SEC ENFORCEMENT TRENDS 2011: The New Era of FCPA Enforcement

This is the ninth in a series of articles that will be published periodically analyzing the direction of SEC enforcement.

Spurred on by a very positive report on its enforcement efforts by the OCED, the Department of Justice has declared that this is a “new era” of FCPA enforcement. The result is more cases, a continuous stream of record breaking amounts paid in settlement, an expansive approach to the interpreting the statutes and more prosecutions of individuals.

Record setting payments

The hallmark of corporate FCPA settlements is the spiraling cost of settlement. That cost begins with what is paid to the enforcers. The current top ten largest settlements as compiled by the FCPA blog (here) range from the $800 million in 2008 by Siemens to settle with DOJ and the SEC (with more was paid to resolve charges with other regulators) to the $70 million paid by Johnson & Johnson in April 2011. In between are: 2) KBR in 2009 at $579 million; 3) BAE in 2010 at $400 million; 4) Snamprogetti Netherlands B.V. in 2010 at $365 million; 5) Technip S.A. in 2010 at $338 million; 6) JGC Construction in 2011 at $218.8 million; 7) Daimler AG in 2010 at $185 million; 8) Alcatel-Lucent in 2010 at $137 million; and 9) Panalpina in 2010 at $81.8 million.

Eight of the largest amounts paid to settle FCPA charges are from settlements in 2010 and early 2011. The unmistakable nature of this trend is emphasized by the fact that the composition of the top ten list has changed twice in the first few months of 2011. To be sure these cases are frequently based on what DOJ and the SEC has characterized as pervasive patterns of misconduct and/or multiple violations over a period of years. Siemens (here) and Diamler (here), for example, involved pervasive patterns of multiple violations – essentially corporate cultures which utilized bribes as a business tool according to prosecutors. KBR, Tehnicup, Snamprogetti (here) and JGC (here) were involved in the years long TSKJ conspiracy to secure contracts through bribery.

At the same time not all of the cases in the top ten rise to the level of Siemens or the TSKJ conspiracy. Johnson and Johnson for example (here) is based on a much more limited fact pattern had extensive FCPA procedures which helped root out conduct that was limited to a few subsidiaries.

Despite the large settlement payments, each sum was reduced by the cooperation of the company with the exception of the amount paid by BAE. That credit is most evident in the calculation of the criminal fine which in many cases is at an agreed level below the range calculated under the sentencing guidelines.

In contrast, assessing the impact of cooperation on the charging process rather than the calculation of the fine is difficult. In some instances DOJ acknowledges the impact of the cooperation on that process. For example, in its press release announcing the settlement with Johnson & Johnson, the Department specifically stated that the resolution of the case with a deferred prosecution agreement relating to one the company subsidiary resulted from the extraordinary cooperation of the company. More typically, the underlying court papers or DOJ’s press release discusses the cooperation of the company without specifying its impact on the actual charges brought.

The SEC frequently does not comment on the cooperation of the company or its impact on the settlement. The agency has over the years repeatedly made statements promising credit for cooperation. Yet it is typically difficult to assess the impact of cooperation on a settlement with the Commission. Indeed, the settlement of many SEC FCPA cases where there is a parallel criminal inquiry tend to be the same: consent to an FCPA injunction and the payment of disgorgement and prejudgment interest.

For business organizations huge settlement payments are only the beginning of the costs paid to resolve FCPA cases. To earn cooperation credit the company typically undertakes an extensive internal investigation, terminates the employees involved and revamps many of its procedures. In a number of cases a corporate monitor is appointed for a period of years. In some cases such as Siemens and Johnson & Johnson the company helps develop other investigative leads for enforcers.

While it is difficult to assess the total cost of these efforts some indication is given by the Siemens settlement papers. At the time of settlement the company had paid for 1.5 million professional hours in connection with the investigations and other procedures which earned cooperation credit. That figure of course does not include many costs such the huge amounts of executive time involved in the matter. That total cost may have lead to Siemens, ABB and others to delist their securities from trading in the U.S., a trend which the U.S. Chamber of Commerce argues may make the U.S. markets uncompetitive.

Selected recent FCPA cases

DOJ and the SEC have brought a series of FCPA actions in recent months in addition to the mega cases in the top ten. These include:

Mergers: Two recent cases involving FCPA liability arising out of a merger are SEC v. Alliance One International, Inc., Civil Action no. 01:10-cv-01319 (D.D.C. filed Aug. 6, 2010) and SEC v. General Electric Company, Case No. 1:10-CV-01258 (D.D.C. filed July 27, 2010). Alliance One was formed from a merger of Diamon, Inc. and Standard in May 2005. Between 2000 and 2004 Diamon, in conjunction with Universal Corporation, paid about $800,000 in bribes to the Thailand Tobacco Monopoly to secure about $11.5 million in sales contracts for certain Universal subsidiaries. During the same period Dimon and Standard paid bribes to government officials of the Thailand Tobacco Monopoly totaling $1.2 million to obtain about $18.3 million in sales contracts. In addition, from 1996 through 2004 a subsidiary of Dimon paid about $3 million in bribes to officials of the Kyrgyzstan government to purchase tobacco. Diamon also made improper payments to tax officials in Greece and Indonesia and paid for inappropriate gifts, travel and entertainment to officials in the Asian Region, including China and Thailand. None of these payments were properly recorded.

