THE FCPA: TARGETING INDIVIDUALS MEANS MORE TRIALS

Last Friday, the jury in an FCPA case returned a verdict of guilty on all but two of the 21 counts in the superseding indictment which named Gerald and Patricia Green as defendants. U.S. v. Green, Case No. 2:08-cr-00059 (C.D. Cal. Filed Jan. 16, 2008). See also DOJ Press Release, Film Executive and Spouse Found Guilty of Paying Pribes to senior Thai Tourism Official to Obtain Lucrative Contracts (Sept. 14, 2009) (available here). This is the third FCPA case tried to verdict this year. The government has prevailed in each case.

Mr. and Mrs. Green are the owners of Film Festival Management, Inc., a film company based in Los Angeles. Initially, they were indicted on one count of conspiracy to bribe a foreign public official and six substantive counts of violating the FCPA. The superseding indictment alleged conspiracy to violate the FCPA in Count 1, individual acts in violation of the Act in Counts 2-10 and additional counts of money laundering, obstruction and falsely subscribing a U.S. Income Tax Return. The jury found the couple guilty of all the FCPA charges.

The superseding indictment claimed that Mr. and Mrs. Green paid about $1.8 million in bribes to the former governor of the Tourism Authority of Thailand. In turn, the defendants received contracts to manage and operate Thailand’s yearly Bangkok International Film Festival and others to provide an elite tourism privilege card marketed to wealthy foreigners.

To facilitate the scheme, Mr. and Mrs. Green used a variety of business entities. Some had dummy business addresses and phone numbers. The payments were disguised as sales commissions and were channeled through foreign bank accounts of intermediaries, including those of the former governor’s daughter and friend.

Green is the latest illustration of the government’s emphasis on FCPA enforcement and the targeting of individuals. It follows the August 2009 conviction of former Congressman William Jefferson after a one-month trial for soliciting bribes, honest services wire fraud, money laundering, racketeering and conspiracy. Mr. Jefferson was acquitted on five other counts including one based on the FCPA. U.S. v. Jefferson, Case No. 1:07-cr-00209 (E.D. Va. Filed June 4, 2007).

Jefferson was based on allegations that the former Congressman performed a wide range of official acts in return for things of value, including leading official business delegations to Africa, corresponding with U.S. and foreign government officials and utilizing congressional staff members to promote businesses and business persons. The business ventures that the former Congressman sought to promote included telecommunications deals in Nigeria, Ghana and elsewhere, oil concessions in Equatorial Guinea, satellite transmission contracts in Botswana Equatorial Guinea and the Republic of Congo and the development of different plants and facilities in Nigeria.

Earlier this year the government also prevailed in a criminal FCPA case which named Frederic Bourke as a defendant. U.S. v. Kozeny, Case No. 1:05-cr-00518 (S.D.N.Y. Filed May 12, 2005). Mr. Bourke is the co-founder of handbag maker Dooney & Bourke. The case is based on claims that Mr. Bourke conspired with Czech expatriate Viktor Kozeny to bribe Azerbaijan’s former president and other leaders. The claims centered on allegations that Mr. Bourke invested with Mr. Kozeny knowing that he gave Azeri leaders millions of dollars in cash and a secret two thirds interest in a venture formed to buy the state oil company, Socar. That oil company was never sold. Mr. Bourke, through an investment vehicle, put up $8 million in the deal. Mr. Kozeny is a fugitive.

The increase in FCPA trials is likely to continue in view of the significant enforcement efforts of DOJ and the SEC. At present DOJ reportedly has over 120 open FCPA investigations. While most companies settle FCPA charges, the continuing focus on individuals is likely to result in an increasing number of trials.

IS THE SEC CONTINUING TO TAKE A RAIN CHECK?

