United States: Quarterly FCPA Report: Second Quarter 2012

INTRODUCTION

The second quarter of 2012 saw a new level of media attention focused on the enforcement of the Foreign Corrupt Practices Act ("FCPA"), indicating that the press and the public, not just the government, are taking an increased interest in anti-corruption enforcement. In the biggest FCPA news of the quarter, the New York Times detailed allegations of corrupt payments by Wal-Mart subsidiary Wal-Mart de Mexico to obtain building permits and licenses to facilitate the company's rapid expansion in Mexico. The New York Times article, based in part on information disclosed in a privileged client memorandum, reported that these payments were allegedly known and concealed by Wal-Mart executives in the United States. This in-depth report from a major U.S. newspaper has since sparked a broader public consciousness and dialogue about the FCPA and its perceived costs and benefits. The increased public awareness and debate will be an important trend to follow throughout the year, especially in light of the current efforts by the U.S. Chamber of Commerce and some members of Congress to reform the FCPA.

This quarter also continued the trend of significant enforcement activities against individuals for violation of the FCPA. Three more executives in the LatiNode telecom case, as well as Jean Duperval of the Haiti Teleco case, were sentenced for FCPA violations. Duperval, a former director of international relations for Telecommunications D'Haiti, received a nine year sentence in federal prison, one of the longest FCPA sentences to date. This quarter also saw a number of guilty pleas, including four executives in the Control Components Inc. case, and Garth Peterson of Morgan Stanley.

Corporate enforcement has continued to be active, as the Department of Justice ("DOJ") and Securities Exchange Commission ("SEC") began investigations into several new alleged corporate offenders this quarter. These investigations include inquiries into Hewlett Packard's involvement in the former Soviet Union; the interactions that U.S. movie studios, including Disney and DreamWorks, have with Chinese officials; and Wal-Mart's expansion in Mexico. Yet in the courts, the DOJ continues to face setbacks, as prosecutors were forced to drop their appeal of the first ever trial of a corporate defendant, Lindsey Manufacturing, due to the government's false representations during trial.

At the mid-point of the year, many are eagerly awaiting new guidance from the DOJ and SEC on the enforcement of the FCPA, which is expected to be available before the end of 2012. Given the dearth of case law and agency guidelines, this forthcoming guidance has the potential to be the most comprehensive interpretation of the FCPA to date. Specifically, the guidance is expected to clarify several aspects of the FCPA and its enforcement, including (1) U.S. interagency and international cooperation in global anti-corruption efforts, (2) the required criminal intent, (3) the facilitation payments exception, (4) penalties, (5) cooperation credit for corporate compliance programs, and (6)the definition of a "foreign official." More robust guidance on the foreign official issue may soon come from the courts as well, as Joel Esquenazi, former president of Terra Telecommunications, has sought to determine an appropriate definition in his appeal to the 11th Circuit which argues, in part, that the DOJ's interpretation is too expansive. This potentially groundbreaking appeal will be an essential development to monitor in the months ahead, as no Court of Appeals has ever had the opportunity to interpret this statutory language.

RECENT CORPORATE ENFORCEMENT ACTIONS

Wal-Mart – Under Investigation

On April 25, 2012, the New York Times reported that Wal-Mart's Mexican subsidiary, Wal-Mart de Mexico, allegedly made $24 million in improper payments for licenses to expand the company's presence in Mexico. The article also reported an alleged cover-up of the activity after the discovery of the payments in 2005.

According to the article, investigators, dispatched by Wal-Mart executives in the United States, allegedly discovered hundreds of suspect payments to Mexican officials. The investigators also allegedly discovered documents showing that Wal-Mart de Mexico's senior executives knew about the payments and took steps to conceal them from Wal-Mart executives in the United States.

In late 2011, Wal-Mart informed the Justice Department that it was performing an internal investigation into possible FCPA violations and is currently implementing remedial measures. As expected, Wal-Mart disclosed in a regulatory filing on May 17, 2012, that they are currently the subject of DOJ and SEC investigations into possible FCPA violations.

B. Willbros Group, Inc. – Dismissed

On April 19, 2012, Willbros Group announced that FCPA charges pending against the company had been formally dismissed. The dismissal marks the conclusion of the DOJ's prosecution of Willbros Group and was part of the terms of the deferred prosecution agreement that the company signed in 2008. As part of the settlement, Willbros Group paid $32.3 million in penalties for FCPA violations related to activities in Bolivia, Ecuador, and Nigeria. Willbros Group was also required to update and maintain its FCPA compliance regulations and policies. Several former employees, including Jason Edward Steph and Jim Bob Brown, pleaded guilty and are currently awaiting sentencing.

