by T. GormanPosted on Posted in SECActions

This is the first in a series of five articles that will be posted this week examining current trends in FCPA and anti-corruption enforcement. The posts are excerpts from a forth coming article by Thomas Gorman and William McGrath.

Introduction

It has been over thirty years since the U.S. became the first country to pass anti-corruption legislation known as the Foreign Corrupt Practices Act. At the time many thought that the Act would impede the ability of U.S. business to compete abroad. Nevertheless, congress wrote and passed the legislation which was signed into law by President Jimmy Carter. The Act of course came in the wake of a series of “questionable payment” cases brought by the Securities and Exchange Commission and its highly effective “volunteer program” under which hundreds of corporations came forth and admitted having engaged in foreign bribery.

For years after its passage, enforcement of the Act seemed to languish. In the late 1990s however enforcement efforts increased. During that period other countries became signatures to the anti-bribery convention of the Organization for Economic Cooperation and Development.

Today, it is a new era of FCPA enforcement according to Assistant Attorney General Lanny Breuer. Nobody would doubt Mr. Breuer. There have been more FCPA cases brought in the last few years than in the decades immediately following the passage of the Act. There have been more FCPA trials in the last few years than at any time since the passage of the Act. Larger and larger sums are being paid by corporations to settle FCPA cases. There are also more individuals waiting to go to trial on FCPA charges than at any time in the history of the act. Despite the passage of anti-corruption legislation in other countries and increased enforcement in some, the U.S. is still the most vigorous enforcer of anti-corruption legislation. As a result business groups are clamoring for amendments to the FCPA, claiming it impedes the competitive position of U.S. business.

To examine trends in FCPA enforcement this series will consider five key points: 1) Investigative efforts by the DOJ and the SEC characterized by a drive to conduct “industry wide” inquiries; 2) Expansive interpretations of the statute being used by enforcement authorities; 3) Increasing sums being paid to resolve FCPA cases; 4) prosecutions against individuals and calls for reform; and 5) Analysis and conclusions.

Investigations: Industry wide inquiries

Many commentators and practitioners believe that most FCPA cases come from self-reporting by business organizations. In fact this only accounts for about 30% of the actions. Enforcement officials like to point to their increasing ability to conduct what they call “industry wide” investigations. To examine this trend the cases will be divided into three groups: 1) Targeted industries; 2) The Food-for-Peaces actions; and 3) The oil services and freight forwarding industry cases.

Targeted industries

In 2007 officials at the Department of Justice identified several industries “of interest.” Those included the banking, insurance, gaming, manufacturing, telecommunications and pharmaceutical industries. In 2009 the DOJ again identified the pharmaceutical industry as a target.

While companies in the identified industries have been named in FCPA actions, whether that result follows from targeting the industry or from other factors such as basic investigative work and self- reporting is difficult to assess. Nevertheless, cases have been brought in the telecommunications industry such as those against Alcatel-Lucent, discussed later in this series, Latin Node, Inc. and Veraz Networks, Inc. Other have been brought against an investment fund, such as the 2007 action against Omega Advisors, Inc. FCPA cases have also been brought against pharmaceutical and medical companies. The recent actions against Johnson & Johnson, Inc., discussed later in this series, by the DOJ and the SEC is a current example. Likewise, the action against German giant Siemens AG, also discussed later in this series, involved in part FCPA violations by the company’s medical solutions group which provided physicians at government-owned hospitals in China with inappropriate tips. Another involved medical device manufacturer AGA Medical Corporation which centered on payments made to Chinese patient officials and doctors employed by government-owned hospitals.

A number of pharmaceutical companies have also disclosed FCPA investigations. SciCone Pharmaceuticals, Inc. has reported that it received a subpoena from the SEC and a letter from the DOJ indicating its sales in foreign countries, including China, are being investigated. Merck, Astra Zeneca, Bristol-Myers Squibb, and GlaxoSmithKline are also reportedly being scrutinized.

Recently the SEC is reportedly conducting at least a limited industry inquiry focused on financial institutions. Reportedly the inquiry is focused on the dealings of selected financial institutions with sovereign wealth funds.

