While enforcement actions can provide the DOJ/SEC's current thinking on FCPA compliance best practices, the public information made available during investigations can provide compliance professional many opportunities for teaching points and lessons learned by others.
So with the opportunity for many educational occasions in mind we present our favorite investigations of 2010.
1. Avon-What is the cost of non-compliance?
As noted by the FCPA Professor, one of the significant pieces of information to come out of the Avon matter is the reported costs as reported in the 2009 Annual Report the following costs have been incurred and are anticipated to be incurred in 2010:
Investigate Cost, Revenue and Earnings Loss
Investigative Cost (2009) $35 Million
Investigative Cost (anticipated-2010) $95 Million
Drop in Q1 Earnings $74.8 Million
Loss in Revenue from China Operations $10 Million
Total $214.8 Million
2. Gun Sting Case-Organized Crime Fighting Techniques Come to FCPA Enforcement
On January 18, 2010, on the floor of the largest annual national gun industry trade show in Las Vegas, 21 people from military and law-enforcement supply companies were arrested, with an additional defendant being later arrested in Miami.
The breadth and scope was unprecedented. Assistant Attorney General for the Criminal Division of the US Department of Justice (DOJ), Lanny Breuer, who led the arrest team, described the undercover operation as a “two-and-a-half-year operation”. The arrests represented the largest single investigation and prosecution against individuals in the history of the DOJ’s enforcement of the FCPA.
As explained in the indictments, one FBI special agent posed “as a representative of the Minister of Defense of a country in Africa (Country A), [later identified as Gabon] and another FBI special agent posed “as a procurement officer for Country A’s Ministry of Defense who purportedly reported directly to the Minister of Defense”.
Undercover criminal enforcement techniques such as wire taps, video tapes of the defendants and a cooperating defendant were all used in the lengthy enforcement action. In a later indictment, and seemingly unrelated to the “Africa” part of this undercover sting operation, allegations were included that corrupt payments were made to the Republic of Georgia to induce its government to purchase arms.
3. HP-Questions, Questions and More Questions
How does one begin to discuss HP’s compliance year? From FCPA to Mark Hurd’s very public departure for (alleged) sexual harassment to the recent announcement, reported in the WSJ, that the SEC is investigating Hurd in, ‘a broad inquiry that includes an examination of a claim the former chief executive officer shared inside information.”
However we will focus on the FCPA matter which involves the alleged payment of an approximately $10.9 bribe to obtain a $47.3 million computer hardware contract with the Moscow Prosecutor’s Office.
In an April 15, 2010, WSJ article, Mr. Dieter Brunner, a bookkeeper who is a witness in the probe, said in an interview that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004.
“It didn’t make sense,” because there was no apparent reason for HP to pay such big sums to accounts controlled by small-businesses such as ProSoft Krippner, Mr. Brunner said. Mr. Brunner then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”.
Why didn’t HP self report?
The WSJ article reported that by December 2009, German authorities traced funds to accounts in Delaware and Britain. In early 2010, German prosecutors filed a round of legal-assistance requests in Wyoming, New Zealand and the British Virgin Islands, hoping to trace the flow of funds to new sets of accounts.
Further, HP knew of the German investigation by at least December 2009, when police in Germany and Switzerland presented search warrants detailing allegations against 10 suspects. The New York Times, in an article dated April 16, 2010, reported that three former HP employees were arrested back in December 2009 by German prosecutors.
Although it was unclear from the WSJ article as to the time frame, HP had retained counsel work with prosecutors in their investigation. Apparently, since the SEC only announced it had joined the German and Russian investigation last week, HP had not self-disclosed the investigation or its allegations to the US Department of Justice (DOJ) or SEC.
Where were the SEC and DOJ?
On April 16, 2010, the FCPA Professor wondered in his blog if it was merely coincidence that a few weeks ago the US concluded a Foreign Corrupt Practices Act (FCPA) enforcement action against the Daimler Corporation, an unrelated German company, for bribery and corruption in Russia and now it is German and Russian authorities investigating a US company for such improper conduct in Russia.
