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On September 11, the DOJ announced that ZAO Hewlett-Packard A.O., a Russian subsidiary of Hewlett-Packard Company, pleaded guilty to conspiracy and felony violations of the anti-bribery and accounting provisions of the FCPA for making improper payments to Russian officials to secure a technology contract with the federal prosecutor's office. Following the guilty plea, a federal judge in the U.S. District Court for the Northern District of California sentenced HP to pay a $58.7 million fine. The guilty plea and fine are part of a larger agreement announced in April between HP, the DOJ, and the SEC, whereby HP and its international subsidiaries agreed to pay $108 million in criminal and civil penalties for bribing officials in Russia, Poland, and Mexico. The DOJ's Information accused the Russian subsidiary of the California technology company of improperly paying Russian officials millions of dollars in bribes to secure a $45 million information technology contract with the Office of the Prosecutor General of the Russian Federation. According to the DOJ, for several years company executives bribed Russian government officials using a multimillion dollar slush fund that was financed through an elaborate buyback scheme and concealed through the use of two sets of books and other off-the-books agreements. In its press release, the DOJ praised HP's "extensive cooperation" during the investigation, including conducting a "robust" internal investigation and engaging in "extensive" anti-corruption remedial efforts such as instituting disciplinary actions and enhancing its internal accounting, reporting and compliance functions. In April, HP said the misconduct was limited to a small number of people who are no longer with the company. While HP was required to implement a corporate compliance program and report annually for three years to the DOJ regarding the implementation thereof, HP was not required to engage a corporate monitor in its settlement of the DOJ's allegations.
On August 14, two former Terra Telecommunications Corp. executives convicted of FCPA and related offenses petitioned the U.S. Supreme Court for certiorari review of the U.S. Court of Appeals for the Eleventh Circuit's definition of "instrumentality" under the FCPA. In May, the Eleventh Circuit upheld the former executives' conviction under the FCPA and defined "instrumentality" as "an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own." As a consequence of this definition, the Eleventh Circuit deemed an employee of a partially state-owned Haitian telephone company to be a "foreign official" for purposes of the FCPA. In asking for certiorari review and in citing reasons to grant the petition, the former executives focused on the absence of a definition of "instrumentality" of a foreign government within the FCPA, which, according to petitioners, has resulted in persistent questions about the correct interpretation of the term. The petitioners faulted the Eleventh Circuit for applying "an unacceptably broad interpretation of the term 'instrumentality' that expands the reach of" the FCPA. In so doing, the former executives described the Eleventh Circuit's reasoning as "illogic[al]" and under "its statutory construction, a janitor working for U.S. Government-subsidized General Motors could qualify as a 'foreign official' if General Motors were located overseas." According to published reports, this is believed to be the first substantive FCPA cert petition in the history of the FCPA. In addition, the Supreme Court has never substantively addressed any FCPA issue.
Houston-based Cobalt International Energy, Inc. said in an August 5, 2014 securities filing that it received a Wells Notice in connection with the Securities and Exchange Commission's investigation of its oil-exploration operations in Angola. The Company stated in its filing that due to the SEC's investigation and recommendation, it may be "exposed to liabilities under the U.S. Foreign Corrupt Practices Act." Wells Notices indicate that the staff of the SEC has made a preliminary determination to recommend an enforcement action alleging violations of certain federal securities laws. According to Cobalt's 2013 10-K filing, the SEC first began an informal inquiry of the company in March 2011 which was later joined by the Department of Justice. In April 2012, as first reported by the Financial Times, allegations surfaced that three Angolan officials, including the head of the country's state-owned oil company and two military generals, held shares in Nazaki Oil and Gáz, the local partner in a Cobalt-led deepwater oil venture launched in early 2010. The government officials admitted owning shares in the joint venture but denied using their influence to award Cobalt oil-exploration rights in Angola. The company has previously "strongly refuted" allegations of wrongdoing and has said it was forced to enter into a joint venture with two Angolan-based oil exploration and production companies as part of its deal with the Angolan government.
Brian Bartholomay is an associate in the Washington, DC, office of Buckley Sandler LLP. Mr. Bartholomay assists clients in the financial services industry, primarily in litigation, regulatory and compliance matters. He provides litigation support and assists with large scale document reviews and productions related to complex litigation.
