ALCANTEL-LUCENT SETTLES FCPA CASES

The Department of Justice and the SEC settled FCPA cases with Alcantel-Lucent S.A., a company formed in a November 30, 2006 merger involving Paris, France based Alcantel, S.A. and U.S. based Lucent Technologies, Inc. U.S. v. Alcatel-Lucent S.A., (S.D. Fla. Dec. 27, 2010); U.S. v. Alcatel-Lucent France S.A., (S.D.F.a. Dec. 27, 2010); SEC v. Alcatel-Lucent, S.A., Case No. 1:10-cv-24620 (S.D. Fla. Dec. 27, 2010). The cases allege violations of the anti-bribery, books and records and internal control provisions of the FCPA between December 2001 and June 2006. Until November 30, 2006, Alcatel’s ADRs were registered with the Commission and traded in New York.

Prior to the 2006 merger Alcatel, a French telecommunications equipment and services company, conducted much of its business through subsidiaries. Those subsidiaries in turn retained local business agents who helped the company secure business. Using this business model, the company paid bribes in Costa Rica, Honduras, Malaysia and Taiwan. It also violated the internal control provisions of the FCPA related to hiring third party agents in Kenya, Nigeria, Bangladesh, Ecuador, Nicaragua, Angola, Ivory Coast, Uganda and Mali.

Specifically, during the time period, the court filings stated that:

• In Costa Rica, Alcatel CIT (now known as Alcatel-Lucent France S.A.) obtained three contracts worth more than $300 million which yielded profits of over $23 million. About $18 million was paid to two consultants retained by Alcatel Standard A.G. (now known as Alcatel-Lucent Trade International A.G.). About half of that sum was passed to government officials. Phony invoices were used to conceal the scheme.

• In Honduras, Alcatel CIT was able to retain contracts worth about $47 million which yielded profits of about $870,000. Those contacts resulted from payments made to a local consultant who was personally selected by the brother of a senior Honduran government official. Significant portions of the payments made to the consultant, a perfume distributor with no experience in the telecommunications business, went to government officials.

• In Malaysia, bribes were paid through agents to obtain or retain a telecommunications contract valued at about $85 million.

• In Taiwan, Alcatel Standard retained two consultants on behalf of another subsidiary in Taiwan to assist in obtaining an axle counting contract worth about $19.2 million. The two consultants were paid about $950,000 despite the fact that neither had telecommunications experience. The consultants were retained so that Alcatel SEL A.G. (now known as Alcatel-Lucent Deutschland A.G.) could funnel payments through them to Taiwanese legislators to influence the award of the contract which yielded profits of about $4.34 million.

All of these payments were improperly recorded in the books and records of the subsidiaries and the parent company. This resulted, according to the court papers, from a lax system of internal controls.

To settle with DOJ, the parent company entered into a deferred prosecution agreement. The two count information charged violations of the FCPA internal controls and books and records provisions. Under the terms of the agreement, the company will pay a $92 million criminal fine and a monitor will be installed for three years. In addition, subsidiaries Alcatel-Lucent France S.A., Alcatel-Lucent Trade International A.G., and Alcatel Centroamerica S.A. (formerly known as Alcatel de Costa Rica S.A.) each agreed to plead guilty to a one count information charging conspiracy to violate the anti-bribery, books and records and internal control provisions of the FCPA.

The parent company settled with the SEC by consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 30A, 13(b)(2)(A), 13(b)(2)(b) and 13(b)(5). The company also agreed to pay disgorgement of $45.372 million and to comply with its undertakings including the appointment of an independent monitor for three years.

According to DOJ, the settlement reflects the cooperation of the company after the merger. Prior to the merger there was “limited and inadequate” cooperation. Following the merger, cooperation improved significantly. In addition, the company on its own initiative and at substantial cost undertook an “unprecedented pledge” to alter its business model and stop using third-party sales and marketing agents in its world wide business.