The Professor put forward the following query: is such an investigation “Tit for tat or merely a coincidence?” And much like Socrates, he answered his own question with the musing “likely the later”. The WSJ LawBlog noted in its entry of April 16, 2010, that it would be somewhat unusual for the DOJ or SEC to stand by and watch European regulators conduct a sizable bribery investigation of a high-profile US company; phrasing it as “It’s like asking a child to stand still after a piñata’s been smashed open”.
In September, the WSJ reported that the HP bribery probe has widened and HP, itself, has announced that investigators have “now expanded their investigations beyond that particular transaction.” This original investigation pertained to an investigation of allegations that HP, through a German subsidiary, paid bribes to certain Russian officials to secure a contract to deliver hardware into Russia.
The contract was estimated to be worth approximately $44.5 million and the alleged bribes paid were approximately $10.9 million. In a 10-Q filing made with the SEC, HP stated that the investigation has now expanded into transactions “in Russia and in the Commonwealth of Independent States sub region dating back to 2000.” The WSJ noted that US public companies, such as HP, are only required to report FCPA investigations in SEC filings if they “are material for investors.”
4. Team Inc.- no de minimis exception in FCPA.
As reported by the FCPA Professor, in August 2009, Team disclosed that an internal investigation conducted by FCPA counsel “found evidence suggesting that payments, which may violate the Foreign Corrupt Practices Act (FCPA), were made to employees of foreign government owned enterprises.” The release further noted that “[b]ased upon the evidence obtained to date, we believe that the total of these improper payments over the past five years did not exceed $50,000.
The total annual revenues from the impacted Trinidad branch represent approximately one-half of one percent of our annual consolidated revenues. Team voluntary disclosed information relating to the initial allegations, the investigation and the initial findings to the U.S. Department of Justice and to the Securities and Exchange Commission, and we will cooperate with the DOJ and SEC in connection with their review of this matter.”
There is no de minimis exception found in the FCPA there are books and records and internal control provisions applicable to issuers like Team. Thus, even if the payments were not material in terms of the company’s overall financial condition, there still could be FCPA books and records and internal control exposure if they were misrecorded in the company’s books and records or made in the absence of any internal controls.
In its 8K, filed on January 8, 2010, Team reported “As previously reported, the Audit Committee is conducting an independent investigation regarding possible violations of the Foreign Corrupt Practices Act (“FCPA”) in cooperation with the U.S. Department of Justice and the Securities and Exchange Commission. While the investigation is ongoing, management continues to believe that any possible violations of the FCPA are limited in size and scope.
The investigation is now expected to be completed during the first calendar quarter of 2010. The total professional costs associated with the investigation are now projected to be about $3.0 million.”
So the FCPA Professor posed the question:
“A $3 million dollar internal investigation concerning non-material payments made by a branch office that represents less than one-half of one percent of the company’s annual consolidated revenues?”
And his answer: “Wow!”
In August, 2010, when disclosing its interim financial results for this year, Team reported, “The results of the FCPA investigation were communicated to the SEC and Department of Justice in May 2010 and the Company is awaiting their response. The results of the independent investigation support management’s belief that any possible violations of the FCPA were limited in size and scope. The total professional costs associated with the investigation were approximately $3.2 million.”
So $50,000 in (possibly) illegal payments equate to over $6 million investigative costs, so far.
5. ALSTOM-Arrests in the Board Room.
As reported by the FCPA Blog, the UK Serious Fraud Office reported in dramatic fashion the arrest of three top executives of French industrial giant ALSTOM ‘s British unit. The three ALSTOM Board members were suspected of paying bribes overseas to win contracts. The SFO Press Release stated that “[t]hree members of the Board of ALSTOM in the UK have been arrested on suspicion of bribery and corruption, conspiracy to pay bribes, money laundering and false accounting, and have been taken to police stations to be interviewed by the Serious Fraud Office.”
