Wednesday, November 11, 2009

In the News

Some interesting news articles to pass along.

The first piece is from today's New York Times and is titled "Blackwater Said to Pursue Bribes to Iraq After 17 Died" (see here).

The article suggests, based on former company sources, that Blackwater (and its executives) could ... well ... be in some murky FCPA water in connection with alleged secret payments to Iraqi officials.

According to former company officials, the payments were intended to silence the officials' "criticism and buy their support after a September 2007 episode in which Blackwater security guards fatally shot 17 Iraqi civilians" an event which generated much media coverage and congressional interest (see here among other sources).

The specific recipients of the payments? According to sources, officials in the Iraqi Interior Ministry who demanded that Blackwater secure an operating license after the September 2007 incident in order to continue doing business in the country.

The FCPA anti-bribery provisions contain an obtain or retain business element.

You ask, does making payments to foreign officials to secure a license satisfy that important element?

This general issue was addressed by the Fifth Circuit in U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) (one of the few instances in which a court has rendered a substantive FCPA decision).

The issue in Kay was whether payments to Haitian officials for the purpose of avoiding custom duties and sales taxes in Haiti could satisfy the FCPA's obtain or retain business element.

Concluding that the obtain or retain business element was vague, the court analyzed the FCPA's legislative history and concluded that such payments (even though they do not lead to specific government contracts) could nevertheless provide an unfair advantage to the payor over competitors and thereby assist the payor in obtaining and retaining business.

The court did not hold that ALL such payments could satisfy the FCPA's obtain or retain business element, only that such payments COULD satisfy this key element if, for instance (as in the Kay case), the payments were intended to lower the company's cost of doing business in the foreign country.

Post-Kay there has been an explosion in FCPA enforcement actions involving payments made to secure foreign government licenses, permits, and certifications or otherwise involving custom duties and the like. Because these enforcement actions have not been contested, it remains an open question as to whether all such payments can indeed satisfy the FCPA's obtain or retain business element and under what circumstances.

Blackwater (now called Xe Services), through a spokeswomen, dismissed the allegations as baseless.

Nevertheless, some juicy stuff here - the U.S. military's then prime security contractor in Iraq (and a company which did classified work for the CIA) making bribe payments in a war zone.

One wonders who knew what within official Washington.

Will this alleged conduct be pursued by the DOJ or put on the backshelf due to national security / foreign policy issues?

To my knowledge, this angle of Blackwater's activities in Iraq has never been disclosed and, if so, the piece would seem to represent a dandy piece of investigative journalism.

The second article, titled "A Morgan Stanley Star Falls In China," is from Reuters (see here).

The piece examines the rise and fall of Garth Peterson, a U.S. citizen, who joined Morgan Stanley's Hong Kong office earlier this decade and quickly rose through the ranks of V.P., executive director, and ultimately managing director of Morgan Stanley's real estate investment operation in China.

Peterson was fired by Morgan Stanley last December over concerns that he may have violated the FCPA.

Morgan Stanley disclosed the results of its internal investigation into Peterson's conduct to both the DOJ and the SEC. Here is the company's February 2009 8-K filing.

What did Peterson do that may have violated the FCPA?

The article suggests that Peterson's relationship with Shanghai Yongye Group (a real estate developer) and its former Chairman, Wu Yonghua, and his daughter, Linda Wu, are at issue. Also relevant, it appears, is Shanghai Dragon Investment Co.

I hate to be the one always bringing up this issue, but if employees of Shanghai Yongye Group and Shanghai Dragon Investment Co., are somehow being considered "foreign officials" under the FCPA, I would sure love to see that legal analysis.

Anyway, back to the story.

The article is an interesting read on a number of fronts and provides an insight into one company's handling of an FCPA issue.

First, the article notes that Morgan Stanley sent Peterson to an FCPA workshop. Given that this occured in 2008, it is debatable whether this was "too little too late."

Second, comes an internal review, which from the article, appears to have been done in the ordinary course of business. The ordinary internal review uncovers some extraordinary issues.

Next, the company initiates an internal investigation to look into the suspicious issues. And what an internal investigation it was. According to the article, more than 7.4 million pages of e-mails were reviewed. According to the article, the investigation "found that in a discrete number of instances, investment assets were used for improper purposes not authorized by senior management" an occurrence which would seem to violate, at the very least, the FCPA's internal control provisions which require, among other things, that an issuer like Morgan Stanley devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; and (ii) access to assets is permitted only in accordance with management's general or specific authorization.

Next, comes the corrective measures, in this case, Peterson was fired.

Next, comes the disclosure (see above).

The article closes by saying that even if found guilty Peterson is "unlikely to be jailed as he and the firm are expected to pay damages and fees, possibly through a deferred prosecution agreement."

Spot-on with the company likely entering into a deferred prosecution agreement.

However, the authors (and their sources) apparently have never heard the names of Frederic Bourke, Albert Jack Stanley, Steven Ott, Roger Michael Young (and many others) who are currently living in a federal prison (or waiting to check in) for violating or conspiring to violate the FCPA.

According to article, Peterson currently lives in Singapore.

1 comment:

  1. Mike,

    Fascinating post, but I would love to hear you talk more about why you think it so unusual that the employees of a Chinese company would be considered foreign officials. I have always thought that if the company is government owned (and so many Chinese companies are) that one always runs the risk of the employees being deemed government officials.