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Ng’s Motion To Dismiss Denied – Judge States That Internal Controls Provisions Can Be Implicated Even In Transactions In Which An Issuer Does Not Use Its Own Assets To Pay An Alleged Bribe

As highlighted in this prior post [1], in November 2018 the DOJ criminally charged former Goldman Sachs executives Tim Leissner and Ng Chong Hwa (Roger Ng) (along with Low Taek Jho – Jho Low) with Foreign Corrupt Practices Act offenses for paying bribes to various Malaysian and Abu Dhabi officials in connection with 1Malaysia Development Berhad (1MDB), Malaysia’s state-owned and state-controlled investment development company.

Leissner pleaded guilty and in October 2020 Goldman Sachs resolved a net $1.66 billion FCPA enforcement action [2] based on the same conduct. (See additional posts here [3] and here [4]).

Previous posts here [5], here [6] and here [7] highlighted Ng’s motion to dismiss in which he argues that the DOJ’s case against him suffers from several factual errors and legal deficiencies. Ng also suggested that the DOJ scripted Leissner’s guilty plea and that Goldman’s DPA was entered into for reasons of risk aversion and otherwise compromises his ability to defend himself.

As to FCPA specific issues, Ng argued as follows:

Last Friday, U.S. District Court Judge Margo Brodie (E.D.N.Y)(pictured) denied Ng’s motion to dismiss (see here [8]). The lengthy 161 page decision is heavy on alleged facts and non-FCPA specific issues including venue.

While many of Judge Brodie’s conclusions were based on the procedural posture of the case at the motion to dismiss state, Judge Brodie did make a meaningful conclusion that the FCPA’s internal controls provisions can be implicated even in transactions in which an issuer does not use its own assets to pay an alleged bribe.

As to the first FCPA issue highlighted above, Judge Brodie summarized the parties positions as follows (various internal citations omitted):

“In his initial memorandum of law, filed before the Government superseded the Indictment, Ng argued that the Court should dismiss Count One of the Indictment because it failed to allege essential elements of the crime charged.  In support, Ng argued that Count One did not allege that he was an agent or employee of an actual issuer of U.S. securities, as required, but rather created “U.S. Financial Institution #1” as “an artificial combination of different business entities, one of which [i.e., the Goldman Sachs Group] is an issuer of U.S. securities and others of which (including Ng’s actual employers [i.e., the Goldman Sachs Group’s subsidiaries]) are not.” Ng argued that, in doing so, “the Government relieve[d] itself of having to prove the statutory element that Ng must be an employee or an agent of an issuer.” In addition, Ng argued that the “the Indictment [was] both inconsistent and . . . imprecise in how it describe[d] his employment,” referring to him sometimes as an agent and at other times as an employee of U.S. Financial Institution #1 but always failing to describe “what made Ng an agent or employee of an ‘issuer,’” as it did not allege which specific entity he worked for or whether that entity was an issuer and thus would not allow the jury to decide whether he was an agent or employee of an issuer. In his reply to the Government’s opposition, Ng argues that the Government superseded the indictment only four days after serving its opposition to change Count One based on his arguments, “chang[ing] the identity of the ‘issuer’ . . . from a made-up ‘[U.S.] Financial Institution [#1]’ to ‘The Goldman Sachs Group, Inc.,’” and adding the allegation that Ng is also “a stockholder thereof acting on behalf of such issuer.”

In its opposition to Ng’s motion, the Government argued that Count One satisfied the pleading requirements of Rule 7 and the Constitution because “it not only track[ed] the statutory language — which is all that is required — but it also provide[d] additional specific information regarding [Ng’s] criminal scheme” and thus “fairly inform[ed] Ng of the charge against him and enable[d] him to ‘plead an acquittal or conviction in bar of future prosecutions for the same offense.’”  The Government also argued that the Indictment did not “reliev[e] it[] of having to prove the statutory element that [Ng] must be an employee or agent of an issuer” by using the term “U.S. Financial Institution #1” because whether that term referred solely to the Goldman Sachs Group or to a larger group of entities that included the Goldman Sachs Group, Ng was on notice that he was being charged with conspiracy to violate the FCPA as an employee and agent of the issuer Goldman Sachs Group. In addition, the Government argued that it “is axiomatic that in a criminal trial an indictment is not evidence,” and thus the Indictment’s allegations “in no way relieve[d] the [G]overnment of its burden to prove to the jury that [Ng] was, in fact, an employee or agent of an ‘issuer’ under the FCPA.” In its sur-reply, the Government argues that it did not “change[] the identity of the ‘issuer,’” because it “disclosed to [Ng] in pre-trial discovery that [the Goldman Sachs Group] was the issuer and repeated that fact in its opposition.”