C. Movie Studios – Under Investigation

According to Reuters, the SEC has sent letters of inquiry to a number of movie studios, including Disney and DreamWorks. The letters are believed to be related to an industry-wide inquiry to determine how the movie industry interacts with Chinese officials and the potential for illegal acts in the country, given China's traditionally tight restrictions on the importation of foreign films.

D. Lindsey Manufacturing Company – Appeal Dropped

On May 25, 2012, the DOJ filed a motion to dismiss its appeal against Lindsey Manufacturing Co., CEO Keith Lindsey, and CFO Steve Lee. Lindsey and Lee were charged and convicted in 2011 for making illegal payments to the Comision Federal de Electricidad in Mexico. Notably, the trial of Lindsey Manufacturing Co. was the first trial and conviction of a corporation charged with FCPA violations. U.S. District Judge Howard Matz dismissed the case with prejudice in December 2011. According to the judge, the DOJ "allowed a key FBI agent to testify untruthfully before the grand jury, inserted material falsehoods into affidavits submitted to magistrate judges in support of applications for search warrants and seizure warrants, improperly reviewed e-mail communications between Defendant and her lawyer, recklessly failed to comply with its discovery obligations, posed questions to certain witnesses in violation of the Court's rulings, engaged in questionable behavior during closing argument and even made misrepresentations to the Court."

E. Hewlett Packard Co. – Investigation Disclosed

On June 8, 2012, Hewlett Packard ("HP") disclosed to the SEC that the German Public Prosecutor's Office began investigating alleged improper payments between Hewlett Packard and the General Prosecutor's Office of the Russian Federation. The alleged illegal activity related to "the delivery and installation of an information technology network" and is thought to have been worth approximately $44 million.

The DOJ and the SEC are also investigating this matter for violations of the FCPA. According to the disclosure, the U.S. agencies requested information related to (1) transactions in Russia, Serbia and the Commonwealth of Independent States, dating back to 2000; (2) whether any HP employees received kickbacks as a method to facilitate improper payments; and (3) specific information on certain HP executives. HP has indicated its intent to cooperate fully with the investigations.

F. Data Systems & Solutions LLC – Charged, Deferred Prosecution Agreement

On June 18, 2012, Data Systems & Solutions LLC ("DS&S"), now known as Optimized Systems and Solutions LLC, entered into a two-year deferred prosecution agreement with the DOJ and agreed to pay an $8.82 million criminal penalty based on allegations that it made improper payments to officials at a state-owned nuclear power plant in Lithuania. DS&S is a fossil fuel and nuclear power plant service provider.

The DOJ agreed to defer prosecution provided that DS&S cooperates with the DOJ; implements, updates, and monitors its compliance program; and reports to the DOJ on its efforts. The DOJ settlement and press release noted the "extraordinary cooperation" of DS&S. According to the release, DS&S conducted an exacting internal investigation, gave the DOJ all requested information, and worked quickly to answer all DOJ requests. The company also terminated the employees responsible for the improper payments, created a new compliance program, updated training, updated ethics policies, and heavily reviewed foreign transactions.

ENFORCEMENT ACTIONS AGAINST INDIVIDUALS

Fernando Basurto Jr. – Sentenced to Time Served

On April 6, 2012, Fernando Basurto, a sales agent hired by ABB manager John O'Shea, was sentenced to time served by Judge Lynn Hughes. Basurto, a chief witness against O'Shea, faced five years in jail for laundering money for O'Shea and ABB. His lighter sentence was due in part to his cooperation with the FBI during its investigation of O'Shea. Basurto spent 22 months in jail after his arrest.

O'Shea was charged with authorizing illegal payments to officials in the Comision Federal de Electricidad in Mexico, using Basurto as a middle-man. He faced one count of conspiracy to violate the FCPA, four counts of international money laundering, one count of falsifying records in a federal investigation, and twelve counts of substantive FCPA violations. O'Shea was acquitted on January 16, 2012.