Previously, two former Alcatel executives were charged with FCPA violations. One, Christian Sapsizian, a French citizen and Alcatel CIT executive, pleaded guilty to FCPA violations and was sentenced to 30 months in prison in September 2008. Edgar Valverde Acosta, a citizen of Costa Rica and former president of Alcatel de Costa Rica, has not been arrested. In January 2010, Alcatel-Lucent agreed to pay $10 million to settle a corruption case brought by the government of Costa Rica based out of the bribery of government officials. The case is the first in Costa Rica’s history in which a foreign corporation paid damages to the government for corruption.

TWO SEC INSIDER TRADING CASES

The SEC filed back to back insider trading cases just prior to the Christmas holiday against unknown option purchasers. Each centers huge option trading positions. Each was brought to obtain a freeze of the trading profits. These cases contrast sharply with the recent expert network criminal complaint filed by the Manhattan U.S. Attorney’s Office (here).

The Commission’s first case involves trading shortly prior to the announcement that Royal DSM N.V., a Dutch company, would acquire all of the outstanding shares of Maryland based Martek Biosciences Corporation. Shareholders would receive a 35% premium over the market price under the terms of the agreement. which was announced on December 21, 2010.

According to the SEC, between December 10, 2010 and December 15, 2010, 2,616 Martek call options were purchased through a UBS account. These purchases represented over 90% of the volume for those contract days.

Following the acquisition announcement, the share price increased by 36%. This placed the account in a position to realize total profits of about $1.2 million on the sale of the call options. The complaint alleges a violation of Exchange Act Section 10(b). SEC v. One or More Unknown Purchasers of Securities of Martek Biosciences Corporation, Case No. 10 Civ. 9527 (S.D.N.Y. Filed Dec. 22, 2010); see also Litig. Rel. 21792 (Dec. 23, 2010).

The day after filing Martek, the Commission brought SEC v. One or More Unknown Purchasers of Options of InterMune, Inc., Case No. 10 Civ. 9560 (S.D.N.Y. Filed Dec. 23, 2010); see also Litig. Rel. 21794 (Dec. 23, 2010). This action centers on option trading prior to the announcement by the European Union’s Committee for Medicinal Products for Human Use that a drug of InterMune, Inc, a biotechnology company based in Brisbane, California, would be recommended for approval. The recommendation was scheduled to be announced on December 17, 2010.

On December 7 and 8, 2010, four hundred call options were cleared through UBS Securities LLC. The purchases constituted 100% and 57.2%, respectively, of the volume of transactions for the two days on which they were made. On December 13, 2010, an additional 237 option contracts were cleared through Barclays Capital, New York.

On the day of the announcement the share price of InterMune rose about 144%. If realized the accounts would have had a trading profit of $912,000. The complaint alleges a violation of Exchange Act Section 10(b).

Both Martek and InterMune focus on suspected insider trading. Each complaint centers on the large option trading positions established by the unknown purchases. Each case was brought to freeze the potential trading profits before they could be realized and possibly move out of the country. The critical questions to be resolved in each case focus on the identity of the traders and their source of information.

In contrast, the “expert network” actions being investigated and brought by the U.S. Attorney in Manhattan are not about illegal trading and profits which damage the markets and other traders. The recent criminal complaint does not mention trading. That complaint does not contain any allegations about illegal trading profits. Indeed, the only references to money in that complaint are to consulting fees paid to network consultants. In and of themselves, there is nothing illegal about consulting fees.

Rather, the criminal expert network case is about information flow. A central question in that case is if the information communicated to various confidential witnesses was important or material to a decision to purchase or sell a security. Perhaps it is; perhaps not. Since the case did not involve trading, there was no harm to the markets or other traders. If it turns out that the information is in fact material, then the case will have prevented that harm. If it turns out that the information is bits and pieces of items that traders might find of interest or valuable when combined with other data, but not necessarily material, then the action will have harmed the market it was intended to protect. Under those circumstances, the case and the related investigations will have thwarted price discovery. That is the same kind of harm that insider trading causes.