Judge Brodie then stated (various internal citations omitted):

“The FCPA explicitly lays out several different categories of persons over whom the government may exercise jurisdiction.” As relevant here, “the statute prohibits a company issuing securities regulated by federal law (an ‘issuer’) from using interstate commerce in connection with certain types of corrupt payments to foreign officials.” In addition, “the prohibitions on issuers . . . also apply to ‘any officer, director, employee, or agent of’ the entity, ‘or any stockholder thereof acting on behalf of’ the entity.”

Count One of the Indictment charged Ng with conspiring to violate the FCPA under 15 U.S.C. §§ 78dd-1, 78ff(a), and 78ff(c)(2)(a) in violation of the conspiracy statute, 18 U.S.C. § 371. In support, the Indictment alleged that “U.S. Financial Institution #1 was a global investment banking, securities and investment management firm” that “conducted its activities primarily through various subsidiaries and affiliates (collectively ‘U.S. Financial Institution #1’), including those that employed [Ng],” and that it “had a class of securities registered pursuant to [15 U.S.C. § 78l] . . . and was required to file reports with the U.S. Securities and Exchange Commission under [15 U.S.C. § 78o(d)],” making it “an ‘issuer’ within the meaning of [15 U.S.C. § 78dd-l(a)].” In addition, the Indictment alleged that Ng was “employed as a Managing Director by various subsidiaries, and acted as an agent and employee, of U.S. Financial Institution #1 . . . from approximately 2005 to May 2014,” making Ng “an ‘employee’ and ‘agent’ of an ‘issuer’ within the meaning of [15 U.S.C. § 78dd1(a)].” The Superseding Indictment repeats these allegations, substituting the Goldman Sachs Group for U.S. Financial Institution #1 and adding that Ng was also a stockholder of the Goldman Sachs Group’s.

Ng’s arguments with respect to Count One have been mooted by the Superseding Indictment, which, as discussed above, controls, and which, as Ng notes, substitutes the Goldman Sachs Group for “U.S. Financial Institution #1” and adds the specific allegation that Ng is a stockholder of the Goldman Sachs Group acting on its behalf. Because the Superseding Indictment specifically names the Goldman Sachs Group as the issuer and alleges that Ng is not only an employee and agent of the Goldman Sachs Group but also owned stock in it, and because the Superseding Indictment otherwise tracks the statutory language, it fairly informs Ng of the charge against him and enables him to plead an acquittal or conviction in bar of future prosecutions for the same offense.

Accordingly, the Court finds that Count One of the Superseding Indictment sufficiently tracks the language of 15 U.S.C. § 78dd-1(a) and denies Ng’s motion to dismiss this count.”

[9]

As to the second FCPA issue raised by Ng – that Count two of the indictment should be dismissed because it fails to allege that Ng conspired to circumvent a set of internal accounting controls cognizable under the FCPA – Judge Brodie summarized the parties positions as follows (various internal citations omitted):

“Ng argues that the Court must dismiss Count Two because the Superseding Indictment fails to allege that he conspired to circumvent a set of internal accounting controls cognizable under the FCPA. In support, he argues that (1) the statutory text and objectives of the FCPA’s internal accounting control provision demonstrate that the provision applies only to the transactions and assets of an “issuer,” but Count Two’s allegations relate only to transactions and assets that belonged to non-issuer 1MDB at the time of the violations, rather than to the Goldman Sachs Group; (2) prior applications of the internal accounting control provision “do not square” with the allegations in Count Two, ; and (3) because the alleged bribes did not relate to a Goldman Sachs Group transaction or its assets, the internal accounting controls provision is unconstitutionally vague as applied and Count Two must be dismissed.