Alliance settled with the SEC by consenting to the entry of a permanent injunction prohibiting future violations of the anti-bribery and books and records and internal control provisions of the FCPA. Alliance also agreed to pay disgorgement of $10 million and to retain an independent monitor. The company settled with DOJ, entering into a non-prosecution agreement and agreeing to pay a $9.45 million criminal fine. See also SEC v. Universal Corporation, Inc., Civil Action no. 1:10-cv-01318 (D.D.C. Filed Aug. 6, 2010)(FCPA case based on substantially the same conduct and settled on similar terms).

In General Electric, the company was named as a defendant along with two subsidiaries. The complaint centers on violations by two GE subsidiaries and two companies which GE acquired after the alleged violations. According to the complaint, from 2000 to 2003 two GE subsidiaries made about $2.04 million in kickback payments in the form of computer equipment, medical supplies and services to the Iraqi Health Ministry as part of the U.N. program. The kickbacks were made through agents in the form of “after sales service fees” on the sale of products to Iraq. Similarly, the two companies which later became GE subsidiaries paid about $1.55 million in cash kickback payments to Iraqi under the U.N. program.

To settle the action with the SEC, each of the three defendants consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). GE also agreed to disgorge $18,397,949 in wrongful profits, pay prejudgment interest and a civil penalty of $1 million. The settlement reflects the cooperation of the defendants according to the SEC.

Grease payment: Facilitation or grease payments are not bribes. Under the Act payment to an official to expedite the completion of what are otherwise ministerial duties is not a violation of the anti-bribery provisions. The question of grease payments was involved in In the matter of NATCO Group, In., Adm. Proc. File No. 3-13742 (filed Jan. 11, 2010); SEC v. NATCO Group, Inc., Civil Action No. 4:10-CV-98 (S.D. Tex. Filed Jan. 11, 2010). These cases focus on Huston based NATCO and its subsidiary TEST Automation & Controls which has an office in Kazakhstan. TEST won a contract in Kazakhstan. The subsidiary hired local Kazakh workers and expatriates. During an audit of TEST in 2007 Kazakh Immigration prosecutors claimed that the expatriate workers did not have proper documentation and threatened to impose fines and either jail or deport the workers if the company did not pay the fines. Accordingly, TEST reimbursed two payments but did not properly record them. In addition, a TEST consultant who did not have the proper license, but had close ties to the Ministry of Labor, requested cash to facilitate obtaining a visa. The consultant provided the company with bogus invoices for the necessary amount of money. Those invoices were necessary under local law to withdraw the sum from the bank. Later they were reimbursed by TEST despite knowledge of their true purpose. The company settled with the SEC, consenting to the entry of a cease and desist order based on FCPA books and records and internal control charges and the payment of a $65,000 penalty

Gifts, travel and entertainment. There is no guidance in the statute regarding gifts. In contrast, the 1988 amendments to Act added an affirmative defense for reasonable and actual expenditures for travel and lodging expenses directly related to promotions and demonstrations for products and the execution or performance of a contract.

A criminal case brought last year centered on a gift of two snowmobiles. In U.S. v. Mercator Corp., (S.D.N.Y. Filed Aug 6, 2010) the defendant merchant bank pleaded guilty to one count of making corrupt payments in violation of the FCPA. The bank acted as an adviser to the government of Kazakhstan in connection with the sale of part of the oil and gas wealth of the country. It was dependent on the good will of three senior government officials. Those officials had the ability to influence whether Mercator obtained and retained lucrative business and would be paid. To maintain its lucrative contracts, in November 1999 Mercator purchased two snowmobiles and shipped them to Kazakhstan for deliver to one of the officials.

SEC v. UTStarcom, Inc., Case No. CV-09-6094 (N.D. Cal. Filed Dec. 31, 2009) involved the payment of travel and entertainment expenses. There the SEC claimed that the telecommunications company paid about $7 million for 225 foreign trips by employees of a Chinese state owned company. While the trips, made between 2002 and 2007, were to be for training, the Commission claimed that in fact they were largely entertainment. The complaint also alleged that there were expenditures for executive training programs in the U.S. and field trips to nearby tourist destinations. In addition, the company provided $10,000 in French wine and $13,000 in other entertainment expenditures to employees of a government owned telecommunications customer in Thailand. In Mongolia, $1.5 million was paid to an agent for a so-called “license fee” when in fact the actual fee was only $50,000 and the balance was used to make improper payments to a government official.