In the future the efforts of enforcement officials to conduct industry wide inquires may be aided by two developments. First, a new trend in “cooperation credit” appears to be emerging. Business organizations ensnared in FCPA inquires are developing evidence against others in an effort to mitigate their own liability Companies such as Panalpina World Wide Transport, Pride International, Inc., Siemens A.G. and Johnson & Johnson, Inc. have furnished enforcement officials with information their investigators developed about others as part of their efforts to cooperate with the DOJ and the SEC and mitigate their own liability. Second, the new SEC whistleblower rules, which offer substantial bounties and do not require that the person first report to the company, may well aid enforcement officials. This is particularly true in view of the large bounties offered and the frequently huge amounts paid to resolve FCPA charges.

The largest industry wide inquiries – the U.N. cases

The Oil-For-Food Program FCPA cases represent the largest “industry wide” inquiry. The cases stem from the United Nations embargo imposed on Iraq following its invasion of Kuwait in 1990 and the ensuring war and corruption in a the Oil-For Food Program created by the U.N. Essentially the program was designed to alleviate hardship on the people of Iraq from the embargo by permitting the sale of oil and the purchase of humanitarian goods under the auspicious of the United Nations. Following wide spread allegations of corruption in the program an investigation was conducted and a report prepared by a commission chaired by former Federal Reserve Chairman Paul Volker. The report identified 2,253 companies worldwide who paid more than $1.8 billion in illicit income to the Iraqi government.

The DOJ and the SEC have brought a series of FCPA cases involving the program. The cases can be divided into those on the humanitarian and those oil sides of the program. On the humanitarian side of the program the cases typically involved the payment of a 10% surcharge demanded by the Iraq government. It was added to the contract price before the agreement was submitted to the U.N. for approval as required by the program.

The case against Italian manufacturer Fiat, S.p.A. is typical of those on the humanitarian side of the program. Between 2000 and 2003 Fiat entered into a series of agreements with a value of over €46 million to sell industrial pumps, gears and similar equipment. Over $4 million in so-called “after sales service fees” – kickbacks – were added to the contract prices. The fees were not properly recorded in the books and records of the company.

Fiat, whose ADRs were traded in New York until the company delisted in 2007, and its subsidiaries, resolved the criminal inquiry by entering into a deferred prosecution agreement at the parent company level coupled with guilty pleas by three subsidiaries. The parent company accepted responsibility for the acts of its subsidiaries although it was not charged and agreed to pay a $7 million criminal fine. Two subsidiaries pleaded guilty to charges of conspiracy to commit wire fraud and to violate the books and records provisions of the FCPA. A third pleaded guilty to a charge of conspiracy to commit wire fraud – the FCPA bribery provisions were not implicated because the payments went to the government of Iraq, not a “foreign official” as defined in the Act. The resolution reflects the cooperation of the company. See, e.g., Fiat deferred prosecution Agreement, Dec. 22, 2008, available at http://www.justice.gov/opa/documents/fiat-dpa.pdf.; U.S. v. Iveco S.p.A., 108-cr-00377 (D.D.C. Dec. 22, 2008); U.S. v. CNH Italia S.p.A., 1:08-cr-00377 (D.D.C. Dec. 22, 2008); U.S. v. CNH France S.A., 1:08-cr-00377 (D.D.C. Dec. 22, 2008).

Fiat also settled with the SEC. The parent company consented to the entry of a permanent injunction prohibiting future violations of the FCPA books and records provisions and agreed to pay disgorgement of about $5.3 million, prejudgment interest and a civil penalty of $3.6 million. SEC v. Fiat S.p.A. , Case No. 1:08-cv-02211 (D.D.C. Filed Dec. 22, 2008).

Cases on the oil side were similar. The action involving Chevron Corporation is typical. From April 2001 to May 2002, the company purchased about 78 million barrels of crude oil from Iraq under 36 contracts with third parities. It paid about $20 million in surcharges or kickbacks to Iraqi’s State Oil Marketing Organization or SOMO. Before the purchases, Chevron learned about Iraq’s demand for kickbacks. In January 2001, Chevron instituted a policy prohibiting the payment of surcharges and directing that traders obtain prior written approval from the Director of Global Crude Trading before any Iraqi oil purchase as well as a management review of the proposed deal. Traders ignored the policy. Management routinely approved the purchases although documents suggest it knew about the surcharges.