The Government argues that (1) the Superseding Indictment sufficiently alleges relevant “transactions,” “assets,” and “internal accounting controls” of the Goldman Sachs Group; (2) Ng’s challenges relate to the sufficiency of the evidence and adequacy of the pleading of the Superseding Indictment and are therefore fact questions for the jury, and (3) Ng’s argument that the internal accounting controls provisions of the FCPA are unconstitutionally vague as applied is both premature and fails on the merits.”

In pertinent part, Judge Brodie stated (various internal citations omitted):

“While the FCPA’s internal accounting controls provision is “supportive of accuracy and reliability in the auditor’s review and financial disclosure process, this provision should not be analyzed solely from that point of view.” Rather, “[t]he internal controls requirement is primarily designed to give statutory content to an aspect of management stewardship responsibility, that of providing shareholders with reasonable assurances that the business is adequately controlled.” “The internal accounting controls element of a company’s control system is that which is specifically designed to provide reasonable, cost-effective safeguards against the unauthorized use or disposition of company assets and reasonable assurances that financial records and accounts are sufficiently reliable for purposes of external reporting.” “Internal controls safeguard assets and assure the reliability of financial records, one of their main jobs being to prevent and detect errors and irregularities that arise in the accounting systems of the company. Internal accounting controls are basic indicators of the reliability of the financial statements and the accounting system and records from which financial statements are prepared.”

Citing World-Wide Coin extensively (see here [10] for the prior post), Judge Brodie stated:

“Although not specifically delineated in the Act itself, the following directives can be inferred from the internal controls provisions”:

(1) Every company should have reliable personnel, which may require that some be bonded, and all should be supervised. (2) Account functions should be segregated and procedures designed to prevent errors or irregularities. The major functions of recordkeeping, custodianship, authorization, and operation should be performed by different people to avoid the temptation for abuse of these incompatible functions. (3) Reasonable assurances should be maintained that transactions are executed as authorized. (4) Transactions should be properly recorded in the firm’s accounting records to facilitate control, which would also require standardized procedures for making accounting entries. Exceptional entries should be investigated regularly. (5) Access to assets of the company should be limited to authorized personnel. (6) At reasonable intervals, there should be a comparison of the accounting records with the actual inventory of assets, which would usually involve the physical taking of inventory, the counting of cash, and the reconciliation of accounting records with the actual physical assets.

“Examples of internal controls include manual or automated review of records to check for completeness, accuracy and authenticity; a method to record transactions completely and accurately; and reconciliation of accounting entries to detect errors.”

The Superseding Indictment alleges that “[i]n or about and between January [of] 2009 and May [of] 2014,” Ng “knowingly and willfully conspir[ed] to . . . circumvent and cause to be circumvented a system of internal accounting controls at [the] Goldman Sachs Group” in violation of 15 U.S.C. §§ 78m(b)(2)(B), 78m(b)(5), and 78ff(a). In support, it alleges that the Goldman Sachs Group is an “issuer” under the FCPA, , and that the Goldman Sachs Group used its own assets to purchase the bonds at issue in the three bond transactions discussed. It further alleges that in order to secure the bond deals, Ng and others conspired to circumvent the Goldman Sachs Group’s internal accounting controls by concealing Low’s involvement in procuring the deals from the Goldman Sachs Group’s Compliance Group and Intelligence Group — which were responsible for overseeing and enforcing the Goldman Sachs Group’s internal accounting controls — to prevent any investigation into the business relationship with Low that might jeopardize the deals and “to prevent [them] from attempting to stop Goldman from participating in the lucrative transactions.” Ng allegedly concealed Low’s involvement despite knowing that Low played a central role in the bond transactions and that he intended to use funds misappropriated from the bond deals to pay bribes promised to foreign officials. The Superseding Indictment also alleges that, later, members of the conspiracy used the same funds to pay bribes to the foreign officials and kickbacks to themselves, after laundering the funds through multiple shell companies owned and controlled by the co-conspirators.