Mr. Bartholomay received his J.D. from Wake Forest University School of Law in 2006 and his B.A. from Davidson College in 2001.
On August 4, 2014, the United Kingdoms Serious Fraud Office announced that four former executives of Innospec Inc. (formerly known as Associated Octel Corp.) were sentenced following a long-running investigation related to conduct in in Indonesia and Iraq. Three of the four were sentenced to prison terms, with a former chief executive receiving four years in prison after being convicted at a jury trial earlier this year. A former regional sales director received an 18 month sentence following a conviction at trial, and another former CEO was sentenced to two years following a guilty plea. The fourth individual, a former business unit director, received a suspended 16-month sentence following a guilty plea. The sentencing of these former executives comes after Innospec pled guilty in 2010 to FCPA and anti-bribery criminal charges brought by DOJ and the UKs Serious Fraud Office, and after Innospec settled civil charges brought by the SEC. The charges alleged that Innospec, a global specialty chemicals company, had bribed Indonesian and Iraqi government officials to win sales of a gasoline additive after environmental legislation in the US and abroad led to a decline in sales of that additive. As part of the settlement, Innospec paid U.S. authorities $27.5 million, and paid UK authorities $12.7 million. Two of the four individuals sentenced in the UK had also previously settled with the SEC over civil FCPA charges.
On July 23, Thomas Baxter, General Counsel for the New York Federal Reserve Bank, in public remarks at a risk management conference, questioned the FCPA’s “exception for ‘facilitating or expediting payments’ made in furtherance of routine government action.” Mr. Baxter stated that “official corruption is a problem that some U.S. financial institutions have found challenging during the last year,” and suggested that those problems could derive from an organizational value system undermined by the facilitating payments exception. Mr. Baxter acknowledged that the exception “is grounded in a practical reality,” but expressed his preference for a zero tolerance standard. He explained that “when an organizational policy allows some types of official corruption . . ., this diminishes the efficacy of compliance rules that are directed toward stopping official corruption.” He urged U.S. financial institutions to foster organizational value systems that “go beyond black-letter U.S. law” with regard to official corruption. Mr. Baxter made these comments in the context of a broader speech on organizational culture and its impact on compliance in which he also suggested that foreign banks’ recent sanctions and tax evasion compliance woes could be explained by a difference in the corporate values of foreign and U.S. banks and their employees when it comes to laws designed to support broader U.S. public policy.
On July 28, the SEC announced that Smith & Wesson Holding Corporation agreed to pay $2 million to settle charges that the United States-based firearms manufacturer had violated the FCPA by making or authorizing improper payments to foreign officials in Pakistan and other countries in an effort to win contracts to sell weapons to overseas military and police forces. The settlement comes just weeks after Smith & Wesson announced in a June 19 securities filing with the SEC that the DOJ had abandoned its own related investigation without pursuing FCPA criminal charges. The claims against Smith & Wesson were filed in the SEC's administrative court. In the order instituting the settled administrative proceeding, the SEC alleged that Smith & Wesson from 2007 to 2010 engaged in a "pervasive effort" of making the improper payments in order to generate new overseas business. According to the SEC the only contract that was successfully consummated under the scheme arose after Smith & Wesson officials in 2008 authorized a third party agent to make cash payments and provide firearms to Pakistani police officials as gifts. The resulting agreement to sell more than 500 pistols yielded a profit to Smith & Wesson of more than $100,000, the SEC found. Similar improper payments and gifts that did not ultimately result in contracts for Smith & Wesson were allegedly made to foreign officials in Indonesia, Turkey, Nepal, and Bangladesh. As described in the SEC's order, Smith & Wesson failed to account for the improper payments and instead characterized them as legitimate commissions and business expenses. The order also found the illegal conduct was allowed to continue undetected for years because Smith & Wesson failed to establish an appropriate compliance program or adequate internal accounting controls in connection with its expanding business in "new and high risk" overseas markets. In addition to the $2 million settlement, which consists of disgorgement, prejudgment interest, and a civil penalty of more than $1.9 million, Smith & Wesson also agreed for the next two years to report to the SEC on its FCPA compliance efforts. In its press release, the SEC praised Smith & Wesson's cooperation with the investigation and its other remedial efforts following discovery of the bribery scheme, including the termination of the company's entire international sales staff and the implementation of "a series of significant measures to improve its internal controls and compliance process." Smith & Wesson consented to the settlement without admitting or denying the SEC's findings.