Chevron resolved possible criminal charges by entering into a non-prosecution agreement with the U.S. Attorneys Office for the Southern District of New York (“USAONY”) while simultaneously settling with the SEC, the Office of Foreign Asset Control (“OFAC”) and the Manhattan District Attorney’s Office (“Manhattan DA”) by agreeing to make the following payments: 1) $20 million to the USAONY; 2) $5 million to the Manhattan DA; and 3) $2 million to OFAC. The USAONY cited the cooperation of the company which was considered in the overall settlement. http://www.justice.gov/usao/nys/pressreleases/November07/chevronagreementpr.pdf

To settle with the SEC, Chevron consented to the entry of an injunction prohibiting future violations of the FCPA books and records and internal control provisions and agreed to pay disgorgement of $25 million along with prejudgment interest and a penalty of $3 million. Those obligations were satisfied by the payments made to resolve the two criminal investigations. SEC v. Chevron Corp., No. 07-10299 (S.D.N.Y. filed Nov. 14, 2007); SEC Litig. Rel. No. 20363 (Nov. 14, 2007).

The largest industry wide inquiries – the freight forwarding cases

A second significant industry wide group of actions focused on the oil services and freight forwarding industry. Six companies were involved here: Panalpina World Transport (Holdings) Ltd, Pride International, Inc., Shell, Nobel Industries, Inc., Tidewater Inc. and Transocean, Inc. and/or their subsidiaries. The SEC also brought an action against GlobalSantaFe Corporation which had merged into Transocean in 2007.

The cases trace to 2007 when DOJ and the SEC settled actions with Vetco Gray Controls, Inc. and others. That inquiry involved bribes paid through the services of an international freight forwarding and customs clearing company in Nigeria where Panalpina conducted business and most of the actions in this group of cases occurred. Following that case the DOJ conducted a sweep of the oil services companies. In addition Pride furnished a substantial amount of information about Panalpina which in turn provided enforcement officials with information on others as part of its cooperation efforts.

Five of the six cases in this group involve at least in part bribes paid in Nigeria to customs officials and relate to the development of Nigeria’s first deep water oil drilling operation known as the Bonga Project. Pride is the only case in the group not tied to Nigeria but it facilitated the investigation of Panalpina who in turn assisted with the inquiries against others. Many of the payments characterized as bribes in this group of cases appear to be facilitation payments related to customs issues.

Pride International, Inc. is a Huston based worldwide operator of offshore oil and gas drilling rigs. The charges centered on claims that between 2003 and 2004 the company, through certain subsidiaries, branches, employees and agents, paid over $804,000 in bribes to, or for the benefit of, government officials in Venezuela, India and Mexico to extend drilling contracts, secure a favorable administrative decision relating to a customs dispute and to avoid payment of customs duties. The company received at least $13 million in benefits. The bribes were falsely characterized in the books and records of subsidiaries, which were consolidated into those of the parent.

The company settled with the DOJ, entering into a deferred prosecution agreement and agreeding to pay a fine of $32,625,000. Its subsidiary, Pride Forasol, pleaded guilty to charges of conspiracy to violate, and violations of, the anti-bribery provisions and aiding and abetting violations of the books and records provisions. The DOJ considered the extensive cooperation of the company in resolving the case. That is reflected in the fine of $32,625,000 which is about half of the lower end of the sentencing guideline calculation. U.S. v. Pride International, Inc., Case No. 4:10-cr-00766(S.D. Tex. Nov. 10, 2010), available at http://www.justice.gov/opa/documents/pride-intl-dpa.pdf

Pride International also settled with the SEC. The terms were substantially similar to those of the other cases in this group except for Shell. The company consented to the entry of a permanent injunction prohibiting violations of the anti-bribery and books and records and internal control provisions of the FCPA and agreed to pay $23,529,718 in disgorgement and prejudgment interest. SEC v. Pride International, Inc., Civil Action No. 4:10-cv-4335 (S.D. Tex. filed Nov. 4, 2010).