According to the release, search warrants were executed at five ALSTOM businesses premises and four residential addresses. The operation, involving “109 SFO staff and 44 police officers” is code-named “Operation Ruthenium” and centers on “suspected payment of bribes by companies within the ALSTOM group in the U.K.” According to the release, “[i]t is suspected that bribes have been paid in order to win contracts overseas.”
ALSTOM released a statement which said:
Several Alstom offices in the United Kingdom have been raided on Wednesday 24 March by police officers and some of its local managers are being questioned. The police apparently executed search warrants upon the request of the Swiss Federal justice. Alstom has been investigated by the Swiss justice for more than 3 years on the motive of alleged bribery issues. Within this frame, Alstom’s offices in Switzerland and France have already been searched in the past years. Alstom is cooperating with the British authorities.
While not an FCPA investigation, this is one of the first cases where arrests were made of Board members. With the April 1 implementation date for the UK Bribery Act, we would anticipate a much more robust and aggressive enforcement by the UK SFO.
We are indebted to our fellow bloggers, the FCPA Blog and the FCPA Professor for providing up to date and excellent reviews of many of the Top 10 investigations of 2010. If you did not review their sites daily in 2010, you should do so in 2011.
6. PBSJ- The Effect of an Ongoing FCPA Investigation in a Merger and Acquisition.
As reported by the FCPA Blog, in what may be the first case of its kind, a U.S. company that has no securities traded on an exchange but files periodic reports with the SEC disclosed an internal investigation into possible Foreign Corrupt Practices Act violations. The matter involved PBSJ Corporation, which in January, 2010, stated that it would not satisfy the filing deadline for its Annual Report on Form 10-K for the year ended September 30, 2009 “due to an internal investigation being conducted by the Audit Committee of the Board of Directors.”
The company said the purpose of the internal investigation “is to determine whether any laws have been violated, including the Foreign Corrupt Practices Act, in connection with certain projects undertaken by PBS&J International, Inc., one of the Company’s subsidiaries, in certain foreign countries.”
However this was not the reason that PBSJ made our Top 10 list. In the spring and summer of 2010, PBSJ sought bidders for itself. One of the concerns was the ongoing and unresolved FCPA investigation. PBSJ whittled the bidders down to two finalists, Company A and Company B.
Company B had a higher bid price but demanded that the merger agreement include additional closing conditions regarding the FCPA investigation and a definition of “Company Material Adverse Effect” that would have allowed Company B to terminate the merger agreement in the event of adverse developments in the FCPA investigation. PSBJ declined to provide this in the closing documents and so PBSJ took a lower stock price for its shareholders because of its unresolved FCPA investigation.
7. Schlumberger-Red Flags, Red Flags and More Red Flags.
In October, the Wall Street Journal reported that the DOJ was investigating allegations of possible bribery in Yemen by Schlumberger Ltd., in connect with Schlumberger’s 2002 agreement with the Yemen government to create a national exploration data-bank for the country’s oil industry. The allegations involve a foreign business representative, Zonic Invest Ltd., which became involved in the 2002 Data Bank Development Project between Schlumberger and Yemen’s national oil company, the Petroleum Exploration and Production Authority.
Zonic’s General Director is the nephew of the then and current President of Yemen, Ali Abdullah Saleh. From the WSJ article, it was not clear the precise business relationship between Schlumberger and Zonic, for instance: whether Zonic was an agent of Schlumberger, a joint venture partner or simply a contractor.
In the WSJ article there were several reported allegations which stand out as classic Red Flags in Foreign Corrupt Practices Act (FCPA) compliance policies. Initially, Petroleum Exploration and Production Authority had urged Schlumberger to hire Zonic as a go-between at or near the time the contractual negotiations were nearing conclusion.
