempted to distinguish the trial court’s Kay ruling by arguing that in the civil enforcement context, the Court should interpret the FCPA’s language more liberally than in criminal cases. The court rejected the SEC’s arguments and followed the trial court’s analysis in Kay that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.” See this Memorandum and Order (Sept. 9, 2002). As noted in this release, the SEC dropped its appeal in July 2004.
Of interest is that Mattson’s lawyers, Martin Weinstein and Robert Meyer of Willkie Farr & Gallagher, were the lawyers identified in the New York Times articles who advised Wal-Mart in 2005 on an investigative work plan that was apparently rejected by Wal-Mart.
Kay Fifth Circuit Ruling
The DOJ appealed the 2002 decision of the Southern District of Texas dismissing the indictment and one issue on appeal was whether payments to “foreign officials” to obtain favorable tax and customs treatment can come within the scope of the FCPA’s anti-bribery provisions.
The Fifth Circuit, like the trial court, concluded that the FCPA’s “obtain or retain business” element was ambiguous and it thus analyzed the FCPA’s legislative history. See 359 F.3d 738 (5th Cir. 2004). The Fifth Circuit focused specifically on the U.S. Senate’s 1977 sponsored bill and the SEC report on which the Senate’s proposal was based. According to the court, the SEC report “exhibited concern about a wide range of questionable payments [including those at issue in Kay] that were resulting in millions of dollars being recorded falsely in corporate books and records.” Although the Fifth Circuit recognized that the Senate’s proposal did not expressly cover payments that seek to influence the administration of tax laws or seek a favorable tax treatment, the Senate, in the words of the court, “was mindful of bribes that influence legislative or regulatory actions, and those that maintain established business opportunities.”
In short, the Fifth Circuit was convinced that Congress intended to prohibit a range of payments wider than those that only directly influence the acquisition or retention of government contracts or similar arrangements. The Fifth Circuit held that making payments to a “foreign official” to lower taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business. The court concluded that there was “little difference” between these type of payments and traditional FCPA violations in which a company makes payments to a “foreign official” to influence or induce the official to award a government contract.
However, the Kay court empathically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. According to the court, the key question of whether Defendants’ alleged payments constituted an FCPA violation depended on whether the payments were intended to lower ARI’s costs of doing business in Haiti enough to assist ARI in obtaining or retaining business in Haiti. The court then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country. On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.
The court specifically stated: “[I]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”
In short, the enforcement theory that payments outside the context of foreign government procurement satisfy the FCPA’s “obtain or retain business” has been subjected to judicial scrutiny three times.
The scorecard: US – 1; Defendants – 2; or if you prefer US – .5; Defendants – 2.5 (recognizing that the 5th Circuit decision is equivocal).
Contrary to popular misperception, Kay thus does not hold that all payments to a “foreign official” outside the context of foreign government procurement fall within the FCPA’s scope. Rather, the decision merely holds that Congress intended for the FCPA to apply broadly to payments intended to assist the payer, directly or indirectly, in obtaining or retaining business and that payments to a “foreign official” outside the context of foreign government procurement can, under appropriate circumstances, fall within the statute. Given the facts and circumstances the Kay court found relevant, it is highly fact-dependant analysis whether a payment to a “foreign official” satisfies the “obtain or retain business” element outside of the context of foreign government procurement.
A key portion from the Kay ruling likely relevant in Wal-Mart is the following: “there are bound to be circumstances” in which payments outside the context of foreign government procurement merely increase the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.
Despite the equivocal nature of the Kay holding, (and the enforcement agencies overall losing record on the issue) the decision clearly energized the enforcement agencies and post-Kay there has been a significant increase in FCPA enforcement actions where the alleged improper payments involve customs duties and tax payments or are otherwise alleged to have assisted the payer in securing foreign government licenses, permits, and certifications which assisted the payer in generally doing business in a foreign country. For a listing of many such cases, see my scholarship, “The Facade of FCPA Enforcement” – here. None of the enforcement actions profiled therein were challenged or subjected to judicial scrutiny.
It thus remains an open question whether payments outside the context of foreign government procurement, in any particular case if subjected to judicial scrutiny, (i) would satisfy the FCPA’s “obtain or retain business” element; or (ii) are too attenuated to obtaining or retaining business (such as merely increasing the profitability of an existing profitable business) and thus, per the Kay holding, not a violation of this key FCPA anti-bribery element.
Does It Even Matter?
A logical and practical question then becomes, does it even matter? As in most FCPA enforcement actions, the answer in any future Wal-Mart FCPA enforcement action is likely no. At the end of the day it will not matter if Wal-Mart’s payments, if subjected to judicial scrutiny, would result in FCPA violations.
The short reason is that while Wal-Mart’s counsel can make valid and legitimate legal and factual arguments around conference room tables behind closed doors in Washington D.C., to truly challenge the DOJ in an instance of FCPA scrutiny, and to put the DOJ to its high burden of proof at trial, first requires that the company be criminally indicted, something few corporate leaders are willing to let happen. It is simply easier, more cost-efficient, and more certain to resolve FCPA scrutiny notwithstanding aggressive (and dubious) enforcement theories or the existence of valid and legitimate defenses. Also relevant to this issue is the existence of the “carrots” and “sticks” relevant to resolving FCPA enforcement actions. To learn more about these “carrots” and “sticks” please read my article “The Facade of FCPA Enforcement” – here.
To my knowledge, in the FCPA’s 35 year history, only two corporate defendants have put the DOJ to its high burden of proof in trial. Wal-Mart will not become the third. Even so, it is instructive to learn about the two instances in which corporate defendants have put the DOJ to its high burden of proof at trial.
The DOJ’s ultimate record? 0-2.
As noted in this prior post, in 1990, Harris Corporation (“Harris” – a publicly traded telecom provider), along with certain of its executives, were charged in a criminal indictment concerning conduct in Colombia. In 1991, the court, after hearing the prosecution’s case, granted a defense motion for a verdict of acquittal. The San Francisco Chronicle stated as follows. “Shortly after the government rested its case, U.S. District Judge Charles Legge of San Francisco ruled from the bench that ‘no reasonable jury’ could convict the company nor its executives on any of the five bribery-related counts for which they were indicted. Citing insufficient evidence, Legge said the government had failed to show any intent by the defendants to enter into a criminal conspiracy. Legge also said it was the first time in his six years on the federal bench that he had dismissed a criminal case at mid-trial for lack of evidence.”
As noted in this prior post, in December 2011 (after the DOJ had secured trial court jury verdicts convicting privately held Lindsey Manufacturing Company and its CEO and CFO of FCPA offenses), Judge Howard Matz (C.D. Cal). vacated the convictions and dismissed the indictment based on numerous prosecutorial misconduct issues that together added “up to an unusual and extreme picture of a prosecution gone badly awry.” In addition to prosecutorial misconduct, Judge Matz noted the “weakness of the Government’s case” and that the “case against the Lindsey Defendants was far from compelling.”