Panalpina World Transport or PWT is at the center each of the other cases in this group. PWT is a global freight forwarding and logistics services firm. Enforcement officials claim it had a culture of corruption. Over a five year period beginning in 2002, the company is alleged to have paid bribes to foreign officials valued at $49 million, including $27 million on behalf of U.S. customers. Bribes were also paid in six other countries to circumvent local rules regarding the import of goods and materials.

PWT settled with the DOJ, executing a deferred prosecution agreement in which it agreed to pay $70.56 million fine which was reduced from the guideline range based on cooperation. The company also agreed to report to enforcement officials on its compliance efforts. Panalpina, Inc., the U.S. subsidiary and a domestic concern,pleaded guilty to charges of conspiracy to violate the books and records provisions and aiding and abetting certain customers in violating those provisions of the FCPA. The DOJ cited what it called the “extensive cooperation” of the company. U.S. v. Panalpina Inc., Case No. 4:10-cr-0765, (S.D. Tex. Filed Nov. 5, 2010).

The U.S. subsidiary also settled with the SEC. It consented to the entry of a permanent injunction prohibiting violations of the anti-bribery provisions and from aiding and abetting violations of the books and records provisions of the FCPA. It also agreed to pay $11,329,369 as disgorgement. SEC v. Panalpina, Inc., Civil Action No. 4:10-4334 (S.D. Tex. Nov. 4, 2010). This is an unusual case for the SEC since it did not involve an issuer. It is based on claims that the company acted as agent for issuers or aided and abetted their violations.

Shell Nigerian Exploration and Production Co. Ltd.or SNEPCO, a subsidiary of Royal Dutch Shell whose ADRs were traded in New York, obtained what is perhaps the most favorable SEC settlement in this group. The action focuses on March 2004 through November 2006 during the construction phase of the Bonga Project and the efforts by SNEPCO and others to explore and produce oil in the first deepwater project in Nigeria. The company paid over $2 million to subcontractors and agents for customs clearance services knowing that some or all of the money paid through Panalpina was to reimburse subcontractors for sums paid to Nigerian Customs Services to expedite the delivery of materials. Avoiding Nigerian duties, taxes and penalties resulted in a $7 million financial benefit to the company. The payments were not accurately reflected in the books and records of the company which were consolidated with Royal Dutch Shell.

SNEPCO entered into a deferred prosecution agreement with the DOJ and agreed to pay a criminal penalty of $30 million. The agreement acknowledges the cooperation of the company. Noticeably missing however, is any discussion of those efforts as in the Panalpina papers. Although the conduct here does not appear to be as extensive as in Panalpina the fine is similar in that it is slightly below the bottom of the sentencing guideline range. See generally, Press Release, U.S. Dept. of Justice, Six International Freight Forwarding Companies Agree to Plead Guilty to Criminal Price-Fixing Charges (Sept. 30, 2010) available at http://www.justice.gov/opa/pr/2010/September/10-at-1104.html.

To settle with the SEC Respondents Royal Dutch Shell plc and its U.S. subsidiary, Shell International Exploration and Production Inc., consented to the entry of a cease and desist order prohibiting future violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) in a Commission administrative proceeding. Respondents also agreed to pay $18,149,459 in disgorgement and prejudgment interest. The SEC did not mention the cooperation of the company. This is the only case in this group to be resolved with a cease and desist order rather than a Federal Court injunction. There is no explanation in the papers which indicates the basis for this settlement. In the Matter of Royal Dutch Shell plc, and Shell International Exploration and Production Inc., Adm. Proc. File No. 3-14107 (Nov. 4, 2010)

Nobel Corporation is the only company in this group to settle potential criminal liability with a non-prosecution agreement. According to the court papers, beginning in January 2003, and continuing through early 2007, whenever the temporary arrangement to have company drilling equipment in the country was about to expire, false paper work was submitted on its behalf to Nigerian officials. This permitted Nobel to maintain its equipment in the country and avoid paying duties which the law required. Payments were made to government officials in connection with these transactions. Overall benefit to the company was about $2,973,000. See Nov. 4, 2010 DOJ Press Release. A copy of the November 4, 2010 Non-Prosecution Agreement between DOJ and Noble is available at http://www.justice.gov/opa/documents/noble-npa.pdf .