Second the data-bank project went forward after Schlumberger “agreed to hire and pay Zonic a $500,000 signing bonus” then the contract between Schlumberger and the Petroleum Exploration and Production Authority was concluded. Indeed the General Director of Zonic was quoted as saying, “If it wasn’t for Zonic, there would have been no data-bank project.” Lastly, the WSJ article does not reference that any written contract was executed between Schlumberger and Zonic for this $500,000 payment.
As many Red Flags that may have been raised in the WSJ report of the actions and statements that transpired before the contract for the data-bank project was concluded between Schlumberger and the Petroleum Exploration and Production Authority, there were several raised thereafter. After the contract for was concluded, WSJ reported that internal Schlumberger documents revealed that “Zonic wanted a roughly 20% cut of Schlumberger’s profits from the project.”
While Schlumberger did not agree to pay such percentage of profits outright, it was noted that Schlumberger documents stated that the Yemen country manager had “suggested that those amounts could be compensated [to Zonic] through services.” These services were said to include providing personnel to the project, networking, furniture and computer hardware. Payments for such services were made, even though there was no contract between Schlumberger and Zonic, from 2002 to 2004.
A contractual relationship between the parties was established in 2004 and lasted until at least 2007. The total amount paid by Schlumberger to Zonic was reported to be $1.38 from 2003 to 2007. However, with regards to the services and products supplied by Zonic to Schlumberger, the WSJ noted that some were “above market rate” and others were unnecessary; specifically noting that over $200,000 was paid for certain computer hardware, “although Schlumberger itself was among the leading providers of such hardware.” The Daily Finance Blog reported, in an October 8, 2010 posting, that Zonic did not provide some of the services for which it was paid.
8. CB Richard Ellis-No business or industry immune from the FCPA.
In October, CB Richard Ellis, global real estate firm disclosed possible FCPA violations related to its operations in China. As reported by the FCPA Blog, the Company detailed in a SEC filing that its employees made payments for entertainment and gifts to Chinese government officials, which were discovered during an internal investigation.
The Company said in the filing that it has” As a result of an internal investigation that began in the first quarter of 2010, …determined that some of its employees in certain of its offices in China made payments in violation of Company policy to local governmental officials, including payments for non−business entertainment and in the form of gifts. The payments the Company discovered are minor in amount and the Company believes relate to only a few discrete transactions involving immaterial revenues. The Company also said that it had self disclosed the payments to the DOJ and SEC in February, 2010. It has been cooperating with the agencies and has taken other unspecified “remedial measures.”
As reported by the FCPA Professor, the Company also reported another investigation. This second investigation began in the third quarter of 2010. It was labled as an “internal investigation, with the assistance of outside counsel, involving the use of a third party agent in connection with a purchase in 2008 of an investment property in China for one of the funds the Company manages through its Global Investment Management business.
This investigation is ongoing and at this point the Company is unable to predict the duration, scope or results thereof. In light of the Company’s cooperation with the DOJ and the SEC as described above, the Company voluntarily notified both agencies of this separate internal investigation and will report back to them when the Company has more information.”
Most business believe that the DOJ and SEC target industries or sectors which work traditionally in countries where corruption is perceived to be endemic, such as the energy sector. However this CB Richard Ellis investigation clearly demonstrates that any company which does business overseas needs to have a full FCPA compliance program in place.
9. Rino-Welcome to the (FCPA) Club.
In what the FCPA Professor termed the first focus of a FCPA inquiry on a China-based issuer, the Chinese company Dalian disclosed in an SEC filing that it was notified that the SEC was “conducting a formal investigation relating to the Company’s financial reporting and compliance with the Foreign Corrupt Practices Act for the period January 1, 2008 through the present.
The Company is cooperating with the SEC’s investigation. It is not possible to predict the outcome of the investigation, including whether or when any proceedings might be initiated, when these matters may be resolved or what if any penalties or other remedies may be imposed.”