On July 14, the SEC moved for leave to file an Amended Complaint in its FCPA enforcement action against three former executives of Magyar Telekom, a Hungarian telecommunications company. The Amended Complaint dropped allegations that the defendants bribed officials in Montenegro, while maintaining allegations of bribery in Macedonia.
While this sort of pre-trial narrowing of the allegations is not unusual, the development is still notable for those willing to litigate FCPA cases against the government. Magyar previously settled with both the SEC and the Department of Justice based on both sets of bribery allegations, even admitting to a detailed statement of facts regarding the alleged bribes in Montenegro in its Deferred Prosecution Agreement. Yet those allegations evidently did not stand up to scrutiny in contested litigation against the individual defendants. As with the SECs recent enforcement action against two Noble Corp. executives (one of whom was represented by Buckley Sandler LLP), it is often the case that individual defendants may have more success defending FCPA charges even where related corporate entities have already admitted or settled those same charges.
Delaware Supreme Court Upholds Ruling Ordering Wal-Mart to Disclose Documents Relating to Mexican Bribery Allegations
On July 23, the Delaware Supreme Court unanimously upheld a ruling by the Court of Chancery granting Wal-Mart Stores, Inc. shareholders access to various documents relevant to highly publicized allegations that Wal-Mart engaged in a long-running bribery scheme in Mexico. At the same time, the Court also affirmed the Court of Chancery's ruling that the shareholders could not use confidential documents allegedly provided by an anonymous whistleblower. The shareholders initiated an action pursuant to Delaware General Corporation Law § 220, which authorizes shareholders to access corporate books and records for "any proper purpose." Wal-Mart voluntarily provided some documents, but the Court of Chancery ordered a more wide-ranging production. All of Wal-Mart's challenges to that ruling were rejected by the Supreme Court. The most notable aspect of the Supreme Court's ruling was its determination that Wal-Mart would have to produce documents held by corporate officers, as opposed to documents held by members of the board of directors. Wal-Mart argued that the only proper purpose for which the shareholders needed the documents was to determine whether a demand on Wal-Mart's Board (a predicate to filing a derivative lawsuit) would be futile. Instead, the Court held that the shareholders had also established a proper purpose of investigating "the underlying bribery and how the ensuing [internal] investigation was handled." Moreover, the Supreme Court held that documents possessed by corporate officers were relevant to the demand futility issue to the extent the officers may have reported their knowledge to members of the board. The Supreme Court also upheld the Court of Chancery's rulings that Wal-Mart would have to produce documents beyond a date cut-off that Wal-Mart sought, that Wal-Mart would have to search disaster recovery tapes for certain custodians (Wal-Mart had previously agreed to some searches of disaster recovery tapes), and that Wal-Mart would have to produce otherwise privileged documents under the Garner doctrine, an exception to the privilege for documents relating to alleged breaches of fiduciary duties by those in control of the corporation. On the other hand, the Supreme Court sided with Wal-Mart with regard to certain confidential documents apparently provided to the shareholders' counsel by an anonymous whistleblower. Wal-Mart demanded the return of those documents, claiming that they were stolen by a former employee in its IT Department. The Supreme Court agreed, at least as to documents that had not otherwise been publicized by the media or members of Congress. However, the Court noted that the shareholders would still be able to obtain the documents if they were within the scope of the shareholders' valid § 220 demands.
