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Where Does The Truth Lie?


If the DOJ and/or SEC make allegations in a Foreign Corrupt Practices Act enforcement action, and a risk averse corporation agrees to resolve the enforcement action in the absence of judicial scrutiny, does that mean the allegations are true?

Not necessarily.

For instance, a component of the 2014 HP enforcement action (see here and here for prior posts) involved DOJ and SEC allegations concerning business conduct in Mexico.

In this NPA, the DOJ alleged that HP Mexico indirectly made cash payments to a Pemex Chief Information Officer. In this administrative order, the SEC alleged the same thing.

Pemex raises money from private investors, including those in the U.S., and thus every year files an annual report with the SEC. The company’s most recent annual report states as follows concerning the allegations in the DOJ and SEC FCPA enforcement action.

“On April 9, 2014, the SEC issued an order imposing sanctions against Hewlett-Packard Company (or HP) based on its findings that HP’s subsidiaries in Mexico, Russia and Poland made improper payments to certain public officials in order to obtain public contracts in violation of the U.S. Foreign Corrupt Practices Act. In the case related to Mexico, the sanctions related in part to allegations that [HP Mexico] paid a Mexican information-technology and consulting company more than U.S. $1 million to win a software and licensing contract with [Pemex] worth approximately U.S. $6 million. The SEC’s order alleged that a former officer of [Pemex] received a portion of the HP subsidiary’s unlawful payment to the consulting company. The Internal Control Body of [Pemex] concluded its investigation after finding no improper payment.”

Where does the truth lie?

The public will likely never know, but this much is true.

The DOJ and SEC allegations, while accepted by a risk averse company, were not subjected to any judicial scrutiny. Moreover, there are no consequences to the DOJ and SEC should the allegations not be accurate and there is no accountability for untrue statements.

On the other hand, Pemex’s statement are contained in an SEC filing and are thus statements to the market. The consequences to Pemex should its statements not be true can be securities fraud actionable under Section 10(b) and Rule 10b-5 for making untrue statements of material facts.  Such actions could be brought by, among other plaintiffs, the SEC and shareholders.

To the extent the DOJ and SEC allegations in the HP Mexico are not accurate, it would be the first time agreed to allegations in a corporate FCPA enforcement action fall apart when subjected to scrutiny.

As highlighted in this prior post, in 2010, Innospec agreed to pay approximately $26 million to resolve DOJ and SEC enforcement actions. The conduct was wide-ranging in that the enforcement action involved alleged violations of U.S. sanctions regarding doing business in Cuba in addition to alleged conduct in violation of the FCPA.  Even as to the FCPA conduct, the enforcement action was wide-ranging and included typical Iraq Oil-for-Food allegations found in a number of previous enforcement actions (i.e. inflated commission payments to an agent which were then used to pay kickbacks to the government of Iraq) as well as alleged conduct in Indonesia.

The bulk of the enforcement action though concerned DOJ allegations that Ousama Naaman (Innospec’s agent in Iraq) paid various bribes to officials in Iraq’s Ministry of Oil (“MoO”) to “ensure” that a competitor’s product “failed a field trial test and therefore would not be used by the MoO” as well as other allegations that Naaman paid other bribes to officials of the MoO to obtain and retain contracts with MoO on Innospec’s behalf.

The DOJ’s criminal information alleged (or perhaps merely assumed) a casual connection between the alleged bribes and the failed field test, as well as two specific contracts: a 2004 Long Term Purchase Agreement (“LTPA”) and a 2008 Long Term Purchase Agreement.

However, in a U.K. civil proceeding, Innospec denied that bribes or the promise of bribes induced the 2004 LTPA, lead to the requirement of the field test or its result, or induced the 2008 LTPA.  Innospec argued that despite its admissions in the FCPA enforcement actions, the “court must look carefully and analytically at the evidence there is as to what bribes were paid and promised and when and whether any bribes paid or promised actually led to a decision different from that which would have been made anyway.”

The U.K. court held approximately 15 days of hearings with multiple witnesses to actually determine if there was a casual link between the alleged bribe payments or other benefits that Innospec obtained. The end result of this process is that the U.K. court did not find any casual links and indeed found false certain allegations in the DOJ’s FCPA enforcement action.

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