As reported in the Wall Street Journal, the DOJ and the SEC have never charged a listed Chinese company. At least two Chinese subsidiaries of U.S. issuers — DaimlerChrysler China Ltd., now known as Daimler North East Asia Ltd. and DPC (Tianjin) Co. Ltd., a medical products company — have settled foreign bribery charges with the agencies. But now we have the first Chinese issuer. All we can say is to quote the FCPA Professor, “Welcome to the Club”.
10. SciClone-hell hath no fury like a SEC Subpoena.
The pharmaceutical company SciClone had a fairly tumultuous August and September. As reported by the FCPA Professor, it included the following:
August 10th-Shares of the Company as low as 40% down from the previous day’s close, closing down 31.9%. Levi & Korsinsky, The Law Offices of Howard G. Smith LLP, the law firm of Kahn Swick & Foti, LLC and the law firm of Roy Jacobs & Associates all announced that they were is investigating SciClone on behalf of shareholders for possible violations of state and federal securities laws.
August 11-The law firms of Pomerantz Haudek Grossman & Gross, Statman, Harris & Eyrich, Goldfarb Branham and Finkelstein Thompson all announced that they were investigating claims on behalf of investors of SciClone to determine whether it has violated federal securities laws.
August 12-the law firm of Robbins Umeda announced that it commenced an investigation into possible breaches of fiduciary duty and other violations of the law by certain officers and directors at the Company.
August 13-The law firm of Kahn Swick & Foti announced that the firm has filed the first securities fraud class action lawsuit against SciClone in the United States District Court for the Northern District of California.
August 19-the law firms of Barroway Topaz Kessler Meltzer & Check and Brower Piven
both announced that they had filed class action lawsuits was filed in the United States District Court for the Northern District of California on behalf of purchasers of the securities of SciClone and purchasers of the common stock of SciClone.
August 20-the law firm of Kendall Law Group announced an investigating of SciClone for shareholders. Unfortunately another class action law suit was filed, this time by the law firm of Ryan & Maniskas.
August 28-the law firm of Roy Jacobs & Associates (again) announced that it was investigating SciClone for potentially violating the federal securities laws.
September 7-The Shuman Law Firm announced that it had filed a class action lawsuit against the Company.
September 8-the law firm of Kaplan Fox & Kilsheimer announced that it had filed a class action suit against SciClone.
September 16-the law firm of Strauss & Troy announced that it had filed a class action lawsuit against SciClone for potential violations of state and federal law.
September 23- The law firm of Lieff Cabraser Heimann & Bernstein announce that class action lawsuits have been brought on behalf of purchasers of the common stock of SciClone.
So what did SciClone actually do? The FCPA Professor reported that on August 9th, SciClone announced that it had been was contacted by the SEC and was advised that the SEC has initiated a formal, non-public investigation of SciClone. In connection with this investigation, the SEC had issued a subpoena to SciClone requesting a variety of documents and other information.
The subpoena requested documents relating to a range of matters including: interactions with regulators and government-owned entities in China, activities relating to sales in China and documents relating to certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the DOJ indicating that the DOJ was investigating FCPA issues in the pharmaceutical industry generally, and had received information about the Company’s practices suggesting possible violations.
During SciClone’s August 9th earnings conference call, the Company President and CEO Friedhelm Blobel stated that SciClone “intends to cooperate fully with the SEC and DOJ in the conduct of their investigations, and has appointed a special committee of independent directors to oversee the Company’s efforts.” Blobel noted that “as far as timing is concerned, the lawyers tell us that these investigations typically are long lasting.” We would opine that his lawyers got that point “spot on”.
So there it is, our Top 10 investigations from 2010. Last week, we listed our Top 10 enforcement actions from this year. We will end this year with a list of our Top 10 FCPA compliance issues for 2010. We hope you have found these lists and this blog helpful and instructive. We also want to thank everyone who has supported us throughout the year with kudos, criticisms, questions and comments.This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at email@example.com.
Cross-posted from Tom Fox Law