In contrast, Nobel settled with the Commission on the same terms as the other defendants in this inquiry except Shell. The company consented to the entry of a permanent injunction prohibiting future violations of the anti-bribery and books and records and internal control provisions and agreed to pay disgorgement and prejudgment interest of $5,576,998. SEC v. Noble Corporation, Case No. 4:10-cv-4336 (S.D. Tex. filed Nov. 4, 2010); SEC Litig. Rel. No. 21728 (Nov. 4, 2010).

Finally, Transocean and Tidewater, like Nobel, self-reported. Tidewater is a subsidiary of Swiss based Transocean Ltd. It has offices in Huston, Texas and its shares are registered for trading under the Exchange Act. Each was charged with paying bribes to a freight forwarding agent in Nigeria. Transocean is alleged to have paid about $90,000 in bribes while Tidewater paid about $1.6 million and, in addition, $160,000 in bribes to tax inspectors in Azerbaijan. Each resolved the case with a deferred prosecution. Transocean agreed to pay a criminal file of $13,440,000 which is about 20% below the bottom of the guideline range. Tidewater agreed to pay a criminal fine of $7.35 million which is about 30% below the bottom of the guideline range. The settlements reflect the fact that both companies self reported and cooperated. Deferred Prosecution Agreement at 4-11 in U.S. v. Transocean Inc., (S.D. Tex. filed Nov. 4, 2010) available at http://www.justice.gov/opa/documents/transocean-info.pdf.

Each company settled with the SEC on similar terms, consenting to the entry of a permanent injunction prohibiting future violations of the anti-bribery and books and records provisions. Transocean agreed to pay disgorgement and prejudgment interest of $7,265,080. SEC v. Transocean Inc., Civil Action No. 1:10-CV-01891 (D.D.C. Filed Nov. 4, 2010). Tidewater agreed to pay disgorgement and prejudgment interest of $8,104,362, plus a penalty of $217,000. The SEC stated that the fine was not increased because of the criminal penalties. SEC v. Tidewater Inc., Civil Action No. 2:10-CV-04180 (E.D. La. Filed Nov. 4, 2010); see also SEC Litig. Rel. No. 21729 (Nov. 4, 2010).This statement is puzzling since Tidewater is the only company in this group to settle with DOJ and the SEC and pay a civil fine.

Next: Expansive interpretations.

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by T. GormanPosted on Posted in SECActions

The price of gold continues to spiral upward this weeks while the European banking crisis continued. As the crisis has unfolded European regulators took steps to preclude the short sale of shares in financial institutions. At the same time FINRA issued an investor warning cautioning the public regarding possible scams in connection with the sale of shares in companies with gold mines. The SEC settled with two defendants in a long running enforcement action centered on a manipulative short selling scheme.

Courts in the U.S. and the UK handed down sentences for securities fraud. In New York a former brokerage firm account executive was sentenced to prison for running up unauthorized trading losses in one client account and then trying to conceal them with fraudulent cash transfers from the account of another firm client. A CEO was sentenced to prison for fraudulently inflating the revenue of his company and a former attorney was sent to prison for insider trading. In the U.K. a father and his two sons were sentenced to prison for running a large cross-boarder boiler room operation.

SEC enforcement – filings and settlements

Short selling scheme: SEC v. Andreas Badian, Civil Action No. 06 CV 2621 (S.D.N.Y. Filed Apr. 4, 2006). The SEC settled with two defendants in this on-going litigation centered on manipulative short selling. The action named as defendants Andreas Badian, an employee of unregistered investment adviser Rhino Advisors; three registered representatives then employed by now defunct Refco Securities, Jacob Spinner, Mottes Drillman, and Jeffrey Graham; and Pond Securities Corp., a registered broker dealer, along with two of its employees, Ezra Birnbaum and Shaye Hirsch. Mr. Badian, acting for Rhino, directed the scheme to manipulate down the share price of Sedona Corporation, according to the Commission. Under an agreement with Sedona, Amro International, S.A., a Rhino client, loaned Sedona $2.5 million. Three months later Amro was to be paid $3 million by Sedona. The agreement permitted Amro to convert Sedona’s debenture debt to shares of Sedona stock on certain specified dates. The lower the share price, the more shares Amro would receive. The agreement prohibited the company from selling Sedona’s shares short. Nevertheless, the defendants drove the share price down with a short selling scheme from about $1.43 per share in early 2001 to about $0.75 per share by March 23, 2001. Amro then exercised its conversion rights, receiving over 1.6 million shares of Sedona stock in repayment of $1.1 million due under the Agreement.