On July 2, the SEC agreed to resolve its claims against Buckley Sandler client, Mark A. Jackson, former CEO of Noble Corp., and co-defendant James J. Ruehlen, a current Noble executive. Back in February 2012, the SEC had filed suit in the Southern District of Texas alleging that Jackson and Ruehlen violated the FCPA by approving bribes to Nigerian government officials in connection with temporary import permits for its rigs, falsifying Noble's internal accounting records, and circumventing its internal controls, but on the eve of trial, the SEC agreed to final resolutions that did not include any bribery violations. The trial, set for July 9 in the Southern District of Texas, before Judge Keith Ellison, would have been the first FCPA civil enforcement action by the SEC in 30 years to proceed to the trial stage of litigation. Noble Corp., a leading oil and gas drilling company, was one of the companies that voluntarily disclosed its internal investigation and subsequently settled with the government during the SEC and DOJ's investigation of the industry arising out of the Panalpina settlement. In Jackson's settlement, Jackson consented, without admitting or denying any allegations, to the entry of judgment solely with regard to the claim that he was a "control person" of Noble's books and records violations, and an injunction on that basis. The settlement did not include payment of money by Jackson or any restriction on his future employment opportunities. Likewise, Ruehlen consented, without admitting or denying any allegations, to the entry of judgment solely with regard to the claim that he aided and abetted Noble's books and records violations, and an injunction on that basis. Ruehlen's settlement also did not include payment of money by Ruehlen or any restriction on his future employment opportunities. The settlements were approved by Judge Ellison on July 3. The SEC's ultimate recovery had it proceeded to trial may have been limited by a number of factors, including the Judge's prior rulings on issues such as the definition of "corruptly" under the FCPA, and the facilitating payments exception to the FCPA. Judge Ellison's decision on the Defendants' motions to dismiss is now some of the only case law regarding the definition of "corruptly" in the FCPA context and the "facilitating payments" exception, and is a must-read for any FCPA practitioner. In that decision, Judge Ellison interpreted the FCPA's legislative history and limited existing FCPA case law to define the term "corruptly" under the FCPA as "an act done with an evil motive or wrongful purpose of influencing a foreign official to misuse his position." Judge Ellison also held that the SEC was required to affirmatively negate the idea that the payments at issue were facilitating payments, as part of its burden of alleging corrupt intent. Interpreting "corruptly" was at issue again shortly prior to the settlement, when Judge Ellison heard argument from the parties on Jackson and Ruehlen's motions for summary judgment, as well as the SEC's motion for partial summary judgment on the facilitating payments exception. In their motions, Jackson and Ruehlen argued that the undisputed evidence demonstrated that they reasonably believed that Noble was entitled to the temporary import permits it sought, and therefore, they could not have acted with the requisite corrupt intent in approving the payments at issue. The SEC responded with a new definition of "corruptly," arguing that "corruptly" meant only an intent to "influence any act or decision made by an official in his official capacity " regardless of any "entitlement" to that act or decision." Jackson and Ruehlen responded that the SEC's novel interpretation effectively read "corruptly" out of the FCPA, was inconsistent with the FCPA's legislative history and the SEC's own prior FCPA guidance, and was not supported by case law. Judge Ellison declined to further address the proper interpretation of "corruptly" beyond his motion to dismiss opinion, denying both sides — motions from the bench at oral argument. The 2013 Supreme Court decision in Gabelli v. SEC, 568 U.S. __, 133 S. Ct. 1216 (2013) also potentially limited the SEC's ability to seek penalties had the case gone to trial. In Gabelli, the Supreme Court held that, when seeking civil penalties in fraud cases, the government faced a five year state of limitations from the time the conduct occurred, rather than from the time it was discovered. On the heels of the Gabelli decision, and after the SEC had already once amended its complaint, the SEC agreed in March 2013 to limit its complaint to seek monetary penalties only for alleged conduct after May 2006. Any potential recovery would also have been reduced by the SEC's voluntary dismissal, just days before the summary judgment deadline, of claims regarding the adequacy of Noble's internal controls. Press coverage about the settlements has noted the favorable settlement terms for Jackson and Ruehlen and has viewed the settlements as victories for the individuals.
- Sherry-Maria Safchuk to discuss UDAAP at an American Bar Association webinar
- Jeffrey P. Naimon to discuss "What to expect: The new administration and regulatory changes" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Jonice Gray Tucker to discuss “The future of fair lending” at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Steven R. vonBerg to discuss "LO comp challenges" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss “The False Claims Act today” at the Federal Bar Association Qui Tam Section Roundtable