In a recent interview, former President Bill Clinton was asked: if he had to do it over again, would he sign the deregulatory Gramm-Leach-Bliley Act in 1999 and not regulate derivatives? Mr. Clinton responded “And again, if I had known that the S.E.C. would have taken a rain check, would I have done it? Probably not . . . In other words, I would have tried to reverse everything if I had known we were going to have eight years where we would not have an S.E.C. for most of the time.” Peter Baker, “The Mellowing of William Jefferson Clinton,” New York Times Magazine, May 31, 2009. Now, there is a new SEC Chairman and a new Enforcement Director. Both have promised to revitalize SEC enforcement. Yet one might ask, paraphrasing Mr. Clinton, “Has the SEC taken a rain check?”

Yesterday Judge Rakoff issued an order in SEC v. Bank of America, discussed here, rejecting the settlement of the SEC and the Bank. It is unusual for a judge to reject a settlement proposed by the parties in an SEC enforcement action. Proposed settlements are routinely accepted and executed. As the judge noted in his order, the parties are entitled to significant deference. The rejection of the settlement here however, is beyond unusual. It raises fundamental questions about the Commission, the Enforcement program and the repeated promises of the Chairman and her new Enforcement Director that the program is being rejuvenated.

The story of the case and the events leading to the rejection of the settlement is by now well known and is discussed here. In brief, the SEC brought an action claiming shareholders were defrauded when they voted to have the Bank acquire Merrill Lynch. The proxy materials suggested that bonuses would not be paid to Merrill executives absent consent from the Bank, according to the SEC. In fact, an omitted schedule to the merger agreement stated that the boards of both companies had approved the payment of up to $5.8 billion in bonuses for executives at the brokerage firm.

The SEC’s enforcement action alleges violations of the Exchange Act proxy provisions and rules. The Bank agreed to settle by consenting to an injunction and the payment of a $33 million fine. No action would be brought against any individuals.

The court initially ordered the parties to explain the proposed settlement, particularly the fine since it would ultimately be paid by the shareholders. Through two rounds of briefs the SEC essentially claimed that the Bank lied to the shareholders and it could not determine which individuals were involved because of privilege assertions, but the settlement should be accepted by the Court. The Bank maintained that it had done nothing wrong and settled only to avoid a dispute with a regulator.

In rejecting the settlement the Court concluded that since it does not “comport with the most elementary notions of justice and morality . . .,” it is not entitled to the usual deference. The court also rejected the SEC’s claim that the corporate penalty would send a strong signal to shareholders that unsatisfactory corporate conduct had occurred so they could better assess management as making “no sense.” In fact, the fine would be paid by the very shareholders who were defrauded.

The court went on to conclude that the settlement represented little more than a subterfuge cobbled together by the SEC and the Bank for their own interests: “Overall, indeed the parties’ submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the façade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry – all at the expense of the sole alleged victims, the shareholders. Even under the most deferential review, this proposed Consent Judgment cannot remotely be called fair.”

The Court went on to reject the SEC’s claim that its efforts to determine which individuals were responsible were stymied by privilege assertions. Rather, it appears that the SEC never “seriously pursued whether this [the privilege assertions] constituted a waiver of the privilege . . .” The Court also found inadequate the Bank’s explanations for the settlement with the payment of shareholder funds, concluding essentially that it failed to answer the questions posed by its orders.

The order concludes by returning to the theme that a cozy relationship between the SEC and the Bank generated a failed enforcement action noting: “The proposed Consent Judgment in this case suggests a rather cynical relationship between the parties: the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but of the truth.” To ensure that the truth comes out the Court is moving the case to trial.

To say that the Court’s order raises fundamental questions about the SEC and its Enforcement program is a gross understatement. This is particularly true here since the proposed deal in this case was approved by the current Commission in the wake of its repeated promises of a rejuvenated and renewed SEC enforcement program. While the SEC’s Inspector General is now investigating; the resolution of this matter should not wait. Bank of America calls for a swift and complete evaluation not just of the Enforcement Division and its program, but of the Commissioners who are the SEC, the predicate for their decision and the direction in which they are taking the agency. As Mr. Clinton’s comments make clear, it is essential that the SEC not take a rain check. We all need an effective SEC – now.