Defendants Mottes Drillman and Jacob Spinner settled with the Commission. Each consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and Securities Act Section 17(a) and from aiding and abetting violations of Exchange Act Section 17(a). Each agreed to pay disgorgement of $4,000 representing their share of the ill-gotten gains, along with prejudgment interest and a civil penalty of $25,000.

Criminal cases

Unauthorized transactions: U.S. v. Shah (S.D.N.Y.). Sanjeev Jayant Kumar Shah, a former Smith Barney financial adviser, was sentenced to thirty-eight months in prison for securities fraud in connection with the handling of two client accounts. Mr. Shah pleaded guilty to one count of securities fraud and three counts of wire fraud. In the fall of 2008 Mr. Shah executed unauthorized foreign currency transactions in the account of one foreign bank client, incurring large losses. To try and conceal the losses he arranged for the transfer of about $3.25 million from the account of another client using false documents. That client was told that the transfer was to pay for bonds he had convinced the client to purchase. When the bonds were not listed on the account statement the defendant claimed they were erroneous.

Financial fraud: U.S. v. Cuti, No. 08-cr-00972 (S.D.N.Y.).The former Chairman of the Board and CEO of Duane Reade, Inc., Anthony Cuti, was sentenced to serve three years in prison for financial fraud and ordered to pay a $5 million fine. Mr. Cuti was convicted following a jury trial on one count of conspiracy to make false statements in annual and quarterly SEC reports and to auditors, one count of securities fraud and three counts of making false statements in SEC reports. The charges are based on a scheme implemented by Mr. Cutri and William Tennant, the former CFO of the company, to inflate the financial results of Duane Reade from November 2000 through June 2005. The scheme involved increasing the income of the company using the proceeds from the sale of fraudulent real estate transactions while reducing expenses through the use of fictitious vendor credits.

As a result the income of the company was artificially and materially inflated, defrauding its public shareholders and the private equity firm Oak Hill Capital Partners, L.P. which took the company private in 2004.

Insider trading: U.S. v. Goffer, No. 1:10-cr-00056 (S.D.N.Y.). Defendant Jason Goldfarb, who previously pleaded guilty, was sentenced to three years in prison for his part in an insider trading scheme. Mr. Goldfarb was involved in the insider trading ring with former Ropes and Gray associates Arthur Cutillo and Brien Santarlas. In 2007 and 2008 Messrs. Cutillo and Santarlas furnished inside information on deals being handled by the firm to Mr. Goldfarb who is also an attorney. The information concerned the then pending deals involving 3Com Corporation and Axcan Pharma, Inc. Mr. Goldfarb in turn furnished that information to Zvi Goffer, known as Octopussy because of his multiple sources of inside information. The information was exchanged for cash. Mr. Goffer traded on the information and passed it on to others who also traded.

FINRA

The regulator issued an investor warning titled: “Gold” Stocks – Some Investments Mine Your Pocketbook. The warning cautions investors about scams involving gold stocks in view of the run up in the price of the metal in recent months.

FSA

Three men who ran a string of 16 cross-boarder boiler rooms that victimized over 1,700 investors from 2003 to 2008 out of ?27.5 million were sentenced to prison this week following their conviction at trial. The defendants were Thomas Wilmot and his two sons, Kevin and Christopher. The father was sentenced to serve nine years in prison while each of the sons will serve five years. Many of the victims of the scheme were elderly and some were ill. To date there has been ?17 million in losses. The scheme came to light when 93 FSA and CoLP investigators carried out a series of coordinated searches at various residences of suspected participants and seized thousands of documents along with related computer files. Substantial portions of the money had been transferred out of the UK.