B. Albert Stanley and Jeffrey Tesler – Jailed

Albert Stanley, former Chairman and CEO of Kellogg Brown & Root, and Jeffrey Tesler, Kellogg Brown & Root's former agent, both entered federal prison in April to begin serving their prison sentences for their role in the TSKJ joint venture. Stanley began his thirty-month sentence on April 10, 2012, while Tesler was ordered to report on April 17, 2012, for his twenty-one month sentence. In 2008, Stanley was charged with, and pleaded guilty to, violations of the FCPA and mail and wire fraud. Tesler pleaded guilty in March 2011 to FCPA and conspiracy charges for his role in allegedly delivering improper payments to Nigerian officials on behalf of TSKJ, and has already forfeited $149 million in gains. Kellogg Brown & Root, a subsidiary of Halliburton Co., was charged with five counts of violating the FCPA in 2009 after Stanley pleaded guilty in 2008. Halliburton was charged with books-andrecords and internal controls violations. The company settled with the U.S. authorities in 2009 for $579 million in criminal and civil penalties. The DOJ alleges that the TSKJ joint venture, comprised of Technip S.A., Kellogg Brown & Root, Snamprogetti Netherlands B.V., and JGC made more than $182 million in improper payments to Nigerian officials in order to obtain contracts and licenses to build gas facilities. Technip, Snamprogetti and JGC also reached settlements with U.S. authorities, who have levied $1.5 billion in criminal and civil penalties as a result of the activities of the TSKJ joint venture.

C. Garth R. Peterson – Charged

On April 25, 2012, Garth Peterson, a managing director of Morgan Stanley, pleaded guilty to charges that he evaded accounting controls required under the FCPA. Peterson admitted that he attempted to transfer ownership of a multimillion dollar real estate asset to a Chinese official, who was a close personal friend. Peterson told Morgan Stanley that the real estate would be sold to a state-owned and controlled entity, but, instead, the asset was transferred to a shell corporation over which Peterson had partial control. Because of Peterson's misrepresentations, Morgan Stanley sold the real estate at a discount, resulting in an improper profit of more than $2.5 million.

According to the DOJ press release, Morgan Stanley has extensive internal controls addressing improper payments, gifts, and other FCPA related violations. The company terminated Peterson after the situation came to light and voluntarily disclosed the investigation and Peterson's activities to the authorities. As a result of these efforts, the DOJ was reasonably satisfied that Morgan Stanley had sufficient internal controls to guard against employees bribing government officials, and elected not to bring an enforcement action.

D. Mark A. Jackson and James J. Ruehlen – Filed Motion to Dismiss

On May 9, 2012, Mark A. Jackson, the former CEO of Noble Corporation ("Noble"), and James J. Ruehlen, a former Director and Division Manager of Noble's subsidiary in Nigeria, filed separate motions to dismiss charges filed against them by the SEC. The charges alleged that Jackson and Ruehlen made improper payments to government officials in Nigeria, signed false financial statements, misled auditors, and prepared false documents. Ruehlen claimed in his motion to dismiss that the SEC failed to allege any illegal conduct, but instead merely alleged instances of "facilitating payments," an exception under the FCPA.

The SEC charged the executives in February 2012, alleging that Jackson and Ruehlen made hundreds of thousands of dollars in improper payments to customs officials in Nigeria to avoid the costs associated with Nigerian oil rig regulations. The payments allowed Noble to avoid the significant costs associated with transporting the rigs in and out of the country.

Noble paid $8.1 million in 2010 to settle FCPA charges related to Noble's conduct in Nigeria: $2.6 million as a criminal penalty in its DOJ case and $5.5 million in its SEC settlement.

E. Jean Rene Duperval – Sentenced

On May 21, 2012, Duperval, a former director of international relations for Telecommunications D'Haiti, was sentenced to nine years in prison and ordered to forfeit $497,331. Duperval was convicted of laundering funds from two communications companies to facilitate their entrance into the Haitian telecommunications arena. Assistant Attorney General Lanny Breur stated that Duperval accepted illegal payments "in exchange for giving companies an unfair and illegal advantage in the marketplace, and then tried to hide these illicit transactions behind the cloak of shell corporations and fake invoices."

The investigation into Haiti's telecommunication corruption scheme also has resulted in the conviction and sentencing of six other individuals, including Antonio Perez, Juan Diaz, Jean Fourcant, Robert Antoine, Joel Esquenazi, and Carlos Rodriguez. Esquenazi is currently appealing his conviction. The investigation was part of an ongoing U.S. operation to address corruption in Haiti.

