The books, records and internal control provisions discussed in the last segment of this series work together with the anti-bribery provisions, the second key segment of the FCPA. Those provisions, contained in 18 U.S.C. § 78dd-2, make it unlawful for any issuer, domestic concern or for any officer, director, employee, agent or shareholder to utilize any means or instrumentality of interstate commerce

corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to … any foreign official or any foreign political party or official thereof or to any person knowing that the payment or item of value will be given in whole or part to one of the foregoing for purpose of … influencing any act or decision . . inducing such … [person] to do or omit to do any act in violation of the lawful duty of such official … inducing such … [person] to use his influence with a foreign government or instrumentality thereof … in order to … assist … in obtaining or retaining business for or with, or directing business to, any person.

Under this section there are eight key elements to an offense:

1) Any U.S. person or entity – includes “issuers,” “domestic concerns,” officer, directors and agents;

2) Jurisdictional means;

3) Corruptly;

4) Payment – anything of value including a promise to pay;

5) Foreign government official – includes any official, member of party or candidate;

6) Receipt of thing of value – knowing that all or part of the thing of value will be offered;

7) Purpose – to influence to do/omit; and

8) Obtain/retain business;

The prohibitions apply to any U.S. issuer as defined in 15 U.S.C. § 78dd-1(a). Accordingly, the anti-bribery provisions extend to any U.S. public company subject to the reporting requirements of the Securities Exchange Act, as well as their employees and foreign agents. They also apply to any domestic concern which, under 15 U.S.C. § 78dd-2(h)(10)(B), including any business with its principal place of business in the U.S. While the provisions do not apply to foreign corporations directly, there may be indirect liability if the entity acts as a conduit for proscribed payments. They do not apply, however, to the foreign official either directly or even through a conspiracy count.

Two key elements of an offense are “corruptly” and “to obtain or retain” business. Both of these elements will be discussed later in this series in connection with recent case law developments.

Not included within the prohibitions of the statute is so-called “grease” payments. The statute defines these payments as “any facilitating or expediting payment to a foreign official, political party or party official the purpose of which is to expedite or to secure the performance of routine government action by a foreign official, political party, or party official.” 15 U.S.C. § 78dd-1(b) & 2(b). Generally these are small payments for routine services as defined in 15 U.S.C. § 78dd-1(f)(3)(A). However, in U.S. v. Vistusa Corp., No. 93-253 (S.D.N.Y. 1994), 3 FCPA Rep. 699.158 (1994), the government obtained a guilty plea where the charge was based on payments made to expedite the release of the final payment required under an existing contract that had been performed.

While the anti-bribery provisions are perhaps the best known parts of the FCPA, their scope, as evidenced by the elements noted above, is not as broad as the books, records and internal control provisions. At the same time, there is a clear interplay between the anti-bribery and books, records and internal control provisions.

Next: Recent court decisions

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Last week, a key privilege issue typically raised by government and SEC prosecutors with issuers seeking cooperation credit was raised against by a defendant in an option backdating case. In many cases, a key issue in such discussions is the notes taken by internal investigators during interviews of various company employees. This is particularly true when the employee asserts a constitutional right not to testify in response to a government request for testimony.

Now, however, former McAfee, Inc. General Counsel Kent Roberts is raising the issue in his option backdating case concerning the refusal of internal investigators from Howrey to turn over their notes prepared while interviewing company employees as part of their inquiry. Mr. Roberts has been named as a defendant in a criminal case and an SEC enforcement action for his alleged role in an option backdating scheme at his former employer. U.S. v. Roberts, Case No. 3:07-cr-00100 (N.D. Cal. Filed February 27, 2007); SEC v. Roberts, Civil Action No. 07-CV-00407 (D.D.C. February 28, 2007).

Mr. Robert’s claims that notes from interviews of company employee’s taken by the internal investigators will support his claim that others at the company frequently backdated options. Investigators claim the notes are privileged and have refused to turn them over.

Previously, in the option backdating case of Gregory Reyes, U.S. v. Reyes, discussed here, the court held that Brocade Communications had waived privilege, making interview notes subject to production. That ruling was based on the fact that the notes had been shared with the government. The ruling in Reyes is consistent with that of most courts. Nevertheless SEC has long argued that companies can share privileged material with it under a so-called non-waiver agreement and preserve the privilege as to third parties.

In Roberts, the confidentiality of the notes has been preserved and they have not been shared with the government. The court has not ruled on the issue.

Insider trading

Former UBS employee Mitchel Guttenberg pled guilty last week to two counts of conspiracy and four counts of securities fraud. Sentencing is set for June 2.

Mr. Guttenberg is at the center of an insider trading case which many have called the most significant since the days of Ivan Boesky, Dennis Levine and others in the late 1980s, discussed here, because it involved so many Wall Street players. Mr. Guttenberg is alleged to have shared information about up coming UBS recommendations on stocks prior to their announcement. To date, eleven of the thirteen criminally charged in this matter have pled guilty. U.S. v. Guttenberg, 1:07-cr-00141 (S.D.N.Y. Filed February 26, 2007). Fourteen were named as defendants in the related SEC enforcement action. SEC v. Guttenberg, Civil Action No. 07 CV 1774 (S.D.N.Y. March 1, 2007).

Finally, a study by David Yermack, a finance professor at New York University, has concluded that that chief executives and company chairman appear to be able to repeatedly make gifts of large amounts of company stock to their family foundations directly prior to big declines in share price. This finding is based on a study of 155 gifts of more than $1 million made by C.E.O.’s and chairmen to their family foundations between 2003 and 2005. Professor Yermack estimates that while most of the 90 persons in his sample are playing by the rules about 20% are not.

While the results of Professor Yermack’s research may not establish a misuse of inside information, his earlier work on option backdating was key in the evolution of that scandal. Similarly, other academic studies have triggered SEC scrutiny of executive practices such as trading under Rule 10b5-1 plans as discussed here. One has to wonder if this study will trigger new scrutiny by the enforcement division of executive gifts of stock.

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