To settle with the SEC the company consented to the entry of a permanent injunction prohibiting future violations of the anti-bribery, books and records and internal control provisions of the FCPA. The company also agreed to pay a $1.5 million penalty. The criminal investigation was resolved with an agreement to pay a $1.5 million criminal fine. DOJ noted that the resolution of the case reflected the cooperation and remedial efforts of the company including self-reporting.

A key focus: Individuals

A key focus of the new era of FCPA enforcement is a focus on individuals. Perhaps the most significant indication of this focus is the nineteen indictments brought against twenty-one individuals in January 2010 from the largest FCPA sting operation in history. See, e.g., U.S. v. Goncalves, Case No. CR-09-335 (D.D.C. unsealed Dec. 19, 2009)(and related cases).

The indictments center on a sting operation in which an undercover FBI agent, posing as a sales agent, met with executives of various companies in the defense supply business. The executives were told that the defense minister for an African country was prepared to spend $15 million to outfit the country’s presidential guard. The so-called agent then told the executives that a 20% “commission” was required. Half of the commission would go to the agent and half to the minister. To participate, the executive would then agree to create two price quotes for the equipment. One quote did not have the commission while the other included it. These cases are currently proceeding to trial.

Other FCPA cases against individuals last year included:

U.S. v. Warwick (E.D. Va.) is an action in which John Warwick pleaded guilty to one count of conspiring to make payments in violation of the FCPA. The case centered on efforts to secure a maritime contract from certain Panamanian government officials for Ports Engineering Consultants Corporation. Mr. Warwick admitted that from 1997 through July 2003 he and others made corrupt payments of more than $200,000 to the former administrator and deputy administrator of the Panama maritime Authority and to a former high ranking elected official of the Panama government.

SEC v. Elkin, Civil Action No. 1:10-cv-0061 (DD.C. Filed April 28, 2010) is a settled FCPA action against individuals formerly employed by Dimon, Inc. discussed above. The defendants are Bobby Elkin, Jr., former country manager for Kyrgystan, Baxter Myers, former Regional finance Director, Thomas Reynolds, former corporate controller and Tommy Williams, a former Senior vice President of Sales. Each defendant settled the action by consenting to the entry of a permanent injunction prohibiting future violations of the anti-bribery and books and records and internal control provisions of the Exchange Act. Defendants Myers and Reynolds also agreed to pay civil penalties of $40,000 each. See also U.S. v. Elkin, Case No. 4;10 CR 00015 (W.D. Va. Filed Aug. 3, 2010)(Mr. Elkin pleaded guilty to a one count information alleging conspiracy to violate the FCPA).

SEC v. Summers, Civil Action No. 4:10-cv-02286 (S.D. Tex. filed Aug. 5, 2010) is a settled FCPA action against Joe Summers, the former country manager for Venezuela for Pride International. From 2003 through 2005 Mr. Summers, according to the complaint, authorized the payment of $384,000 to third parties with the understanding the money was going to state officials to help obtain three oil drilling contracts. Mr. Summers settled the action by consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 30A and 13(b)(5). He also agreed to pay a civil penalty of $25,000. See also Lit. Rel. 21617.

SEC v. Turne, Civil Action No. 1:10-cv-01309 (D.D.C. Filed Aug. 5, 2010) is a settled FCPA action against two former Innospec, Inc. executives, David Turner and Ousama Naaman. The action centers on payments initially made under the U.N. Oil For Food Program which continued after it ended. Corrupt payments were made in connection with the sale of the chemical Tetra. Between 2000 and 2008 about $6.3 million in bribes were paid while another $2.8 million were promised to secure about $176 million in contracts. The case was settled with the consent by each defendant to the entry of a permanent injunction prohibiting future violations of the anti-bribery and books and records and internal control provisions of the FCPA. In addition, Mr. Naaman agreed to disgorge over $810,000 and pay prejudgment interest along with a penalty of $438,000 which will be satisfied by payment of a criminal fine in a related action previously brought by DOJ. See also Lit. Rel. 21615 (Aug. 5, 2010).

The focus on individuals also means that more cases are going to trial. In 2009 for example, three criminal FCPA cases were tried to verdict. DOJ prevailed in all three cases. Currently thirty-five individuals are awaiting trial on FCPA charges. Overall, the New Era of FCPA enforcement is reflected in the increasing cost of corporate settlements, increasing prosecutions against individuals and the increasing number of FCPA cases going to trial.

Next: Financial fraud