F. LatiNode: Caceres, Vasquez, Salvoc – Sentenced

By way of background, in 2007, eLandia International Inc. acquired LatiNode, and discovered a scheme of paying or arranging $1.1 million in payment to officials at Honduran state-owned telecommunications company, Hondutel, to maintain monopoly access to Hondutel's long distance telecommunications lines between Honduras and the United States. The company self-reported to the DOJ. LatiNode then pleaded guilty in 2009 to violating the FCPA and agreed to pay a $2 million fine. Last year, a LatiNode executive, Jorge Granados, the former Chief Executive Officer, pleaded guilty and was sentenced to forty-six months in prison.

In the second quarter of 2012, three former LatiNode executives were sentenced in the U.S. District Court for the Southern District of Florida for conspiracy to violate the FCPA in connection with the payment scheme. All three individuals pleaded guilty in 2011 and faced up to five years in prison. On April 19, 2012, U.S. District Court Judge Joan Lenard sentenced Manuel Caceres, the former LatiNode vice president for business development, to twenty-three months in prison followed by one year of supervised release.

On April 25, 2012, U.S. District Court Judge Patricia Seitz sentenced Juan Pablo Vasquez, former vice president of sales and chief commercial officer, to six months home detention, three years probation, and community service. He also paid a $7,500 criminal fine.

On June 7, 2012, U.S. District Court Judge Paul Huck sentenced Manuel Salvoch, former Chief Financial Officer, to ten months in prison and three years of supervised release.

G. Control Components Inc.: Carsons, Cosgrove, Edmonds – Pleaded Guilty

In the second quarter of 2012, four former Control Components Inc. ("CCI") executives pleaded guilty to FCPA violations. All four executives, along with two others, were charged in 2009 in connection with a decade-long conspiracy to win contracts by making improper payments to officials at foreign stateowned companies.

CCI designs and manufactures service control valves for the nuclear, oil and gas, and power generation industries. The company pleaded guilty in 2009 to charges of conspiracy to violate the FCPA and the Travel Act and to two substantive violations of the FCPA. CCI admitted to paying over $6.8 million through at least 236 payments between 2003 and 2007 to officers and employees at state-owned companies in 36 countries, including China, Malaysia, and the United Arab Emirates. Stuart Carson, former president of CCI, was charged in 2009 with one count of conspiracy to violate the FCPA and the Travel Act and two counts of violating the FCPA. His wife Hong "Rose" Carson, former CCI director of sales for China and Taiwan, was charged in 2009 with one count of conspiracy to violate the FCPA and the Travel Act, five counts of violating the FCPA, and one count of destruction of records. Both pleaded guilty on April 16, 2012, to separate one-count superseding informations charging them with making a corrupt payment to a foreign government official. Under the plea deal, Stuart Carson faces up to ten months in prison and Rose Carson faces up to three years probation with six months of home confinement. Their sentencing is scheduled for October 15, 2012.

Paul Cosgrove, former director of worldwide sales at CCI, was charged in 2009 with one count of conspiracy to violate the FCPA and the Travel Act, six counts of violating the FCPA, and one count of violating the Travel Act. Cosgrove pleaded guilty on May 29, 2012, to a one-count superseding information charging him with making a corrupt payment to a foreign government official in China in violation of the FCPA. His sentencing is scheduled for August 27, 2012, and he faces up to fifteen months in prison.

David Edmonds, former vice president of worldwide customer service at CCI, was charged in 2009 with one count of conspiracy to violate the FCPA and the Travel Act, three counts of violating the FCPA, and two counts of violating the Travel Act. Edmonds pleaded guilty on June 15, 2012, to making a corrupt payment to a foreign official in Greece. Sentencing is scheduled for November 12, 2012, and he faces up to fifteen months in prison.

In addition to the Carsons, Cosgrove, and Edmonds, three former company executives, Richard Morlok, Mario Covino, and Flavio Ricotti, have pleaded guilty to one count of conspiracy to violate the FCPA. Another former executive, Han Yong Kim, has been charged with one count of conspiracy to violate the FCPA and the Travel Act, and two counts of violating the FCPA.

CONCLUSION

Although the DOJ encountered setbacks this quarter in court, there is no indication that it has slowed its ever-increasing enforcement of the FCPA. The Wal-Mart investigation has amplified the public's focus on the anti-corruption enforcement efforts and may have an effect on efforts to reform the law. With guidance from the DOJ expected this year, companies will likely be provided with better clarity of the government's interpretation of the FCPA's scope, as well as the factors used by the DOJ in making its enforcement decisions.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.