Part X: SEC Enforcement Trends And Priorities, 2008 – The FCPA (cont)

The SEC and DOJ have taken an expansive view of the FCPA as part of their renewed emphasis on enforcement. Their approach here echoes that taken to the insider trading cases. Two key limitations illustrate this approach.

The first is the limitation on the antibribery provision that the payment must be to obtain or retain business. This provision was incorporated in the Act in 1978 and has remained unchanged through the 1988 amendments. It was intended to reflect the fact that not all payments to foreign officials violated the Act, but only those to obtain business or retain business. The legislative history at the time the FCPA was first passed suggests that payments regarding taxes were not within this provision, although the legislative reports from the 1988 amendments suggest to the contrary despite not changing the statutory language.

Nevertheless, both DOJ and the SEC are expanding the obtain/retain business provision to include matters relating to taxes. In two decision in U.S. v. Kay, the court of appeals has expansively read this key limitation to include payments about taxes. The first decision focused only on the adequacy of the language of the indictment while the second followed the remand and trial of the case. U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) (Kay I); U.S. v. Kay, 2007 WL 3099140 (5th Cir. Oct. 24, 2007) (Kay II). In these decisions, the court concluded that in certain instances payments regarding taxes may fall within the obtain/retain business limitation. In Kay II, the court held that since the defendants testified that payments to officials to reduce certain taxes were necessary because everyone was doing it, then those payments must in fact be necessary to obtain or retain business. As such, they are within the prohibitions of the antibribery sections.

The SEC has recently taken a similar position in a settled administrative proceeding. In the Matter of Bristow Group, Admin. Proc. File No. 3-12833, SEC Release 5633 (Sept. 26, 2007).

The second limitation concerns the payment of promotional expenses. 15 U.S.C. § 78dd-2(c)(2) permits the payment of a “reasonable and bona fide expenditure, such as travel and lodging expenses …” and the payment of expenses for “the promotion, demonstration, or explanation of products or services.”

Last year, the SEC brought two key cases involving this section. Perhaps the most significant is SEC v. Lucent Technologies, Inc., Civil Action No. 07-092301 (D.D.C. Dec. 21, 2007). In this settled civil injunctive action, the SEC’s complaint alleged that over a three year period the company paid over $10 million of about 1,000 Chinese foreign officials to travel to the U.S. According to the complaint 315 of those trips had disproportionate amounts of sightseeing, entertainment and leisure. The trips had been booked to a “factor inspection account.” The SEC also claimed that Lucent had inadequate FCPA training.

To resolve the case, Lucent consented to the entry of an injunction prohibiting future violations of the books and records provisions of the FCPA. In addition, the company agreed to pay a $1.5 million civil penalty.

To settle with DOJ, Lucent entered into a non-prosecution agreement that required the payment of a $1 million fine.

The SEC brought a similar action against Dow Chemical Company. That settled action was based on the payment of $37,000 in gifts, travel, entertainment and other items. SEC v. The Dow Chemical Co, Civil Action No. 07-00336 (D.D.C. Feb. 13, 2007).

The Department of Justice also published two rulings regarding travel and entertainment which define limitations in this area consistent with these cases. FCPA Op. Proc. Rel 2007-01; Rel 2007-02.

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