Accepting these allegations as true, the Court finds that the Superseding Indictment sufficiently states an offense under 15 U.S.C. § 78m(b)(2)(B). Ng’s arguments to the contrary are unavailing.

First, Ng argues that the Court must dismiss Count Two because “the FCPA’s internal accounting control provision applies only to the transactions and assets of the issuer,” but none of Count Two’s allegations relate to an internal accounting of a Goldman Sachs Group transaction or assets, as the Goldman Sachs Group did not directly pay bribes with its own assets; rather, they relate to bribes that were paid from assets that belonged to non-issuer 1MDB at the time. As the Government observes, “[a]t the core of [Ng’s] argument is his . . . assertion that the ‘bribes did not involve any of [the] Goldman [Sachs] Group’s funds and therefore had nothing to do with [the Goldman Sachs Group’s] internal accounting controls.’” However, the relevant “transaction” and use of “assets” are the Goldman Sachs Group’s purchase of the bonds with its own assets, which the Government alleges would not have been authorized by the groups at the Goldman Sachs Group that enforce its internal accounting controls had Ng and others not concealed Low’s involvement in the bond transactions. In addition, as the Government also notes, the internal accounting controls provision does not strictly require that the issuer’s assets be used, as subsection 78m(b)(2)(B)(i) makes no mention of “assets” but rather focuses on “transactions.” Nor does the plain language of the statute support Ng’s assertion that internal accounting controls can only be implicated in transactions where an issuer uses its own assets to pay a bribe directly. Because the Superseding Indictment alleges that Ng and others conspired to conceal information from the groups at the Goldman Sachs Group responsible for enforcing the internal accounting controls, and that, had the concealed information been known, it would have triggered an investigation in accordance with those controls that likely would have prevented the authorization of the bond transactions and access to the assets used to purchase the bonds, the allegations in Count Two are sufficient to state an offense under these sections.

Second, Ng argues that the Superseding Indictment fails to identify an internal accounting control that was violated, instead identifying the compliance and legal groups within the Goldman Sachs Group as internal controls, though they are not “accounting related.” In the civil context, courts have dismissed claims that a defendant conspired to circumvent internal accounting controls where the SEC failed to specifically allege which controls were violated.

However, in the criminal context, allegations that track the language of the statute are generally sufficient to state an offense under Rule 12(b)(3)(B), and questions such as whether “transactions” or “assets” of the issuer were involved, and whether the controls at issue are internal “accounting” controls, are matters for the jury to decide.

Third, Ng argues that prior applications of the internal accounting controls provision “do not square” with the allegations in Count Two.  Specifically, he argues that “the Government’s theory of Count Two is . . . inconsistent with the Government’s own Resource Guide To The U.S. Foreign Corrupt Practices Act,” which “limits application of the internal accounting controls provision to accounting controls regarding ‘the firm’s assets.’” In support, Ng argues that “there has never been a criminal case where a defendant was convicted for violating his company’s internal accounting controls when it was undisputed that his company did not engage in a transaction concerning its own funds,” and therefore “every existing criminal violation of the internal accounting controls provision . . . involved an affirmative falsification of some record, document or piece of information that was maintained by the issuer and involved the company’s assets, such that it could be reflected on the issuer’s financial statement.”

As discussed above, the Superseding Indictment alleges that Goldman Sachs Group underwrote the 1MDB bond transactions. Therefore, this is not a case, as Ng suggests, that does not involve a transaction by the firm or use of the firm’s assets. In addition, as the Government argues, Ng’s suggestion that the circumvention of internal accounting controls must be attended by the falsification of an accounting document appears to conflate the “books and records” provision of the FCPA with the “internal accounting controls” provision of the FCPA under which he is charged. Under the FCPA’s “books and records” provision, every issuer must “make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” 15 U.S.C. §§ 78m(b)(2)(A). While the falsification of a book or record is a common feature of violations of this provision, the “internal accounting controls” provision has no such requirement. Rather, subsections 78m(b)(2)(B)(i) and (iii) of the internal accounting provision, for example, only require that issuers maintain a system of controls sufficient to provide reasonable assurances that “transactions are executed in accordance with management’s general or specific authorization,” 15 U.S.C. § 78m(b)(2)(B)(i), and that “access to assets is permitted only in accordance with management’s general or specific authorization.” Thus, the focus in these sections “is not on actual entries into the books and records” but on “management control.” As the leading case on the internal accounting controls provision — and the main authority cited by the parties — noted, “while [this provision] is supportive of accuracy and reliability in the auditor’s review and financial disclosure process, [it] should not be analyzed solely from that point of view.” World-Wide Coin Invs. Ltd., 567 F. Supp. at 749–50. Rather, “[t]he internal controls requirement is primarily designed to give statutory content to an aspect of management stewardship responsibility, that of providing shareholders with reasonable assurances that the business is adequately controlled.” Thus, the Superseding Indictment’s allegations that Ng concealed Low’s involvement in the bond deals in order to ensure that the Goldman Sachs Group would authorize them is consistent with the Government’s Resource Guide, which states that the focus is not only on maintaining controls to ensure accurate accounting but also on “maintain[ing] a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the firm’s assets.”

Finally, Ng argues that because Count Two’s allegations “do not relate to a Goldman [Sachs Group] transaction or assets,” the statue is unconstitutionally vague as applied, as it (1) fails to give sufficient notice of prohibited conduct because “a person of ordinary intelligence reading the FCPA’s internal accounting control provision would believe that it applies only to accounting of an issuer’s transactions and assets,” and (2) is prone to “subjective” enforcement because once the provision “is untethered from accounting, there is no limit to how far prosecutors can expand the term.” The Government argues that Ng’s void-for-vagueness argument is premature because not all the facts regarding the Goldman Sachs Group’s internal accounting controls and Ng’s co-conspirators’ knowing and willful circumvention of them can be determined at this stage. In addition, the Government argues that Ng’s void-for-vagueness argument fails on its merits because (1) the internal accounting controls provision gives sufficient notice to Ng that his concealment of Low’s involvement in the bond deals was related to a transaction or asset of [the Goldman Sachs Group’s] — namely, its underwriting of the bond deals — and (2) the internal accounting controls provision is not prone to subjective enforcement because it ties the allegations against Ng to the Goldman Sachs Group’s underwriting of the bond deals.

To ensure that persons are not denied liberty without due process, “the void-forvagueness doctrine requires that a penal statute define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement.” “The doctrine addresses concerns about (1) fair notice and (2) arbitrary and discriminatory prosecutions.” “Under the ‘fair notice’ prong, a court must determine ‘whether the statute, either standing alone or as construed, made it reasonably clear at the relevant time that the defendant’s conduct was criminal.’” “The arbitrary enforcement prong requires that a statute give ‘minimal guidelines’ to law enforcement authorities, so as not to ‘permit a standardless sweep that allows policemen, prosecutors, and juries to pursue their personal predilections.’” “[V]agueness challenges to statutes not threatening First Amendment interests are examined in light of the facts of the case at hand; the statute is judged on an as-applied basis.”

Ng’s void-for-vagueness argument is based on the premise that the allegations in the Superseding Indictment “do not relate to a Goldman [Sachs] Group transaction or assets.” However, as discussed above, the Court finds otherwise because the relevant “transactions” and uses of “assets” are the Goldman Sachs Group’s purchase of the bonds with its own assets, which the Government alleges would not have been authorized by the groups at the Goldman Sachs Group that enforce its internal accounting controls had Ng and others not concealed Low’s involvement in the bond transactions. Accordingly, because the internal accounting controls provision gives sufficient notice to Ng that his concealment of Low’s involvement in the bond deals was related to a transaction or asset of the Goldman Sachs Group’s — namely, its underwriting of the bond deals — the provision is not prone to subjective enforcement because it ties the allegations against Ng to the transactions and assets used to conduct them.

Accordingly, the Court finds that Count Two of the Superseding Indictment sufficiently states an offense under 15 U.S.C. § 78m(b)(2)(B).”

As highlighted in the original post discussing Ng’s motion to dismiss, he also argued that the DOJ scripted Leissner’s guilty plea and that Goldman’s DPA was entered into for reasons of risk aversion and otherwise compromises his ability to defend himself.

A future post will discuss this aspect of Judge Brodie’s decision.

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